What changed in this filing

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Item 1. Financial Statements

2023-02-06 compared with 2022-08-04 · 400 added, 434 removed, 170 unchanged (83% of the section changed)

3 unchanged sentences

(In thousands, except per share amounts)

(unaudited) June 30, 2022

December 31, 2022

September 30, 2022

Current assets:

Cash and cash equivalents $ 139,439 $ 184,434

Cash, cash equivalents and restricted cash $ 202,249 $ 108,005

Accounts receivable 39,568 1,410

Short term investments 299,582 268,391

Prepaid expenses 8,412 7,289

Other current assets 25,188 20,204

Marketable securities — 126,728

Short term investments 277,057 56,627

Total current assets 574,999 405,299

16 unchanged sentences

Deferred revenue, net of current portion 40,789 55,950

Liability related to the sale of future royalties 252,849 —

Total long-term liabilities 373,108 134,750

Commitments and contingencies (Note 7)

STOCKHOLDERS’ EQUITY

Arrowhead Pharmaceuticals, Inc.

stockholders’ equity:

Noncontrolling interest and stockholders’ equity:

Common stock, $ 0.001 par value:

145,000 shares authorized;

105,795 and 104,327 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively

Authorized 145,000 shares;

issued and outstanding 106,140 and 105,960 shares

Additional paid-in capital 1,239,178 1,219,213

4 unchanged sentences

Noncontrolling interest 19,333 19,819

TOTAL STOCKHOLDERS’ EQUITY 474,177 408,822

Total noncontrolling interest and stockholders’ equity 396,372 418,339

Total Liabilities, Noncontrolling Interest and Stockholders’ Equity $ 891,489 $ 691,939

1 unchanged sentence

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts)

Three Months Ended June 30, Nine Months Ended June 30,

2022 2021 2022 2021

Three Months Ended December 31,

Revenue $ 62,546 $ 27,439

1 unchanged sentence

Research and development 83,695 65,765

General and administrative expenses 33,141 18,434 92,403 43,581

General and administrative 20,985 24,995

Total operating expenses 104,680 90,760

OPERATING INCOME (LOSS) ( 72,909 ) ( 31,868 ) ( 94,677 ) ( 84,153 )

Interest income, net 1,240 1,280 3,450 4,972

Operating loss ( 42,134 ) ( 63,321 )

Other income (expense):

Interest (expense) income, net ( 167 ) 1,156

Other income (expense), net 507 ( 707 )

Total other income 340 449

INCOME (LOSS) BEFORE INCOME TAXES ( 72,046 ) ( 29,924 ) ( 90,552 ) ( 77,474 )

Provision for income taxes — — — —

NET INCOME (LOSS) ( 72,046 ) ( 29,924 ) ( 90,552 ) ( 77,474 )

NET INCOME (LOSS) PER SHARE - BASIC $ ( 0.68 ) $ ( 0.29 ) $ ( 0.86 ) $ ( 0.75 )

NET INCOME (LOSS) PER SHARE - DILUTED $ ( 0.68 ) $ ( 0.29 ) $ ( 0.86 ) $ ( 0.75 )

Weighted average shares outstanding - basic 105,753 104,099 105,273 103,569

Weighted average shares outstanding - diluted 105,753 104,099 105,273 103,569

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

Loss before income tax expense and noncontrolling interest ( 41,794 ) ( 62,872 )

Income tax expense 17 —

Net loss including noncontrolling interest $ ( 41,811 ) $ ( 62,872 )

Net loss attributable to noncontrolling interest, net of tax ( 486 ) —

Net loss attributable to Arrowhead Pharmaceuticals, Inc.

$ ( 41,325 ) $ ( 62,872 )

Net loss per share attributable to Arrowhead Pharmaceuticals, Inc.:

Basic $ ( 0.39 ) $ ( 0.60 )

Diluted $ ( 0.39 ) $ ( 0.60 )

Weighted-average shares used in calculating

Basic 106,039 104,534

Diluted 106,039 104,534

Other comprehensive loss, net of tax:

Foreign currency translation adjustments ( 122 ) ( 39 )

COMPREHENSIVE INCOME (LOSS) $ ( 72,079 ) $ ( 29,964 ) $ ( 90,623 ) $ ( 77,430 )

Comprehensive loss $ ( 41,933 ) $ ( 62,911 )

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

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity and Noncontrolling Interest

(In thousands, except per share amounts)

Amount ($) Additional

Accumulated Other

Comprehensive

Income (Loss)

Noncontrollling Interest Totals

Balance at March 31, 2021 104,020 $ 196 $ 996,645 $ 102 $ ( 551,394 ) $ — $ 445,549

Stock-based compensation — — 18,549 — — — 18,549

Exercise of stock options 161 1 2,755 — — — 2,756

Common stock - restricted stock units vesting 28 — — — — — —

Foreign currency translation adjustments — — — ( 40 ) — — ( 40 )

Net income (loss) for the three months ended June 30, 2021

— — — — ( 29,924 ) — ( 29,924 )

Balance at June 30, 2021

104,209 $ 197 $ 1,017,949 $ 62 $ ( 581,318 ) $ — $ 436,890

Amount ($) Additional

Accumulated Other

Comprehensive

Income (Loss)

Noncontrollling Interest Totals

Balance at March 31, 2022 105,702 $ 198 $ 1,115,373 $ ( 107 ) $ ( 663,198 ) $ — $ 452,266

Stock-based compensation — — 33,391 — — — 33,391

Exercise of stock options 53 — 599 — — — 599

Common stock - restricted stock units vesting 40 — — — — — —

Foreign currency translation adjustments — — — ( 33 ) — — ( 33 )

Interest in joint venture — — 39,750 — — 20,250 60,000

Net income (loss) for the three months ended June 30, 2022

— — — — ( 72,046 ) — ( 72,046 )

Balance at June 30, 2022

105,795 $ 198 $ 1,189,113 $ ( 140 ) $ ( 735,244 ) $ 20,250 $ 474,177

Consolidated Statements of Stockholders’ Equity

(in thousands)

Amount ($) Additional

Accumulated Other

Comprehensive

Income (Loss)

Noncontrollling Interest Totals

controllling Interest Totals

Balance at September 30, 2021

4 unchanged sentences

Foreign currency translation adjustments — — — ( 39 ) — — ( 39 )

Net income (loss) for the nine months ended June 30, 2021

Net loss for the three months ended December 31, 2021

— — — — ( 62,872 ) — ( 62,872 )

Balance at June 30, 2021

Balance at December 31, 2021

104,798 $ 197 $ 1,080,035 $ ( 108 ) $ ( 707,564 ) $ — $ 372,560

Amount ($) Additional

Accumulated Other

Comprehensive

Income (Loss)

Noncontrollling Interest Totals

controllling Interest Totals

Balance at September 30, 2022

5 unchanged sentences

Interest in joint venture — — — — — ( 486 ) ( 486 )

Net income (loss) for the nine months ended June 30, 2022

Net loss for the three months ended December 31, 2022

— — — — ( 41,325 ) — ( 41,325 )

Balance at June 30, 2022

Balance at December 31, 2022

106,140 $ 199 $ 1,239,178 $ ( 258 ) $ ( 862,080 ) $ 19,333 $ 396,372

2 unchanged sentences

Consolidated Statements of Cash Flows

(In thousands, except per share amounts)

Nine Months Ended June 30,

(in thousands)

Three Months Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ ( 90,552 ) $ ( 77,474 )

Net loss $ ( 41,811 ) $ ( 62,872 )

Adjustments to reconcile net loss to net cash flow from operating activities

Stock-based compensation 19,390 24,504

Depreciation and amortization 2,689 2,573

Unrealized (gains) losses on marketable securities 5,755 ( 1,387 )

Amortization (accretion) of note premiums/discounts 690 ( 280 )

Non-cash interest expense on liability related to the sale of future royalties 2,849 —

Changes in operating assets and liabilities:

1 unchanged sentence

Prepaid expenses and other current assets 10,529 ( 450 )

Deferred revenue ( 87,100 ) 211,392

Accounts payable ( 2,072 ) ( 5,389 )

Accrued expenses ( 7,203 ) ( 2,290 )

Other 3,672 685

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ( 67,464 ) 195,341

Deferred revenue ( 22,979 ) ( 27,439 )

Operating lease liabilities 559 230

Net cash used in operating activities ( 75,516 ) ( 61,308 )

CASH FLOWS FROM INVESTING ACTIVITIES:

1 unchanged sentence

Purchases of investments ( 111,199 ) ( 65,875 )

Proceeds from sale of investments 201,595 87,130

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 41,862 ) ( 23,433 )

Proceeds from sales and maturities of investments 69,416 38,268

Net cash used in investing activities ( 80,694 ) ( 33,385 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from the exercises of stock options 576 1,885

Proceeds from investment in joint venture 60,000 —

Proceeds from the sale of future royalties 250,000 —

Net cash provided by financing activities 250,576 1,885

NET INCREASE (DECREASE) IN CASH ( 44,995 ) 182,398

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 184,434 143,583

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,439 $ 325,981

Net increase (decrease) in cash, cash equivalents and restricted cash 94,366 ( 92,808 )

Effect of exchange rate on cash, cash equivalents and restricted cash ( 122 ) ( 39 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

BEGINNING OF PERIOD 108,005 184,434

END OF PERIOD $ 202,249 $ 91,587

Supplementary disclosures:

Interest paid $ — $ —

Income taxes (paid) refunded $ — $ —

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

1 unchanged sentence

Notes to Consolidated Financial Statements

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”), Visirna Therapeutics Inc.

("Visirna"), and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, par value $0.001 per share, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock, par value $0.001 per share, and (6) the term “Stockholder(s)” refers to the holders of Arrowhead’s Common Stock.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Recent Developments

General 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.

and its subsidiaries (referred to herein collectively as the “Company”) are primarily engaged in developing medicines that treat intractable diseases by silencing the genes that cause them.

Using a broad portfolio of RNA chemistries and efficient modes of delivery, the Company’s therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes.

RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein.

Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing.

The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-ENaC2 for cystic fibrosis, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens, ARO-C3 for complement mediated diseases, ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary conditions and ARO-MMP7 for idiopathic pulmonary fibrosis.

ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No.

3) Limited (“GSK”) in November 2021.

ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”).

JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for patients with non-alcoholic steatohepatitis (NASH).

ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc.

(“Takeda”) in October 2020.

JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.

Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc.

(“Amgen”) in 2016.

While the Company believes that initial ARO-HIF2 Phase 1 clinical data provides proof of concept for the ability to deliver siRNA to RCC tumors, the Company has decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.

Arrowhead operates lab facilities in Madison, Wisconsin and San Diego, California, where the Company’s research and development activities, including the development of RNAi therapeutics, take place.

The Company’s RNAi-based therapeutics may leverage this natural pathway of gene silencing to target and shut down specific disease-causing genes.

The following table presents the Company’s current pipeline:

Therapeutic Area Name Stage Product Rights

Cardiometabolic ARO-APOC3 Two Phase 2b and one Phase 3 Arrowhead

ARO-ANG3 Two Phase 2b Arrowhead

Olpasiran Phase 3 Amgen

Pulmonary ARO-ENAC2 Pre-Clinical Arrowhead

ARO-RAGE Phase 1/2 Arrowhead

ARO-MUC5AC Phase 1/2a Arrowhead

ARO-MMP7 Phase 1/2a Arrowhead

Liver ARO-HSD Phase 1/2 GSK

Fazirsiran Phase 2 Takeda and Arrowhead

JNJ-3989 Phase 2 Janssen

HZN-457 (formerly ARO-XDH) Phase 1 Horizon

ARO-C3 Phase 1/2 Arrowhead

JNJ-75220795 Phase 1 Janssen

Muscle ARO-DUX4 Pre-Clinical Arrowhead

The Company operates lab facilities in San Diego, California and Madison, Wisconsin, where its research and development activities, including the development of RNAi therapeutics, take place.

The Company’s principal executive offices are located in Pasadena, California.

During the first three quarters of fiscal 2022, the Company continued to develop and advance its pipeline and partnered candidates and expanded its facilities to support the Company’s growing pipeline.

During the first quarter of fiscal 2023, the Company continued to develop and advance its pipeline and partnered candidates.

Several key recent developments include:

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

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

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

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

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

vi) completed the purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin and held a groundbreaking ceremony on the site.

The site is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company's process development and analytical activities.

The Company also announced that it received awards for up to $ 16 million in tax increment financing from the city of Verona, and up to $ 2.5 million in refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs.

Additionally, The Company entered into a lease agreement for a new 144,000 square foot laboratory and office facility in San Diego, California to support discovery activities;

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

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

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

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

xi) entered into definitive agreements to form a joint venture, Visirna Therapeutics, Inc.

(“Visirna”) with Vivo Capital (“Vivo”) through which the Company and Vivo intend to expand the reach of innovative medicines in Greater China;

xii) hosted a pulmonary research & development (R&D) Day to discuss the Company’s emerging pipeline of pulmonary targeted RNA interference (RNAi) therapeutic candidates that leverage its proprietary Targeted RNAi Molecule (TRIM TM ) platform, including an announcement of its previously undisclosed candidate designed to reduce expression of matrix metalloproteinase 7 (MMP7) as a potential treatment for idiopathic pulmonary fibrosis (IPF);

xiii) in conjunction with Takeda, announced results from a Phase 2 clinical study (AROAAT-2002) of investigational fazirsiran (TAK-999/ARO-AAT) for the treatment of liver disease associated with alpha-1 antitrypsin deficiency (AATD), and was recently published in the New England Journal of Medicine (NEJM) and presented in an oral presentation at The International Liver Congress™ 2022 - The Annual Meeting of the European Association for the Study of the Liver (EASL).

The Company is actively monitoring the ongoing COVID-19 pandemic.

The financial results for the three and nine months ended June 30, 2022 were not significantly impacted by COVID-19.

Operationally, the Company has experienced delays in its earlier stage programs due to a shortage in non-human primates, which are critical to the Company’s preclinical programs.

Additionally, the Company has experienced delays in enrollment in its clinical trials.

The Company’s operations at its research and development facilities in Madison, Wisconsin and San Diego, California, and its corporate headquarters in Pasadena, California have continued with limited impact, other than for enhanced safety measures and intermittent lab supply shortages.

However, the Company cannot predict the impact the progression of COVID-19 will have on future financial and operational results due to a variety of factors, including the ability of the Company’s clinical sites to continue to enroll subjects, the ability of the Company’s suppliers to continue to operate, the continued good health and safety of the Company’s employees and the length and severity of the COVID-19 pandemic.

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern.

Historically, the Company’s primary sources of financing have been through the sale of its securities and revenue from its licensing and collaboration agreements.

• enrolled the first subject in a Phase 1 randomized, placebo-controlled trial to assess the safety tolerability, pharmacokinetics and pharmacodynamics of a development-stage medicine, HZN-457 (formerly ARO-XDH), which is out-licensed to Horizon, triggering a $ 15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023;

• enrolled the first subject in Amgen’s Phase 3 trial of Olpasiran, triggering a $ 25.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023;

• entered into a Royalty Purchase Agreement (the “Royalty Pharma Agreement”) with Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) on November 9, 2022, pursuant to which Royalty Pharma paid $ 250.0 million upfront (See Note 11 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part I, “Item 1.

Financial Statements.”);

• announced Topline Results from SEQUOIA Phase 2 Study of Fazirsiran (formerly ARO-AAT) in Patients with Alpha-1 Antitrypsin Deficiency-Associated Liver Disease in which;

◦ Fibrosis regression was observed in 50% of patients receiving Fazirsiran;

◦ Median reductions of 94% of Z-AAT accumulation in the liver and mean reductions of 68% in histologic globule burden were observed;

◦ Treatment emergent adverse events were generally well balanced between Fazirsiran and placebo groups;

◦ Results were consistent with AROAAT-2002 open-label study previously published in The New England Journal of Medicine.

Consolidation and Basis of Presentation

The interim Consolidated Financial Statements include the accounts of Arrowhead Pharmaceuticals, Inc.

and its subsidiaries (wholly-owned subsidiaries and a variable interest entity for which the Company is the primary beneficiary).

Subsidiaries refer to Arrowhead Madison, Inc., Visirna Therapeutics, Inc.

(“Visirna”), and Arrowhead Australia Pty Ltd.

For subsidiaries in which the Company owns or is exposed to less than 100% of the economics, the Company records net loss attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interests retained in such entity by the respective noncontrolling party.

The interim Consolidated Financial Statements have been prepared in conformity with U.S.

generally accepted accounting principles (“GAAP”).

The financial data of the Company included herein are unaudited.

In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at December 31, 2022 and the results of operations and cash flows for the periods presented.

All intercompany transactions and balances have been eliminated.

Certain prior period amounts have been reclassified to conform with the current period presentation.

Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted from the accompanying interim consolidated financial statements and related notes.

Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 for more complete descriptions and discussions.

Operating results and cash flows for the three months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023.

The Company’s primary sources of financing have been through the sale of its securities, revenue from its licensing and collaboration agreements and the sale of certain future royalties.

Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded significantly.

Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials, as well as with the Company’s plans to increase its internal manufacturing capabilities, and expand its footprint in Verona, Wisconsin and San Diego, California.

At June 30, 2022, the Company had $ 139.4 million in cash and cash equivalents (including $ 7.4 million in restricted cash), $ 277.1 million in short-term investments, $ 0 in marketable securities and $ 165.9 million in long-term investments to fund operations.

$ 60 million of our cash balance resulted from the formation of our joint venture, Viserna.

During the nine months ended June 30, 2022, the Company’s cash and investments balance decreased by $ 31.0 million, which was primarily due to cash being used to fund the Company’s operations, partially offset by the $ 120.0 million upfront payment received from GSK, and $ 60 million cash infusion to Viserna.

In total, the Company remains eligible for $ 4.9 billion in developmental, regulatory and sales milestones and various royalties on net sales from its licensing and collaboration agreements.

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

Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials and as the Company plans to increase its internal manufacturing capabilities.

At December 31, 2022, the Company had $ 202.2 million in cash and cash equivalents (including $ 7.3 million in restricted cash), $ 299.6 million in short-term investments and $ 115.8 million in long-term investments to fund operations.

During the three months ended December 31, 2022, the Company’s cash and cash equivalents and investments balance increased by $ 135.3 million which was primarily due to the $ 250.0 million upfront payment received from Royalty Pharma.

In total, the Company is eligible to receive up to $ 4.1 billion in developmental, regulatory and sales milestones, and may receive various royalties on net sales from its licensing and collaboration agreements, subject to the terms and conditions of those agreements.

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

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.

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Recent Accounting Pronouncements

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information.

Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.

In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows.

The interim results are not necessarily indicative of the results of operations to be expected for the year ending September 30, 2022 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries, as well as the accounts of Visirna, a variable interest entity for which we are the primary beneficiary.

All intercompany balances and transactions have been eliminated in consolidation.

For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2021, filed with the SEC.

COLLABORATION AND LICENSE AGREEMENTS

On September 28, 2016, the Company entered into two collaboration and license agreements and a common stock purchase agreement with Amgen.

Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel RNAi Olpasiran (previously referred to as AMG 890 or ARO-LPA) program.

These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease.

Under the prior collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target.

Under both agreements, Amgen is wholly responsible for clinical development and commercialization.

Under the terms of the agreements taken together, the Company has received $ 35.0 million in upfront payments, $ 21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and $ 30.0 million in milestone payments, and may receive up to an additional $ 400.0 million in remaining development, regulatory and sales milestone payments.

The Company is further eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement.

In July 2019, Amgen informed the Company that it would not be exercising its option for an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under

the ARO-AMG1 Agreement.

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers.

The Company has substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 Agreement.

Future milestones and royalties achieved will be recognized in their entirety when earned.

In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $ 20.0 million milestone payment to the Company.

During the three and nine months ended June 30, 2022 and 2021, the Company recognized $ 0 and $ 0 of revenue associated with its agreement with Amgen, respectively.

As of June 30, 2022, there were $ 0 in contract assets recorded as accounts receivable and $ 0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Glaxosmithkline Intellectual Property (No.

3) Limited (“GSK”)

On November 22, 2021, GSK and the Company entered into an Exclusive License Agreement (the “GSK License Agreement”).

Under the GSK License Agreement, GSK has received an exclusive license for ARO-HSD.

The exclusive license is worldwide with the exception of greater China, for which the Company retained rights to develop and commercialize ARO-HSD.

The Company has completed its Phase 1/2 study of ARO-HSD, and GSK is now wholly responsible for all clinical development and commercialization of ARO-HSD in its territory.

Under the terms of the agreement, the Company has received an upfront payment of $ 120.0 million and is eligible for additional payments of $ 30.0 million at the start of a Phase 2 trial and $ 100.0 million upon achieving (i) a successful Phase 2 trial readout and (ii) the first patient dosed in a Phase 3 trial.

Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to $ 190.0 million at first commercial sale, and up to $ 590.0 million in sales-related milestone payments.

The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent.

At the inception of the GSK License Agreement, the Company identified one distinct performance obligation.

The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibility to complete the Phase 1/2 study (the “GSK R&D Services”).

Due to the specialized and unique nature of the GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation.

Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory.

The Company determined the initial transaction price totaled $ 120.0 million, including the upfront payment, which was collected in January 2022.

The Company has excluded any future estimated milestones or royalties from this transaction price to date.

The Company has allocated the total $ 120.0 million initial transaction price to its one distinct performance obligation for the ARO-HSD license and the associated GSK R&D Services.

As the Company has completed its performance obligation related to this agreement, the upfront payment of $ 120.0 million was fully recognized as of September 30, 2022.

There were no revenue recorded associated with the GSK License Agreement for the three months ended December 31, 2022 and 2021.

There were no contract assets and liabilities recorded as of December 31, 2022.

Horizon Therapeutics Ireland DAC (“Horizon”)

On June 18, 2021, Horizon and the Company entered into a collaboration and license agreement (the “Horizon License Agreement”).

Under the terms of the Horizon License Agreement, Horizon received a worldwide exclusive license for HZN-457, a clinical-stage medicine being developed by Horizon as a potential treatment for people with uncontrolled gout.

The Company conducted all activities through the preclinical stages of development of, and Horizon is now wholly responsible for clinical development and commercialization of HZN-457.

In July 2021, the Company received $ 40.0 million as an upfront payment and is eligible to receive up to $ 660.0 million in potential development, regulatory and sales milestones.

The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.

At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation.

The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibilities to conduct all activities through the preclinical stages of development of HZN-457 (the “Horizon R&D Services”).

Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation.

Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon is responsible for managing future clinical development and commercialization of HZN-457.

The Company determined the initial transaction price totaled $ 40.0 million, including the upfront payment.

The Company has excluded any future estimated milestones or royalties from this transaction price to date.

The Company allocates the total $ 40.0 million initial transaction price to its one distinct performance obligation for the HZN-457 license and the associated Horizon R&D Services.

Revenue is recognized on a straight-line basis over the estimated timeframe for completing the Horizon R&D Services.

The Company determined that the straight-line basis was appropriate as its efforts will be expended evenly over the course of completing its performance obligation.

Further, Horizon enrolled the first subject in December 2022 in a Phase 1 randomized, placebo-controlled trial to assess the safety, tolerability, pharmacokinetics and pharmacodynamics of HZN-457, triggering a $ 15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023.

Revenue for the three months ended December 31, 2022 and 2021 were $ 21.7 million and $ 6.7 million, respectively.

There were $ 15.0 million in contract assets recorded as accounts receivable and $ 0 in contract liabilities recorded as deferred revenue as of December 31, 2022.

Takeda Pharmaceutical Company Limited (“Takeda”)

On October 7, 2020, Takeda and the Company entered into an Exclusive License and Co-Funding Agreement (the “Takeda License Agreement”).

Under the Takeda License Agreement, Takeda and the Company will co-develop its Fazirsiran 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, Fazirsiran, if approved, will be co-commercialized under a 50/50 profit sharing structure.

Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize Fazirsiran, while the Company will be eligible to receive tiered royalties of 20 % to 25 % on net sales.

In January 2021 , the Company received $ 300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $ 595.0 million.

At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation.

The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of Fazirsiran drug product is completed and delivered to Takeda (the “Takeda R&D Services”).

Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.

Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization outside the United States.

Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States.

The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts are recorded as research and development expenses or general and administrative expenses, as appropriate.

The Company determined the initial transaction price totaled $ 300.0 million, which includes the upfront payment.

The Company has excluded any future milestones or royalties from this transaction price to date.

The Company has allocated the total $ 300.0 million initial transaction price to its one distinct performance obligation for the Fazirsiran license and the associated Takeda R&D Services.

Revenue is recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies).

The Company recognized $ 16.3 million and $ 20.8 million in connection with these efforts for the three months ended December 31, 2022 and 2021, respectively.

There were $ 0 of contract assets recorded as accounts receivable and $ 107.1 million of contract liabilities recorded as deferred revenue, of which $ 66.3 million was classified as current deferred revenue, as of December 31, 2022.

The Company also recorded $ 9.8 million as accrued expenses as of December 31, 2022 that was primarily driven by co-development and co-commercialization activities.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into a License Agreement (the “Janssen License Agreement”) and a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”) with Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson.

The Company also entered into a stock purchase agreement with JJDC (“JJDC Stock Purchase Agreement”).

On October 3, 2018, Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson, and the Company entered into a License Agreement (the “Janssen License Agreement”) and a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”).

The Company also entered into a stock purchase agreement with JJDC, Inc.

(“JJDC”), Johnson & Johnson's venture capital arm (the “JJDC Stock Purchase Agreement”).

Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection.

Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989.

Under the Janssen Collaboration Agreement, Janssen was able to select three new targets against which Arrowhead would develop clinical candidates.

These candidates were subject to certain restrictions and do not include candidates that already were in the Company’s pipeline.

Under the Janssen Collaboration Agreement, Janssen was able to select three new targets against which the Company would develop clinical candidates.

These candidates were subject to certain restrictions and did not include candidates that already were in the Company’s pipeline.

The Company was obligated to perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, would have been sufficient to allow the filing of a U.S.

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If the option was exercised, Janssen would have been wholly responsible for clinical development and commercialization of each optioned candidate.

Under the terms of the agreements taken together, the Company has received $ 175.0 million as an upfront payment, $ 75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling $ 73.0 million, and the Company may receive up to $ 1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $ 0.6 billion in development and sales milestone payments for the remaining target covered under the Janssen Collaboration Agreement.

The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

During the three months ended June 30, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement.

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers.

At the inception of these agreements, the Company identified one distinct performance obligation.

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 the Company’s common stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling $ 73.0 million, and the Company may receive up to $ 0.8 billion in development and sales milestone payments for the Janssen License Agreement, and up to $ 0.6 billion in development and sales milestone payments for the remaining target covered under the Janssen Collaboration Agreement.

The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License

Agreement and up to low teens under the Janssen Collaboration Agreement.

During 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement.

At the inception of the Janssen License Agreement and Janssen Collaboration Agreement, the Company identified one distinct performance obligation.

Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”).

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The Company has allocated the total $ 252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.

The Company has recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed.

The Company recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed.

Future milestones and royalties achieved will be recognized in their entirety when earned.

During the three months ended June 30, 2022 and 2021, the Company recognized approximately $ 0 and $ 0 of revenue associated with this performance obligation, respectively.

During the nine months ended June 30, 2022 and 2021, the Company recognized approximately $ 0 and $ 20.2 million of revenue associated with this performance obligation, respectively.

As of June 30, 2022, there were $ 0 in contract

assets recorded as accounts receivable, and $ 0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

There were no contract assets and liabilities recorded as of December 31, 2022.

The Company has conducted its discovery, optimization and preclinical research and development of JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement.

All costs and labor hours spent by the Company have been entirely funded by Janssen.

During the three months ended June 30, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement as reported in the second quarter of 2022.

During the three months ended June 30, 2022 and 2021, the Company recognized $ 0.0 million and $ 0.2 million of revenue associated with these efforts, respectively.

During the nine months ended June 30, 2022 and 2021, the Company recognized $ 0.1 million and $ 0.5 million of revenue associated with these efforts, respectively.

In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $ 10.0 million milestone payment to the Company.

This $ 10 million milestone payment was recognized entirely during the three months ended June 30, 2021.

As of June 30, 2022, there were $ 0 of contract assets recorded as accounts receivable and $ 0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Takeda Pharmaceuticals U.S.A., Inc.

On October 7, 2020, the Company entered into an Exclusive License and Co-funding agreement (the “Takeda License Agreement”) with Takeda.

Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program, the Company’s second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1 antitrypsin deficiency.

Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure.

Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, while the Company will be eligible to receive tiered royalties of 20 % to 25 % on net sales.

In January 2021, the Company received $ 300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $ 740.0 million.

The Company has evaluated the Takeda License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers.

At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation.

The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the “Takeda R&D Services”).

Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization outside the United States.

The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.

The Company determined the initial transaction price totaled $ 300.0 million, which includes the upfront payment.

The Company has excluded any future milestones or royalties from this transaction price to date.

The Company has allocated the total $ 300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services.

Revenue will be recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies).

Revenue for the three months ended June 30, 2022 and 2021 was $ 25.5 million and $ 35.7 million, respectively.

Revenue for the nine months ended June 30, 2022 and 2021 was $ 67.1 million and $ 69.3 million, respectively.

As of June 30, 2022, there were $ 0 in contract assets recorded as accounts receivable, $ 71.0 million in contract liabilities recorded as deferred revenue and $ 71.2 million in contract liabilities recorded as deferred revenue, net of the current portion, and $ 7.8 million in contract liabilities recorded as accrued expenses.

The $ 7.8 million in accrued expenses was primarily driven by co-development and co-commercialization activities.

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon.

Under the Horizon

License Agreement, Horizon received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout.

The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH.

In July 2021, the Company received $ 40 million as an upfront payment and is eligible to receive up to $ 660 million in potential development, regulatory and sales milestones.

The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.

The Company has evaluated the Horizon License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers.

At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation.

Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of ARO-XDH.

The Company determined the initial transaction price totaled $ 40.0 million, including the upfront payment.

The Company has excluded any future estimated milestones or royalties, from this transaction price to date.

The Company will allocate the total $ 40.0 million initial transaction price to its one distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services.

Revenue will be recognized on a straight-line basis over the estimated timeframe for completing the Horizon R&D Services.

The Company determined that the straight-line basis was appropriate as its efforts will be expended evenly over the course of completing its performance obligation.

Revenue for the three months ended June 30, 2022 and 2021 was $ 6.7 million and $ 0 , respectively.

Revenue for the nine months ended June 30, 2022 and 2021 was $ 20.0 million and $ 0 , respectively.

As of June 30, 2022, there were $ 0 million in contract assets recorded as accounts receivable, $ 13.3 million in contract liabilities recorded as deferred revenue.

The Company has manufactured ARO-XDH material for Horizon in furtherance of the research plan entered into pursuant to the Horizon License Agreement, for which the Company has been reimbursed for its costs.

During the nine months ended June 30, 2022 and 2021, the Company recognized $ 1.3 million and $ 0 with these efforts, respectively.

As of June 30, 2022, there were $ 0.0 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.

Glaxosmithkline Intellectual Property (No.

On November 22, 2021, the Company entered into an Exclusive License Agreement (the “GSK License Agreement”) with GSK.

Under the GSK License Agreement, GSK has received an exclusive license for ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH).

The exclusive license is worldwide with the exception of greater China, for which the Company retained rights to develop and commercialize.

Beyond the Company’s Phase 1/2 study of (ARO-HSD), which the Company is responsible for completing, GSK is wholly responsible for clinical development and commercialization of ARO-HSD in its terr itory.

Under the terms of the agreement, the Company has received an upfront payment of $ 120 million and is eligible for additional payments of $ 30 million at the start of Phase 2 and $ 100 million upon achieving a successful Phase 2 trial readout and the first patient dosed in a Phase 3 trial.

Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to $ 190 million at first commercial sale, and up to $ 590 million in sales-related milestone payments.

The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent.

The Company has evaluated the GSK License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers.

At the inception of the GSK License Agreement, the Company identified one distinct performance obligation.

The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibility to complete the Phase 1/2 study, (the “GSK R&D Services”).

Due to the specialized and unique nature of these GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation.

Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory.

The Company determined the initial transaction price totaled $ 120.0 million, including the upfront payment.

The $ 120.0 million upfront payment was collected in January 2022.

The Company has excluded any future estimated milestones or royalties from this transaction price to date.

The Company has allocated the total $ 120.0 million initial transaction price to its one distinct performance obligation for the ARO-HSD license and the associated GSK R&D Services.

As the Company has completed its performance obligation related to this agreement, the upfront payment of $ 120.0 million will be fully recognized as of the three and nine months ended June 30, 2022.

Revenue for the nine months ended June 30, 2022 and 2021 was $ 120.0 million and $ 0 , respectively.

As of June 30, 2022, there were $ 0 in contract assets recorded as accounts receivable, $ 0 in contract liabilities recorded as deferred revenue.

Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement during 2022.

In May 2021, Janssen exercised its option right for JNJ-75220795 (ARO-JNJ1), which resulted in a $ 10.0 million milestone payment to the Company.

This $ 10.0 million milestone payment was recognized entirely as of September 30, 2021.

There were no revenue recorded associated with the Company’s agreement with Janssen for the three months ended December 31, 2022 and 2021.

There were no contract assets and liabilities recorded as of December 31, 2022.

On September 28, 2016, Amgen and the Company entered into two collaboration and license agreements and a common stock purchase agreement.

Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen received a worldwide, exclusive license to the Company’s novel RNAi Olpasiran 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 first collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license to ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target.

Under both agreements, Amgen is wholly responsible for clinical development and commercialization.

Under the Olpasiran Agreement and the ARO-AMG1 Agreement, the Company has received $ 35.0 million in upfront payments, $ 21.5 million in the form of an equity investment by Amgen in the Company’s common stock, and $ 30.0 million in milestone payments.

The Company has substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 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.

In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $ 20.0 million milestone payment to the Company.

In December 2022, Amgen enrolled the first subject in its Phase 3 trial of Olpasiran, which triggered a $ 25.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023.

Revenue for the three months ended December 31, 2022 and 2021 were $ 25.0 million and $ 0 , respectively.

There were $ 25.0 million in contract assets recorded as accounts receivable and $ 0 in contract liabilities recorded as deferred revenue as of December 31, 2022.

Further, in November 2022, Royalty Pharma and the Company entered into the Royalty Pharma Agreement.

In consideration for the payments under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement.

The Company remains eligible to receive up to an additional $ 375.0 million in remaining development, regulatory and sales milestone payments payable by Amgen under the Olpasiran Agreement.

Joint Venture and License Agreement with Visirna Therapeutics, Inc.

On April 25, 2022, the Company entered into a License Agreement (the “Visirna License Agreement”) with Visirna Therapeutics, Inc.

(“Visirna”), pursuant to which Visirna received an exclusive license to develop, manufacture and commercialize four of Arrowhead’s RNAi-based investigational cardiobolic medicines in Greater China (including the People’s Republic of China, Hong Kong, Macau and Taiwan).

On April 25, 2022, Visirna and the Company entered into a License Agreement (the “Visirna License Agreement”), pursuant to which Visirna received an exclusive license to develop, manufacture and commercialize four of the Company’s RNAi-based investigational cardiometabolic medicines in Greater China (including the People’s Republic of China, Hong Kong, Macau and Taiwan).

Pursuant to a Share Purchase Agreement entered into simultaneously with the Visirna License Agreement (the “Visirna SPA”), the Company acquired a majority stake in Visirna (after accounting for shares reserved for Visirna’s employee stock ownership plan) as partial consideration for the Visirna License Agreement.

Under the Visirna SPA, entities affiliated with Vivo Capital (“Vivo”) also acquired a minority stake in Visirna in exchange for $ 60 million in upfront capital to support the operations of Visirna.

Under the Visirna SPA, entities affiliated with Vivo Capital also acquired a minority stake in Visirna in exchange for $ 60.0 million in upfront capital to support the operations of Visirna.

As further consideration under the Visirna License Agreement, the Company is also eligible to receive potential royalties on commercial sales.

The Company has determined that Visirna is a variable interest entity upon its formation and as of June 30, 2022, and it has been determined that Arrowhead is the primary beneficiary;

accordingly, Arrowhead consolidates the financial statements of Visirna.

During the three months ended December 31, 2022, the Company performed manufacturing and development work pursuant to a Clinical Supply Agreement between the parties contemplated by the Visirna License Agreement.

The Company received $ 0.7 million as consideration for this manufacturing and development work, and there were no contract assets and liabilities recorded as of December 31, 2022.

PROPERTY AND EQUIPMENT

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

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

(in thousands)

Computers, software, office equipment and furniture $ 2,182 $ 2,182

Land 2,996 2,996

Research equipment 43,739 38,283

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Construction in progress 90,215 56,373

Total gross fixed assets 101,239 71,539

181,149 141,851

Accumulated depreciation and amortization ( 33,835 ) ( 31,554 )

Property and equipment, net $ 147,314 $ 110,297

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2022 and 2021 was $ 2.2 million and $ 1.6 million, respectively.

Depreciation and amortization expense for property and equipment for the nine months ended June 30, 2022 and 2021 was $ 6.5 million and $ 4.5 million, respectively.

Construction in Progress relates to the Company’s Verona and San Diego research facilities.

Land relates to the Company’s Verona, Wisconsin research facility.

Investments at June 30, 2022 primarily consisted of commercial paper and corporate bonds that have maturities of less than 36 months and a certificate of deposit.

Cash and cash equivalents consist of cash on hand and commercial paper purchased with 90-days or less remaining to maturity.

The Company’s corporate bonds consist of both short-term and long-term bonds and are classified as “held-to-maturity” on the Company’s Consolidated Balance Sheets.

The Company’s certificate of deposit matures in less than 12 months and is classified as “held-to-maturity” on the Company’s Consolidated Balance Sheet,’.

The Company’s marketable equity securities consisted of mutual funds that primarily invest in U.S.

government bonds, U.S.

government agency bonds, corporate bonds and other asset-backed debt securities.

Dividends from these funds were automatically re-invested.

In April 2022, all marketable securities were sold for $ 122.3 million.

The Company may also invest excess cash balances in money market accounts, and these securities would be classified as cash and cash equivalents on the Company’s Consolidated Balance Sheet.

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.

We did not record any impairment charges related to our marketable debt securities during the three and nine months ended June 30, 2022.

The following tables summarize the Company’s short-term and long-term investments and marketable securities as of June 30, 2022 and September 30, 2021 by measurement category:

As of June 30, 2022

Depreciation and amortization expense for property and equipment for the three months ended December 31, 2022 and 2021 was $ 2.3 million and $ 2.1 million, respectively.

The increase in the construction in progress during the three months ended December 31, 2022 was mainly due to the continuing developments of manufacturing, laboratory and office facilities in Verona, Wisconsin as well as a new laboratory and office facility in San Diego, California.

The Company’s investments consisted of the following:

As of December 31, 2022

(In thousands)

Cost Basis Gross

Losses Fair Value

Classified as Cash Equivalents

Commercial notes (due within ninety days) $ 25,325 $ 11 $ — $ 25,336

Classified as Held to Maturity

Commercial notes (due within one year) $ 227,057 $ 21 $ ( 1,588 ) $ 225,490

Commercial notes (due within one through three years) $ 165,920 $ — $ ( 6,380 ) $ 159,540

Certificate of deposit (due within one year) $ 50,000 $ — $ — $ 50,000

Classified as Marketable Securities

Marketable securities $ — $ — $ — $ —

Total $ 468,302 $ 32 $ ( 7,968 ) $ 460,366

Adjusted Basis Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

Short-term investments (due within one year)

Held to maturity debt securities $ 299,582 $ — $ ( 2,644 ) $ 296,938

Held to maturity certificate of deposit — — — —

Total short-term investments $ 299,582 $ — $ ( 2,644 ) $ 296,938

Long-term investments (Due within one through three years)

Held to maturity debt securities $ 115,774 $ — $ ( 4,440 ) $ 111,334

Total long-term investments $ 115,774 $ — $ ( 4,440 ) $ 111,334

As of September 30, 2022

(In thousands)

Cost Basis Gross

Losses Fair Value

Classified as Held to Maturity

Commercial notes (due within one year) $ 56,627 $ 803 $ — $ 57,430

Commercial notes (due within one through three years) $ 195,595 $ 1,151 $ ( 103 ) $ 196,643

Certificate of deposit (due within one through two years) $ 50,000 $ — $ — $ 50,000

Classified as Marketable Securities

Marketable securities $ 127,481 $ — $ ( 753 ) $ 126,728

Total $ 429,703 $ 1,954 $ ( 856 ) $ 430,801

Adjusted Basis Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

Short-term investments (due within one year)

Held to maturity debt securities $ 218,391 $ — $ ( 3,661 ) $ 214,730

Held to maturity certificate of deposit 50,000 — — 50,000

Total short-term investments $ 268,391 $ — $ ( 3,661 ) $ 264,730

Long-term investments (Due within one through three years)

Held to maturity debt securities $ 105,872 $ — $ ( 5,569 ) $ 100,303

Total long-term investments $ 105,872 $ — $ ( 5,569 ) $ 100,303

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 $ 1.1 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 $ 11.4 million.

Amortization expense for the three months ended June 30, 2022 and 2021 was $ 0.4 million and $ 0.4 million, respectively.

Amortization expense for the nine months ended June 30, 2022 and 2021 was $ 1.3 million and $ 1.3 million, respectively.

Amortization expense is expected to be $ 0.4 million for the remainder of fiscal 2022, $ 1.7 million in 2023, $ 1.7 million in 2024, $ 1.7 million in 2025, $ 1.7 million in 2026 and $ 5.2 million thereafter.

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

(in thousands)

Balance at September 30, 2021

Amortization ( 1,276 )

Balance at June 30, 2022

The following table presents the components of intangible assets:

Gross Carrying Amount Accumulated Amortization Impairment Net Carrying Amount Useful Lives

(amounts in thousands) (in years)

As of December 31, 2022

Patents $ 21,728 $ 12,158 $ — $ 9,570 14

License 3,129 1,162 — 1,967 21

Total intangible assets, net $ 24,857 $ 13,320 $ — $ 11,537

As of September 30, 2022

Patents $ 21,728 $ 11,770 $ — $ 9,958 14

License 3,129 1,125 — 2,004 21

Total intangible assets, net $ 24,857 $ 12,895 $ — $ 11,962

Intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist.

No impairment indicators were identified during the three months ended December 31, 2022 and 2021.

Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.

Intangible assets amortization expense for each of the three months ended December 31, 2022 and 2021 was $ 0.4 million.

None of the intangible assets with definite useful lives are anticipated to have a residual value.

The following table presents the estimated future amortization expense related to intangible assets as of December 31, 2022:

Amortization Expense

Year Ending September 30, (in thousands)

2023 (remainder) $ 1,275

Thereafter 3,462

Total $ 11,537

STOCKHOLDERS’ EQUITY

At June 30, 2022, 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 June 30, 2022, 105,795,456 shares of Common Stock were outstanding.

At June 30, 2022, 13,942,716 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, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules.

In August 2020, the Company entered into an Open Market Sale Agreement (the “ATM Agreement”), pursuant to which the Company may, from time to time, sell up to $ 250,000,000 in shares of the Company’s Common Stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering.

The Company is not required to sell shares under the ATM Agreement.

The Company will pay Jefferies LLC a commission of up to 3.0 % of the aggregate gross proceeds received from all sales of the common stock under the ATM Agreement.

Unless otherwise terminated, the ATM Agreement continues until the earlier of selling all shares available under the ATM Agreement or December 2, 2022.

At June 30, 2022, no shares have been sold under the ATM Agreement.

The following table summarizes the Company’s shares of common stock and preferred stock:

Par Value Authorized Issued Outstanding

(in thousands)

As of December 31, 2022

Common stock $ 0.001 145,000 106,140 106,140

Preferred stock $ 0.001 5,000 — —

As of September 30, 2022

Common stock $ 0.001 145,000 105,960 105,960

Preferred stock $ 0.001 5,000 — —

13,769,984 and 14,000,392 shares of common stock as of December 31, 2022 and September 30, 2022, respectively, were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under the Company’s 2004 Equity Incentive Plan, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules.

On December 2, 2022, the Company entered into an open market sale agreement (the “Open Market Sale Agreement”), pursuant to which the Company may, from time to time, sell up to $ 250,000,000 in shares of the Company’s common stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering (“ATM Offering”).

The Company is not required to sell shares under the Open Market Sale Agreement.

The Company will pay Jefferies LLC a commission of up to 3.0 % of the aggregate gross proceeds received from all sales of the common stock under the Open Market Sale Agreement.

Unless otherwise terminated, the ATM Offering shall terminate upon the earlier of (i) the sale of all shares of common stock subject to the Sales Agreement and (ii) the termination of the Sales Agreement as permitted therein.

The Company and Jefferies may each terminate the Open Market Sale Agreement at any time upon prior notice.

As of December 31, 2022, no shares have been issued under the Open Market Sale Agreement.

COMMITMENTS AND CONTINGENCIES

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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 June 30, 2022.

On December 20, 2021, the Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is planned to be the site of an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility to support process development and analytical activities.

Arrowhead intends to invest between $ 200 million and $ 250 million into the buildout of the facilities.

As part of this acquisition, the Company also entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the TIF district, and will be reimbursed by the City of Verona by future tax increment revenue generated from the developed property.

The total amount of funding that City of Verona will pay as reimbursements under the TIF program for these improvements is not guaranteed and will depend on future tax revenues generated from the developed property.

There were no contingent liabilities recorded as of December 31, 2022.

On December 20, 2021, the Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company’s process development and analytical activities.

The Company intends to invest between $ 200.0 million and $ 260.0 million into the build-out of the facilities.

As part of this acquisition, the Company entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the tax incremental district and will be reimbursed up to $ 16.0 million by the City of Verona by future tax increment revenue generated from the developed property.

The total amount of funding that the City of Verona will pay under the Tax Incremental Financing program is not guaranteed and will depend on future tax revenues generated from the developed property.

The Company will also receive up to $ 2.5 million of refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs.

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.

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 it may develop using these licensed technologies.

These agreements and other similar agreements often require milestone and royalty payments.

Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon a new drug application and upon certain sales level milestones.

These milestone payments could amount to the mid to upper double-digit millions of dollars.

During the three and nine months ended June 30, 2022 and 2021, the Company did not reach any milestones.

Under certain agreements, the Company may be required to make mid to high single-digit percentage royalty payments based on a percentage of sales of the relevant products.

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 June 30, 2022.

On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office space at the same location for its corporate headquarters.

Lease payments for the expansion began in July 2021 and the lease for the expansion expires in April 2027.

The lease payments for the expansion are expected to total $ 6.9 million.

The Company has paid approximately $ 4.0 million of leasehold improvements, net of tenant improvement allowances, for the lease expansion.

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 square feet and to extend the lease expiration date to September 30, 2031.

Lease payments are estimated to total approximately $ 26.2 million for the term.

The Company incurred 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 June 30, 2022.

In November 2020 and December 2020, the Company entered into amendments 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 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.

On November 19, 2021, the Company entered into a new lease for a San Diego, California research facility.

The 15-year lease is for approximately 144,000 square feet of office and research and development laboratory space to be constructed in San Diego, California.

This lease will replace the Company’s current research facility sublease for property located in San Diego, California.

The increased capacity of this new facility compared to the Company’s current research facility in San Diego will accommodate increased personnel for the Company’s expanding pipeline of current and future drug candidates.

The estimated rent commencement date for the lease is in March 2023, after construction and leasehold improvements have been completed.

During the three months ended December 31, 2022 and 2021, the Company did not reach any milestones.

On November 19, 2021, the Company entered into a new 15 -year lease for approximately 144,000 square feet of office and research and development laboratory space under construction in San Diego, California.

This facility will replace the Company’s current office and research facility sublease located in San Diego, California.

The increased capacity of this new facility compared to the Company’s current research facility in San Diego will accommodate increased personnel for its expanding pipeline of current and future drug candidates.

The estimated rent commencement date for the new lease is in April 2023 after construction and leasehold improvements have been completed.

The lease payments, which begin on the rent commencement date, will be approximately $ 119.0 million over the initial 15 -year term.

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The Company expects to pay approximately $ 31.0 million for leasehold improvements, net of tenant improvement allowances.

Pursuant to the lease, within twelve months of the expiration of the initial 15-year term, the

Company has the option to extend the lease for up to one additional ten-year term, with certain annual increases in base rent.

Operating lease cost during the three months ended June 30, 2022 and 2021 was $ 3.4 million and $ 1.6 million, respectively.

Operating lease cost during the nine months ended June 30, 2022 and 2021 was $ 6.0 million and $ 3.6 million, respectively.

Variable lease costs for the three months ended June 30, 2022 and 2021 was $ 0.2 million and $ 0.1 million, respectively.

Variable lease costs for the nine months ended June 30, 2022 and 2021 was $ 0.5 million and $ 0.6 million, respectively.

There was no short-term lease cost during the three and nine months ended June 30, 2022 and 2021.

The following table presents payments of operating lease liabilities on an undiscounted basis as of June 30, 2022:

Pursuant to the lease, within twelve months of the expiration of the initial 15 -year term, the Company has the option to extend the lease for up to one additional ten-year term, with certain annual increases in base rent.

Other Significant Leases

Pasadena, California :

The Company leases office space located at 177 Colorado Blvd for its corporate headquarters from 177 Colorado Owner, LLC.

The lease began on September 30, 2019 and expires on April 30, 2027.

The lease contains an option to renew for one term of five years .

On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office with a lease expiration date of April 30, 2027.

San Diego, California :

The Company subleased space from Halozyme, Inc.

for additional research and development facility in San Diego, California.

The term of this sublease commenced on April 1, 2020 and ended on January 14, 2023.

On December 23, 2022, the Company entered into a new six-month lease agreement with 11404 & 11408 Sorrento Valley Owner (DE) LLC, effective January 15, 2023.

The lease will end on July 15, 2023.

Madison, Wisconsin :

The Company leases space for office and laboratory facilities, which expires on September 30, 2031.

The lease contains options to renew for two terms of five years .

After accounting for additional rental square feet added pursuant to amendments to the lease agreement in 2019 and 2020, the Company currently leases a total of 111,000 square feet.

The components of lease assets and liabilities along with their classification on the Company’s consolidated balance sheets were as follows:

Lease Assets and Liabilities Classification December 31, 2022 September 30, 2022

(in thousands)

Operating lease assets Right-of-use assets $ 41,655 $ 58,291

Current operating lease liabilities Lease liabilities 2,664 2,776

Non-current operating lease liabilities Lease liabilities, net of current portion 79,470 78,800

Three Months Ended December 31,

Lease Cost Classification 2022 2021

(in thousands)

Operating lease cost Research and development $ 2,069 $ 878

General and administrative expense 533 420

Variable lease cost Research and development 210 158

General and administrative expense — —

Total $ 2,812 $ 1,456

Variable lease cost primarily related to operating expenses associated with the Company’s operating leases.

There was $ 0.1 million and $ 0 short-term lease cost during the three months ended December 31, 2022, and 2021, respectively.

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

(in thousands)

2023 (remainder of fiscal year) $ 4,470

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Total operating lease liabilities (includes current portion) $ 82,134

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 Statements of Cash Flows for the nine months ended June 30, 2022 and 2021 was $ 3.4 million and $ 2.2 million, respectively.

The weighted-average remaining lease term and weighted-average discount rate for all leases as of June 30, 2022 was 7.3 years and 8.5 %, respectively.

Supplemental cash flow and other information related to leases was as follows:

Three Months Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases (in thousands) $ 1,331 $ 1,023

Weighted-average remaining lease term (in years) 6.9 7.8

Weighted-average discount rate 8.5 % 8.5 %

STOCK-BASED COMPENSATION

Arrowhead has three plans that provide for equity-based compensation.

Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of June 30, 2022, 216,607 and 4,114,999 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, and restricted stock unit awards to employees, consultants and others.

No further grants may be made under the 2004 Equity Incentive Plan.

As of June 30, 2022, there were options granted and outstanding to purchase 216,607 and 1,806,987 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 2,308,012 restricted stock units granted and outstanding under the 2013 Incentive Plan.

As of June 30, 2022, there were 816,248 shares reserved for options and 682,500 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans.

As of June 30, 2022, there were 3,000 shares of Common Stock reserved for options and 1,507,267 shares of Common Stock reserved for restricted stock units granted and outstanding under the 2021 Incentive Plan.

As of June 30, 2022, the total number of shares available under the 2021 Incentive Plan was 6,627,845 shares, which includes 119,612 shares that were forfeited under the 2013 Incentive Plan.

Stock Options

The following table summarizes information about stock options:

Outstanding Weighted-

The Company has three plans that provide for equity-based compensation.

Under the 2004 Equity Incentive Plan (the “2004 Plan”) and 2013 Incentive Plan (the “2013 Plan”), 175,083 and 3,991,304 shares, respectively, of the Company’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 as of December 31, 2022.

On March 18, 2021, the Company’s Board of Directors approved the Arrowhead Pharmaceuticals, Inc.

2021 Incentive Plan (the “2021 Plan”), which authorizes 8,000,000 shares (subject to certain adjustments) to be awarded for grants of stock options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of the Company’s common stock.

The maximum number of shares authorized under the 2021 Plan will be (i) reduced by any shares subject to awards made under the 2013 Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 Plan as of January 1, 2021 that, after January 1, 2021, are canceled, expired, forfeited or otherwise not issued under such awards (other than as a result of being tendered or withheld to pay the exercise price or withholding taxes in connection with any such awards) or settled in cash.

As of December 31, 2022, the total number of shares reserved for issuance under the 2021 Incentive Plan was 7,155,527 shares, which includes 136,972 shares that were forfeited under the 2013 Plan.

In addition, there were 762,150 shares reserved for options and 739,625 shares reserved for restricted stock units issued as inducement grants to new employees granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules.

The following table presents a summary of awards outstanding:

As of December 31, 2022

2004 Plan 2013 Plan 2021 Plan Inducement Awards Total

Granted and outstanding awards:

Options 175,083 1,685,543 3,000 762,150 2,625,776

Restricted stock units — 2,305,761 918,795 739,625 3,964,181

Total 175,083 3,991,304 921,795 1,501,775 6,589,957

Stock Option Awards

The following table presents a summary of the stock option activity for the three months ended December 31, 2022:

Shares Weighted-

Per Share Weighted-

Term Aggregate

Balance at September 30, 2021

Term (Years) Aggregate

Outstanding at September 30, 2022

2,721,384 $ 20.73

Cancelled ( 106,801 ) 43.68

Cancelled or expired ( 13,875 ) 45.57

Exercised ( 81,733 ) 7.04

Balance at June 30, 2022

2,842,842 $ 20.60 5.1 years $ 55,434,252

Exercisable at June 30, 2022

2,370,089 $ 16.14 4.6 years $ 52,941,990

Stock-based compensation expense related to stock options for the three months ended June 30, 2022 and 2021 was $ 2.6 million and $ 3.2 million, respectively.

Stock-based compensation expense related to stock options for the nine months ended June 30, 2022 and 2021 was $ 8.3 million and $ 9.6 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 June 30, 2022 and 2021 was $ 0 and $ 0.9 million, respectively.

The grant date fair value of the options granted by the Company for the nine months ended June 30, 2022 and 2021 was $ 0 and $ 9.0 million, respectively.

The intrinsic value of the options exercised during the three months ended June 30, 2022 and 2021 was $ 1.6 million and $ 10.2 million, respectively.

The intrinsic value of the options exercised during the nine months ended June 30, 2022 and 2021 was $ 24.9 million and $ 63.0 million, respectively.

As of June 30, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $ 14.9 million will be recognized in the Company’s results of operations over a weighted average period of 1.7 years.

Outstanding at December 31, 2022

2,625,776 $ 21.02 4.7 $ 61,867,396

Exercisable at December 31, 2022

2,346,710 $ 17.83 4.4 $ 60,525,256

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the stock option exercise price) that would have been received by the stock option holders had all stock options been exercised on December 31, 2022.

The total intrinsic value of the options exercised during the three months ended December 31, 2022 and 2021 was $ 2.3 million and $ 12.5 million, respectively.

Stock-based compensation expense related to stock options oustanding for the three months ended December 31, 2022 and 2021, was $ 2.4 million and $ 3.0 million, respectively.

As of December 31, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $ 9.5 million will be recognized in the Company’s results of operations over a weighted average period of 1.3 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 Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not

have vesting restrictions and are fully transferable.

The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables.

Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The assumptions used to value stock options are as follows:

Nine Months Ended June 30,

Dividend yield N/A —

Risk-free interest rate N/A 0.4 % - 1.1 %

Volatility N/A 86 % - 90.4 %

Expected life (in years) N/A 6.25

Weighted average grant date fair value per share of options granted N/A $ 48.64

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.

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, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

No options were granted during the three months ended December 31, 2022 and 2021.

Restricted Stock Units

Restricted stock units (“RSUs”), including time-based, market condition-based, and performance condition-based awards, have been granted under the Company’s 2013 Incentive Plan, 2021 Incentive Plan, and as inducements grants granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules.

Restricted stock units (“RSUs”), including market-based, time-based and performance-based awards, have been granted under the Company’s 2013 and 2021 Plans and as inducements grants granted outside of the Company’s equity-based compensation plans.

At vesting, each outstanding RSU will be exchanged for one share of the Company’s common stock.

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RSUs Weighted-

Unvested at September 30, 2021

Outstanding at September 30, 2022

4,069,431 $ 62.96

2 unchanged sentences

Forfeited ( 25,875 ) 44.70

Unvested at June 30, 2022

Outstanding at December 31, 2022

3,964,181 $ 63.31

During the three months ended June 30, 2022 and 2021, the Company recorded $ 33.7 million and $ 15.4 million of expense related to RSUs, respectively.

During the nine months ended June 30, 2022 and 2021, the Company recorded $ 83.4 million and $ 32.5 million of expense related to RSUs, respectively.

Such expense is included in stock-based compensation expense in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

For RSUs, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

For RSUs, the grant date fair value of the award is based on the Company’s closing stock price at the grant date, with consideration given to the probability of achieving performance conditions for performance-based awards.

The grant date fair value of the RSUs granted by the Company for the three months ended June 30, 2022 and 2021 was $ 42.5 million and $ 3.1 million, respectively.

The grant date fair value of the RSUs granted by the Company for the nine months ended June 30, 2022 and 2021 was $ 95.2 million and $ 112.1 million, respectively.

As of June 30, 2022, the pre-tax compensation expense for all unvested RSUs in the amount of $ 190.3 million will be recognized in the Company’s results of operations over a weighted average period of 2.7 years.

The fair value of RSUs was determined based on the closing price of the Company’s common stock on the grant date, with consideration given to the probability of achieving service and/or performance conditions for awards.

For the three months ended December 31, 2022 and 2021, the Company recorded stock-based compensation expense of $ 17.0 million and $ 21.5 million, respectively, related to shares of RSUs.

As of December 31, 2022, there was $ 128.3 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.2 years.

FAIR VALUE MEASUREMENTS

The Company measures its financial assets and liabilities at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date.

Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation.

Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment.

Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement.

The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table summarizes fair value measurements at June 30, 2022 and September 30, 2021 for assets and liabilities measured at fair value on a recurring basis:

June 30, 2022:

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price.

Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.

Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows:

Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following:

• Quoted prices for similar assets or liabilities in active markets;

• Quoted prices for identical or similar assets or liabilities in non-active markets;

• Either directly or indirectly observable inputs as of the reporting date.

Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3).

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.

In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

At December 31, 2022 and September 30, 2022, the Company did not have any financial assets or financial liabilities based on Level 3 measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company:

December 31, 2022

Level 1 Level 2 Level 3 Total

(in thousands)

Classified as Cash and cash equivalents

government bonds $ 27,423 $ — $ — $ 27,423

Commercial notes — 104,311 — 104,311

Classified as Marketable Securities

Marketable securities $ — $ — $ — $ —

Classified as Held to Maturity

Short-term investments $ — $ 225,490 $ — $ 225,490

Long-term investments $ — $ 159,540 $ — $ 159,540

Corporate debt securities — 319,690 — 319,690

Certificate of deposits — — — —

Classified as Contingent Consideration

Contingent consideration $ — $ — $ — $ —

Money market instruments 82,924 — — 82,924

September 30, 2022

1 unchanged sentence

(in thousands)

Classified as Marketable Securities

Marketable securities $ 126,728 $ — $ — $ 126,728

Classified as Held to Maturity

Short-term investments $ — $ 57,430 $ — $ 57,430

Long-term investments $ — $ 196,643 $ — $ 196,643

Certificate of deposit $ 50,000 $ — $ — $ 50,000

Classified as Contingent Consideration

Contingent consideration $ — $ — $ — $ —

SUBSEQUENT EVENTS

government bonds $ 1,973 $ — $ — $ 1,973

Commercial notes — 41,727 — 41,727

Corporate debt securities — 271,333 — 271,333

Certificate of deposits 50,000 — — 50,000

Money market instruments 39,262 — — 39,262

LIABILITY RELATED TO THE SALE OF FUTURE ROYALTIES

On November 9, 2022, the Company and Royalty Pharma entered into the Royalty Pharma Agreement, pursuant to which Royalty Pharma agreed to pay up to $ 410.0 million in cash to the Company in consideration for the Company’s future royalty interest in Olpasiran, a small interfering RNA (siRNA) originally developed by the Company and licensed to Amgen in 2016 under the Olpasiran Agreement.

Pursuant to the Royalty Pharma Agreement, Royalty Pharma paid $ 250.0 million upfront and agreed to pay up to an additional $ 160.0 million in aggregate one-time milestone payments due if and when the following milestone events occur:

(i) $ 50.0 million on completion of enrollment in the planned OCEAN Phase 3 clinical trial for Olpasiran, (ii) $ 50.0 million upon receipt of FDA approval of Olpasiran for an approved indication (reduction in the risk of myocardial infarction, urgent coronary revascularization, or coronary heart disease death in adults with established cardiovascular disease and elevated Lp(a)), and (iii) $ 60.0 million upon Royalty Pharma’s receipt of at least $ 70.0 million of royalty payments under the Royalty Pharma Agreement in any single calendar year.

In consideration for the payment of the foregoing amounts under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement.

The Company remains eligible to receive any milestone payments potentially payable by Amgen under the Olpasiran Agreement.

The Company has evaluated the terms of the Royalty Pharma Agreement and concluded in accordance with the relevant accounting guidance that the Company accounted for the transaction as debt and the funding of $ 250.0 million from Royalty Pharma was recorded as a liability related to the sale of future royalties on its consolidated balance sheets.

The Company is not obligated to repay this upfront funding received under the Royalty Pharma Agreement.

This liability is amortized over the expected repayment term using an effective interest rate method.

The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement.

The interest rate may vary during the term of the agreement depending on a number of factors, including the amount and timing of forecasted net revenues which affects the repayment timing and ultimate amount of repayment.

The Company will evaluate the effective interest rate quarterly based on its current revenue forecasts utilizing the prospective method.

For the three months ended December 31, 2022, the Company recognized non-cash interest expense of $ 2.8 million on the consolidated statements of operations and comprehensive loss.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements