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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, 2020

☐	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)


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 (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.

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

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

The number of shares of the registrant’s common stock outstanding as of February 1, 2021 was 103,792,410.

	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	15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23

ITEM 4. CONTROLS AND PROCEDURES	23

PART II — OTHER INFORMATION	24

ITEM 1. LEGAL PROCEEDINGS	24

ITEM 1A. RISK FACTORS	24

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	24

ITEM 4. MINE SAFETY DISCLOSURES	24

ITEM 5. OTHER INFORMATION	24

ITEM 6. EXHIBITS	25

SIGNATURE	26

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

	(unaudited) December 31, 2020			September 30, 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	139,921		$	143,583
Accounts receivable		9,002			845
Prepaid expenses		7,069			4,250
Other current assets		2,318			1,782
Marketable securities		86,012			85,020
Short term investments		79,394			86,890
TOTAL CURRENT ASSETS		323,716			322,370
Property and equipment, net		33,730			30,881
Intangible assets, net		14,938			15,363
Long term investments		110,855			137,487
Right-of-use assets		15,747			16,138
Other assets		265			265
TOTAL ASSETS	$	499,251		$	522,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	4,827		$	6,829
Accrued expenses		9,570			5,389
Accrued payroll and benefits		2,753			8,061
Lease liabilities		1,183			1,095
Deferred revenue		6,744			19,291
Other current liabilities		17			16
TOTAL CURRENT LIABILITIES		25,094			40,681
LONG-TERM LIABILITIES
Lease liabilities, net of current portion		19,685			20,044
TOTAL LONG-TERM LIABILITIES		19,685			20,044
Commitments and contingencies (Note 7)
STOCKHOLDERS’ EQUITY
Arrowhead Pharmaceuticals, Inc. stockholders' equity:
Common stock, $0.001 par value; 145,000 shares authorized; 103,194 and 102,376 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively		195			195
Additional paid-in capital		978,655			965,410
Accumulated other comprehensive income (loss)		198			18
Accumulated deficit		(524,576	)		(503,844	)
TOTAL STOCKHOLDERS’ EQUITY		454,472			461,779
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	499,251		$	522,504

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

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

(In thousands, except per share amounts)

	Three Months Ended December 31,
	2020			2019
REVENUE	$	21,303		$	29,455
OPERATING EXPENSES
Research and development		36,555			23,374
General and administrative expenses		8,802			10,934
TOTAL OPERATING EXPENSES		45,357			34,308
OPERATING INCOME (LOSS)		(24,054	)		(4,853	)
OTHER INCOME (EXPENSE)
Interest income (expense), net		2,169			2,180
Other income (expense)		1,153			-
TOTAL OTHER INCOME (EXPENSE)		3,322			2,180
INCOME (LOSS) BEFORE INCOME TAXES		(20,732	)		(2,673	)
Provision for income taxes		-			-
NET INCOME (LOSS)		(20,732	)		(2,673	)
NET INCOME (LOSS) PER SHARE - BASIC	$	(0.20	)	$	(0.03	)
NET INCOME (LOSS) PER SHARE - DILUTED	$	(0.20	)	$	(0.03	)
Weighted average shares outstanding - basic		102,757			97,090
Weighted average shares outstanding - diluted		102,757			97,090
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments		180			196
COMPREHENSIVE INCOME (LOSS)	$	(20,552	)	$	(2,477	)

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

Arrowhead Pharmaceuticals, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

(In thousands, except per share amounts)

	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	$	187	$	664,086		$	(392	)	$	(419,291	)	$	(555	)	$	244,035
Stock-based compensation		-		-		4,491			-			-			-			4,491
Exercise of stock options		472		1		3,001			-			-			-			3,002
Common stock - restricted stock units vesting		533		1		(1	)		-			-			-			-
Common stock - issued for cash		4,600		5		250,473			-			-			-			250,478
Foreign currency translation adjustments		-		-		-			196			-			-			196
Net income (loss) for the three months ended December 31, 2019		-		-		-			-			(2,673	)		-			(2,673	)
Balance at December 31, 2019		101,111	$	194	$	922,050		$	(196	)	$	(421,964	)	$	(555	)	$	499,529

	Common Stock		Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit			Totals
Balance at September 30, 2020		102,376	$	195	$	965,410	$	18	$	(503,844	)	$	461,779
Stock-based compensation		-		-		8,144		-		-			8,144
Exercise of stock options		538		-		5,101		-		-			5,101
Common stock - restricted stock units vesting		280		-		-		-		-			-
Foreign currency translation adjustments		-		-		-		180		-			180
Net income (loss) for the three months ended December 31, 2020		-		-		-		-		(20,732	)		(20,732	)
Balance at December 31, 2020		103,194	$	195	$	978,655	$	198	$	(524,576	)	$	454,472

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

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands, except per share amounts)

	Three Months Ended December 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(20,732	)	$	(2,673	)
Stock-based compensation		8,144			4,492
Depreciation and amortization		1,848			1,260
Amortization/(accretion) of note premiums		(302	)		177
Changes in operating assets and liabilities:
Accounts receivable		(8,157	)		(684	)
Prepaid expenses and other current assets		(3,193	)		1,378
Deferred revenue		(12,547	)		(28,771	)
Accounts payable		(2,002	)		4,552
Accrued expenses		(1,126	)		(4,214	)
Other		(855	)		953
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(38,922	)		(23,530	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(4,271	)		(4,320	)
Proceeds from sale of marketable securities		34,429			13,600
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		30,158			9,280
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercises of stock options		5,102			3,001
Proceeds from the issuance of common stock		-			250,477
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		5,102			253,478
NET INCREASE (DECREASE) IN CASH		(3,662	)		239,228
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		143,583			221,804
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	139,921		$	461,032

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

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-LUNG2 as a candidate to treat chronic obstructive pulmonary disorder (“COPD”) and ARO-COV for treatment for the current novel coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. 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, are based. The Company’s principal executive offices are located in Pasadena, California.

During the first quarter of fiscal year 2021, the Company continued to develop its pipeline and partnered candidates. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3. The Company presented positive interim clinical data from AROAAT2002, an open-label Phase 2 clinical study of ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being developed as a treatment for the rare genetic liver disease associated with AATD. The Company also announced positive clinical data on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, at the American Heart Association (“AHA”) Scientific Session 2020. Finally, the Company announced a collaboration with Takeda to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease. See Note 2 for more information regarding the collaboration with Takeda.

The Company’s partnered candidates under its collaboration agreements 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. In connection with the start of this study, Arrowhead earned a $25.0 million milestone payment under the Company’s License Agreement with Janssen (“Janssen License Agreement”). 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, two $25.0 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 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.

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 months ended December 31, 2020 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, but the Company does not expect a material impact to any program’s anticipated timelines. 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 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 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, 2020, the Company had $139.9 million in cash and cash equivalents (including $2.4 million in restricted cash), $79.4 million in short-term investments, $86.0 million in marketable securities and $110.9 million in long-term investments to fund operations. During the three months ended December 31, 2020, the Company’s cash and investments balance decreased by $36.8 million, which was primarily the result of funding its research and development operations.

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 October 1, 2020 and did not have a material impact on its Consolidated Financial Statements.

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 October 1, 2020 and did not have a material impact on its Consolidated Financial Statements.

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into two Collaboration and License Agreements and a Common Stock Purchase Agreement with Amgen. Under one of the collaboration and license agreements (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, which resulted in a $20.0 million milestone payment to the Company. During the three months ended December 31, 2020 and 2019, the Company recognized $0 and $0, respectively. As of December 31, 2020, there were $0 in contract assets recorded as accounts receivable and $0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into 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 (“JJDC Stock Purchase Agreement”) with JJDC. 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), Janssen is also 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 two $25.0 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 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 $252.6 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the two $25.0 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 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 December 31, 2020 and 2019, the Company recognized approximately $12.7 million and $28.8 million of Revenue associated with this performance obligation, respectively. As of December 31, 2020, there were $0 in contract assets recorded as accounts receivable, and $6.7 million of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets. The $6.7 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 $25.0 million milestone payments earned, net of revenue recognized to date.

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 December 31, 2020 and 2019, the Company recognized $0.3 million and $0.7 million of Revenue associated with these efforts, respectively. As of December 31, 2020, there were $0.8 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 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 the new revenue recognition requirements that became effective for the Company on October 1, 2018. The adoption of the new revenue standard will not have a material impact on the balances reported when evaluated under the superseded revenue standard. At the inception of the Takeda License Agreement, the Company has 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, 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 offset against amounts owed to Arrowhead, either from milestones or royalties earned, or profits earned under the 50/50 profit sharing structure for U.S. commercialization.

The Company determined the initial transaction price totaled approximately $300.0 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 $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 December 31, 2020 and 2019 were $8.2 million and $0, respectively. As of December 31, 2020, there were $8.2 million in contract assets recorded as accounts receivable.

NOTE 3. PROPERTY AND EQUIPMENT

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

	December 31, 2020			September 30, 2020
	(In thousands)
Computers, office equipment and furniture	$	662		$	662
Research equipment		23,763			20,654
Software		356			631
Leasehold improvements		26,676			25,238
Total gross fixed assets		51,457			47,185
Less: Accumulated depreciation and amortization		(17,727	)		(16,304	)
Property and equipment, net	$	33,730		$	30,881

Depreciation and amortization expense for property and equipment for the three months ended December 31, 2020 and 2019 was $1.4 million and $0.8 million, respectively.

NOTE 4. INVESTMENTS

Investments at December 31, 2020 primarily consisted of corporate bonds that have maturities of less than 36 months 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 marketable equity securities consist of mutual funds that 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 certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds 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 December 31, 2020 and September 30, 2020 by measurement category.

Held to Maturity	As of December 31, 2020
	(In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial notes (due within one year)	$	79,394	$	1,203	$	-		$	80,597
Commercial notes (due within one through three years)	$	110,855	$	3,634	$	(23	)	$	114,466
Total	$	190,249	$	4,837	$	(23	)	$	195,063

	As of September 30, 2020
	(In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial notes (due within one year)	$	86,890	$	1,590	$	-		$	88,480
Commercial notes (due within one through three years)	$	137,487	$	4,573	$	(79	)	$	141,981
Total	$	224,377	$	6,163	$	(79	)	$	230,461

Fair Value	As of December 31, 2020
	(In thousands)
	Cost		Realized Gains/(Losses)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable securities	$	85,095	$	477	$	440	$	-		$	86,012
Total	$	85,095	$	477	$	440	$	-		$	86,012

	As of September 30, 2020
	(In thousands)
	Cost		Realized Gains/(Losses)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable securities	$	85,000	$	95	$	-	$	(75	)	$	85,020
Total	$	85,000	$	95	$	-	$	(75	)	$	85,020

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 21 years, and the accumulated amortization of the asset is $0.9 million. 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 $9.1 million. Amortization expense for the three months ended December 31, 2020 and 2019 was $0.4 million and $0.4 million, respectively. Amortization expense is expected to be $1.3 million for the remainder of 2021, $1.7 million in 2022, $1.7 million in 2023, $1.7 million in 2024, $1.7 million in 2025 and $6.8 million thereafter.

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

	Intangible assets subject to amortization
	(in thousands)
Balance at September 30, 2020	$	15,363
Impairment		-
Amortization		(425	)
Balance at December 31, 2020	$	14,938

NOTE 6. STOCKHOLDERS’ EQUITY

At December 31, 2020, 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, 2020, 103,194,240 shares of Common Stock were outstanding. At December 31, 2020, 7,635,023 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.

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 no contingent liabilities recorded as of the three months ended December 31, 2020.

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, 2020, these future commitments were estimated at approximately $100.2 million, of which approximately $85.0 million is expected to be incurred in remaining fiscal year 2021.

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 months ended December 31, 2020 and 2019, the Company did not reach any milestones. 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 into a 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. The increased capacity of this new office space compared to the Company’s prior 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 $8.7 million over the term. The lease expires on April 30, 2027. The Company has paid 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, 2020. On October 23, 2020, the Company signed a lease expansion to add an additional approximately 24,000 square feet of office space at the same location for its corporate headquarters. The lease commencement date is expected to be in July 2021, after certain leasehold improvements are completed, and the lease expires in April 2027. The lease payments for the expansion are expected to total $6.9 million. The Company anticipates paying approximately $4.0 million of leasehold improvements, net of tenant improvement allowances. The increased capacity of this additional 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.

In January 2016, the Company entered into a lease for its research facility in Madison, Wisconsin. The lease was for approximately 60,000 square feet of office and laboratory space and had an expiration date of September 30, 2026. The lease was amended in January 2019 and May 2020 to expand the rentable square feet by an additional 40,000 total square feet and extended the lease expiration date to September 30, 2031. Lease payments are estimated to total approximately $26.2 million for the term. The Company anticipates paying approximately $11.0 million of leasehold improvements for the additional 40,000 square feet, net of tenant improvement allowances. 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, 2020. In November 2020 and December 2020, two amendments were signed to expand the rentable square space by an additional 10,743 square feet and these amendments added a total of approximately $1.2 million of lease payments for the remainder of the term.

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 21,000 rentable square feet. The term of the Sublease commenced on April 1, 2020 and will end on January 14, 2023. Sublease payments are estimated to total approximately $2.0 million over the term.

Operating lease cost during the three months ended December 31, 2020 and 2019 was $0.9 million and $0.5 million, respectively. Variable lease costs for the three months ended December 31, 2020 and 2019 was $0.2 million and $0.2 million, respectively. There was no short-term lease cost during the three months ended December 31, 2020 and 2019.

The following table presents maturities of operating lease liabilities on an undiscounted basis as of December 31, 2020:

	(in thousands)
2021 (remainder of fiscal year)	$	2,379
2022		3,853
2023		3,406
2024		3,269
2025		3,358
2026 and thereafter		15,331
Total	$	31,596
Less imputed interest	$	(10,728	)
Total operating lease liabilities (includes current portion)	$	20,868

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 three months ended December 31, 2020 and 2019 was $0.7 million and $0.3 million, respectively. The weighted-average remaining lease term and weighted-average discount rate for all leases as of December 31, 2020 was 9.2 years and 8.4%, respectively.

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of December 31, 2020, 509,210 and 5,102,360 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, 2020, there were options granted and outstanding to purchase 509,210 and 2,320,640 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 2,385,200 restricted stock units granted and outstanding under the 2013 Incentive Plan. Also, as of December 31, 2020, there were 1,260,503 shares reserved for options and 762,950 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation 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, 2020		4,539,403		$	16.67
Granted		144,000		63.64
Cancelled		(55,438	)	24.48
Exercised		(537,612	)	9.49
Balance at December 31, 2020		4,090,353		$	19.16	6.3 years	$	235,465,861
Exercisable at December 31, 2020		2,556,040		$	9.56	4.8 years	$	171,695,135

Stock-based compensation expense related to stock options for the three months ended December 31, 2020 and 2019 was $3.1 million and $1.6 million, 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, 2020 and 2019 was $6.8 million and $8.6 million, respectively.

The intrinsic value of the options exercised during the three months ended December 31, 2020, and 2019 was $32.0 million and $21.6 million, respectively.