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,” “goal,” “endeavor,” “strive,” “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 our future financial performance, trends in our 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 our preclinical studies and clinical trials, our research and development programs, and our “20 in 25” pipeline goal; our expectations regarding the potential benefits of the partnership, licensing and/or collaboration arrangements and other strategic arrangements and transactions we have entered into or may enter into in the future; our 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 our 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 our 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 our control. As such, our 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 our 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 our most recent Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file 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 us 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, we disclaim 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 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 clinical 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; 21 • 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 GSK); • Complement mediated diseases - ARO-C3; • Non-alcoholic steatohepatitis (NASH) - ARO-PNPLA3 (formerly JNJ-75220795 or ARO-JNJ1); • Facioscapulohumeral muscular dystrophy - ARO-DUX4; • Dystrophia myotonica protein kinase (DMPK) - ARO-DM1; and • Hepatic expression of complement factor B (CFB) - ARO-CFB. The Company operates lab facilities in California and 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 Good Laboratory Practice (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, including toxicology/efficacy testing and manufacturing costs, as well as 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 Half of Fiscal 2024 Business Highlights Key recent developments through fiscal 2024 included the following: • Completed enrollment in Amgen’s Phase 3 OCEAN(a) - outcome trial of olpasiran, triggering a $50.0 million milestone payment to the Company, which was paid in the third quarter of fiscal 2024; • Presented final data from the double-blind treatment period of the Company’s Phase 2 SHASTA-2 study of investigational plozasiran in patients with severe Hypertriglyceridemic. Results from the SHASTA-2 study showed dramatic, consistent, and sustained reductions in Apolipoprotein C-III (APOC3) and triglycerides and improvement in multiple atherogenic lipoprotein levels; • Announced an Expanded Access Program (EAP) to make investigational plozasiran available outside of a clinical trial for qualifying patients with familial chylomicronemia syndrome (FCS); • Initiated a Phase 1/2a clinical trial of ARO-DM1, being developed as a potential treatment for type 1 myotonic dystrophy (DM1), the most common adult-onset muscular dystrophy; • Filed an application for clearance to initiate a Phase 1/2a clinical trial of ARO-CFB, being developed as a potential treatment for complement mediated renal disease; • Entered into an underwriting agreement with Jefferies LLC, BofA Securities, Inc., and Cowen and Company, LLC, as representatives of the several underwriters. The Company issued 15,790,000 shares of common stock at a price of $28.50 per share. The aggregate purchase price paid by investors was $450.0 million and the Company received net proceeds of $429.3 million after deducting advisory fees and offering expenses; and • Entered into an Amended and Restated License Agreement with GSK, pursuant to which GSK received a worldwide, exclusive license to develop and commercialize JNJ-3989 (formerly ARO-HBV). JNJ-3989 had previously been licensed to Janssen Pharmaceuticals, Inc. See Note 2 - Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” Net loss attributable to the Company was $125.3 million for the three months ended March 31, 2024 as compared to net income attributable to the Company of $48.7 million for the three months ended March 31, 2023. Net loss attributable to the Company was $258.2 million for the six months ended March 31, 2024 as compared to net income attributable to the Company of $7.4 million for the six months ended March 31, 2023. Net loss per share – diluted was $1.02 for the three months ended March 31, 2024 as compared to net income per share – diluted of $0.45 for the three months ended March 31, 2023. Net loss per share – diluted was $2.24 for the six months ended March 31, 2024 as compared to net income per share – diluted of $0.07 for the six months ended March 31, 2023. The changes in net loss attributable to the Company for the three and six months ended March 31, 2024 were mainly due to a decrease in revenue from the Company’s license and collaboration agreements, in conjunction with increased 22 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 $127.7 million of cash, cash equivalents and restricted cash, $395.4 million in available-for-sale securities, and $955.2 million of total assets as of March 31, 2024, as compared to $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. 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, 2023. RESULTS OF OPERATIONS The following data summarizes the Company’s results of operations for the following periods indicated: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 (in thousands, except per share amounts) Revenue $ — $ 146,267 $ 3,551 $ 208,813 Operating (loss) income $ (126,191) $ 48,165 $ (262,736) $ 6,031 Net (loss) income attributable to Arrowhead Pharmaceuticals, Inc. $ (125,300) $ 48,675 $ (258,164) $ 7,350 Net (loss) income per share-diluted $ (1.02) $ 0.45 $ (2.24) $ 0.07 Revenue Total revenue for the three months ended March 31, 2024 decreased by $146.3 million or 100.0% from the same period of 2023. Total revenue for the six months ended March 31, 2024 decreased by $205.3 million, or 98.3% from the same period of 2023. The changes were primarily driven by decreased revenue recognition associated with the Company’s license and collaboration agreements during the first half of fiscal 2024. The revenue for the six months ended March 31, 2024 was mainly driven by the revenue recognition associated with Takeda and GSK, 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. Takeda : In October 2020, Takeda and the Company entered into the Takeda License Agreement. 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 was 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 Phase 2 study visits for patients in the SEQUOIA and AROAAT2002 studies concluded by December 31, 2023, and the Company has substantially completed its performance obligation under the Takeda license agreement. As such, all revenue has been fully recognized as of December 31, 2023. During the six months ended March 31, 2023, the Company recorded $132.5 million revenue, including $40.0 million milestone payment by dosing the first patient in the Phase 3 REDWOOD clinical study of fazirsiran. GSK : On December 11, 2023, GSK and the Company entered into the GSK HBV Agreement. Under the GSK-HBV Agreement, GSK received a worldwide, exclusive license to develop and commercialize JNJ-3989 (formerly ARO-HBV). JNJ-3989 had previously been licensed to Janssen in October 2018. Under the terms of the GSK-HBV Agreement, the Company received $2.7 million in December 2023, upon signing the GSK-HBV Agreement. During the six months ended March 31, 2023, the Company recorded a $30.0 million milestone payment by dosing the first patient in a Phase 2b trial under GSK License Agreement. Horizon/Amgen : During the six months ended March 31, 2023, the Company recorded $6.7 million revenue of the total $40.0 million upfront payment received in July 2021, which was recognized on a straight-line basis over the 23 timeframe for completing the Horizon R&D Services, concluding in the first quarter of 2023. 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. Further, 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. On October 6, 2023, Amgen, Inc. completed its acquisition of Horizon and subsequently notified the Company of Amgen’s intent to terminate the HZN-457 license. Horizon exercised its right to terminate the Horizon License Agreement for convenience, which took effect on December 21, 2023. 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 six months ended March 31, 2024 and 2023 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 California and Wisconsin, including facility costs and laboratory-related expenses. The Company does not separately track R&D expenses by individual research and development project, or by individual drug candidate. 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 March 31, 2024 % of Expense Category Three Months Ended March 31, 2023 % of Expense Category Increase (Decrease) $ % Candidate costs $ 33,905 34 % $ 26,586 36 % $ 7,319 28 % R&D discovery costs 24,786 24 % 17,431 23 % 7,355 42 % Salaries 24,921 25 % 16,404 22 % 8,517 52 % Facilities related 5,923 6 % 3,450 4 % 2,473 72 % Total research and development expense, excluding non-cash expense $ 89,535 89 % $ 63,871 85 % $ 25,664 40 % Stock compensation 7,487 7 % 8,745 12 % (1,258) (14) % Depreciation and amortization 4,100 4 % 2,265 3 % 1,835 81 % Total research and development expense $ 101,122 100 % $ 74,881 100 % $ 26,241 35 % (in thousands) Six Months Ended March 31, 2024 % of Expense Category Six Months Ended March 31, 2023 % of Expense Category Increase (Decrease) $ % Candidate costs $ 79,179 36 % $ 68,870 43 % $ 10,309 15 % R&D discovery costs 54,008 25 % 30,124 19 % 23,884 79 % Salaries 47,516 22 % 31,093 20 % 16,423 53 % Facilities related 12,465 6 % 6,791 4 % 5,674 84 % Total research and development expense, excluding non-cash expense $ 193,168 89 % $ 136,878 86 % $ 56,290 41 % Stock compensation 16,494 7 % 17,147 11 % (653) (4) % Depreciation/amortization 7,951 4 % 4,551 3 % 3,400 75 % Total research and development expense $ 217,613 100 % $ 158,576 100 % $ 59,037 37 % Candidate costs increased $7.3 million, or 28%, for the three months ended March 31, 2024 and $10.3 million, or 15%, for the six months ended March 31, 2024 compared to the same period of 2023. 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 24 manufacturing, outsourced clinical trial, and toxicity study costs. R&D discovery costs increased $7.4 million, or 42%, for the three months ended March 31, 2024 and $23.9 million, or 79%, for the six months ended March 31, 2024 compared to the same period of 2023. This increase was primarily driven by the growth of the Company’s discovery efforts and continued advancement into novel therapeutic areas and tissue types, particularly due to an increase in labor along with rising costs associated with CNS studies and lab supplies. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes, related benefits and stock compensation for the Company’s R&D personnel. The increase in salaries for the three and six months ended March 31, 2024 was 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 and directors. The decrease in stock compensation expense for the three and six months ended March 31, 2024 was primarily due to the cancelled awards upon the departure of employees. Facilities-related expense includes lease costs for the Company’s research and development facilities in San Diego, California and Madison, Wisconsin. Facilities-related costs increased $2.5 million, or 72%, for the three months ended March 31, 2024 and $5.7 million, or 84%, for the six months ended March 31, 2024 compared to the same period of 2023. This increase was mainly due to the ATIAs on the lease in San Diego, California. See Note 8 — Leases of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” Depreciation and amortization expense, a non-cash expense, increased $1.8 million, or 81% for the three months ended March 31, 2024 and $3.4 million, or 75%, for the six months ended March 31, 2024, compared to the same period of 2023. The increase was primarily attributed to higher leasehold improvements, due to completion of the development of the San Diego facility. Additionally, as of December 31, 2023, the Company completed the build out of one of its laboratory and office facilities in Verona, Wisconsin, and commenced depreciation. 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 March 31, 2024 % of Expense Category Three Months Ended March 31, 2023 % of Expense Category Increase (Decrease) $ % Salaries $ 7,088 28 % $ 5,005 22 % $ 2,083 42 % Professional, outside services, and other 6,278 25 % 4,923 21 % 1,355 28 % Facilities related 1,015 4 % 1,020 4 % (5) — % Total general & administrative expense, excluding non-cash expenses $ 14,381 57 % $ 10,948 47 % $ 3,433 31 % Stock compensation 10,263 41 % 11,868 51 % (1,605) (14) % Depreciation and amortization 425 2 % 405 2 % 20 5 % Total general & administrative expenses $ 25,069 100 % $ 23,221 100 % $ 1,848 8 % (in thousands) Six Months Ended March 31, 2024 % of Expense Category Six Months Ended March 31, 2023 % of Expense Category Increase (Decrease) $ % Salaries $ 13,347 27 % $ 9,212 21 % $ 4,135 45 % Professional, outside services, and other 11,500 24 % 9,306 21 % 2,194 24 % Facilities related 2,040 4 % 2,025 4 % 15 1 % Total general & administrative expense, excluding non-cash expenses $ 26,887 55 % $ 20,543 46 % $ 6,344 31 % Stock compensation 20,950 43 % 22,855 52 % (1,905) (8) % Depreciation and amortization 837 2 % 808 2 % 29 4 % Total general & administrative expenses $ 48,674 100 % $ 44,206 100 % $ 4,468 10 % Salaries expense increased $2.1 million, or 42%, for the three months ended March 31, 2024 and $4.1 million, or 45%, for the six months ended March 31, 2024 compared to the same period of 2023. The increase was driven by the 25 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 $1.4 million, or 28%, for the three months ended March 31, 2024 and $2.2 million, or 24%, for the six months ended March 31, 2024 compared to the same period of 2023. The increase was mainly due to legal services associated with new patent applications and intellectual property matters, as well as other professional services. 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, was based upon the valuation of stock options and restricted stock units granted to employees. This expense decreased $1.6 million, or 14%, for the three months ended March 31, 2024 and $1.9 million, or 8%, for the six months ended March 31, 2024 compared to the same period of 2023. The decrease was mainly due to the decreased compensation costs related to performance awards. Depreciation and amortization expense, a noncash expense, was primarily related to amortization of leasehold improvements for the Company’s corporate headquarters. 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 increased $0.3 million and $2.8 million for the three and six months ended March 31, 2024, respectively, compared to the same periods of 2023. The increase was primarily due to the non-cash interest expense on the liability related to the sale of future royalties, partially offset by higher yields on investments due to increased interest rates. 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 leased additional facilities in San Diego, California. Each of these expansions is designed to increase the Company’s internal manufacturing and discovery capabilities and requires significant capital investment. The Company’s cash, cash equivalents and restricted cash increased to $127.7 million at March 31, 2024 compared to $110.9 million at September 30, 2023. Cash invested in available-for-sale securities was $395.4 million at March 31, 2024 compared to $292.7 million at September 30, 2023. 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 March 31, 2024, no shares have been issued under the Open Market Sale Agreement. On January 2, 2024, the Company entered into an underwriting agreement with Jefferies LLC, BofA Securities, Inc., and Cowen and Company, LLC, as representatives of the several underwriters. The Company issued 15,790,000 shares of common stock at an offering price of $28.50 per share. The aggregate purchase price paid by investors was $450.0 million and the Company received net proceeds of $429.3 million after deducting advisory fees and offering expenses. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months. 26 The following table presents a summary of cash flows: Six Months Ended March 31, 2024 2023 (in thousands) Cash Flow from: Operating activities $ (210,217) $ (107,187) Investing activities (204,098) (116,759) Financing activities 431,044 251,096 Net increase in cash, cash equivalents and restricted cash $ 16,729 $ 27,150 Cash, cash equivalents and restricted cash at end of period $ 127,704 $ 134,959 During the six months ended March 31, 2024, cash flow used in operating activities was $210.2 million, which was primarily due to the ongoing expenses related to the Company’s research and development programs and general and administrative expenses. Cash used in investing activities amounted to $204.1 million, which was primarily attributable to capital expenditures of $102.7 million and investment purchases of $310.0 million, offset by proceeds from sales and maturities of investments of $208.6 million. Cash provided by financing activities of $431.0 million was primarily related to cash received from the issuance of common stock as well as stock option exercises (See Note 6 — Stockholders’ Equity of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.”). During the six months ended March 31, 2023, cash flows used by operating activities was $107.2 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 $40.0 million from Amgen and Horizon. Cash used in investing activities was $116.8 million, which was primarily related to capital expenditures, $66.2 million of construction in progress and investment purchases of $192.5 million, offset by proceeds from sales and maturities of investments of $142.0 million. Cash provided by financing activities of $251.1 million was primarily related to the $250.0 million payment from Royalty Pharma as well as cash received from stock option exercises. See Note 11 – Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” Contractual Obligations There has been no material change in the Company’s contractual obligations from that described in Item 7 of its Annual Report on Form 10-K for the year ended September 2023. 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, 2023.