Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 interference 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, CNS, muscle, and adipose tissue; 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 - Plozasiran (formerly ARO-APOC3)
• Dyslipidemia - Zodasiran (formerly ARO-ANG3)
• Cardiovascular disease - olpasiran (formerly AMG 890 or ARO-LPA, out-licensed to Amgen)
• 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 (1) )
• Uncontrolled gout - HZN-457 (formerly ARO-XDH, out-licensed to Horizon (2) )
• 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
(1) On October 30, 2023, the Company entered into an Assignment and Consent Agreement with Janssen, whereby, the Company consented to the assignment of the Janssen License Agreement to GSK, which assignment shall be effective upon the receipt of certain anti-trust approvals.
(2) On October 6, 2023, Amgen announced that it has completed its acquisition of Horizon.
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 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.
2023 Business Highlights
During fiscal year 2023, the Company continued to develop and advance its pipeline and partnered candidates and expanded its facilities to support its growing programs. The bullets below highlight some of these key developments; however, this list is not all-inclusive and is meant to be read in conjunction with the entirety of management’s discussion and analysis, the Company’s Consolidated Financial Statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.
• presented data on Company’s pulmonary pipeline at the European Respiratory Society (ERS) International Congress 2023 in Milan, Italy in September 2023, which included:
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◦ in an ongoing Phase 1/2 clinical trial, ARO-RAGE achieved mean target gene knockdown of up to 90% with a maximum of 95% after a single inhaled administration;
◦ the TRiM™ platform can achieve compelling results across multiple additional gene targets in the lung, including MUC5AC, MMP7, and the Company’s newest program against thymic stromal lymphopoietin (TSLP), a clinically well validated target;
• filed an application for clearance to initiate a Phase 1/2 clinical trial of ARO-DUX4 in July 2023, which is being developed as a potential treatment for patients with facioscapulohumeral muscular dystrophy (FSHD);
• 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; median reductions of 94% of Z-AAT accumulation in the liver;
◦ fazirsiran consistently reduced hepatic globule burden; mean reductions of 68% in histologic globule burden were observed;
◦ 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; treatment emergent adverse events were generally well balanced between fazirsiran and placebo group;
◦ 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 (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”;
◦ results were consistent with AROAAT-2002 open-label study previously published in The New England Journal of Medicine;
• 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;
• 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;
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◦ 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 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 the 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, 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 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;
• 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, 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.”)
2023 Financial Performance Summary
Net loss attributable to Arrowhead Pharmaceuticals, Inc. was $205.3 million for the year ended September 30, 2023 as compared to $176.1 million for the year ended September 30, 2022. Net loss per share – diluted was $1.92 for the year ended September 30, 2023 as compared to $1.67 for the year ended September 30, 2022. The change in net loss for the
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year ended September 30, 2023 reflected 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 $110.9 million of cash, cash equivalents and restricted cash, $292.7 million in available-for-sale securities and $765.6 million of total assets as of September 30, 2023, as compared to $108.0 million of cash, cash equivalents and restricted cash, $374.3 million in held-to-maturities debt securities, 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
Management makes certain judgments and uses certain estimates and assumptions when applying U.S. generally accepted accounting principles (“GAAP”) in the preparation of the Company’s Consolidated Financial Statements. On an ongoing basis, the Company evaluates its estimates, judgments and assumptions. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expense. Actual results may vary from what the Company anticipates and different assumptions or estimates about the future could change its reported results. The Company believes the following accounting policies are the most critical to it, in that they require its most difficult, subjective or complex judgments in the preparation of the Company’s Consolidated Financial Statements. For further information, see Note 1, Organization and Significant Accounting Policies of the Notes to the Company’s Consolidated Financial Statements in Part IV, “Item 15. Exhibits and Financial Statement Schedules.”
Revenue Recognition —The Company has adopted Financial Accounting Standards Board (“FASB”) Topic 606 – Revenue for Contracts from Customers. The Company has not yet achieved commercial sales of its drug candidates to date, however, this standard is applicable to its licensing and collaboration agreements. This is discussed further in Note 2, Collaboration and License Agreements of the Notes to the Company’s Consolidated Financial Statements in Part IV, “Item 15. Exhibits and Financial Statement Schedules.”
At contract inception, the Company assesses whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation, or whether they are not distinct and are combined with other goods and services until a distinct bundle is identified. The Company then determines the transaction price, which typically includes upfront payments and any variable consideration that it determines is probable to not cause a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is resolved. The Company then allocates the transaction price to each performance obligation and recognizes the associated revenue when (or as) each performance obligation is satisfied.
The Company recognizes the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract. These other performance obligations are typically to perform research and development services for the customer, often times relating to the candidate that the customer is licensing. If the license is not considered to be distinct from other performance obligations, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied at a point in time or over time. If the performance obligation is satisfied over time, the Company then determines the appropriate method of measuring progress for purposes of recognizing revenue from license payments. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the related revenue recognition.
Typically, the Company’s collaboration agreements entitle it to additional payments upon the achievement of milestones or royalties on sales. The milestones are generally categorized into three types: development milestones, generally based on the initiation of toxicity studies or clinical trials; regulatory milestones, generally based on the submission, filing or approval of regulatory applications such as a CTA or a NDA in the United States; and sales-based milestones, generally based on meeting specific thresholds of sales in certain geographic areas. The Company evaluates whether it is probable that the consideration associated with each milestone or royalty will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most-likely-amount method, whereas amounts that do not meet this threshold are excluded from the transaction price until they meet this threshold. At the end of each subsequent reporting period, the Company re-evaluates the probability of a significant reversal of the cumulative revenue recognized for its milestones and royalties, and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and net income in the Company’s consolidated statements of operations and comprehensive loss. Typically, milestone payments and royalties are achieved after the Company’s performance obligations associated with the collaboration agreements have been completed and after the customer has assumed responsibility for the respective clinical or preclinical program. Milestones or royalties achieved after the Company’s
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performance obligations have been completed are recognized as revenue in the period the milestone or royalty was achieved. If a milestone payment is achieved during the performance period, the milestone payment would be recognized as revenue to the extent performance had been completed at that point, and the remaining balance would be recorded as deferred revenue.
The revenue standard requires the Company to assess whether a significant financing component exists in determining the transaction price. The Company performs this assessment at the onset of its licensing or collaboration agreements. Typically, a significant financing component does not exist because the customer is paying for a license or services in advance with an upfront payment. Additionally, future royalty payments are not substantially within the control of the Company or the customer.
The revenue standard requires the Company to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in the revenue standard as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which the Company has sold the same performance obligation separately are not available, the Company estimates the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Whenever we determine that goods or services promised in a contract should be accounted for as a combined performance obligation over time, the Company determines the period over which the performance obligations will be performed and revenue will be recognized. Revenue is recognized using the input method. Labor hours, costs incurred or patient visits in clinical trials are typically used as the measure of performance. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations. If the Company determines that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on the Company’s consolidated balance sheets.
Collaborative Arrangements —The Company analyzes its collaborative arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards, and therefore an appropriate recognition method is determined and applied consistently, either by analogy to appropriate accounting literature or by applying a reasonable accounting policy election. For collaborative arrangements that are within the scope of FASB Topic 808— Collaborative Arrangements , the Company evaluates the income statement classification for presentation of amounts due to or owed from other participants associated with multiple units of account in a collaborative arrangement based on the nature of each activity. Payments or reimbursements that are the result of a collaborative relationship instead of a customer relationship, such as co-development and co-commercialization activities, are recorded as increases or decreases to research and development expense or general and administrative expense, as appropriate.
Leases —The Company classifies each of its leases as operating or financing considering factors such as the length of the lease term, the present value of the lease payments, the nature of the asset being leased, and the potential for ownership of the asset to transfer during the lease term. Leases with terms greater than one-year are recognized on the Company’s consolidated balance sheets as right-of-use assets that represent its right to use an underlying asset for the lease term, and lease liabilities that represent its obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the expected lease term.
The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis an amount equal to the lease payments over a similar term and in a similar economic environment. The Company records expense to recognize fixed lease payments on a straight-line basis over the expected lease term. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are expensed as incurred.
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RESULTS OF OPERATIONS
The following data summarizes the Company’s results of operations for the following periods indicated:
Year Ended September 30,
2023 2022 2021
(in thousands, except per share amounts)
Revenue $ 240,735 $ 243,231 $ 138,287
Operating loss $ (205,002) $ (178,507) $ (149,036)
Net loss attributable to Arrowhead Pharmaceuticals, Inc. $ (205,275) $ (176,063) $ (140,848)
Net loss per share (diluted) attributable to Arrowhead Pharmaceuticals, Inc. $ (1.92) $ (1.67) $ (1.36)
Year Ended September 30, 2023 Compared to Year Ended September 30, 2022
Revenue
Total revenue for the year ended September 30, 2023 decreased slightly to $240.7 million, 1.0% from the same period of 2022. The revenue is mainly 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 of the Notes to Consolidated Financial Statements of Part IV, “Item 15. Exhibits and Financial Statement Schedules.”
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.
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 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 in the year ended September 30, 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.
The Company has also performed certain development and manufacturing activities, including drug substance and drug product manufacture under GMP conditions, for GSK pursuant to the GSK License Agreement, for which the Company has been reimbursed for its costs. The Company recognized $0.3 million and $4.8 million in connection with these efforts for the years ended September 30, 2023 and 2022, respectively.
Horizon
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.
The Company determined the initial transaction price totaled $40.0 million, including the upfront payment, which was collected in July 2021. 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. Further, Horizon enrolled the first subject in December 2022 in a Phase 1 randomized, placebo-controlled trial to assess the safety, tolerability, pharmacokinetics and
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pharmacodynamics of HZN-457, triggering a $15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023.
The Company has performed certain development and manufacturing activities, including drug substance and drug product manufacture under GMP conditions, for Horizon pursuant to the Horizon License Agreement. The Company recognized $1.5 million and $2.5 million in connection with these efforts for the years ended September 30, 2023 and 2022, respectively.
Takeda
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.
Under the terms of the Takeda License Agreement, the Company received $300.0 million as an upfront payment in January 2021 and an additional $40.0 million upon Takeda’s initiation of a Phase 3 REDWOOD clinical study of fazirsiran in March 2023.
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 the input method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). 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, in August 2023, Takeda initiated a Phase 3 OLE study available to patients participating in these Phase 2 studies. 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 December 2023, 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 this newly estimated performance period. The effect of these changes in estimates resulted in accelerated revenue by $70.5 million, or $0.66 per share (diluted) for the year ended September 30, 2023.
Amgen
Under the Olpasiran Agreement, the Company has received $35.0 million in upfront payments and $21.5 million in the form of an equity investment by Amgen in the Company’s common stock. Further, the Company received an additional $55.0 million in milestone payments; $10.0 million upon Amgen’s initiation of a Phase 1 study in September 2018, $20.0 million upon its initiation of a Phase 2 clinical study in July 2020, and $25.0 million upon its first subject enrollment in a Phase 3 trial in December 2022. The Company has substantially completed its performance obligations under the Olpasiran Agreement.
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 $535.0 million in remaining development, regulatory and sales milestone payments payable from Amgen and Royalty Pharma. See Note 13 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part IV, “Item 15. Exhibits and Financial Statement Schedules.”
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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 years ended September 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:
(in thousands) Twelve
Months
Ended
September 30, 2023
% of
Expense
Category Twelve
Months
Ended
September 30, 2022
% of
Expense
Category Increase (Decrease)
$ %
Candidate costs $ 141,436 40 % $ 136,904 46 % $ 4,532 3 %
R&D discovery costs 76,609 22 % 54,346 18 % 22,263 41 %
Salaries 73,668 21 % 51,931 17 % 21,737 42 %
Facilities related 16,267 5 % 12,948 4 % 3,319 26 %
Total research and development expense, excluding non-cash expense $ 307,980 87 % $ 256,129 86 % $ 51,851 20 %
Stock compensation 34,332 10 % 32,371 11 % 1,961 6 %
Depreciation and amortization 10,876 3 % 8,807 3 % 2,069 23 %
Total research and development expense $ 353,188 100 % $ 297,307 100 % $ 55,881 19 %
Candidate costs increased $4.5 million, or 3%, for the year ended September 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 $22.3 million, or 41%, for the year ended September 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 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 stock options and restricted stock units granted to employees.
Facilities-related expense primarily includes lease costs for the Company’s research and development facilities in San Diego, California and Madison, Wisconsin. Facilities-related costs increased $3.3 million, or 26%, for the year ended September 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 general and administrative expenses:
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(in thousands) Twelve
Months
Ended
September 30, 2023
% of
Expense
Category Twelve
Months
Ended
September 30, 2022
% of
Expense
Category Increase (Decrease)
$ %
Salaries $ 22,999 25 % $ 16,646 13 % $ 6,353 38 %
Professional, outside services, and other
20,720 22 % 14,738 12 % 5,982 41 %
Facilities related 3,415 4 % 2,912 2 % 503 17 %
Total general & administrative expense, excluding non-cash expense $ 47,134 51 % $ 34,296 28 % $ 12,838 37 %
Stock compensation 43,798 47 % 88,521 71 % (44,723) (51) %
Depreciation/amortization 1,617 2 % 1,614 1 % 3 — %
Total general & administrative expense $ 92,549 100 % $ 124,431 100 % $ (31,882) (26) %
Salaries expense increased $6.4 million, or 38%, for the year ended September 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, and communication and technology expenses. This expense increased $6.0 million, or 41%, for the year ended September 30, 2023 compared to the same period of 2022. The increase was mainly due to the cost associated with consulting services focused on the preparation of commercialization activities.
Facilities related expense primarily includes rental costs and other facilities-related costs for the Company’s corporate headquarters in Pasadena, California.
Stock compensation expense, a non-cash expense, decreased by $44.7 million, or 51%, for the year ended September 30, 2023 compared to the same period 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 market condition-based awards was expensed ratably over the service period and was not adjusted for actual achievement.
Depreciation and amortization expense, a noncash expense, was primarily related to amortization of leasehold improvements for the Company’s corporate headquarters.
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 (Expense)
Other income (expense) is primarily related to interest income and expense. Other expense was $1.5 million for the year ended September 30, 2023 compared to other income of $5.8 million for the year ended September 30, 2022. The change was primarily due to the interest expense on the liability related to the sale of future royalties, partially offset by higher yields on investments due to increased interest rates.
Year Ended September 30, 2022 Compared to Year Ended September 30, 2021
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended September 30, 2022 for a discussion of changes in its results of operations from the year ended September 30, 2022 to the year ended September 30, 2021.
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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. These expansions are designed to increase the Company’s internal manufacturing and discovery capabilities, and the ongoing expansion in Verona, Wisconsin continues to require capital investment. For further information on our capital needs, see the section titled “Risks Related to Our Financial Condition” in “Item 1A. Risk Factors” of this Annual Report on Form 10-K.
The Company’s cash, cash equivalents and restricted cash slightly increased to $110.9 million at September 30, 2023 compared to $108.0 million at September 30, 2022. Cash invested in available-for-sale debt securities was $292.7 million at September 30, 2023 compared to held-to-maturity debt securities of $374.3 million at September 30, 2022. In April 2022, the Company sold all of its investments in mutual funds for $122.3 million.
On September 30, 2023, the Company changed the classification of its investment securities from held-to-maturity to available-for-sale. This change enables the Company to sell securities to diversify its portfolio, reduce exposure to market risks, and provide flexibility to meet cash flow needs and new investment opportunities.
On December 2, 2022, the Company entered into the Open Market Sale Agreement (See Note 6 — Stockholders’ Equity to Consolidated Financial Statements of Part I, “Item 1. Financial Statements”), 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 September 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:
Year Ended September 30,
2023 2022 2021
(in thousands)
Cash Flow from:
Operating activities $ (153,890) $ (136,131) $ 171,312
Investing activities (96,155) (5,417) (141,678)
Financing activities 253,053 65,186 11,305
Net increase (decrease) in cash, cash equivalents and restricted cash $ 3,008 $ (76,362) $ 40,939
Cash, cash equivalents and restricted cash at end of period $ 110,891 $ 108,005 $ 184,434
During the year ended September 30, 2023, cash flow used by operating activities was $153.9 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 the $110.0 million from collaboration and license agreements (See Note 2 — Collaboration and License Agreements of Notes to Consolidated Financial Statements of Part IV, “Item 15. Exhibits and Financial Statement Schedules.”). Cash used in investing activities was $96.2 million, which was primarily related to the purchase of property and equipment of $176.7 million, offset by net proceeds of $80.6 million from maturities of securities. Cash provided by financing activities of $253.1 million was primarily related to the $250.0 million payment from Royalty Pharma as well as cash received from stock option exercises (See Note 13 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part IV, “Item 15. Exhibits and Financial Statement Schedules.”).
During the year ended September 30, 2022, cash flow used by operating activities was $136.1 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 the $120.0 million upfront payment from GSK. Cash used in investing activities was $5.4 million, which was primarily related to the purchase of property and equipment of $52.8 million, offset by net proceeds from maturities of investments of $47.4 million. Cash provided by financing activities of
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$65.2 million was primarily 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 is now occupying the laboratory and office facility, but construction of the manufacturing facility is still ongoing. As of September 30, 2023, the Company has incurred $166.2 million and intends to spend an additional $120.0 million to $130.0 million to complete the build out of the facilities.
As part of this land acquisition, the Company entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the tax increment 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 City of Verona will pay under the Tax Increment Financing program is not guaranteed and will depend on future tax revenues generated from the developed property . The Company also became eligible to receive up to $2.5 million in refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives for investing in the local community and creating new job opportunities. As of September 30, 2023, the Company has collected $1.5 million of these credits.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended September 30, 2022 for a discussion of cash flows from the year ended September 30, 2021.
Contractual Obligations
For information related to the Company’s future commitments for its facility-related obligations and collaboration and licensing agreements, see Notes 8 and 2, respectively, of Notes to the Company’s Consolidated Financial Statements of Part IV, “Item 15. Exhibits and Financial Statement Schedules.” Commitments related to the Company’s clinical, manufacturing and business operation related agreements are $579.7 million as of September 30, 2023, but many of these agreements are cancellable.