arwr-10q_20191231.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2019

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

Commission file number 001-38042

 

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-0408024

(State of incorporation)

 

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

177 E. Colorado Blvd, Suite 700

Pasadena, California 91105

(626) 304-3400

(Address and telephone number of principal executive offices)

 

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

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

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

 

Large Accelerated Filer

 

  

Accelerated Filer

 

  

 

 

 

 

Non-Accelerated Filer

 

  

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging Growth Company

 

 

 

 

 

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.001 per share

 

ARWR

 

The Nasdaq Global Select Market

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

The number of shares of the registrant’s common stock outstanding as of February 3, 2020 was 101,654,477.

 

 

 


 

 

 

 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Consolidated Statement of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

4

 

 

Notes to Consolidated Financial Statements

5

 

 

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

14

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

22

 

 

ITEM 4. CONTROLS AND PROCEDURES

22

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

23

 

 

ITEM 1A. RISK FACTORS

23

 

 

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

23

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

23

 

 

ITEM 4. MINE SAFETY DISCLOSURES

23

 

 

ITEM 5. OTHER INFORMATION

23

 

 

ITEM 6. EXHIBITS

24

 

 

SIGNATURE

25

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

 

 

(unaudited)

December 31, 2019

 

 

 

September 30, 2019

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

461,032,249

 

 

$

221,804,128

 

Accounts receivable

 

1,345,298

 

 

 

661,361

 

Prepaid expenses

 

2,733,140

 

 

 

3,317,999

 

Other current assets

 

1,534,344

 

 

 

2,563,435

 

Short term investments

 

40,969,341

 

 

 

36,899,894

 

TOTAL CURRENT ASSETS

 

507,614,372

 

 

 

265,246,817

 

Property and equipment, net

 

26,434,783

 

 

 

23,214,899

 

Intangible assets, net

 

16,638,473

 

 

 

17,063,580

 

Long term investments

 

26,329,098

 

 

 

44,175,993

 

Right-of-use assets

 

10,440,758

 

 

 

-

 

Other assets

 

144,150

 

 

 

144,148

 

TOTAL ASSETS

$

587,601,634

 

 

$

349,845,437

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

12,201,532

 

 

$

7,649,921

 

Accrued expenses

 

3,988,186

 

 

 

6,504,729

 

Accrued payroll and benefits

 

2,993,682

 

 

 

4,955,887

 

Lease liabilities

 

461,178

 

 

 

-

 

Deferred rent

 

-

 

 

 

173,952

 

Deferred revenue

 

54,034,129

 

 

 

77,769,629

 

Other current liabilities

 

16,561

 

 

 

16,561

 

TOTAL CURRENT LIABILITIES

 

73,695,268

 

 

 

97,070,679

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

14,377,723

 

 

 

-

 

Deferred rent, net of current portion

 

-

 

 

 

3,703,364

 

Deferred revenue, net of current portion

 

-

 

 

 

5,035,142

 

TOTAL LONG-TERM LIABILITIES

 

14,377,723

 

 

 

8,738,506

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Pharmaceuticals, Inc. stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 145,000,000 shares authorized; 101,111,797 and 95,506,271 shares

   issued and outstanding as of December 31, 2019 and September 30, 2019, respectively

 

193,481

 

 

 

187,876

 

Additional paid-in capital

 

922,050,595

 

 

 

664,086,155

 

Accumulated other comprehensive income (loss)

 

(195,550

)

 

 

(391,624

)

Accumulated deficit

 

(421,964,695

)

 

 

(419,290,967

)

Total Arrowhead Pharmaceuticals, Inc. stockholders' equity

 

500,083,831

 

 

 

244,591,440

 

Noncontrolling interest

 

(555,188

)

 

 

(555,188

)

TOTAL STOCKHOLDERS’ EQUITY

 

499,528,643

 

 

 

244,036,252

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

587,601,634

 

 

$

349,845,437

 

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)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

REVENUE

 

$

29,454,579

 

 

$

34,657,896

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Research and development

 

 

23,373,616

 

 

 

17,572,043

 

General and administrative expenses

 

 

10,934,557

 

 

 

6,139,709

 

TOTAL OPERATING EXPENSES

 

 

34,308,173

 

 

 

23,711,752

 

OPERATING INCOME (LOSS)

 

 

(4,853,594

)

 

 

10,946,144

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

2,179,866

 

 

 

1,091,109

 

TOTAL OTHER INCOME (EXPENSE)

 

 

2,179,866

 

 

 

1,091,109

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(2,673,728

)

 

 

12,037,253

 

Provision for income taxes

 

 

-

 

 

 

-

 

NET INCOME (LOSS)

 

 

(2,673,728

)

 

 

12,037,253

 

NET INCOME (LOSS) PER SHARE - BASIC

 

$

(0.03

)

 

$

0.13

 

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

(0.03

)

 

$

0.13

 

Weighted average shares outstanding - basic

 

 

97,090,079

 

 

 

91,091,823

 

Weighted average shares outstanding - diluted

 

 

97,090,079

 

 

 

95,590,183

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

196,074

 

 

 

(22,180

)

COMPREHENSIVE INCOME (LOSS)

 

$

(2,477,654

)

 

$

12,015,073

 

 

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

 

 

 

2


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2018

 

 

88,505,302

 

 

$

180,875

 

 

$

582,902,694

 

 

$

(21,564

)

 

$

(487,265,816

)

 

$

(555,188

)

 

$

95,241,001

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,717,534

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,717,534

 

Exercise of stock options

 

 

166,327

 

 

 

166

 

 

 

1,004,528

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,004,694

 

Common stock - restricted stock units vesting

 

 

658,959

 

 

 

659

 

 

 

(659

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

3,260,869

 

 

 

3,261

 

 

 

60,518,468

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,521,729

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22,180

)

 

 

-

 

 

 

-

 

 

 

(22,180

)

Net income (loss) for the three months ended December 31, 2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,037,253

 

 

 

-

 

 

 

12,037,253

 

Balance at December 31, 2018

 

 

92,591,457

 

 

$

184,961

 

 

$

647,142,565

 

 

$

(43,744

)

 

$

(475,228,563

)

 

$

(555,188

)

 

$

171,500,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2019

 

 

95,506,271

 

 

$

187,876

 

 

$

664,086,155

 

 

$

(391,624

)

 

$

(419,290,967

)

 

$

(555,188

)

 

$

244,036,252

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

4,491,752

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,491,752

 

Exercise of stock options

 

 

472,193

 

 

 

472

 

 

 

3,001,082

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,001,554

 

Common stock - restricted stock units vesting

 

 

533,333

 

 

 

533

 

 

 

(533

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

4,600,000

 

 

 

4,600

 

 

 

250,472,139

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250,476,739

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

196,074

 

 

 

-

 

 

 

-

 

 

 

196,074

 

Net income (loss) for the three months ended December 31, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,673,728

)

 

 

-

 

 

 

(2,673,728

)

Balance at December 31, 2019

 

 

101,111,797

 

 

$

193,481

 

 

$

922,050,595

 

 

$

(195,550

)

 

$

(421,964,695

)

 

$

(555,188

)

 

$

499,528,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

3


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,673,728

)

 

$

12,037,253

 

Stock-based compensation

 

 

4,491,752

 

 

 

2,717,534

 

Depreciation and amortization

 

 

1,259,884

 

 

 

1,177,352

 

Amortization/(accretion) of note premiums

 

 

177,448

 

 

 

(156,637

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(683,937

)

 

 

(2,841,204

)

Prepaid expenses and other current assets

 

 

1,377,660

 

 

 

(120,912

)

Deferred revenue

 

 

(28,770,642

)

 

 

158,096,440

 

Accounts payable

 

 

4,551,611

 

 

 

1,130,491

 

Accrued expenses

 

 

(4,213,695

)

 

 

(3,489,712

)

Other

 

 

953,189

 

 

 

(265,842

)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

(23,530,458

)

 

 

168,284,763

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,319,714

)

 

 

(737,487

)

Purchases of marketable securities

 

 

-

 

 

 

(69,271,001

)

Proceeds from sale of marketable securities

 

 

13,600,000

 

 

 

2,252,219

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

9,280,286

 

 

 

(67,756,269

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal payments on notes payable

 

 

-

 

 

 

(2,415,149

)

Proceeds from the exercises of stock options

 

 

3,001,554

 

 

 

1,004,694

 

Proceeds from the issuance of common stock

 

 

250,476,739

 

 

 

60,521,729

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

253,478,293

 

 

 

59,111,274

 

NET INCREASE (DECREASE) IN CASH

 

 

239,228,121

 

 

 

159,639,768

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

221,804,128

 

 

 

30,133,213

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

461,032,249

 

 

$

189,772,981

 

Supplementary disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

-

 

 

$

(27,437

)

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these 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 collectively to Arrowhead Madison Inc. (“Arrowhead Madison”), Arrowhead Australia Pty Ltd (“Arrowhead Australia”) and Ablaris Therapeutics, Inc. (“Ablaris”), (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, or 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-AAT for liver disease associated with alpha-1 antitrypsin deficiency (AATD), ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-HSD for liver disease, ARO-ENaC for cystic fibrosis, and ARO-HIF2 for renal cell carcinoma. ARO-JNJ1 is being developed for an undisclosed liver-expressed target under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).  ARO-HBV (JNJ-3989) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  ARO-LPA (AMG 890) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

Arrowhead operates a lab facility in Madison, Wisconsin, where the Company’s research and development activities, including the development of RNAi therapeutics, are based. The Company’s principal executive offices are located in Pasadena, California.

During the first quarter of fiscal 2020, the Company has continued to develop its pipeline and partnered candidates.  The Company has began dosing in an adaptive design phase 2/3 trial, called SEQUOIA, with the potential to serve as a pivotal registration study of ARO-AAT.  The Company also began dosing in its ARO-AAT 2002 study, a pilot open-label, multi-dose Phase 2 study to assess changes in novel histological activity scale in response to ARO-AAT over time in patients with alpha-1 antitrypsin deficiency associated liver disease.  The Company also presented new clinical data on its two cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, in two late-breaking oral presentations at the American Heart Association Scientific Sessions 2019.  The Company also filed an IND to begin a phase 1b study of ARO-HIF2, and filed a CTA to begin a phase 1 study of ARO-HSD.  The Company has continued to work on optimizing its other extra-hepatic preclinical pipeline candidates including ARO-ENaC.  

The Company’s partnered candidates under its collaboration agreements with Janssen and Amgen also continue 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, and in connection with the start of this study Arrowhead earned a $25 million milestone payment under the License Agreement (“Janssen License Agreement”).  Janssen has also nominated the first of 3 potential candidates under the Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”), ARO-JNJ1, and the Company is currently performing discovery, optimization and preclinical research and development for this candidate.  Under the terms of the Janssen agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, two $25 million milestone payments 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 up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  The Company’s collaboration agreement with Amgen for AMG 890 (ARO-LPA), (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), continues to progress.  The Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, a $10 million milestone payment, and may receive up to $420 million in development, regulatory and sales milestone payments.  The Company is eligible to receive up to low double-digit royalties for sales of products under the AMG 890 (ARO-LPA) Agreement.    

The revenue recognition for these collaboration agreements is discussed further in Note 2 below.

5


 

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern.  Historically, the Company’s primary source of financing has been through the sale of its securities. 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. 

At December 31, 2019, the Company had $461.0 million in cash and cash equivalents (including $1.0 million in restricted cash), $41.0 million in short-term investments, and $26.3 million in long-term investments to fund operations.  During the three months ended December 31, 2019, the Company’s cash and investments balance increased by $225.5 million, which was primarily the result of the December 2019 securities offering that generated $250.5 million in net cash proceeds for the Company, as discussed further in Note 6 below.  These cash inflows were partially offset by cash outflows related to operating activities.        

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, except as a result of the Financial Accounting Standards Board (FASB)’s Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), as discussed below.

Leases — The Company determines whether a contract is, or contains, a lease at inception. The Company classifies each of its  leases as operating or financing considering factors such as the length of the lease term, the present value of the lease payments, the nature of the asset being leased, and the potential for ownership of the asset to transfer during the lease term. Leases with terms greater than one-year are recognized on the Consolidated Balance Sheets as Right-of-use assets and Lease liabilities and are measured at the present value of the fixed payments due over the expected lease term less the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain.  The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis an amount equal to the lease payments over a similar term and in a similar economic environment. The Company records expense to recognize fixed lease payments on a straight-line basis over the expected lease term. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are expensed as incurred.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-02, Leases (Topic ASC 842).  Under ASC 842, lessees are required to recognize a right-of-use asset and a right-of-use lease liability for virtually all leases other than those that meet the definition of a short-term lease. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern (similar to current capital leases).  The Company adopted this standard effective October 1, 2019 and elected the package of three practical expedients that permits an entity to a) not reassess whether expired or existing contracts contain leases, b) not reassess lease classification for existing or expired leases, and c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard.  At December 31, 2019, the Company has recorded right-of-use assets of $10.4 million and right-of-use liabilities of $14.8 million on its Consolidated Balance Sheets for its research and development facility lease in Madison, Wisconsin, and its corporate headquarters lease in Pasadena, California, as discussed further in Note 8 below.  The adoption of this standard did not have a material impact on the Company’s Consolidated Statement of Comprehensive Income (Loss) and the Company’s Consolidated Statement of Cash Flows.  

In November 2018, the FASB issued 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 becomes effective for the Company in the first quarter of fiscal 2021 with early adoption permitted.  The Company does not expect the adoption of this update to have a material effect on its Consolidated Financial Statements.

 

6


 

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into two Collaboration and License agreements, and a Common Stock Purchase Agreement with Amgen Inc., a Delaware corporation (“Amgen”). Under one of the license agreements (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel, RNAi 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 license agreement (the “First Collaboration and License Agreement” or “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 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and a $10 million milestone payment, and may receive up to $420 million in 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 AMG 890 (ARO-LPA) 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 AMG 890 (ARO-LPA) Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned.  During the three months ended December 31, 2019 and 2018, the Company recognized $0 and $0 of Revenue associated with its agreements with Amgen, respectively.  As of December 31, 2019, there were $0 contract assets, and $0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into a License Agreement (“Janssen License Agreement”) and a Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”) part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a Stock Purchase Agreement (“JJDC Stock Purchase Agreement”) with Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”), a New Jersey corporation.  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 potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen will be wholly responsible for clinical development and commercialization.  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 will not include candidates in the Company’s current pipeline.  The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, 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 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock under the JJDC Stock Purchase Agreement, and two $25 million milestone payments, 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 up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  

The Company has evaluated these agreements in accordance with the new revenue recognition standard that became effective for the Company on October 1, 2018.  The adoption of the new revenue standard did not have a material impact on the balances reported when evaluated under the superseded revenue standard.  At the inception of these agreements, the Company has 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 ongoing 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 will be accounted for if and when it is exercised.

The Company determined the transaction price totaled approximately $252.6 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the two $25 million milestone payments earned and estimated payments for reimbursable Janssen R&D services to be performed.  The Company has allocated the total $252.6 million initial

7


 

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 labor hours versus estimated total labor hours) beginning in October 2018 and ending as the Company’s efforts in overseeing the ongoing phase 1 / 2 clinical trial are completed.  During the three months ended December 31, 2019 and 2018, the Company recognized approximately $28.8 million and $34.7 million of Revenue associated with its agreements with Janssen and JJDC, respectively.  As of December 31, 2019 there were $0 contract assets recorded as accounts receivable, and $54.0 million of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  The $54.0 million of current deferred revenue is driven by the upfront payment, the premium paid by JJDC for its equity investment in the Company, and the two $25 million milestone payments earned, net of revenue recognized to date.

Janssen has also selected the first of the three targets under the Janssen Collaboration Agreement, now referred to as ARO-JNJ1, and the Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1.  All costs and labor hours spent by the Company will be entirely funded by Janssen.  During the three months ended December 31, 2019 and 2018, the Company recognized $0.7 million and $0 of Revenue associated with its efforts on the ARO-JNJ1 candidate, respectively. As of December 31, 2019, there were $1.3 million of contract assets recorded as Accounts Receivable, and $0 of contract liabilities.                               

 

NOTE 3. PROPERTY AND EQUIPMENT

The following table summarizes the Company’s major classes of property and equipment:

 

 

 

December 31, 2019

 

 

September 30, 2019

 

Computers, office equipment and furniture

 

$

627,311

 

 

$

637,577

 

Research equipment

 

 

15,245,138

 

 

 

12,932,304

 

Software

 

 

147,254

 

 

 

147,254

 

Leasehold improvements

 

 

23,321,242

 

 

 

21,579,415

 

Total gross fixed assets

 

 

39,340,945

 

 

 

35,296,550

 

Less:   Accumulated depreciation and amortization

 

 

(12,906,162

)

 

 

(12,081,651

)

Property and equipment, net

 

$

26,434,783

 

 

$

23,214,899

 

 

Depreciation and amortization expense for Property and Equipment for the three months ended December 31, 2019 and 2018 and was $834,777 and $752,245, respectively. 

 

NOTE 4. INVESTMENTS

The Company invests a portion of its excess cash balances in short-term debt securities and may, from time to time, also invest in long-term debt securities.  Investments at December 31, 2019 consisted of corporate bonds with maturities remaining of less than 24 months.  The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper.  The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities.  At December 31, 2019, all investments were classified as held-to-maturity securities.

The following tables summarize the Company’s short-term and long-term investments as of December 31, 2019, and September 30, 2019.

 

 

 

As of December 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

40,969,341

 

 

$

362,500

 

 

$

 

 

$

41,331,841

 

Commercial notes (due within two years)

 

$

26,329,098

 

 

$

626,503

 

 

$

 

 

$

26,955,601

 

Total

 

$

67,298,439

 

 

$

989,003

 

 

$

 

 

$

68,287,442

 

8


 

 

 

 

As of September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

36,899,894

 

 

$

222,584

 

 

$

 

 

$

37,122,478

 

Commercial notes (due within three years)

 

$

44,175,993

 

 

$

875,258

 

 

$

 

 

$

45,051,251

 

Total

 

$

81,075,887

 

 

$

1,097,842

 

 

$

 

 

$

82,173,729

 

 

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 21 years, and the accumulated amortization of the asset is approximately $717,292.  The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition, which was 14 years, and the accumulated amortization of the assets is approximately $7,501,448.  Amortization expense for the three months ended December 31, 2019 and 2018 was $425,107 and $425,107, respectively.  Amortization expense is expected to be $1,275,322 for the remainder of fiscal 2020, $1,700,429 in 2021, $1,700,429 in 2022, $1,700,429 in 2023, $1,700,429 in 2024, and $8,561,435 thereafter.

The following table provides details on the Company’s intangible asset balances:

 

 

 

Intangible assets

subject to

amortization

 

Balance at September 30, 2019

 

$

17,063,580

 

Impairment

 

 

 

Amortization

 

 

(425,107

)

Balance at December 31, 2019

 

$

16,638,473

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

At December 31, 2019, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.

At December 31, 2019, 101,111,797 shares of Common Stock were outstanding.  At December 31, 2019, 6,665,719 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan and 2013 Incentive Plan, as well as for inducement grants made to new employees.

In December 31, 2019 the Company sold 4,600,000 shares of its Common Stock in a public offering at a price of $58.00 per share.  The aggregate purchase price paid by the investors for the Common Stock was $266.8 million, and the Company received net proceeds of $250.5 million after deducting advisory fees and offering expenses.  

                   

NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

On occasion, 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 no contingent liabilities recorded as of December 31, 2019.

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 December 31, 2019, these future commitments were estimated at approximately $62.5 million, of which approximately $42.5 million is expected to be incurred in fiscal 2020, and $20.0 million is expected to be incurred beyond fiscal 2020.  

9


 

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 NDA and upon certain sales level milestones.  These milestone payments could amount to the mid to upper double-digit millions of dollars. During the three months ended December 31, 2019 and 2018, the Company did not reach milestones requiring payment.  In certain agreements, the Company may be required to make mid to high single-digit percentage royalty payments based on a percentage of the sales of the relevant products.     

 

NOTE 8. LEASES

Leases

 

In April 2019, the Company entered a new lease for its corporate headquarters in Pasadena, California.  The 91 month office building lease between the Company and 177 Colorado Owner, LLC is for approximately 24,000 square feet of office space located at 177 E. Colorado Blvd, Pasadena, California, and this lease has replaced the Company’s previous corporate headquarters office lease.  The increased capacity of this new office space compared to the Company’s current corporate headquarters will accommodate increased personnel as the Company’s pipeline of drug candidates expands and moves closer to market. Lease payments began on September 30, 2019 and are estimated to total approximately $8.8 million over the remainder of the term.  The Company expects to pay approximately $3.5 million for leasehold improvements, net of tenant improvement allowances.  The lease contains an option to renew for one term of five years. The exercise of this option was not determined to be reasonably certain and thus was not included in Lease liabilities on the Company’s Consolidated Balance Sheet at December 31, 2019. 

The Company also leases approximately 74,000 square feet of office and laboratory space for its research facility in Madison, Wisconsin.  The lease will expire in September 2029.  Lease payments are estimated to total approximately $13.3 million for the remainder of the term. The lease contains two options to renew for two terms of five years. The exercise of these options were not determined to be reasonably certain and thus was not included in Lease liabilities on the Company’s Consolidated Balance Sheet at December 31, 2019.    

Operating lease cost during the three months ended December 31, 2019 was $0.5 million.  Variable lease cost during the three months ended December 31, 2019 was $0.2 million.  There was no short-term lease cost during the three months ended December 31, 2019.

The following table presents maturities of Operating Lease Liabilities on an undiscounted basis as of December 31, 2019:

 

2020 (remainder of fiscal year)

 

$

1,240,509

 

2021

 

 

2,256,379

 

2022

 

 

2,521,446

 

2023

 

 

2,590,558

 

2024

 

 

2,661,512

 

2025 and thereafter

 

 

10,834,206

 

Total lease payments

 

 

22,104,610

 

Less imputed interest

 

 

(7,265,709)

 

Total Operating lease liabilities (includes current portion)

 

$

14,838,901

 

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 was $0.3 million for the three months ended December 31, 2019.  The weighted-average remaining lease term and weighted-average discount rate for all leases as of December 31, 2019 was 8.8 years and 8.9%, respectively.

10


 

As of September 30, 2019, future minimum lease payments due in fiscal years under operating leases were as follows:

 

2020

 

$

1,521,451

 

2021

 

 

2,256,379

 

2022

 

 

2,521,446

 

2023

 

 

2,590,558

 

2024

 

 

2,661,512

 

2025 and thereafter

 

 

10,834,206

 

Total

 

$

22,385,552

 

 

 

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and 2013 Incentive Plan, as of December 31, 2019, 955,949 and 4,500,846 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants and others. No further grants may be made under the 2004 Equity Incentive Plan.  As of December 31, 2019, there were options granted and outstanding to purchase 955,949 and 2,635,429 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 1,526,000 restricted stock units granted and outstanding under the 2013 Incentive Plan. Also, as of December 31, 2019, there were 915,849 shares reserved for options and 293,075 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. During the three months ended December 31, 2019, 4,000 options and 5,000 restricted stock units were granted under the 2013 Incentive Plan, and 217,000 options and 284,575 restricted stock units were granted as inducement awards to new employees outside of equity incentive plans.    

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, 2019

 

 

4,773,670

 

 

$

8.16

 

 

 

 

 

 

 

Granted

 

 

221,000

 

 

51.58

 

 

 

 

 

 

 

Cancelled

 

 

(15,250

)

 

7.67

 

 

 

 

 

 

 

Exercised

 

 

(472,193

)

 

6.36

 

 

 

 

 

 

 

Balance At December 31, 2019

 

 

4,507,227

 

 

$

10.48

 

 

6.1 years

 

$

239,071,624

 

Exercisable At December 31, 2019

 

 

3,185,761

 

 

$

6.69

 

 

4.8 years

 

$

180,745,146

 

 

Stock-based compensation expense related to stock options for the three months ended December 31, 2019 and 2018 was $1,609,071 and $790,345, respectively. For non-qualified stock options, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The grant date fair value of the options granted by the Company for the three months ended December 31, 2019 and 2018 was $8,630,492 and $556,889, respectively.

The intrinsic value of the options exercised during the three months ended December 31, 2019 and 2018 was $21,640,591 and $1,315,700, respectively.  

As of December 31, 2019, the pre-tax compensation expense for all outstanding unvested stock options in the amount of approximately $19,560,770 will be recognized in the Company’s results of operations over a weighted average period of 3.4 years.

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.

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The assumptions used to value stock options are as follows:

 

 

 

Three Months Ended December 31,

 

 

2019

 

 

2018

Dividend yield

 

 

 

Risk-free interest rate

 

1.4 – 1.8%

 

 

2.8 – 3.1%

Volatility

 

90.5 – 91.0%

 

 

115%

Expected life (in years)

 

6.25

 

 

6.25

Weighted average grant date fair value per share of options granted

 

$39.05

 

 

$11.85

 

The dividend yield is zero as the Company currently does not pay a dividend.

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.

Restricted Stock Units

Restricted stock units (RSUs), including time-based and performance-based awards, were granted under the Company’s 2013 Incentive Plan and as inducements grants granted outside of the Plan.   During the three months ended December 31, 2019, the Company issued 5,000 RSUs under the 2013 Incentive Plan and 284,575 RSUs as inducement awards to a new director and several new employees outside of equity incentive plans.  At vesting, each outstanding RSU will be exchanged for one share of the Company’s Common Stock. RSU recipients may elect to net share settle upon vesting, in which case the Company pays the employee’s income taxes due upon vesting and withholds a number of shares of Common Stock of equal value.  RSU awards generally vest subject to the satisfaction of service requirements or the satisfaction of both service requirements and achievement of certain performance targets.  

The following table summarizes the activity of the Company’s RSUs:

 

 

 

Number of

RSUs

 

 

Weighted-

Average

Grant

Date

Fair Value

 

Unvested at September 30, 2019

 

 

2,062,833

 

 

$

9.43

 

Granted

 

 

289,575

 

 

 

48.26

 

Vested

 

 

(533,333