ARROWHEAD PHARMACEUTICALS, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “project,” “could,” “estimate,” “target,” “forecast” or “continue” or the negative of these words or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of the Company’s future financial performance, trends in its business, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements include, but are not limited to, statements about the initiation, timing, progress and results of the Company’s preclinical studies and clinical trials, and its research and development programs; its expectations regarding the potential benefits of the partnership, licensing and/or collaboration arrangements and other strategic arrangements and transactions the Company has entered into or may enter into in the future; its beliefs and expectations regarding the amount and timing of future milestone, royalty or other payments that could be due to or from third parties under existing agreements; and its estimates regarding future revenues, research and development expenses, capital requirements and payments to third parties. The forward-looking statements included herein are based on current expectations of the Company ’ s management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately, and many of which are beyond the Company’s control. As such, the Company’s actual results and timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Forward-looking statements are not guarantees of future performance and the Company’s actual results of operations, financial condition and cash flows may differ materially. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in “Item 1. Business” and “ Item 1A. Risk Factors” of Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of the Company’s most recent Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Except as may be required by law, the Company disclaims any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW The Company 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, the Company’s therapies trigger the RNAi mechanism to induce rapid, deep and durable knockdown of target genes. RNAi is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. RNAi-based therapeutics may leverage this natural pathway of gene silencing to target and shut down specific disease-causing genes. The Company has focused its resources on therapeutics that exclusively utilize its high levels of pharmacologic activity in multiple animal models spanning several therapeutic areas. The Company believes that TRiM TM enabled therapeutics offer several potential advantages over prior generation and competing technologies, including: simplified manufacturing and reduced costs; multiple routes of administration including subcutaneous injection and inhaled administration; the ability to target multiple tissue types including liver, lung, muscle, CNS and others; and the potential for improved safety and reduced risk of intracellular buildup, because there are fewer metabolites from smaller, simpler molecules. The Company’s pipeline includes: • Hypertriglyceridemia - ARO-APOC3 • Dyslipidemia - ARO-ANG3 • Cardiovascular disease - Olpasiran (formerly AMG 890 or ARO-LPA, out-licensed to Amgen) 25 • Cystic fibrosis - ARO-ENAC2 • Muco-obstructive or inflammatory pulmonary conditions - ARO-MUC5AC and ARO-RAGE • Idiopathic pulmonary fibrosis - ARO-MMP7 • Non-alcoholic steatohepatitis (NASH) - GSK-4532990 (formerly ARO-HSD, out-licensed to GSK) • Alpha-1 antitrypsin deficiency (AATD) - Fazirsiran (formerly ARO-AAT, a collaboration with Takeda) • Chronic hepatitis B virus - JNJ-3989 (formerly ARO-HBV, out-licensed to Janssen) • Uncontrolled gout - HZN-457 (formerly ARO-XDH, out-licensed to Horizon) • Complement mediated diseases - ARO-C3 • Non-alcoholic steatohepatitis (NASH) - ARO-PNPLA3 (formerly JNJ-75220795 or ARO-JNJ1) • Facioscapulohumeral muscular dystrophy - ARO-DUX4 • Amyotrophic lateral sclerosis “ALS” (CNS) - ARO-SOD1 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. The Company continues to develop other clinical candidates for future clinical trials. Clinical candidates are tested internally and through GLP toxicology studies at outside laboratories. Drug materials for such studies and clinical trials are either manufactured internally or contracted to third-party manufacturers. The Company engages third-party contract research organizations (CROs) to manage clinical trials and works cooperatively with such organizations on all aspects of clinical trial management, including plan design, patient recruiting, and follow up. These outside costs, relating to the preparation for and administration of clinical trials, are referred to as “candidate costs.” As clinical candidates progress through clinical development, candidate costs will increase. The First Three Quarters of Fiscal 2023 Business Highlights Key recent developments during the first three quarters of fiscal 2023 included the following: • hosted a Research & Development (R&D) Day on June 1, 2023 to discuss progress of the Company's pipeline of RNAi Therapeutics, at which the following updates were discussed: ◦ ARO-RAGE showed continued dose response with single inhaled dose of 184 mg achieving mean knockdown of 90% and max of 95%; ◦ adipose delivery platform achieved single dose target gene silencing of greater than 90% with six months of duration in non-human primates; ◦ improved hepatic dimer platform achieved equivalent or better knockdown of two target genes with longer duration than monomer mixture in non-human primates; ◦ TRiM™ platform now has potential to address multiple cell types including liver, solid tumors, lung, central nervous system, skeletal muscle, and adipose; ◦ announced progress towards the Company's "20 in 25" goal to grow its pipeline of RNAi therapeutics that leverage the proprietary Targeted RNAi Molecule (TRiM™) platform to a total of 20 clinical stage or marketed products in the year 2025; • presented updated data from the Phase 2 SEQUOIA study of investigational RNAi therapy Fazirsiran in patients with alpha-1 antitrypsin deficiency liver disease which included: ◦ Fazirsiran reduced serum Z-AAT concentration in a dose-dependent manner; ◦ Fazirsiran significantly reduced liver Z-AAT; ◦ Fazirsiran consistently reduced hepatic globule burden; ◦ Fazirsiran treatment reduced histological signs of hepatic inflammation; ◦ 50% of the pooled Fazirsiran treated patients showed at least a one-point improvement in METAVIR liver fibrosis versus 38% in the placebo group; ◦ Fazirsiran has been well tolerated to date; ◦ pulmonary function test results (FEV1 and DLCO) for both Fazirsiran and placebo were stable over time with no apparent dose-dependent effects; ◦ updated Phase 2 clinical data were presented at the European Association for the Study of the Liver 26 (EASL) Congress 2023 in an oral presentation titled, “Fazirsiran reduces liver Z-alpha-1 antitrypsin synthesis, decreases globule burden and improves histological measures of liver disease in adults with alpha-1 antitrypsin deficiency: a randomized placebo-controlled phase 2 study”; • presented interim data from the ongoing Phase 2 GATEWAY clinical study of ARO-ANG3 which included: ◦ mean reduction in LDL-C of 48.1% (200mg) and 44.0% (300mg); ◦ ANPTL3 inhibition with ARO-ANG3 also reduced HDL-C, non-HDL-C, and triglycerides, consistent with published human genetic data; ◦ safety and tolerability; • completed enrollment of the Phase 3 PALISADE clinical trial evaluating ARO-APOC3 for treatment of familial chylomicronemia syndrome; • secured stockholder approval to increase authorized common shares to 290,000,000 from 145,000,000 to provide the Company with additional flexibility to issue common stock for a variety of general corporate purposes; • announced interim results from ARO-RAGE administration in Part 1 of the ongoing Phase 1/2 study in normal healthy volunteers which included: ◦ reductions in soluble RAGE (sRAGE) as measured in serum after two doses on Day 1 and Day 29; ◦ duration of pharmacologic effect persisted for at least 6 weeks after the second administration of the 92 mg does with further follow up ongoing; ◦ reduction in sRAGE as measured in bronchoalveolar lavage fluid (BALF) at Day 31 after a single dose; ◦ reduction in in serum sRAGE was observed after a single dose; ◦ the pooled placebo groups experienced a mean sRAGE increase of 8% in BALF and a mean decrease of 1% serum; ◦ safety and tolerability; • expanded TRiM TM platform to include an optimized intrathecal administration for CNS delivery with distribution throughout the brain and in all relevant brain cell types. The first development candidate to utilize this new delivery platform is ARO-SOD1. In June 2023, the Company filed a clinical trial application (CTA) for approval to initiate a Phase 1 clinical study. In preclinical studies, ARO-SOD1 achieved 95% spinal cord tissue mRNA knockdown after a single intrathecal dose in human SOD1 transgenic rats and maintained greater than 80% spinal cord tissue mRNA knockdown three months after a single intrathecal dose in non-human primates; • dosed t he first patient in Takeda’s Phase 3 REDWOOD clinical study of Fazirsiran for the treatment of alpha-1 antitrypsin deficiency associated liver diseases, triggering a $40.0 million milestone payment to the Company which was paid in the third quarter of fiscal 2023; • dosed the first patient in GSK’s Phase 2b trial of GSK4532990, formerly called ARO-HSD, an investigational RNAi therapeutic for the treatment of patients with non-alcoholic steatohepatitis (NASH), triggering a $30.0 million milestone payment to the Company which was paid in the third quarter of fiscal 2023; • announced that the U.S. Food and Drug Administration (FDA) has granted Fast Track designation to ARO-APOC3 for reducing triglycerides in adult patients with familial chylomicronemia syndrome (FCS). ARO-APOC3 was previously granted Orphan Drug designation by the FDA and the European Union; • announced interim results from Part 1 of AROC3-1001, an ongoing Phase 1/2 clinical study of ARO-C3, which included: ◦ a dose-dependent reduction in serum C3, with 88% mean reduction at highest dose tested; ◦ a dose-dependent reduction in AH50, a marker of alternative complement pathway hemolytic activity, with 91% mean reduction at highest dose tested; ◦ duration of pharmacologic effect supportive of quarterly or less frequent subcutaneous dose administration; ◦ safety and tolerability; • received notice from Janssen of its decision to voluntarily terminate the Janssen Collaboration Agreement 27 between the Company and Janssen. The Company regained full rights to ARO-PNPLA3, formerly called JNJ-75220795, upon termination of the Janssen Collaboration Agreement which took effect on April 7, 2023. ARO-PNPLA3 is in Phase 1 clinical trials that are now being developed by the Company; • initiated dosing in ARO-MMP7-1001 (NCT05537025), a Phase 1/2a single ascending dose and multiple ascending dose clinical study to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of ARO-MMP7, an investigational RNAi therapeutic designed to reduce expression of matrix metalloproteinase 7 (MMP7) as a potential treatment for idiopathic pulmonary fibrosis (IPF), in up to 56 healthy volunteers and in up to 21 patients with IPF; • 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 (previously known as 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, which triggered a $25.0 million milestone payment to the Company, which was paid in the second quarter of fiscal 2023; • entered into the Royalty Pharma Agreement 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 top line results from the SEQUOIA Phase 2 Study of Fazirsiran 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. Net loss was $102.9 million for the three months ended June 30, 2023 as compared to $72.0 million for the three months ended June 30, 2022. Net loss was $95.6 million for the nine months ended June 30, 2023 as compared to $90.6 million for the nine months ended June 30, 2022. Net loss per share – diluted was $0.96 for the three months ended June 30, 2023 as compared to $0.68 for the three months ended June 30, 2022. Net loss per share – diluted was $0.90 for the nine months ended June 30, 2023 as compared to $0.86 for the nine months ended June 30, 2022. The changes in net loss for the three and nine months ended June 30, 2023 reflect an increase in research and development expenses, which have continued to increase as the Company’s pipeline of candidates has expanded and progressed through clinical trial phases. The Company had $105.3 million of cash, cash equivalents and restricted cash, $346.4 million in short-term investments, $42.8 million of long-term investments and $795.9 million of total assets as of June 30, 2023, as compared to $108.0 million of cash, cash equivalents and restricted cash, $268.4 million in short-term investments, $105.9 million of long-term investments and $691.9 million of total assets as of September 30, 2022. Based upon the Company’s current cash and investment resources and operating plan, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months. Critical Accounting Estimates There have been no significant changes to the Company’s critical accounting estimates disclosed in the most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2022, except the Takeda revenue recognition described in Note 2 — Collaboration and License Agreements of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” 28 RESULTS OF OPERATIONS The following data summarizes the Company’s results of operations for the following periods indicated: Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 (in thousands, except per share amounts) Revenues $ 15,825 $ 32,412 $ 224,638 $ 211,656 Operating loss $ (102,703) $ (72,909) $ (96,672) $ (94,677) Net loss attributable to Arrowhead Pharmaceuticals, Inc. $ (102,946) $ (72,046) $ (95,596) $ (90,552) Net loss per share-diluted $ (0.96) $ (0.68) $ (0.90) $ (0.86) Revenue Total revenue for the three months ended June 30, 2023 decreased to $15.8 million, or 51.2% from the same period of 2022. Total revenue for the nine months ended June 30, 2023 increased to $224.6 million, or 6.1% from the same period of 2022. The changes were primarily driven by the revenue recognition associated with GSK, Horizon, Takeda and Amgen license agreements, as discussed below. The Company has evaluated each agreement in accordance with FASB Topic 808– Collaborative Arrangements and Topic 606- Revenue for Contracts from Customers . See Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements” for more information on revenue recognized under the collaboration and license agreements. GSK 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 (see Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements” for more information on revenue recognized under the GSK License Agreement). 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 GSK-4532990 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 during the six months ended March 31, 2022. Further, GSK dosed the first patient in a Phase 2b trial in March 2023, triggering a $30.0 million milestone payment to the Company which was paid in the third quarter of fiscal 2023. Horizon On June 18, 2021, Horizon and the Company entered into the Horizon License Agreement. 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 (see Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements” for more information on revenue recognized under the Horizon License Agreement). The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company allocated 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 was recognized on a straight-line basis over the timeframe for completing the Horizon R&D Services. The Company determined that the straight-line basis was appropriate as its efforts were expended evenly over the course of completing its performance obligation. Further, Horizon enrolled the first subject in December 2022 in a Phase 1 29 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. Takeda On October 7, 2020, Takeda and the Company entered into the Takeda License Agreement. 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 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 for the ongoing SEQUOIA and AROAAT2002 clinical studies). See Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements” for more information on revenue recognized under the Takeda License Agreement. The Company previously expected these clinical trials to extend to September 2025 in order to demonstrate long term safety and efficacy in the open label extension (OLE) part of the studies; however, Takeda now intends to initiate a new OLE study available to patients participating in these Phase 2 studies that initiated in July 2023. Based on this new information, patients enrolled in the SEQUOIA and AROAAT2002 studies are expected to complete their Phase 2 study visits between June 2023 and June 2024, shortening the Company’s performance obligation. As a result, effective the second quarter of fiscal 2023, the Company changed its estimates of the revenue recognition to better reflect these newly estimated proportional performance periods. The effect of these changes in estimates resulted in accelerated revenue by $61.4 million, or $0.58 per share (diluted) for each of the three and nine months ended June 30, 2023. There were $16.9 million of contract liabilities recorded as deferred revenue, which was classified as current as of June 30, 2023. In March 2023, Takeda dosed the first patient in the Phase 3 REDWOOD clinical study of Fazirsiran, triggering a $40.0 million milestone payment to the Company which was paid in the third quarter of fiscal 2023. Amgen Inc. (“Amgen”) On September 28, 2016, Amgen and the Company entered into two collaboration and license agreements and a common stock purchase agreement. Under the Olpasiran Agreement, Amgen received a worldwide, exclusive license to the Company’s novel RNAi Olpasiran program. Olpasiran is designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Amgen is wholly responsible for clinical development and commercialization. The Company has substantially completed its performance obligations under the Olpasiran Agreement. 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 any milestone payments potentially payable by Amgen under the Olpasiran Agreement. 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. The Company is further eligible to receive up to an additional $535.0 million in aggregate development, regulatory, and sales milestone payments from Amgen and Royalty Pharma. 30 Operating Expenses The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. For purposes of comparison, the amounts for the three and nine months ended June 30, 2023 and 2022 are shown in the tables below. Research and Development (R&D) Expenses R&D expenses are related to the Company’s research and development discovery efforts and related candidate costs, which are comprised primarily of outsourced costs related to the manufacturing of clinical supplies, toxicity/efficacy studies and clinical trial expenses. Internal costs primarily relate to discovery operations at the Company’s research facilities in San Diego, California and Madison, Wisconsin, including facility costs and laboratory-related expenses. The Company does not separately track R&D expenses by individual research and development projects, or by individual drug candidates. The Company operates in a cross-functional manner across projects and does not separately allocate facilities-related costs, candidate costs, discovery costs, compensation expenses, depreciation and amortization expenses, and other expenses related to research and development activities. The following table provides details of research and development expenses for the periods indicated: (in thousands) Three Months Ended June 30, 2023 % of Expense Category Three Months Ended June 30, 2022 % of Expense Category Increase (Decrease) $ % Candidate costs $ 41,209 44 % $ 31,732 44 % $ 9,477 30 % R&D discovery costs 20,253 21 % 15,081 21 % 5,172 34 % Salaries 16,632 18 % 11,243 16 % 5,389 48 % Facilities related 4,810 5 % 3,827 5 % 983 26 % Total research and development expense, excluding non-cash expense $ 82,904 88 % $ 61,883 86 % $ 21,021 34 % Stock compensation 8,982 9 % 8,098 11 % 884 11 % Depreciation and amortization 2,871 3 % 2,200 3 % 671 31 % Total research and development expense $ 94,757 100 % $ 72,181 100 % $ 22,576 31 % (in thousands) Nine Months Ended June 30, 2023 % of Expense Category Nine Months Ended June 30, 2022 % of Expense Category Increase (Decrease) $ % Candidate costs $ 110,079 43 % $ 101,789 47 % $ 8,290 8 % R&D discovery costs 50,377 20 % 40,347 19 % 10,030 25 % Salaries 47,725 19 % 33,641 16 % 14,084 42 % Facilities related 11,601 5 % 7,644 4 % 3,957 52 % Total research and development expense, excluding non-cash expense $ 219,782 87 % $ 183,421 86 % $ 36,361 20 % Stock compensation 26,129 10 % 23,958 11 % 2,171 9 % Depreciation and amortization 7,422 3 % 6,551 3 % 871 13 % Total research and development expense $ 253,333 100 % $ 213,930 100 % $ 39,403 18 % Candidate costs increased $9.5 million, or 30%, for the three months ended June 30, 2023 and $8.3 million, or 8%, for the nine months ended June 30, 2023 compared to the same period of 2022. This increase was primarily due to the additional progression of the Company’s pipeline of candidates into and through clinical trials, which resulted in higher outsourced clinical trial, toxicity study and manufacturing costs. R&D discovery costs increased $5.2 million, or 34%, for the three months ended June 30, 2023 and $10.0 million, or 25%, for the nine months ended June 30, 2023 compared to the same period of 2022. This increase was due to the growth of the Company’s discovery efforts and continued advancement into novel therapeutic areas and tissue types. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes, related benefits and stock compensation for the Company’s R&D personnel. The increases in salaries and stock comp expenses for the nine months ended June 30, 2023 were primarily due to an increase in R&D headcount that has occurred as the Company has expanded its pipeline of candidates, in addition to annual salary increases. Stock compensation expense was based upon the valuation of 31 stock options and restricted stock units granted to employees and directors. Facilities-related expense included lease costs for the Company’s research and development facilities in San Diego, California and Madison, Wisconsin. Facilities-related costs increased $1.0 million, or 26%, for the three months ended June 30, 2023 and $4.0 million, or 52%, for the nine months ended June 30, 2023 compared to the same period of 2022. This increase was mainly due to the additional lease expense as the Company expands discovery efforts to identify new drug candidates. Depreciation and amortization expense, a non-cash expense, relates to depreciation on lab equipment and leasehold improvements at the facilities. The Company anticipates these R&D expenses to continue to increase as its pipeline of candidates grows and progresses to later phase clinical trials, in addition to inflationary pressure on goods and services and the labor market. General & Administrative Expenses The following table provides details of the Company’s general and administrative expenses for the periods indicated: (in thousands) Three Months Ended June 30, 2023 % of Expense Category Three Months Ended June 30, 2022 % of Expense Category Increase (Decrease) $ % Salaries $ 5,063 21 % $ 3,175 10 % $ 1,888 59 % Professional, outside services, and other 5,987 25 % 3,568 11 % 2,419 68 % Facilities related 1,352 6 % 703 2 % 649 92 % Total general & administrative expense, excluding non-cash expense $ 12,402 52 % $ 7,446 23 % $ 4,956 67 % Stock compensation 10,965 46 % 25,292 76 % (14,327) (57) % Depreciation and amortization 404 2 % 403 1 % 1 — % Total general & administrative expense $ 23,771 100 % $ 33,141 100 % $ (9,370) (28) % (in thousands) Nine Months Ended June 30, 2023 % of Expense Category Nine Months Ended June 30, 2022 % of Expense Category Increase (Decrease) $ % Salaries $ 14,275 21 % $ 10,365 11 % $ 3,910 38 % Professional, outside services, and other 15,293 22 % 11,004 12 % 4,289 39 % Facilities related 3,377 5 % 2,085 2 % 1,292 62 % Total general & administrative expense, excluding non-cash expense $ 32,945 48 % $ 23,454 25 % $ 9,491 40 % Stock compensation 33,820 50 % 67,739 73 % (33,919) (50) % Depreciation and amortization 1,212 2 % 1,210 2 % 2 — % Total general & administrative expense $ 67,977 100 % $ 92,403 100 % $ (24,426) (26) % Salaries expense increased $1.9 million, or 59%, for the three months ended June 30, 2023 and $3.9 million, or 38%, for the nine months ended June 30, 2023 compared to the same period of 2022. The increase was driven by the combination of annual salary increases and increased headcount required to support the Company’s growth. Professional, outside services, and other expense includes legal, consulting, patent expenses, business insurance expenses, other outside services, travel, communication and technology expenses. This expense increased $2.4 million, or 68%, for the three months ended June 30, 2023 and $4.3 million, or 39%, for the nine months ended June 30, 2023 compared to the same period of 2022. The increase was mainly due to consulting expenses related to software implementation and administrative expenses in support of additional headcount. Facilities related expense primarily includes rental costs and other facilities-related costs for the Company’s corporate headquarters in Pasadena, California. Depreciation and amortization expense, a noncash expense, was primarily related to amortization of leasehold improvements for the Company’s corporate headquarters. Stock compensation expense, a non-cash expense, decreased by $14.3 million, or 57%, for the three months ended June 30, 2023 and $33.9 million, or 50%, for the nine months ended June 30, 2023 compared to the same periods of 2022. The decrease was mainly due to the lower amount of recognized compensation costs and the reversal of recognized compensation costs related to a performance award where the minimum performance goal was not met. The fair value of 32 market condition-based awards was expensed ratably over the service period and was not adjusted for actual achievement. Other than with respect to the stock compensation costs described above, the Company anticipates these general and administrative expenses to continue to increase as its pipeline of candidates grows and progresses to later phase clinical trials, in addition to inflationary pressure on goods and services and the labor market. Other Income (Loss) Other income (loss) is primarily related to interest income and expense. Other income decreased $1.5 million and $5.0 million for the three and nine months ended June 30, 2023, respectively, compared to the same periods of 2022. The decrease was primarily due to the interest expense on the liability related to the sale of future royalties, offset by higher yields on investments due to increased interest rates as well as various credits the Company received during the first three quarters of fiscal 2023. 33 LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through the sale of its equity 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 as the Company’s pipeline continues to expand and matures into later stage clinical trials. Additionally, the Company expanded its facilities in Verona, Wisconsin and commenced the lease agreement for additional facilities in San Diego, California. Each of these expansions is designed to increase the Company’s internal manufacturing and discovery capabilities, and each will require significant capital investment. The Company’s cash, cash equivalents and restricted cash decreased to $105.3 million at June 30, 2023 compared to $108.0 million at September 30, 2022. Cash invested in short-term fixed income securities was $346.4 million at June 30, 2023 compared to $268.4 million at September 30, 2022. Cash invested in long-term fixed income securities was $42.8 million at June 30, 2023, compared to $105.9 million at September 30, 2022. On December 2, 2022, the Company entered into the Open Market Sale Agreement, pursuant to which the Company may, from time to time, sell up to $250.0 million 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. As of June 30, 2023, no shares have been issued under the Open Market Sale Agreement. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months. The following table presents a summary of cash flows: Nine Months Ended June 30, 2023 2022 (in thousands) Cash Flow from: Operating activities $ (128,633) $ (67,394) Investing activities (126,664) (41,862) Financing activities 252,901 64,331 Net decrease in cash, cash equivalents and restricted cash $ (2,396) $ (44,925) Cash, cash equivalents and restricted cash at end of period $ 105,334 $ 139,439 During the nine months ended June 30, 2023, cash flows used by operating activities was $128.6 million, which was primarily due to the ongoing expenses related to the Company’s research and development programs and general and administrative expenses, partially offset by the receipt of $110.0 million from collaboration and license agreements (see Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements”). Cash used in investing activities was $126.7 million, which was primarily related to capital expenditures, $112.8 million of construction in progress, and $234.0 million purchases of investments, offset by maturities of investments of $220.2 million. Cash provided by financing activities of $252.9 million was primarily related to the $250.0 million payment from Royalty Pharma as well as cash received from stock option exercises. See Note 11 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” During the nine months ended June 30, 2022, cash flows used by operating activities was $67.4 million, which was primarily due to the receipt of the $120.0 million upfront payment from GSK, offset by the ongoing expenses related to the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $41.9 million, which was primarily related to the purchase of property and equipment of $20.1 million and net purchases and maturities of investments of $21.8 million. Cash provided by financing activities of $64.3 million was related to the formation of the Company's joint venture, Visirna, as well as cash received from stock option exercises. 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 has incurred $102.7 million and intends to spend an additional $160.0 million to $180.0 million to complete the build out of the facilities with cash on hand. As part of this land purchase, the Company entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the tax incremental district and expects to 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 City of Verona is expected to pay under the Tax Incremental Financing program is not guaranteed and will depend on future tax revenues generated from the developed property. The Company also expects receive up to $2.5 million of refundable Wisconsin state income tax 34 credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company ’ s exposure to market risk from that described in Item 7A of its Annual Report on Form 10-K for the year ended September 30, 2022.