Arrowhead Pharmaceuticals, Inc 10-Q for FY2021 Q3
Arrowhead Pharmaceuticals, Inc. (ARWR)
About this 10-Q
Arrowhead Pharmaceuticals, Inc filed this 10-Q on August 5, 2021, covering the quarter ended June 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $45.89M
- up 67.6% from $27.38M a year earlier
- Net loss
- $29.92M
- compared with a net loss of $13.61M a year earlier
- Diluted EPS
- -$0.29
- compared with -$0.13 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
(Exact name of registrant as specified in its charter)
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(State of incorporation) |
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(I.R.S. Employer Identification No.) |
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(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Non-Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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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
The number of shares of the registrant’s common stock outstanding as of August 2, 2021 was
PART I. FINANCIAL INFORMATION
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ITEM 1. |
FINANCIAL STATEMENTS |
Arrowhead Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
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(unaudited) June 30, 2021 |
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September 30, 2020 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable |
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Prepaid expenses |
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Other current assets |
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Marketable securities |
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Short term investments |
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TOTAL CURRENT ASSETS |
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Property and equipment, net |
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Intangible assets, net |
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Long term investments |
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Operating Lease - Right-of-use assets |
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Other assets |
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TOTAL ASSETS |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
$ |
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$ |
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Accrued expenses |
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Accrued payroll and benefits |
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Lease liabilities |
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Deferred revenue |
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TOTAL CURRENT LIABILITIES |
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LONG-TERM LIABILITIES |
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Lease liabilities, net of current portion |
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Deferred revenue, net of current portion |
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- |
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TOTAL LONG-TERM LIABILITIES |
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Commitments and contingencies (Note 7) |
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STOCKHOLDERS’ EQUITY |
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Arrowhead Pharmaceuticals, Inc. stockholders’ equity: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Accumulated deficit |
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ |
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$ |
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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)
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Three Months Ended June 30, |
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Nine Months Ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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REVENUE |
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$ |
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$ |
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$ |
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$ |
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OPERATING EXPENSES |
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Research and development |
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General and administrative expenses |
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TOTAL OPERATING EXPENSES |
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OPERATING INCOME (LOSS) |
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OTHER INCOME (EXPENSE) |
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Interest income, net |
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Other income (expense) |
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- |
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- |
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TOTAL OTHER INCOME (EXPENSE) |
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INCOME (LOSS) BEFORE INCOME TAXES |
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( |
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Provision for income taxes |
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- |
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- |
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- |
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- |
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NET INCOME (LOSS) |
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( |
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( |
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NET INCOME (LOSS) PER SHARE - BASIC |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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NET INCOME (LOSS) PER SHARE - DILUTED |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Weighted average shares outstanding - basic |
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Weighted average shares outstanding - diluted |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: |
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Foreign currency translation adjustments |
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( |
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COMPREHENSIVE INCOME (LOSS) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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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)
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Common Stock |
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Amount ($) |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Non-controlling Interest |
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Totals |
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Balance at March 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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- |
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- |
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Common stock - restricted stock units vesting |
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- |
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( |
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- |
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- |
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- |
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( |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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- |
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Net income (loss) for the three months ended June 30, 2020 |
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- |
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- |
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- |
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- |
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( |
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- |
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( |
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Balance at June 30, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Common Stock |
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Amount ($) |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Totals |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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Common stock - restricted stock units vesting |
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- |
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- |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Net income (loss) for the three months ended June 30, 2021 |
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- |
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- |
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- |
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- |
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( |
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( |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Amount ($) |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Non-controlling Interest |
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Totals |
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Balance at September 30, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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- |
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Common stock - restricted stock units vesting |
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( |
) |
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- |
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- |
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- |
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- |
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Common stock - issued for cash |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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- |
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Net income (loss) for the nine months ended June 30, 2020 |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Balance at June 30, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Common Stock |
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Amount ($) |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Totals |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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Common stock - restricted stock units vesting |
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( |
) |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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Net income (loss) for the nine months ended June 30, 2021 |
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- |
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- |
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- |
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- |
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( |
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( |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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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)
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Nine Months Ended June 30, |
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2021 |
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2020 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
( |
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$ |
( |
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Stock-based compensation |
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Depreciation and amortization |
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Amortization/(accretion) of note premiums/discounts |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Deferred revenue |
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( |
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Accounts payable |
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( |
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Accrued expenses |
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( |
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Other |
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( |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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( |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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( |
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( |
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Purchases of investments |
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( |
) |
|
|
( |
) |
|
Proceeds from sale of investments |
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
( |
) |
|
|
( |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Proceeds from the exercises of stock options |
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock |
|
|
- |
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
|
|
|
|
( |
) |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
|
|
|
$ |
|
|
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, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock and (6) the term “Stockholder(s)” refers to the holders of Arrowhead 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-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-LUNG2 for chronic obstructive pulmonary disorder, and ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”). 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. JNJ3989 (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.
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 fiscal year 2021, the Company continued to develop its pipeline and partnered candidates. The Company announced positive interim clinical data on (i) AROAAT2002, an open-label Phase 2 clinical study of ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being co-developed with Takeda as a treatment for the rare genetic liver disease associated with AATD, (ii) AROHSD1001, a Phase 1/2 clinical study of ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH), and (iii) AROHIF21001, a Phase 1b dose-finding clinical study of ARO-HIF2, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with clear cell renal cell carcinoma. The Company also presented preclinical data on the development of ARO-DUX4, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with facioscapulohumeral muscular dystrophy (FSHD), at the 28th Annual FSHD Society International Research Congress. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, and presented positive clinical data from the Phase 1/2 clinical studies of ARO-APOC3 and ARO-ANG3 at the American Heart Association Scientific Sessions 2020. The Company filed two Investigational New Drug Applications with the United States Food and Drug Administration (the “FDA”) to begin a Phase 2b clinical study of ARO-APOC3 in patients with severe hypertriglyceridemia and a Phase 2b clinical study of ARO-ANG3 in patients with mixed dyslipidemia, and initiated these two Phase 2b clinical studies in the third quarter of fiscal year 2021. In July 2021, the Company voluntarily paused AROENaC1001, a Phase 1/2 clinical study of ARO-ENaC, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with cystic fibrosis, after receiving a preliminary update from an ongoing chronic toxicology study in rats that contained unexpected signals of local lung inflammation. New screening, enrollment and any further dosing of investigational ARO-ENaC have been paused pending additional data from ongoing nonclinical toxicology studies. The Company announced two collaborations during the first three quarters of fiscal year 2021: a collaboration with Takeda to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease and a collaboration with Horizon to develop ARO-XDH, an investigational RNAi therapeutic for uncontrolled gout. In July 2021, the Company received Breakthrough Therapy designation from the FDA for ARO-AAT, which is a process designed to expedite the development and review of drugs that are intended to treat a serious life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The Company also earned a $
5
The Company’s partnered candidates under its collaboration agreements also continued to progress. Janssen began dosing patients in a Phase 2b triple combination study called REEF-1, designed to enroll up to 450 patients with chronic hepatitis B infection. The Company is currently performing discovery, optimization and preclinical research and development for ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 for Janssen as part of the Company’s Research Collaboration and Option Agreement with Janssen (“Janssen Collaboration Agreement”). Under the terms of the Janssen agreements taken together, the Company has received $
The Company’s collaboration agreement with Amgen for Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”) continues to progress. In July 2020, Amgen initiated a Phase 2 clinical study, which resulted in a $
On October 7, 2020, the Company entered into an Exclusive License and Co-Funding Agreement with Takeda (the “Takeda License Agreement”). Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program. Within the United States, ARO-AAT, if approved, will be co-commercialized under a
On
The revenue recognition for these collaboration agreements is discussed further in Note 2 below.
The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended June 30, 2021 were not significantly impacted by COVID-19. During fiscal year 2020, the Company had temporarily paused enrollment in its two ARO-AAT studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of screening and enrolling patients. During the pause in enrollment, patients already enrolled in these studies continued to be dosed per protocol and continued to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs. Additionally, 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 to operate with limited impact, other than for enhanced safety measures, including work from home policies. However, the Company cannot predict the impact the progression of COVID-19 will have on future financial 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 ultimately 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 collaboration agreements. Research and development activities have required significant capital investment since the Company’s inception. The Company expects its operations to continue to require cash investment to pursue its research and development goals, including clinical trials and related drug manufacturing.
6
At June 30, 2021, the Company had $
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
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-18 Collaborative Arrangements (Topic 808). This update provides clarification on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) including the alignment of unit of account guidance between the two topics. ASU 2018-18 became effective for the Company on
In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard requires that certain implementation costs for cloud computing arrangements are capitalized and amortized over the term of the associated hosted cloud computing arrangement service. Capitalized implementation costs are classified in prepaid expenses and other assets. The amortization of the capitalized asset is presented in the same line on the statement of operations and comprehensive loss as the fees for the associated hosted cloud computing arrangement service and not included with depreciation or amortization expense related to property and equipment or intangible assets. Cash flows related to capitalized implementation costs are presented in cash flows used in operating activities. ASU 2018-15 became effective for the Company on
NOTE 2. COLLABORATION AND LICENSE AGREEMENTS
Amgen Inc.
On
The Company 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 $
Janssen Pharmaceuticals, Inc.
On
7
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 is responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates. These candidates are subject to certain restrictions and do not include candidates that already were in the Company’s pipeline. The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, is sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be wholly responsible for clinical development and commercialization of each optioned candidate. Under the terms of the agreements taken together, the Company has received $
The Company has evaluated these agreements in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of these agreements, the Company identified
The Company determined the transaction price totaled approximately $
The Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company will be entirely funded by Janssen. During the three months ended June 30, 2021 and 2020, the Company recognized $
Takeda Pharmaceuticals U.S.A., Inc.
On
8
The Company has evaluated the Takeda License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Takeda License Agreement, the Company identified
The Company determined the initial transaction price totaled approximately $
Horizon Therapeutics Ireland DAC
On
The Company has evaluated the Horizon License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Horizon 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 conduct all activities through the preclinical stages of development of ARO-XDH (the “Horizon R&D Services”). Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represent
The Company determined the initial transaction price totaled approximately $
9
NOTE 3. PROPERTY AND EQUIPMENT
The following table summarizes the Company’s major classes of property and equipment:
|
|
|
June 30, 2021 |
|
|
September 30, 2020 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Computers, office equipment and furniture |
|
$ |
|
|
|
$ |
|
|
|
Research equipment |
|
|
|
|
|
|
|
|
|
Software |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
Total gross fixed assets |
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation and amortization expense for property and equipment for the three months ended June 30, 2021 and 2020 was $
NOTE 4. INVESTMENTS
Investments at June 30, 2021 primarily consisted of corporate bonds that have maturities of less than 36 months, a certificate of deposit and marketable equity securities. The Company’s corporate bonds consist of both short-term and long-term bonds and are classified as “held-to-maturity” on the Company’s Consolidated Balance Sheets. The Company’s certificate of deposit matures in less than 24 months and is classified as “held-to-maturity” on the Company’s Consolidated Balance Sheet. The Company’s marketable equity securities consist of mutual funds that primarily invest in U.S. government bonds, U.S. government agency bonds, corporate bonds and other asset-backed debt securities. Dividends from these funds are automatically reinvested. The Company may also invest excess cash balances in money market accounts, government-sponsored enterprise securities, and/or commercial paper. The Company accounts for its held to maturity investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities and its marketable equity securities in accordance with ASC 321, Investments – Equity Securities.
The following tables summarize the Company’s short-term and long-term investments and marketable securities as of June 30, 2021 and September 30, 2020 by measurement category.
|
Held to Maturity |
|
As of June 30, 2021 |
|
|
|
|||||||||||||
|
|
|
(In thousands) |
|
|
|
|||||||||||||
|
|
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
|
||||
|
Commercial notes (due within one year) |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
Commercial notes (due within one through three years) |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
Certificate of deposit (due within two years) |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020 |
|
|
|
|||||||||||||
|
|
|
(In thousands) |
|
|
|
|||||||||||||
|
|
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
|
||||
|
Commercial notes (due within one year) |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
Commercial notes (due within one through three years) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
10
|
Fair Value |
|
As of June 30, 2021 |
|
|||||||||||||||||
|
|
|
(In thousands) |
|
|||||||||||||||||
|
|
|
Cost |
|
|
Realized Gains/(Losses) |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|||||
|
Marketable securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020 |
|
|||||||||||||||||
|
|
|
(In thousands) |
|
|||||||||||||||||
|
|
|
Cost |
|
|
Realized Gains/(Losses) |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|||||
|
Marketable securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
Realized gains for marketable securities recorded at fair value consist of dividends received and re-invested into the associated fund.
NOTE 5. INTANGIBLE ASSETS
Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition, which was
The following table provides details on the Company’s intangible asset balances:
|
|
|
Intangible assets subject to amortization |
|
|
|
|
|
(in thousands) |
|
|
|
Balance at September 30, 2020 |
|
$ |
|
|
|
Impairment |
|
|
- |
|
|
Amortization |
|
|
( |
) |
|
Balance at June 30, 2021 |
|
$ |
|
|
NOTE 6. STOCKHOLDERS’ EQUITY
At June 30, 2021, the Company had a total of
At June 30, 2021,
11
NOTE 7. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were
Purchase Commitments
In the normal course of business, the Company enters into various purchase commitments for the manufacture of drug components, for toxicology studies and for clinical studies. As of June 30, 2021, these future commitments were estimated at approximately $
Technology License Commitments
The Company has licensed from third parties the rights to use certain technologies for its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon a new drug application and upon certain sales level milestones. These milestone payments could amount to the mid to upper double-digit millions of dollars. During the three and nine months ended June 30, 2021, the Company did
NOTE 8. LEASES
Leases
In April 2019, the Company entered into a lease for its corporate headquarters in Pasadena, California. The
In January 2016, the Company entered into a lease for its research facility in Madison, Wisconsin. The lease is for approximately
12
In March 2020, the Company entered into a sublease agreement (the “Sublease”) with Halozyme, Inc. for additional research and development facility space in San Diego, California. The Sublease provides additional space needed to accommodate the recent growth of the Company’s personnel and discovery efforts. The Sublease is for approximately
Operating lease cost during the three months ended June 30, 2021 and 2020 was $
The following table presents maturities of operating lease liabilities on an undiscounted basis as of June 30, 2021:
|
|
|
(in thousands) |
|
|
|
2021 (remainder of fiscal year) |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 and thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
|
Less imputed interest |
|
$ |
( |
) |
|
Total operating lease liabilities (includes current portion) |
|
$ |
|
|
Cash paid for the amounts included in the measurement of the operating lease liabilities on the Company’s Consolidated Balance Sheet and included in Other changes in operating assets and liabilities within cash flows from operating activities on the Company’s Consolidated Statement of Cash Flow for the nine months ended June 30, 2021 and 2020 was $
NOTE 9. STOCK-BASED COMPENSATION
Arrowhead has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of June 30, 2021,
13
Stock Options
The following table summarizes information about stock options:
|
|
|
Number of Options Outstanding |
|
|
Weighted- Average Exercise Price Per Share |
|
|
Weighted- Average Remaining Contractual Term |
|
Aggregate Intrinsic Value |
|
|||
|
Balance at September 30, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Exercisable at June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
Stock-based compensation expense related to stock options for the three months ended June 30, 2021 and 2020 was $
The grant date fair value of the options granted by the Company for the three months ended June 30, 2021 and 2020 was $
The intrinsic value of the options exercised during the three months ended June 30, 2021 and 2020 was $
As of June 30, 2021, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The assumptions used to value stock options are as follows:
|
|
|
Nine Months Ended June 30, |
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
||
|
Dividend yield |
|
|
- |
|
|
|
- |
|
|
|
Risk-free interest rate |
|
|
|
|
|
|
|
||
|
Volatility |
|
|
|
|
|
|
|
||
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value per share of options granted |
|
$ |
|
|
|
$ |
|
|
|
The dividend yield is
The risk-free interest rate is based on that of the U.S. Treasury bond.
Volatility is estimated based on volatility average of the Company’s Common Stock price.
14
Restricted Stock Units
Restricted stock units (“RSUs”), including time-based and performance-based awards, have been granted under the Company’s 2013 Incentive Plan, 2021 Incentive Plan, and as inducements grants granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules.
The following table summarizes the activity of the Company’s RSUs:
|
|
|
Number of RSUs |
|
|
Weighted- Average Grant Date Fair Value |
|
||
|
Unvested at September 30, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Unvested at June 30, 2021 |
|
|
|
|
|
$ |
|
|
During the three months ended June 30, 2021 and 2020, the Company recorded $
For RSUs, the grant date fair value of the award is based on the Company’s closing stock price at the grant date, with consideration given to the probability of achieving performance conditions for performance-based awards. The grant date fair value of the RSUs granted by the Company for the three months ended June 30, 2021 and 2020 was $
As of June 30, 2021, the pre-tax compensation expense for all unvested RSUs in the amount of $
NOTE 10. FAIR VALUE MEASUREMENTS
The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.
15
The following table summarizes fair value measurements at June 30, 2021 and September 30, 2020 for assets and liabilities measured at fair value on a recurring basis.
June 30, 2021
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
Marketable securities |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
Short-term investments (held to maturity) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Long-term investments (held to maturity) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Contingent consideration |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
September 30, 2020:
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
Marketable securities |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
Short-term investments (held to maturity) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Long-term investments (held to maturity) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Contingent consideration |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
16
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “project,” “could,” “estimate,” “target,” “forecast,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, or other characterizations of future events or circumstances are forward-looking statements.
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In addition, many of these risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. As such, our actual results may differ materially from those expressed in any forward-looking statements. Readers should carefully review the factors identified in our most recent Annual Report on Form 10-K under the caption “Risk Factors” as well as the additional risks and uncertainties described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and this Quarterly Report on Form 10-Q. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events
Description of Business
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, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock and (6) the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock.
Overview
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-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-LUNG2 for chronic obstructive pulmonary disorder, and ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”). 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. JNJ3989 (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.
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.
Arrowhead has focused its resources on therapeutics that exclusively utilize the Company’s Targeted RNAi Molecule (TRiMTM) platform technology. Therapeutics built on the TRiMTM platform have demonstrated high levels of pharmacologic activity in multiple animal models spanning several therapeutic areas. TRiMTM enabled therapeutics offer several potential advantages over prior generation and competing technologies, including: simplified manufacturing and reduced costs; multiple routes of administration including subcutaneous injection and inhaled administration; the ability to target multiple tissue types including liver, lung and tumors; and the potential for improved safety and reduced risk of intracellular buildup, because there are less metabolites from smaller, simpler molecules.
17
During fiscal year 2021, the Company continued to develop its pipeline and partnered candidates. The Company announced positive interim clinical data on (i) AROAAT2002, an open-label Phase 2 clinical study of ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being co-developed with Takeda as a treatment for the rare genetic liver disease associated with AATD, (ii) AROHSD1001, a Phase 1/2 clinical study of ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH), and (iii) AROHIF21001, a Phase 1b dose-finding clinical study of ARO-HIF2, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with clear cell renal cell carcinoma. The Company also presented preclinical data on the development of ARO-DUX4, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with facioscapulohumeral muscular dystrophy (FSHD), at the 28th Annual FSHD Society International Research Congress. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, and presented positive clinical data from the Phase 1/2 clinical studies of ARO-APOC3 and ARO-ANG3 at the American Heart Association Scientific Sessions 2020. The Company filed two Investigational New Drug Applications with the United States Food and Drug Administration (the “FDA”) to begin a Phase 2b clinical study of ARO-APOC3 in patients with severe hypertriglyceridemia and a Phase 2b clinical study of ARO-ANG3 in patients with mixed dyslipidemia, and initiated these two Phase 2b clinical studies in the third quarter of fiscal year 2021. In July 2021, the Company voluntarily paused AROENaC1001, a Phase 1/2 clinical study of ARO-ENaC, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with cystic fibrosis, after receiving a preliminary update from an ongoing chronic toxicology study in rats that contained unexpected signals of local lung inflammation. New screening, enrollment and any further dosing of investigational ARO-ENaC have been paused pending additional data from ongoing nonclinical toxicology studies. The Company announced two collaborations during the first three quarters of fiscal year 2021: a collaboration with Takeda to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease and a collaboration with Horizon to develop ARO-XDH, an investigational RNAi therapeutic for uncontrolled gout. In July 2021, the Company received Breakthrough Therapy designation from the FDA for ARO-AAT, which is a process designed to expedite the development and review of drugs that are intended to treat a serious life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The Company also earned a $10 million payment in connection with Janssen’s exercise of its option right for ARO-JNJ1 in May 2021, which option grants Janssen all rights, including licenses, and obligations to develop and commercialize ARO-JNJ1. See Note 2 for more information regarding the Company’s collaboration and license agreements.
The Company’s partnered candidates under its collaboration agreements also continued to progress. Janssen began dosing patients in a Phase 2b triple combination study called REEF-1, designed to enroll up to 450 patients with chronic hepatitis B infection. The Company is currently performing discovery, optimization and preclinical research and development for ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 for Janssen as part of the Company’s Research Collaboration and Option Agreement with Janssen (“Janssen Collaboration Agreement”). Under the terms of the Janssen 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 Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead Common Stock, and three milestone payments totaling $60.0 million, which include a $10 million payment for Janssen’s exercise of its option right for ARO-JNJ1 in May 2021. The Company may receive up to $1.6 billion in additional development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in additional development and sales milestone payments for the three additional targets 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.
The Company’s collaboration agreement with Amgen for Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”) continues to progress. In July 2020, Amgen initiated a Phase 2 clinical study, which resulted in a $20.0 million milestone payment to the Company. 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, $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 eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement.
On October 7, 2020, the Company entered into an Exclusive License and Co-Funding Agreement with Takeda (the “Takeda License Agreement”). Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program. 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 receive an exclusive license to commercialize ARO-AAT with the Company 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.
18
On June 18, 2021, the Company entered into a Collaboration and License Agreement (the “Horizon License Agreement”) with Horizon Therapeutics Ireland DAC (“Horizon”). Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones. The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales. The revenue recognition for these collaboration agreements is discussed further in Note 2 of the Notes to Consolidated Financial Statements of Part I, Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
The Company continues to develop other clinical candidates for future clinical trials. Clinical candidates are tested internally and through GLP toxicology studies at outside laboratories. Drug materials for such studies and clinical trials are either contracted to third-party manufacturers or manufactured internally. The Company engages third-party contract research organizations (“CROs”) to manage clinical trials and works cooperatively with such organizations on all aspects of clinical trial management, including plan design, patient recruiting, and follow up. These outside costs, relating to the preparation for and administration of clinical trials, are referred to as “candidate costs.” If the clinical candidates progress through human testing, candidate costs will increase.
The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended June 30, 2021 were not significantly impacted by COVID-19. During fiscal year 2020, the Company had temporarily paused enrollment in its two ARO-AAT studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of screening and enrolling patients. During the pause in enrollment, patients already enrolled in these studies continued to be dosed per protocol and continued to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs. Additionally, 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 to operate with limited impact, other than for enhanced safety measures, including work from home policies. However, the Company cannot predict the impact the progression of COVID-19 will have on future financial 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 ultimately the length and severity of the COVID-19 pandemic.
Net losses were $29.9 million for the three months ended June 30, 2021 as compared to net losses of $13.6 million for the three months ended June 30, 2020. Net losses were $77.5 million for the nine months ended June 30, 2021 as compared to net losses of $36.1 million for the nine months ended June 30, 2020. Net losses per share-diluted were $0.29 for the three months ended June 30, 2021 as compared to net losses per share-diluted of $0.13 for the three months ended June 30, 2020. Net losses per share-diluted were $0.75 for the nine months ended June 30, 2021 as compared to net losses per share-diluted of $0.36 for the nine months ended June 30, 2020. The increase in net losses for the three and nine months ended June 30, 2021 was due to an increase in research and development expenses as the Company’s pipeline of candidates has expanded and progressed through clinical trial phases, partially offset by an increase in revenue from the Company’s license and collaboration agreements, primarily from the Takeda collaboration.
The Company has strengthened its liquidity and financial position through upfront and milestone payments received under its collaboration agreements, as well as equity financings. Under the terms of the Company’s agreements with Janssen 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, and three milestone payments totaling $60.0 million. Under the terms of the Company’s agreements with Amgen, 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. The Company’s October 2020 licensing agreement with Takeda resulted in a $300.0 million upfront payment, which was collected in the beginning of the second quarter of 2021. The Company had $326.0 million of cash and cash equivalents, $126.4 million of marketable securities, $63.9 million in short-term investments, $128.4 million of long term investments and $734.9 million of total assets as of June 30, 2021, as compared to $143.6 million of cash and cash equivalents, $85.0 million of marketable securities, $86.9 million in short-term investments, $137.5 million of long term investments and $522.5 million of total assets as of September 30, 2020, respectively. Based upon the Company’s current cash and investment resources and operating plan, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months.
Critical Accounting Policies and Estimates
There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K.
19
Results of Operations
The following data summarizes our results of operations for the following periods indicated:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(in thousands, except per share amounts) |
|
|||||
|
Revenues |
|
$ |
45,891 |
|
|
$ |
27,376 |
|
|
Operating Income (loss) |
|
$ |
(31,868 |
) |
|
$ |
(15,946 |
) |
|
Net Income (loss) |
|
$ |
(29,924 |
) |
|
$ |
(13,611 |
) |
|
Net Income (Loss) per Share-Diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(in thousands, except per share amounts) |
|
|||||
|
Revenues |
|
$ |
100,004 |
|
|
$ |
80,359 |
|
|
Operating Income (loss) |
|
$ |
(84,153 |
) |
|
$ |
(43,040 |
) |
|
Net Income (loss) |
|
$ |
(77,474 |
) |
|
$ |
(36,120 |
) |
|
Net Income (Loss) per Share-Diluted |
|
$ |
(0.75 |
) |
|
$ |
(0.36 |
) |
The increase in revenue for the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 was driven by the revenue recognized for the Takeda collaboration. The increase in net losses during the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 was driven by an increase in research and development expenses as our pipeline of clinical candidates has continued to increase and progress through clinical trial phases, partially offset by an increase in revenue from the Takeda License Agreement.
Revenue
Total revenue for the three months ended June 30, 2021 and 2020 was $45.9 million and $27.4 million, respectively. Total revenue for the nine months ended June 30, 2021 and 2020 was $100.0 million and $80.4 million, respectively. Revenue for the three months ended June 30, 2021 is primarily related to the recognition of $35.7 million of revenue associated with the Takeda License Agreement and the $10 million milestone payment from Janssen for ARO-JNJ1. Revenue for the nine months ended June 30, 2021 is primarily related to the recognition of $69.3 million of revenue associated with the Takeda License Agreement, the recognition of a portion of the $252.7 million initial transaction price associated with our agreements with Janssen and JJDC for the progress we achieved towards completing our performance obligations under those agreements, and the $10 million milestone payment from Janssen for ARO-JNJ1.
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 or 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 other 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. In 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 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 months ended June 30, 2021 and 2020, the Company recognized $0 and $20.0 of revenue, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0 and $20 million of revenue, respectively. As of June 30, 2021, 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.
20
Janssen Pharmaceuticals, Inc.
On October 3, 2018, the Company entered into the Janssen License Agreement and 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 is responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates. These candidates are subject to certain restrictions and do not include candidates that already were in the Company’s pipeline. The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, is sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be 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 three milestone payments totaling $60.0 million, and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the three additional targets 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.
The Company has evaluated these agreements in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. 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.
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. This revenue will be recognized using a proportional performance method (based on actual costs incurred versus total estimated costs incurred) beginning in October 2018 and ending as the Company’s efforts in overseeing the Phase 1/2 clinical trial are completed. During the three months ended June 30, 2021 and 2020, the Company recognized approximately $0 million and $6.9 million of revenue associated with this performance obligation, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized approximately $20.2 million and $57.9 million of revenue associated with this performance obligation, respectively. As of June 30, 2021, there were $0.4 million 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 begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company will be entirely funded by Janssen. During the three months ended June 30, 2021 and 2020, the Company recognized $0.2 million and $0.4 million of revenue associated with these efforts, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0.5 million and $2.4 million of revenue associated with these efforts, respectively. In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $10.0 million milestone payment to the Company. This $10 million milestone payment was recognized entirely during the three months ended June 30, 2021. As of June 30, 2021, there were $0.3 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 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
21
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 receive an exclusive license to commercialize ARO-AAT with the Company 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 Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. 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. The Company will co-fund certain of the development and commercialization costs that Takeda manages, and 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 approximately $300.0 million, which includes the upfront payment. The Company has excluded any future estimated milestones, royalties, or profit-sharing payments 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 costs incurred versus total estimated costs incurred for the Takeda R&D Services). Revenue for the three months ended June 30, 2021 and 2020 was $35.7 million and $0, respectively. Revenue for the nine months ended June 30, 2021 and 2020 was $69.3 million and $0, respectively. As of June 30, 2021, there were $0 in contract assets recorded as accounts receivable, $150.9 million in contract liabilities recorded as deferred revenue and $79.7 million in contract liabilities recorded as deferred revenue, net of the current portion.
Horizon Therapeutics Ireland DAC
On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon. Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones. The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.
The Company has evaluated the Horizon License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Horizon 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 conduct all activities through the preclinical stages of development of ARO-XDH (the “Horizon R&D Services”). Due to the specialized and unique nature of these Horizon 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 Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of ARO-XDH.
The Company determined the initial transaction price totaled approximately $40.0 million, which includes the upfront payment. The Company will exclude any future estimated milestones, royalties, or profit-sharing payments from this transaction price to date. The Company will allocate the total $40.0 million initial transaction price to its one distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services. Revenue will be recognized using a proportional performance method. At June 30, 2021, no amounts were recorded on the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Income (Loss), as the Company has not performed any substantive Horizon R&D Services.
22
Operating Expenses
The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. Certain reclassifications have been made to prior-period operating expense categories to conform to the current period presentation. For purposes of comparison, the amounts for the three and nine months ended June 30, 2021 and 2020 are shown in the tables below.
Research and Development Expenses
R&D expenses are related to the Company’s research and development efforts and related program costs, which are comprised primarily of outsourced costs related to the manufacturing of clinical supplies, toxicity/efficacy studies and clinical trial expenses. Internal costs primarily relate to operations at our research facilities in Madison, Wisconsin and San Diego, California, including facility costs and laboratory-related expenses. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes and related benefits and stock compensation for our R&D personnel. Depreciation and amortization expense relates to depreciation on lab equipment and leasehold improvements at our research facilities. We do not separately track R&D expenses by individual research and development projects, including by individual drug candidates. The Company operates in a cross-functional manner across projects and does not separately allocate facilities-related costs, candidate costs, discovery costs, compensation expenses, depreciation and amortization expenses, and other expenses for research and development activities. The following table provides details of research and development expenses for the periods indicated:
(table below in thousands)
|
|
|
Three |
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|||||||
|
|
|
Months Ended |
|
|
% of Expense |
|
|
Months Ended |
|
|
% of Expense |
|
|
Increase (Decrease) |
|
|||||||||
|
|
|
June 30, 2021 |
|
|
Category |
|
|
June 30, 2020 |
|
|
Category |
|
|
$ |
|
|
% |
|
||||||
|
Salaries |
|
$ |
8,518 |
|
|
|
14 |
% |
|
$ |
4,861 |
|
|
|
15 |
% |
|
$ |
3,657 |
|
|
|
75 |
% |
|
Facilities related |
|
|
1,306 |
|
|
|
2 |
% |
|
|
1,209 |
|
|
|
4 |
% |
|
|
97 |
|
|
|
8 |
% |
|
Candidate costs |
|
|
31,468 |
|
|
|
53 |
% |
|
|
15,755 |
|
|
|
48 |
% |
|
|
15,713 |
|
|
|
100 |
% |
|
R&D discovery costs |
|
|
10,082 |
|
|
|
17 |
% |
|
|
4,070 |
|
|
|
13 |
% |
|
|
6,012 |
|
|
|
148 |
% |
|
Total research and development expense, excluding non-cash expense |
|
|
51,374 |
|
|
|
87 |
% |
|
|
25,895 |
|
|
|
80 |
% |
|
|
25,479 |
|
|
|
98 |
% |
|
Stock compensation |
|
|
6,530 |
|
|
|
11 |
% |
|
|
5,296 |
|
|
|
16 |
% |
|
|
1,234 |
|
|
|
23 |
% |
|
Depreciation/amortization |
|
|
1,421 |
|
|
|
2 |
% |
|
|
1,382 |
|
|
|
4 |
% |
|
|
39 |
|
|
|
3 |
% |
|
Total research and development expense |
|
$ |
59,325 |
|
|
|
100 |
% |
|
$ |
32,573 |
|
|
|
100 |
% |
|
$ |
26,752 |
|
|
|
82 |
% |
|
|
|
Nine |
|
|
|
|
|
|
Nine |
|
|
|
|
|
|
|
|
|||||||
|
|
|
Months Ended |
|
|
% of Expense |
|
|
Months Ended |
|
|
% of Expense |
|
|
Increase (Decrease) |
|
|||||||||
|
|
|
June 30, 2021 |
|
|
Category |
|
|
June 30, 2020 |
|
|
Category |
|
|
$ |
|
|
% |
|
||||||
|
Salaries |
|
$ |
25,375 |
|
|
|
18 |
% |
|
$ |
13,173 |
|
|
|
15 |
% |
|
$ |
12,202 |
|
|
|
93 |
% |
|
Facilities related |
|
|
4,456 |
|
|
|
3 |
% |
|
|
2,653 |
|
|
|
3 |
% |
|
|
1,803 |
|
|
|
68 |
% |
|
Candidate costs |
|
|
67,152 |
|
|
|
48 |
% |
|
|
44,901 |
|
|
|
53 |
% |
|
|
22,251 |
|
|
|
50 |
% |
|
R&D discovery costs |
|
|
20,295 |
|
|
|
14 |
% |
|
|
11,540 |
|
|
|
14 |
% |
|
|
8,755 |
|
|
|
76 |
% |
|
Total research and development expense, excluding non-cash expense |
|
$ |
117,278 |
|
|
|
84 |
% |
|
$ |
72,267 |
|
|
|
85 |
% |
|
$ |
45,011 |
|
|
|
62 |
% |
|
Stock compensation |
|
|
18,421 |
|
|
|
13 |
% |
|
|
9,411 |
|
|
|
11 |
% |
|
|
9,010 |
|
|
|
96 |
% |
|
Depreciation/amortization |
|
|
4,877 |
|
|
|
4 |
% |
|
|
3,712 |
|
|
|
4 |
% |
|
|
1,165 |
|
|
|
31 |
% |
|
Total research and development expense |
|
$ |
140,576 |
|
|
|
100 |
% |
|
$ |
85,390 |
|
|
|
100 |
% |
|
$ |
55,186 |
|
|
|
65 |
% |
Salaries expense increased by $3,657,000 from $4,861,000 during the three months ended June 30, 2020 to $8,518,000 during the current period. Salaries expense increased by $12,202,000 from $13,173,000 during the nine months ended June 30, 2020 to $25,375,000 during the current period. This increase is primarily due to an increase in R&D headcount that has occurred as the Company has expanded its pipeline of candidates. We anticipate this expense to continue to increase as we continue to expand our pipeline of candidates and increase headcount to support our discovery efforts to identify new drug candidates
23
Facilities expense increased by $97,000 from $1,209,000 during the three months ended June 30, 2020 to $1,306,000 during the current period. Facilities expense increased by $1,803,000 from $2,653,000 during the nine months ended June 30, 2020 to $4,456,000 during the current period. This category includes rental costs for our research and development facilities in Madison, Wisconsin and San Diego, California. This increase is primarily due to the commencement of our sublease in San Diego, California in April 2020 and the lease expansion at our Madison facility in May 2020.
Candidate costs increased by $15,713,000 from $15,755,000 during the three months ended June 30, 2020 to $31,468,000 during the current period. Candidate costs increased by $22,251,000 from $44,901,000 during the nine months ended June 30, 2020 to $67,152,000 during the current period. This increase is primarily due to the progression of our pipeline of candidates into and through clinical trials, which results in higher outsourced clinical trial, toxicity study and manufacturing costs. We anticipate these expenses to continue to increase as our pipeline of candidates grows and progresses to later phase clinical trials.
R&D discovery costs increased by $6,012,000 from $4,070,000 during the three months ended June 30, 2020 to $10,082,000 in the current period. R&D discovery costs increased by $8,755,000 from $11,540,000 during the nine months ended June 30, 2020 to $20,295,000 in the current period. This increase is primarily due to the growth of our discovery efforts, including the addition of our research facility in San Diego. We anticipate this expense to continue to increase as we increase headcount to support our discovery efforts to identify new drug candidates.
Stock compensation expense, a non-cash expense, increased by $1,234,000 from $5,296,000 during the three months ended June 30, 2020 to $6,530,000 during the current period. Stock compensation expense, a non-cash expense, increased by $9,010,000 from $9,411,000 during the nine months ended June 30, 2020 to $18,421,000 during the current period. Stock compensation expense is based upon the valuation of stock options and restricted stock units granted to employees, directors and certain consultants. Many variables affect the amount expensed, including the Company’s stock price on the date of the grant, as well as other assumptions. The increase in the expense in the current period is primarily due to the increased headcount discussed above and a mix of higher grant date fair values of awards amortizing during the current period due to the Company’s stock price at the time of the grants. We generally expect future stock compensation expense to increase as our headcount continues to increase to support our clinical pipeline.
Depreciation and amortization expense, a non-cash expense, increased by $39,000 from $1,382,000 during the three months ended June 30, 2020 to $1,421,000 during the current period. Depreciation and amortization expense, a non-cash expense, increased by $1,165,000 from $3,712,000 during the nine months ended June 30, 2020 to $4,877,000 during the current period. The majority of depreciation and amortization expense relates to depreciation on lab equipment and leasehold improvements at our Madison and San Diego research facilities.
General & Administrative Expenses
The following table provides details of our general and administrative expenses for the periods indicated:
(table below in thousands)
|
|
|
Three |
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|||||||
|
|
|
Months Ended |
|
|
% of Expense |
|
|
Months Ended |
|
|
% of Expense |
|
|
Increase (Decrease) |
|
|||||||||
|
|
|
June 30, 2021 |
|
|
Category |
|
|
June 30, 2020 |
|
|
Category |
|
|
$ |
|
|
% |
|
||||||
|
Salaries |
|
$ |
2,570 |
|
|
|
14 |
% |
|
$ |
2,633 |
|
|
|
25 |
% |
|
$ |
(63 |
) |
|
|
-2 |
% |
|
Professional/outside services |
|
|
379 |
|
|
|
2 |
% |
|
|
2,020 |
|
|
|
19 |
% |
|
|
(1,641 |
) |
|
|
-81 |
% |
|
Facilities related |
|
|
610 |
|
|
|
3 |
% |
|
|
446 |
|
|
|
4 |
% |
|
|
164 |
|
|
|
37 |
% |
|
Other G&A |
|
|
2,278 |
|
|
|
12 |
% |
|
|
746 |
|
|
|
7 |
% |
|
|
1,532 |
|
|
|
205 |
% |
|
Total general & administrative expense, excluding non-cash expense |
|
|
5,837 |
|
|
|
32 |
% |
|
|
5,845 |
|
|
|
54 |
% |
|
|
(8 |
) |
|
|
159 |
% |
|
Stock compensation |
|
|
12,020 |
|
|
|
65 |
% |
|
|
4,750 |
|
|
|
44 |
% |
|
|
7,270 |
|
|
|
153 |
% |
|
Depreciation/amortization |
|
|
577 |
|
|
|
3 |
% |
|
|
154 |
|
|
|
1 |
% |
|
|
423 |
|
|
|
275 |
% |
|
Total general & administrative expense |
|
$ |
18,434 |
|
|
|
100 |
% |
|
$ |
10,749 |
|
|
|
100 |
% |
|
$ |
7,685 |
|
|
|
586 |
% |
24
|
|
|
Nine |
|
|
|
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Months Ended |
|
|
% of Expense |
|
|
Months Ended |
|
|
% of Expense |
|
|
Increase (Decrease) |
|
|||||||||
|
|
|
June 30, 2021 |
|
|
Category |
|
|
June 30, 2020 |
|
|
Category |
|
|
$ |
|
|
% |
|
||||||
|
Salaries |
|
$ |
8,411 |
|
|
|
19 |
% |
|
$ |
9,747 |
|
|
|
26 |
% |
|
$ |
(1,336 |
) |
|
|
-14 |
% |
|
Professional/outside services |
|
|
4,199 |
|
|
|
10 |
% |
|
|
5,519 |
|
|
|
15 |
% |
|
|
(1,320 |
) |
|
|
-24 |
% |
|
Facilities related |
|
|
2,127 |
|
|
|
5 |
% |
|
|
1,657 |
|
|
|
4 |
% |
|
|
470 |
|
|
|
28 |
% |
|
Other G&A |
|
|
4,326 |
|
|
|
10 |
% |
|
|
2,531 |
|
|
|
6 |
% |
|
|
1,795 |
|
|
|
71 |
% |
|
Total general & administrative expense, excluding non-cash expense |
|
$ |
19,063 |
|
|
|
44 |
% |
|
$ |
19,454 |
|
|
|
51 |
% |
|
$ |
(391 |
) |
|
|
-2 |
% |
|
Stock compensation |
|
|
23,631 |
|
|
|
54 |
% |
|
|
18,099 |
|
|
|
48 |
% |
|
|
5,532 |
|
|
|
31 |
% |
|
Depreciation/amortization |
|
|
887 |
|
|
|
2 |
% |
|
|
456 |
|
|
|
1 |
% |
|
|
431 |
|
|
|
95 |
% |
|
Total general & administrative expense |
|
$ |
43,581 |
|
|
|
100 |
% |
|
$ |
38,009 |
|
|
|
100 |
% |
|
$ |
5,572 |
|
|
|
15 |
% |
Salaries expense decreased by $63,000 from $2,633,000 during the three months ended June 30, 2020 to $2,570,000 during the current period. Salaries expense decreased by $1,336,000 from $9,747,000 during the nine months ended June 30, 2020 to $8,411,000 during the current period. The decrease of $1,336,000 during the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020 is primarily due to higher annual performance bonuses awarded in December 2019. We expect salaries expense to increase as our headcount continues to increase to support our expanding clinical pipeline.
Professional/outside services include legal, accounting, consulting, patent expenses, business insurance expenses and other outside services retained by the Company. Professional/outside services expense decreased by $1,641,000 from $2,020,000 during the three months ended June 30, 2020 to $379,000 during the current period. Professional/outside services expense decreased by $1,320,000 from $5,519,000 during the nine months ended June 30, 2020 to $4,199,000 during the current period. The decrease in professional/outside services expense is primarily related to the timing of certain patent-related expenses.
Facilities-related expense increased by $164,000 from $446,000 during the three months ended June 30, 2020 to $610,000 during the current period. Facilities-related expense increased by $470,000 from $1,657,000 during the nine months ended June 30, 2020 to $2,127,000 during the current period. This category primarily includes rental costs for our corporate headquarters in Pasadena, California. The increase in both periods was due to the additional space leased for our corporate headquarters to accommodate an increase in headcount.
Other G&A expense increased by $1,532,000 from $746,000 during the three months ended June 30, 2020 to $2,278,000 during the current period. Other G&A expense increased by $1,795,000 from $2,531,000 during the nine months ended June 30, 2020 to $4,326,000 during the current period. This category consists primarily of travel, communication and technology, office expenses, and franchise and property tax expenses. The increase is due to an increase in headcount at the Company’s corporate headquarters.
Stock compensation expense, a non-cash expense, increased by $7,270,000 from $4,750,000 during the three months ended June 30, 2020 to $12,020,000 during the current period. Stock compensation expense, a non-cash expense, increased by $5,532,000 from $18,099,000 during the nine months ended June 30, 2020 to $23,631,000 during the current period. Stock compensation expense is based upon the valuation of stock options and restricted stock units granted to employees, directors and certain consultants. Many variables affect the amount expensed, including the Company’s stock price on the date of the grant, as well as other assumptions. We generally expect future stock compensation expense to increase as our headcount continues to increase to support our clinical pipeline.
Depreciation and amortization expense, a noncash expense, increased by $423,000 from $154,000 during the three months ended June 30, 2020 to $577,000 during the current period. Depreciation and amortization expense, a noncash expense, increased by $431,000 from $456,000 during the nine months ended June 30, 2020 to $887,000 during the current period. The increase is primarily related to amortization of leasehold improvements for our corporate headquarters.
Other Income/Expense
Other income/expense was income of $2,335,000 during the three months ended June 30, 2020 compared to income of $1,944,000 during the current period. Other income/expense was income of $6,920,000 during the nine months ended June 30, 2020 compared to income of $6,679,000 during the current period. Other income is primarily related to interest income and realized and unrealized gain/loss on our marketable securities.
25
Liquidity and Capital Resources
Arrowhead has historically financed its operations through the sale of its equity securities and revenue from its 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.
At June 30, 2021, the Company had cash on hand of approximately $326.0 million as compared to $143.6 million at September 30, 2020. Cash invested in short-term fixed income securities and marketable securities was $190.3 million at June 30, 2021, compared to $171.9 million at September 30, 2020. Cash invested in long-term fixed income securities was $128.4 million at June 30, 2021, compared to $137.5 million at September 30, 2020. The Company also entered into an Open Market Sale Agreement (the “ATM agreement”) in August 2020, pursuant to which the Company may, from time to time, sell up to $250,000,000 in shares of the Company’s Common Stock through Jefferies LLC. As of June 30, 2021, no shares have been issued under the ATM agreement. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months.
A summary of cash flows for the nine months ended June 30, 2021 and 2020 is as follows:
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||
|
|
|
June 30, 2021 |
|
|
June 30, 2020 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Cash Flow from: |
|
|
|
|
|
|
|
|
|
Operating Activities |
|
|
195,341 |
|
|
|
(84,541 |
) |
|
Investing Activities |
|
|
(23,433 |
) |
|
|
(174,883 |
) |
|
Financing Activities |
|
|
10,490 |
|
|
|
256,943 |
|
|
Net Increase (decrease) in cash and cash equivalents |
|
|
182,398 |
|
|
|
(2,481 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
143,583 |
|
|
|
221,804 |
|
|
Cash and cash equivalents at end of period |
|
|
325,981 |
|
|
|
219,323 |
|
During the nine months ended June 30, 2021, cash flow provided by operating activities was $195.3 million, which was primarily due to the $300 million payment received under the Takeda License Agreement and the $10 million milestone payment from Janssen for ARO-JNJ1, partially offset by ongoing expenses of the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $23.4 million, which was primarily related to the purchase of property and equipment of $15.4 million, partially offset by the net purchase of investments of $8.1 million. Cash provided by financing activities of $10.5 million was related to cash received from stock option exercises.
During the nine months ended June 30, 2020, the Company used $84.5 million in cash from operating activities, which was primarily related to the ongoing expenses of the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $174.9 million, which was primarily related to the purchase of fixed-income investments of $194.0 million and property and equipment of $10.1 million, partially offset by the maturity of $29.1 million of fixed-income securities. Cash provided by financing activities of $256.9 million was driven by the Company’s securities financing in December 2019, which generated $250.5 million in net cash proceeds, as well as $6.5 million in cash received from stock option exercises.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2020.
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ITEM 4. |
CONTROLS AND PROCEDURES |
Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer where appropriate, to allow timely decisions regarding required disclosure.
No change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
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ITEM 1. |
LEGAL PROCEEDINGS |
From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty. There have been no material developments in the legal proceedings that we disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended September 30, 2020.
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ITEM 1A. |
Risk Factors |
There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended September 30, 2020. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business.
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. |
MINE SAFETY DISCLOSURES |
Not Applicable.
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ITEM 5. |
OTHER INFORMATION |
None.
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ITEM 6. |
EXHIBITS |
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Exhibit |
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Document Description |
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10.1 |
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Form of Performance RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)* |
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10.2 |
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Form of Stock Option Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)* |
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10.3 |
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Form of RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)* |
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10.4 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document* |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document* |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document* |
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104 |
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The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL (included as Exhibit 101)* |
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* |
Filed herewith |
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** |
Furnished herewith |
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† |
Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 5, 2021
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ARROWHEAD PHARMACEUTICALS, INC. |
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By: |
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/s/ Kenneth A. Myszkowski |
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Kenneth A. Myszkowski Chief Financial Officer |
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(Principal Financial Officer and Duly Authorized Officer) |
30