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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to       .  

Commission file number 001-38042

 

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-0408024

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

177 E. Colorado Blvd, Suite 700

Pasadena, California 91105

(626) 304-3400

(Address and telephone number of principal executive offices)

 

Former name, former address, and former fiscal year, if changed since last report: N/A

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ARWR

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

  

Accelerated Filer

 

  

 

 

 

 

Non-Accelerated Filer

 

  

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging Growth Company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock outstanding as of May 5, 2022 was 105,736,200.

 

 

 


 

 

 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Consolidated Statements of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

4

 

 

Notes to Consolidated Financial Statements

5

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

18

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

 

 

ITEM 4. CONTROLS AND PROCEDURES

29

 

 

PART II — OTHER INFORMATION

30

 

 

ITEM 1. LEGAL PROCEEDINGS

30

 

 

ITEM 1A. RISK FACTORS

30

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

31

 

 

ITEM 4. MINE SAFETY DISCLOSURES

31

 

 

ITEM 5. OTHER INFORMATION

31

 

 

ITEM 6. EXHIBITS

32

 

 

SIGNATURE

33

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

(unaudited)

March 31, 2022

 

 

September 30, 2021

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

86,408

 

 

$

184,434

 

Accounts receivable

 

1,317

 

 

 

10,255

 

Prepaid expenses

 

6,622

 

 

 

4,362

 

Other current assets

 

7,796

 

 

 

2,191

 

Marketable securities

 

122,575

 

 

 

126,728

 

Short term investments

 

192,912

 

 

 

56,627

 

TOTAL CURRENT ASSETS

 

417,630

 

 

 

384,597

 

Property and equipment, net

 

54,888

 

 

 

48,675

 

Intangible assets, net

 

12,813

 

 

 

13,663

 

Long term investments

 

201,590

 

 

 

245,595

 

Right-of-use assets

 

16,379

 

 

 

17,346

 

Other assets

 

275

 

 

 

272

 

TOTAL ASSETS

$

703,575

 

 

$

710,148

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

10,603

 

 

$

9,457

 

Accrued expenses

 

23,710

 

 

 

14,001

 

Accrued payroll and benefits

 

3,765

 

 

 

9,773

 

Lease liabilities

 

2,910

 

 

 

2,250

 

Deferred revenue

 

97,869

 

 

 

111,055

 

TOTAL CURRENT LIABILITIES

 

138,857

 

 

 

146,536

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

22,698

 

 

 

23,295

 

Deferred revenue, net of current portion

 

89,754

 

 

 

131,495

 

TOTAL LONG-TERM LIABILITIES

 

112,452

 

 

 

154,790

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Pharmaceuticals, Inc. stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 145,000 shares authorized; 105,702 and 104,327 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively

 

198

 

 

 

197

 

Additional paid-in capital

 

1,115,373

 

 

 

1,053,386

 

Accumulated other comprehensive loss

 

(107

)

 

 

(69

)

Accumulated deficit

 

(663,198

)

 

 

(644,692

)

TOTAL STOCKHOLDERS’ EQUITY

 

452,266

 

 

 

408,822

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

703,575

 

 

$

710,148

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

1


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

REVENUE

 

$

151,805

 

 

$

32,811

 

 

$

179,244

 

 

$

54,113

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

75,985

 

 

 

44,697

 

 

 

141,750

 

 

 

81,251

 

General and administrative expenses

 

 

34,267

 

 

 

16,346

 

 

 

59,262

 

 

 

25,147

 

TOTAL OPERATING EXPENSES

 

 

110,252

 

 

 

61,043

 

 

 

201,012

 

 

 

106,398

 

OPERATING INCOME (LOSS)

 

 

41,553

 

 

 

(28,232

)

 

 

(21,768

)

 

 

(52,285

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,054

 

 

 

1,524

 

 

 

2,210

 

 

 

3,692

 

Other income (expense)

 

 

1,759

 

 

 

(110

)

 

 

1,052

 

 

 

1,043

 

TOTAL OTHER INCOME (EXPENSE)

 

 

2,813

 

 

 

1,414

 

 

 

3,262

 

 

 

4,735

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

44,366

 

 

 

(26,818

)

 

 

(18,506

)

 

 

(47,550

)

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

NET INCOME (LOSS)

 

 

44,366

 

 

 

(26,818

)

 

 

(18,506

)

 

 

(47,550

)

NET INCOME (LOSS) PER SHARE - BASIC

 

$

0.42

 

 

$

(0.26

)

 

$

(0.18

)

 

$

(0.46

)

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

0.41

 

 

$

(0.26

)

 

$

(0.18

)

 

$

(0.46

)

Weighted average shares outstanding - basic

 

 

105,545

 

 

 

103,867

 

 

 

105,034

 

 

 

103,303

 

Weighted average shares outstanding - diluted

 

 

107,929

 

 

 

103,867

 

 

 

105,034

 

 

 

103,303

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1

 

 

 

(96

)

 

 

(38

)

 

 

84

 

COMPREHENSIVE INCOME (LOSS)

 

$

44,367

 

 

$

(26,914

)

 

$

(18,544

)

 

$

(47,466

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

2


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except per share amounts)

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

Balance at December 31, 2020

 

 

103,194

 

 

$

195

 

 

$

978,655

 

 

$

198

 

 

$

(524,576

)

 

$

454,472

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

15,359

 

 

 

-

 

 

 

-

 

 

 

15,359

 

Exercise of stock options

 

 

282

 

 

 

-

 

 

 

2,632

 

 

 

-

 

 

 

-

 

 

 

2,632

 

Common stock - restricted stock units vesting

 

 

544

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(96

)

 

 

-

 

 

 

(96

)

Net income (loss) for the three months ended March 31, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(26,818

)

 

 

(26,818

)

Balance at March 31, 2021

 

 

104,020

 

 

$

196

 

 

$

996,645

 

 

$

102

 

 

$

(551,394

)

 

$

445,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

Balance at December 31, 2021

 

 

104,798

 

 

$

197

 

 

$

1,080,035

 

 

$

(108

)

 

$

(707,564

)

 

$

372,560

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

33,802

 

 

 

-

 

 

 

-

 

 

 

33,802

 

Exercise of stock options

 

 

237

 

 

 

-

 

 

 

1,537

 

 

 

-

 

 

 

-

 

 

 

1,537

 

Common stock - restricted stock units vesting

 

 

667

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

Net income (loss) for the three months ended March 31, 2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

44,366

 

 

 

44,366

 

Balance at March 31, 2022

 

 

105,702

 

 

$

198

 

 

$

1,115,373

 

 

$

(107

)

 

$

(663,198

)

 

$

452,266

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

Balance at September 30, 2020

 

 

102,376

 

 

$

195

 

 

$

965,410

 

 

$

18

 

 

$

(503,844

)

 

$

461,779

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

23,502

 

 

 

-

 

 

 

-

 

 

 

23,502

 

Exercise of stock options

 

 

820

 

 

 

-

 

 

 

7,734

 

 

 

-

 

 

 

-

 

 

 

7,734

 

Common stock - restricted stock units vesting

 

 

824

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

84

 

 

 

-

 

 

 

84

 

Net income (loss) for the six months ended March 31, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(47,550

)

 

 

(47,550

)

Balance at March 31, 2021

 

 

104,020

 

 

$

196

 

 

$

996,645

 

 

$

102

 

 

$

(551,394

)

 

$

445,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

Balance at September 30, 2021

 

 

104,327

 

 

$

197

 

 

$

1,053,386

 

 

$

(69

)

 

$

(644,692

)

 

$

408,822

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

58,306

 

 

 

-

 

 

 

-

 

 

 

58,306

 

Exercise of stock options

 

 

444

 

 

 

-

 

 

 

3,682

 

 

 

-

 

 

 

-

 

 

 

3,682

 

Common stock - restricted stock units vesting

 

 

931

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(38

)

 

 

-

 

 

 

(38

)

Net income (loss) for the six months ended March 31, 2022

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18,506

)

 

 

(18,506

)

Balance at March 31, 2022

 

 

105,702

 

 

$

198

 

 

$

1,115,373

 

 

$

(107

)

 

$

(663,198

)

 

$

452,266

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

3


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands, except per share amounts)

 

 

 

Six Months Ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(18,506

)

 

$

(47,550

)

Stock-based compensation

 

 

58,307

 

 

 

23,502

 

Depreciation and amortization

 

 

5,167

 

 

 

3,766

 

Unrealized (gains) losses on marketable securities

 

 

4,153

 

 

 

(773

)

Amortization/(accretion) of note premiums/discounts

 

 

329

 

 

 

193

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,938

 

 

 

(109

)

Prepaid expenses and other current assets

 

 

(7,914

)

 

 

(2,213

)

Deferred revenue

 

 

(54,926

)

 

 

247,118

 

Accounts payable

 

 

1,146

 

 

 

(1,530

)

Accrued expenses

 

 

3,699

 

 

 

2,271

 

Other

 

 

990

 

 

 

276

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

1,383

 

 

 

224,951

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10,530

)

 

 

(11,437

)

Purchases of investments

 

 

(148,391

)

 

 

(40,000

)

Proceeds from sale of investments

 

 

55,781

 

 

 

47,545

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

(103,140

)

 

 

(3,892

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the exercises of stock options

 

 

3,731

 

 

 

7,735

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

3,731

 

 

 

7,735

 

NET INCREASE (DECREASE) IN CASH

 

 

(98,026

)

 

 

228,794

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

184,434

 

 

 

143,583

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

86,408

 

 

$

372,377

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

4


 

Arrowhead Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware corporation and its Subsidiaries, (2) the terms “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers to Arrowhead Madison Inc. (“Arrowhead Madison”) and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, par value $0.001 per share, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock, par value $0.001 per share, and (6) the term “Stockholder(s)” refers to the holders of Arrowhead’s Common Stock.

     

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Recent Developments

Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-ENaC2 for cystic fibrosis, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens, ARO-C3 for complement mediated diseases and ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary conditions. ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”) in November 2021.  ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for patients with non-alcoholic steatohepatitis (NASH). ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016. While the Company believes that initial ARO-HIF2 Phase 1 clinical data provides proof of concept for the ability to deliver siRNA to RCC tumors, the Company has decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.

Arrowhead operates lab facilities in Madison, Wisconsin and San Diego, California, where the Company’s research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, California.

During the first half of fiscal 2022, the Company continued to develop and advance its pipeline and partnered candidates and expanded its facilities to support the Company’s growing pipeline. Several key recent developments include:

 

i)

dosed the first patients in its PALISADE study, a phase 3 clinical study to evaluate the safety and efficacy of ARO-APOC3 in adults with familial chylomicronemia syndrome (FCS);

 

ii)

entered into an exclusive license agreement with GSK for ARO-HSD;

 

iii)

Janssen presented clinical data from REEF-1, a Phase 2b study of different combination regimens, including JNJ-73763989 (JNJ-3989), formerly called ARO-HBV, and/or JNJ-56136379 (JNJ-6379), and a nucleos(t)ide analog (NA) for the treatment of chronic hepatitis B virus infection (CHB);

 

iv)

filed for regulatory clearance to begin a Phase 1/2a study of ARO-C3 and subsequently dosed the first subjects in AROC3-1001, a Phase 1/2 clinical study of ARO-C3, the Company’s investigational RNA interference (RNAi) therapeutic designed to reduce production of complement component 3 (C3) as a potential therapy for various complement mediated diseases;

 

v)

presented additional interim clinical data from AROHSD1001, AROAAT2002, and AROAPOC31001;

 

vi)

completed the purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is planned to be the site of an approximately 140,000 square foot drug manufacturing facility and an approximately 115,000 square foot laboratory and office facility and entered into a lease agreement for a new 144,000 square foot laboratory and office facility in San Diego, California.  Both facilities will provide additional space to support the Company’s continued growth;

5


 

vii)

completed enrollment in Phase 2b ARCHES-2 study of investigational ARO-ANG3 for patients with mixed dyslipidemia;

 

viii)

filed for regulatory clearance to initiate Phase 1/2a study of ARO-RAGE for treatment of Asthma;

 

ix)

filed for regulatory clearance to initiate Phase 1/2a study of ARO-MUC5AC for treatment of muco-obstructive lung disease;

 

x)

initiated and dosed the first patients in the Phase 2 GATEWAY clinical study of investigational ARO-ANG3 for the treatment of patients with homozygous familial hypercholersterolemia;

 

xi)

decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.

The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and six months ended March 31, 2022 were not significantly impacted by COVID-19. Operationally, the Company has experienced delays in its earlier stage programs due to a shortage in non-human primates, which are critical to the Company’s preclinical programs. Additionally, the Company has experienced delays in enrollment in its clinical trials. The Company’s operations at its research and development facilities in Madison, Wisconsin and San Diego, California, and its corporate headquarters in Pasadena, California have continued with limited impact, other than for enhanced safety measures, including work from home policies and intermittent lab supply shortages. However, the Company cannot predict the impact the progression of COVID-19 will have on future financial and operational results due to a variety of factors, including the ability of the Company’s clinical sites to continue to enroll subjects, the ability of the Company’s suppliers to continue to operate, the continued good health and safety of the Company’s employees and the length and severity of the COVID-19 pandemic.

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern.  Historically, the Company’s primary sources of financing have been through the sale of its securities and revenue from its licensing and collaboration agreements. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded significantly.  Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials, as well as with the Company’s plans to increase its internal manufacturing capabilities, as well as expand its footprint in Verona, Wisconsin and San Diego, California. 

 

At March 31, 2022, the Company had $86.4 million in cash and cash equivalents (including $7.9 million in restricted cash), $192.9 million in short-term investments, $122.6 million in marketable securities and $201.6 million in long-term investments to fund operations.  During the six months ended March 31, 2022, the Company’s cash and investments balance decreased by $9.9 million, which was primarily due to cash being used to fund the Company’s operations, partially offset by the $120.0 million upfront payment received from GSK.  

In total, the Company remains eligible for $4.9 billion in developmental, regulatory and sales milestones and various royalties on net sales from its licensing and collaboration agreements.  The revenue recognition for these collaboration agreements is discussed further in Note 2 below.  

Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements  

There have been no recent accounting pronouncements that have significantly impacted this Quarterly Report on Form 10-Q, beyond those disclosed in the Company’s most recent Annual Report on Form 10-K.

 

 

6


 

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into two collaboration and license agreements and a common stock purchase agreement with Amgen. Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel RNAi Olpasiran (previously referred to as AMG 890 or ARO-LPA) program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the prior collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target. Under both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the terms of the agreements taken together, the Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and $30.0 million in milestone payments, and may receive up to an additional $400.0 million in remaining development, regulatory and sales milestone payments. The Company is further eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement. In July 2019, Amgen informed the Company that it would not be exercising its option for an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under the ARO-AMG1 Agreement.     

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers. The Company has substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 Agreement. Future milestones and royalties achieved will be recognized in their entirety when earned. In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0 million milestone payment to the Company. During the three and six months ended March 31, 2022 and 2021, the Company recognized $0 and $0 of revenue associated with its agreement with Amgen, respectively. As of March 31, 2022, there were $0 in contract assets recorded as accounts receivable and $0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into a License Agreement (the “Janssen License Agreement”) and a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”) with Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a stock purchase agreement with JJDC (“JJDC Stock Purchase Agreement”).  Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989.  Under the Janssen Collaboration Agreement, Janssen was able to select three new targets against which Arrowhead would develop clinical candidates.  These candidates were subject to certain restrictions and do not include candidates that already were in the Company’s pipeline.  The Company was obligated to perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, would have been sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen would have the option to take an exclusive license. If the option was exercised, Janssen would have been wholly responsible for clinical development and commercialization of each optioned candidate.  Under the terms of the agreements taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling $73.0 million, and the Company may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $0.6 billion in development and sales milestone payments for the remaining target covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement. During the three months ended March 31, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement.

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers.  At the inception of these agreements, the Company identified one distinct performance obligation.  Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”).  Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  The Company also determined that Janssen’s option to require the Company to develop up to three new targets is not a material right and, thus, not a performance obligation at the onset of the agreement.  The consideration for this option is accounted for separately.

7


The Company determined the transaction price totaled approximately $252.7 million, which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two $25.0 million milestone payments related to JNJ-3989 (ARO-HBV), and estimated payments for reimbursable Janssen R&D Services to be performed.  The Company has allocated the total $252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  The Company has recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed. Future milestones and royalties achieved will be recognized in their entirety when earned.  During the three months ended March 31, 2022 and 2021, the Company recognized approximately $0 and $7.5 million of revenue associated with this performance obligation, respectively. During the six months ended March 31, 2022 and 2021, the Company recognized approximately $0 and $20.2 million of revenue associated with this performance obligation, respectively. As of March 31, 2022, there were $0 in contract assets recorded as accounts receivable, and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  

The Company has conducted its discovery, optimization and preclinical research and development of JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement.  All costs and labor hours spent by the Company have been entirely funded by Janssen. During the three months ended March 31, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement. During the three months ended March 31, 2022 and 2021, the Company recognized $0.1 million and $0.1 million of revenue associated with these efforts, respectively. During the six months ended March 31, 2022 and 2021, the Company recognized $0.1 million and $0.3 million of revenue associated with these efforts, respectively. As of March 31, 2022, there were $0.1 million of contract assets recorded as accounts receivable and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Takeda Pharmaceuticals U.S.A., Inc.

On October 7, 2020, the Company entered into an Exclusive License and Co-funding agreement (the “Takeda License Agreement”) with Takeda.  Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program, the Company’s second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1 antitrypsin deficiency. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales.  In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $740.0 million.  

The Company has evaluated the Takeda License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation.  The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the “Takeda R&D Services”).  Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization outside the United States.  Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States.  The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.  

The Company determined the initial transaction price totaled $300.0 million, which includes the upfront payment.  The Company has excluded any future milestones or royalties from this transaction price to date.  The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services.  Revenue will be recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). Revenue for the three months ended March 31, 2022 and 2021 was $20.8 million and $25.4 million, respectively. Revenue for the six months ended March 31, 2022 and 2021 was $41.6 million and $33.6 million, respectively. As of March 31, 2022, there were $0 in contract assets recorded as accounts receivable, $77.9 million in contract liabilities recorded as deferred revenue and $89.8 million in contract liabilities recorded as deferred revenue, net of the current portion, and $