ARROWHEAD PHARMACEUTICALS, INC. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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 our future financial performance, trends in our business, or other characterizations of future events or circumstances are forward-looking statements. 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. In addition, many of these risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. As such, our actual results may differ materially from those expressed in any forward-looking statements. Readers should carefully review the factors identified in our most recent Annual Report on Form 10-K under the caption "Risk Factors" as well as the additional risks and uncertainties described in other documents we file from time to time with theSecurities and Exchange Commission ("SEC"), including this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 . 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. 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.
Description of Business
Unless otherwise noted, (1) the term "Arrowhead" refers toArrowhead Pharmaceuticals, Inc. , aDelaware corporation and its Subsidiaries, (2) the terms "Company," "we," "us," and "our," refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term "Subsidiaries" refers toArrowhead Madison Inc. ("Arrowhead Madison") andArrowhead Australia Pty Ltd ("ArrowheadAustralia "), (4) the term "Common Stock" refers to Arrowhead's Common Stock, par value$0.001 per share, (5) the term "Preferred Stock" refers to Arrowhead's Preferred Stock, par value$0.001 per share, and (6) the term "Stockholder(s)" refers to the holders of Arrowhead Common Stock.
Overview
Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference ("RNAi") is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead's RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company's pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-ENaC2 for cystic fibrosis, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens, ARO-C3 for complement mediated diseases and ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary conditions. ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No. 3) Limited ("GSK") inNovember 2021 . ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC ("Horizon"). JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for patients with non-alcoholic steatohepatitis (NASH). ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency ("AATD") was out-licensed toTakeda Pharmaceuticals U.S.A., Inc. ("Takeda") inOctober 2020 . JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen inOctober 2018 . Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. ("Amgen") in 2016. While the Company believes that initial ARO-HIF2 Phase 1 clinical data provides proof of concept for the ability to deliver siRNA to RCC tumors, the Company has decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.
Arrowhead operates lab facilities in
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During the first half of fiscal 2022, the Company continued to develop and advance its pipeline and partnered candidates and expanded its facilities to support the Company's growing pipeline. Several key recent developments include:
i) dosed the first patients in its PALISADE study, a phase 3 clinical
study to evaluate the safety and efficacy of ARO-APOC3 inadults with
familial chylomicronemia syndrome (FCS);
ii) entered into an exclusive license agreement with GSK for ARO-HSD;
iii) Janssen presented clinical data from REEF-1, a Phase 2b study of
different combination regimens, including JNJ-73763989 (JNJ-3989),
formerly called ARO-HBV, and/or JNJ-56136379 (JNJ-6379), and a
nucleos(t)ide analog (NA) for the treatment of chronic hepatitis B
virus infection (CHB);
iv) filed for regulatory clearance to begin a Phase 1/2a study of ARO-C3
and subsequently dosed the first subjects in AROC3-1001, a Phase 1/2
clinical study of ARO-C3, the Company's investigational RNA
interference (RNAi) therapeutic designed to reduce production of
complement component 3 (C3) as a potential therapy for various
complement mediated diseases;
v) presented additional interim clinical data from AROHSD1001,
AROAAT2002, and AROAPOC31001;
vi) completed the purchase of 13 acres of land in the Verona Technology
Park in Verona, Wisconsin , which is planned to be the site of an
approximately 140,000 square foot drug manufacturing facility and an
approximately 115,000 square foot laboratory and officefacility and
entered into a lease agreement for a new 144,000 square foot
laboratory and office facility in San Diego, California . Both
facilities will provide additional space to support the Company's
continued growth;
vii) completed enrollment in Phase 2b
ARO-ANG3 for patients with mixed dyslipidemia;
viii) filed for regulatory clearance to initiate Phase 1/2a study of
ARO-RAGE for treatment of Asthma;
ix) filed for regulatory clearance to initiate Phase 1/2a study of
ARO-MUC5AC for treatment of muco-obstructive lung disease;
x) initiated and dosed the first patients in the Phase 2 GATEWAY clinical
study of investigational ARO-ANG3 for the treatment of patients with
homozygous familial hypercholersterolemia;
xi) decided not to pursue further clinical development of ARO-HIF2 based
on a number of factors including the evolving competitive landscape
for HIF2 inhibitors.
The Company is actively monitoring the ongoing COVID-19 pandemic. The financial
results for the three and six months ended March 31, 2022 were not significantly
impacted by COVID-19. Operationally, the Company has experienced delays in its
earlier stage programs due to a shortage in non-human primates, which are
critical to the Company's preclinical programs. Additionally, the Company has
experienced delays in enrollment in its clinical trials. The Company's
operations at its research and development facilities in Madison, Wisconsin and
San Diego, California , and its corporate headquarters in Pasadena, California
have continued with limited impact, other than for enhanced safety measures,
including work from home policies and intermittent lab supply shortages.
However, the Company cannot predict the impact the progression of COVID-19 will
have on future financial and operational results due to a variety of factors,
including the ability of the Company's clinical sites to continue to enroll
subjects, the ability of the Company's suppliers to continue to operate, the
continued good health and safety of the Company's employees and the length and
severity of the COVID-19 pandemic.
Net income was $44.4 million for the three months ended March 31, 2022 as
compared to net losses of $26.8 million for the three months ended March 31,
2021 . Net losses were $18.5 million for the six months ended March 31, 2022 as
compared to net losses of $47.6 million for the six months ended March 31, 2021 .
Net income per share-diluted was $0.41 for the three months ended March 31, 2022
as compared to net losses per share-diluted of $0.26 for the three months ended
March 31, 2021 . Net losses per share-diluted were $0.18 for the six months ended
March 31, 2022 as compared to net losses per share-diluted of $0.46 for the six
months ended March 31, 2021 . The net income during the three months ended March
31, 2022 , and the reduction in net loss for the six months ended March 31, 2022
as compared to the six months ended March 31, 2021 was due to the recognition of
the $120.0 million upfront payment received from GSK under the GSK License
Agreement (as defined below). This increased revenue was partially offset by
increased research and development and general and administrative expenses as
the Company's pipeline of candidates has expanded and progressed through
clinical trial phases.
The Company has strengthened its liquidity and financial position through
upfront and milestone payments received under its collaboration agreements, as
well as equity financings. Under the terms of the Company's agreements with
Janssen, taken together, the Company has received $175.0 million as an upfront
payment, $75.0 million in the form of an equity investment by JJDC in
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Arrowhead Common Stock, and four milestone payments totaling $70.0 million .
Under the terms of the Company's agreements with Amgen, the Company has received
$35.0 million in upfront payments, $21.5 million in the form of an equity
investment by Amgen in the Company's Common Stock and $30.0 million in milestone
payments. The Takeda License Agreement resulted in a $300.0 million upfront
payment, and the Horizon License Agreement resulted in a $40.0 million upfront
payment. Finally, the GSK License Agreement resulted in an upfront payment of
$120.0 million , which was received in January 2022 . The Company had $86.4
million of cash and cash equivalents, $122.6 million of marketable securities,
$192.9 million in short-term investments, $201.6 million of long term
investments and $703.6 million of total assets as of March 31, 2022 , as compared
to $184.4 million of cash and cash equivalents, $126.7 million of marketable
securities, $56.6 million in short-term investments, $245.6 million of long term
investments and $710.1 million of total assets as of September 30, 2021 . 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 Policies and Estimates
There have been no changes to the significant accounting policies disclosed in the Company's most recent Annual Report on Form 10-K.
Results of Operations
The following data summarizes our results of operations for the following
periods indicated:
Three Months Ended March 31,
2022 2021
(in thousands, except per share
amounts)
Revenues $ 151,805 $ 32,811
Operating income (loss) $ 41,553 $ (28,232 )
Net income (loss) $ 44,366 $ (26,818 )
Net income (loss) per share-diluted $ 0.41 $ (0.26 )
Six Months Ended March 31,
2022 2021
(in thousands, except per share
amounts)
Revenues $ 179,244 $ 54,113
Operating income (loss) $ (21,768 ) $ (52,285 )
Net income (loss) $ (18,506 ) $ (47,550 )
Net income (loss) per share-diluted $ (0.18 )
The increase in revenue and operating income for the three and six months endedMarch 31, 2022 compared to the three and six months endedMarch 31, 2021 was driven by the revenue recognized from the GSK, Takeda and Horizon License Agreements.
Revenue
Total revenue for the three months endedMarch 31, 2022 and 2021 was$151.8 million and$32.8 million , respectively. Total revenue for the six months endedMarch 31, 2022 and 2021 was$179.2 million and$54.1 million , respectively. Revenue for the three months endedMarch 31, 2022 is primarily related to the recognition of the$120.0 million of revenue associated with the upfront payment received from GSK under the GSK License Agreement.
Amgen Inc.
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On September 28, 2016 , the Company entered into two collaboration and license
agreements and a common stock purchase agreement with Amgen. Under the Second
Collaboration and License Agreement (the "Olpasiran Agreement"), Amgen has
received a worldwide, exclusive license to Arrowhead's novel RNAi Olpasiran
(previously referred to as AMG 890 or ARO-LPA) program. These RNAi molecules are
designed to reduce elevated lipoprotein(a), which is a genetically validated,
independent risk factor for atherosclerotic cardiovascular disease. Under the
prior collaboration and license agreement (the "First Collaboration and License
Agreement" or the "ARO-AMG1 Agreement"), Amgen received an option to a
worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed
genetically validated cardiovascular target. Under both agreements, Amgen is
wholly responsible for clinical development and commercialization. Under the
terms of the agreements taken together, the Company has received $35.0 million
in upfront payments, $21.5 million in the form of an equity investment by Amgen
in the Company's Common Stock, and $30.0 million in milestone payments, and may
receive up to an additional $400.0 million in remaining development, regulatory
and sales milestone payments. The Company is further eligible to receive up to
low double-digit royalties for sales of products under the Olpasiran Agreement.
In July 2019 , Amgen informed the Company that it would not be exercising its
option for an exclusive license for ARO-AMG1, and as such, there will be no
further milestone or royalty payments under the ARO-AMG1 Agreement.
The Company has evaluated these agreements in accordance with FASB Topics 808 -
Collaboration Arrangements and 606 - Revenue for Contracts from Customers. The
Company has substantially completed its performance obligations under the
Olpasiran Agreement and the ARO-AMG1 Agreement. Future milestones and royalties
achieved will be recognized in their entirety when earned. In July 2020 , Amgen
initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0
million milestone payment to the Company. During the three and six months ended
March 31, 2022 and 2021, the Company recognized $0 and $0 of revenue associated
with its agreement with Amgen, respectively. As of March 31, 2022 , there were $0
in contract assets recorded as accounts receivable and $0 contract liabilities
recorded as current deferred revenue on the Company's Consolidated Balance
Sheets.
OnOctober 3, 2018 , the Company entered into a License Agreement (the "Janssen License Agreement") and a Research Collaboration and Option Agreement (the "Janssen Collaboration Agreement") with Janssen, part of theJanssen Pharmaceutical Companies of Johnson & Johnson. The Company also entered into a stock purchase agreement with JJDC ("JJDC Stock Purchase Agreement"). Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company's JNJ-3989 (ARO-HBV) program, the Company's third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company's Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen Collaboration Agreement, Janssen was able to select three new targets against which Arrowhead would develop clinical candidates. These candidates were subject to certain restrictions and do not include candidates that already were in the Company's pipeline. The Company was obligated to perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, would have been sufficient to allow the filing of aU.S. Investigational New Drug Application or equivalent, at which time Janssen would have the option to take an exclusive license. If the option was exercised, Janssen would have been wholly responsible for clinical development and commercialization of each optioned candidate. Under the terms of the agreements taken together, the Company has received$175.0 million as an upfront payment,$75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling$73.0 million , and the Company may receive up to$1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to$0.6 billion in development and sales milestone payments for the remaining target covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement. During the three months endedMarch 31, 2022 , Janssen's option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement. The Company has evaluated these agreements in accordance with FASB Topics 808 - Collaboration Arrangements and 606 - Revenue for Contracts from Customers. At the inception of these agreements, the Company identified one distinct performance obligation. Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company's responsibility to complete the Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company's responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the "Janssen R&D Services"). Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation. The Company also determined that Janssen's option to require the Company to develop up to three new targets is not a material right and, thus, not a performance obligation at the onset of the agreement. The consideration for this option is accounted for separately. 21 -------------------------------------------------------------------------------- The Company determined the transaction price totaled approximately$252.7 million , which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two$25.0 million milestone payments related to JNJ-3989 (ARO-HBV), and estimated payments for reimbursable Janssen R&D Services to be performed. The Company has allocated the total$252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services. The Company has recognized this transaction price in its entirety as ofSeptember 30, 2021 , as its performance obligations were substantially completed. Future milestones and royalties achieved will be recognized in their entirety when earned. During the three months endedMarch 31, 2022 and 2021, the Company recognized approximately$0 and$7.5 million of revenue associated with this performance obligation, respectively. During the six months endedMarch 31, 2022 and 2021, the Company recognized approximately$0 and$20.2 million of revenue associated with this performance obligation, respectively. As ofMarch 31, 2022 , there were$0 in contract assets recorded as accounts receivable, and$0 of contract liabilities recorded as current deferred revenue on the Company's Consolidated Balance Sheets. The Company has conducted its discovery, optimization and preclinical research and development of JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company have been entirely funded by Janssen. During the three months endedMarch 31, 2022 , Janssen's option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement. During the three months endedMarch 31, 2022 and 2021, the Company recognized$0.1 million and$0.1 million of revenue associated with these efforts, respectively. During the six months endedMarch 31, 2022 and 2021, the Company recognized$0.1 million and$0.3 million of revenue associated with these efforts, respectively. As ofMarch 31, 2022 , there were$0.1 million of contract assets recorded as accounts receivable and$0 of contract liabilities recorded as current deferred revenue on the Company's Consolidated Balance Sheets.
OnOctober 7, 2020 , the Company entered into an Exclusive License and Co-funding agreement (the "Takeda License Agreement") with Takeda. Under the Takeda License Agreement, Takeda and the Company will co-develop the Company's ARO-AAT program, the Company's second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1 antitrypsin deficiency. Withinthe United States , ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outsidethe United States , Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales. InJanuary 2021 , the Company received$300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to$740.0 million . The Company has evaluated the Takeda License Agreement in accordance with FASB Topics 808 - Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services including the Company's responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the "Takeda R&D Services"). 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 outsidethe United States . Withinthe 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 withinthe United States . The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate. The Company determined the initial transaction price totaled$300.0 million , which includes the upfront payment. The Company has excluded any future milestones or royalties from this transaction price to date. The Company has allocated the total$300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services. Revenue will be recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). Revenue for the three months endedMarch 31, 2022 and 2021 was$20.8 million and$25.4 million , respectively. Revenue for the six months endedMarch 31, 2022 and 2021 was$41.6 million and$33.6 million , respectively. As ofMarch 31, 2022 , there were$0 in contract assets recorded as accounts receivable,$77.9 million in contract liabilities recorded as deferred revenue and$89.8 million in contract liabilities recorded as deferred revenue, net of the current portion, and$5.0 million in contract liabilities recorded as accrued expenses. The$5.0 million in accrued expenses was primarily driven by co-development and co-commercialization activities.
Horizon Therapeutics Ireland DAC
On
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RNAi therapeutic being developed by the Company as a potential treatment for
people with uncontrolled gout. The Company will conduct all activities through
the preclinical stages of development of ARO-XDH, and Horizon will be wholly
responsible for clinical development and commercialization of ARO-XDH. In July
2021 , the Company received $40 million as an upfront payment and is eligible to
receive up to $660 million in potential development, regulatory and sales
milestones. The Company is also eligible to receive royalties in
the low- to mid-teens range on net product sales.
The Company has evaluated the Horizon License Agreement in accordance with FASB
Topics 808 - Collaborative Arrangements and 606 - Revenue for Contracts from
Customers. At the inception of the Horizon License Agreement, the Company
identified one distinct performance obligation. 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 ARO-XDH (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
will be responsible for managing future clinical development and
commercialization of ARO-XDH.
The Company determined the initial transaction price totaled $40.0 million ,
including the upfront payment. The Company has excluded any future estimated
milestones or royalties, from this transaction price to date. The Company will
allocate the total $40.0 million initial transaction price to its one distinct
performance obligation for the ARO-XDH license and the associated Horizon R&D
Services. Revenue will be recognized on a straight-line basis over the estimated
timeframe for completing the Horizon R&D Services. The Company determined that
the straight-line basis was appropriate as its efforts will be expended evenly
over the course of completing its performance obligation. Revenue for the three
months ended March 31, 2022 and 2021 was $6.7 million and $0 , respectively.
Revenue for the six months ended March 31, 2022 and 2021 was $13.3 million and
$0 , respectively. As of March 31, 2022 , there were $0 million in contract assets
recorded as accounts receivable, $20.0 million in contract liabilities recorded
as deferred revenue.
The Company has manufactured ARO-XDH material for Horizon in furtherance of
the research plan entered into pursuant to the Horizon License Agreement, for
which the Company has been reimbursed for its costs. During the three and six
months ended March 31, 2022 and 2021, the Company recognized $1.3 million and $0
with these efforts, respectively. As of March 31, 2022 , there were $1.3 million
of contract assets recorded as accounts receivable and $0 of contract
liabilities recorded as current deferred revenue on the Company's Consolidated
Balance Sheets.
Glaxosmithkline Intellectual Property (No. 3) Limited
OnNovember 22, 2021 , the Company entered into an Exclusive License Agreement (the "GSK License Agreement") with GSK. Under the GSK License Agreement, GSK has received an exclusive license for ARO-HSD, the Company's investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH). The exclusive license is worldwide with the exception of greaterChina , for which the Company retained rights to develop and commercialize. Beyond the Company's Phase 1/2 study of (ARO-HSD), which the Company is responsible for completing, GSK is wholly responsible for clinical development and commercialization of ARO-HSD in its territory. Under the terms of the agreement, the Company has received an upfront payment of$120 million and is eligible for additional payments of$30 million at the start of Phase 2 and$100 million upon achieving a successful Phase 2 trial readout and the first patient dosed in a Phase 3 trial. Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to$190 million at first commercial sale, and up to$590 million in sales-related milestone payments. The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent. The Company has evaluated the GSK License Agreement in accordance with FASB Topics 808 - Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the GSK License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services, including the Company's responsibility to complete the Phase 1/2 study, (the "GSK R&D Services"). Due to the specialized and unique nature of these GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation. Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory. 23 -------------------------------------------------------------------------------- The Company determined the initial transaction price totaled$120.0 million , including the upfront payment. The$120.0 million upfront payment was collected inJanuary 2022 . The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company has allocated the total$120.0 million initial transaction price to its one distinct performance obligation for the ARO-HSD license and the associated GSK R&D Services. As the Company has completed its performance obligation related to this agreement, the upfront payment of$120.0 million will be fully recognized as of the three and six months endedMarch 31, 2022 . Revenue for the three and six months endedMarch 31, 2022 and 2021 was$120.0 million and$0 , respectively. As ofMarch 31, 2022 , there were$0 in contract assets recorded as accounts receivable,$0 in contract liabilities recorded as deferred revenue.
Operating Expenses
The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. Certain reclassifications have been made to prior-period operating expense categories to conform to the current period presentation. For purposes of comparison, the amounts for the three and six months endedMarch 31, 2022 and 2021 are shown in the tables below.
Research and Development Expenses
R&D expenses are related to the Company's research and development efforts and related program 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 operations at our research facilities inMadison, Wisconsin andSan Diego, California , including facility costs and laboratory-related expenses. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes and related benefits and stock compensation for our R&D personnel. Depreciation and amortization expense consist of depreciation on lab equipment and leasehold improvements at our research facilities. We do not separately track R&D expenses by individual research and development projects, including 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 for research and development activities. The following table provides details of research and development expenses for the periods indicated: 24
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(table below in thousands)
Three Three
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
March 31, March 31,
2022 Category 2021 Category $ %
Salaries $ 11,404 15 % $ 8,685 19 % $ 2,719 31 %
Facilities related 1,779 2 % 1,671 4 % 108 6 %
Candidate costs 37,713 50 % 20,667 47 % 17,046 82 %
R&D discovery costs 14,266 19 % 5,502 12 % 8,764 159 %
Total research and development
expense, excluding non-cash
expense $ 65,162 86 % $ 36,525 82 % $ 28,637 78 %
Stock compensation 8,642 11 % 6,406 14 % 2,236 35 %
Depreciation/amortization 2,181 3 % 1,766 4 % 415 23 %
Total research and development
expense $ 75,985 100 % $ 44,697 100 % $ 31,288 70 %
Six Six
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
March 31, March 31,
2022 Category 2021 Category $ %
Salaries $ 22,398 16 % $ 16,857 21 % $ 5,541 33 %
Facilities related 3,817 3 % 3,150 4 % 667 21 %
Candidate costs 70,058 49 % 35,684 44 % 34,374 96 %
R&D discovery costs 25,266 18 % 10,213 13 % 15,053 147 %
Total research and development
expense, excluding non-cash
expense 121,539 86 % 65,904 82 % 55,635 84 %
Stock compensation 15,860 11 % 11,891 15 % 3,969 33 %
Depreciation/amortization 4,351 3 % 3,456 3 % 895 26 %
Total research and development
expense $ 141,750 100 % $ 81,251 100 % $ 60,499 74 %
Salaries expense increased by $2,719,000 from $8,685,000 during the three months
ended March 31, 2021 to $11,404,000 during the current period. Salaries expense
increased by $5,541,000 from $16,857,000 during the six months ended March 31,
2021 to $22,398,000 during the current period. This increase is primarily due to
an increase in R&D headcount that has occurred as the Company has expanded its
pipeline of candidates. We anticipate this expense to continue to increase as we
continue to expand our pipeline of candidates and increase headcount to support
our discovery efforts to identify new drug candidates, in addition to
inflationary pressures in the labor market.
Facilities expense increased by $108,000 from $1,671,000 during the three months
ended March 31, 2021 to $1,779,000 during the current period. Facilities expense
increased by $667,000 from $3,150,000 during the six months ended March 31, 2021
to $3,817,000 during the current period. This category includes rental costs for
our research and development facilities in Madison, Wisconsin and San Diego,
California . We expect this expense to continue to increase as we continue to
build out our manufacturing capabilities to support our discovery efforts to
identify new drug candidates.
Candidate costs increased by $17,046,000 from $20,667,000 during the three
months ended March 31, 2021 to $37,713,000 during the current period. Candidate
costs increased by $34,374,000 from $35,684,000 during the six months ended
March 31, 2021 to $70,058,000 during the current period. This increase is
primarily due to the progression of our pipeline of candidates into and through
clinical trials, which results in higher outsourced clinical trial, toxicity
study and manufacturing costs. For example, our cardiometabolic candidates,
ARO-ANG3 and ARO-APOC3, have advanced into phase 2 and phase 3 clinical trials.
We anticipate these expenses to continue to increase as our pipeline of
candidates grows and progresses to later phase clinical trials, in addition to
unforeseen inflationary pressure on goods and services.
R&D discovery costs increased by $8,764,000 from $5,502,000 during the three
months ended March 31, 2021 to $14,266,000 in the current period. R&D discovery
costs increased by $15,053,000 from $10,213,000 during the six months ended
March 31, 2021 to $25,266,000 in the current period. This increase is primarily
due to the growth of our discovery efforts, including the addition of our
research facility in San Diego . We anticipate this expense to continue to
increase as we increase headcount to support our discovery efforts to identify
new drug candidates.
25
--------------------------------------------------------------------------------
Stock compensation expense, a non-cash expense, increased by $2,236,000 from
$6,406,000 during the three months ended March 31, 2021 to $8,642,000 during the
current period. Stock compensation expense, a non-cash expense, increased by
$3,969,000 from $11,891,000 during the six months ended March 31, 2021 to
$15,860,000 during the current period. Stock compensation expense is based upon
the valuation of stock options and restricted stock units granted to employees,
directors and certain consultants. Many variables affect the amount expensed,
including the Company's stock price on the date of the grant, as well as other
assumptions. The increase in the expense in the current period is primarily due
to the increased headcount discussed above and a mix of higher grant date fair
values of awards amortizing during the current period due to the Company's stock
price at the time of the grants. We generally expect future stock compensation
expense to continue to increase as our headcount continues to increase to
support our clinical pipeline.
Depreciation and amortization expense, a non-cash expense, increased by $415,000
from $1,766,000 during the three months ended March 31, 2021 to $2,181,000
during the current period. Depreciation and amortization expense, a non-cash
expense, increased by $895,000 from $3,456,000 during the six months ended March
31, 2021 to $4,351,000 during the current period. The majority of depreciation
and amortization expense relates to depreciation on lab equipment and leasehold
improvements at our Madison and San Diego research facilities. The increase in
depreciation and amortization expense is due to an increase in laboratory
equipment and leasehold improvements. We expect this amount to increase in the
future as we continue to purchase additional lab equipment to support our
growing pipeline.
General & Administrative Expenses
The following table provides details of our general and administrative expenses
for the periods indicated:
(table below in thousands)
Three Three
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
March 31, March 31,
2022 Category 2021 Category $ %
Salaries $ 3,760 11 % $ 3,257 20 % $ 503 15 %
Professional/outside services 2,330 7 % 1,838 11 % 492 27 %
Facilities related 702 2 % 787 5 % (85 ) -11 %
Other G&A 1,911 6 % 1,355 8 % 556 41 %
Total general & administrative
expense, excluding non-cash
expense $ 8,703 26 % $ 7,237 44 % $ 1,466 20 %
Stock compensation 25,160 73 % 8,953 55 % 16,207 181 %
Depreciation/amortization 404 1 % 156 1 % 248 159 %
Total general & administrative
expense $ 34,267 100 % $ 16,346 100 % $ 17,921 110 %
Six Six
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
March 31, March 31,
2022 Category 2021 Category $ %
Salaries $ 7,190 12 % $ 5,841 23 % $ 1,349 23 %
Professional/outside services 4,507 8 % 3,820 15 % 687 18 %
Facilities related 1,382 2 % 1,517 6 % (135 ) -9 %
Other G&A 2,929 5 % 2,048 8 % 881 43 %
Total general & administrative
expense, excluding non-cash
expense 16,008 27 % 13,226 52 % 2,782 21 %
Stock compensation 42,447 72 % 11,611 46 % 30,836 266 %
Depreciation/amortization 807 1 % 310 2 % 497 160 %
Total general & administrative
expense $ 59,262 100 % $ 25,147 100 % $ 34,115 136 %
26-------------------------------------------------------------------------------- Salaries expense increased by$503,000 from$3,257,000 during the three months endedMarch 31, 2021 to$3,760,000 during the current period. Salaries expense increased by$1,349,000 from$5,841,000 during the six months endedMarch 31, 2021 to$7,190,000 during the current period. This increase is primarily due to an increase in G&A headcount that has occurred as the Company has grown. We expect salaries expense to continue to increase as our headcount continues to increase to support our expanding clinical pipeline. Professional/outside services include legal, accounting, consulting, patent expenses, business insurance expenses and other outside services retained by the Company. Professional/outside services expense increased by$492,000 from$1,838,000 during the three months endedMarch 31, 2021 to$2,330,000 during the current period. Professional/outside services expense increased by$687,000 from$3,820,000 during the six months endedMarch 31, 2021 to$4,507,000 during the current period. We expect future professional/outside services expense to increase as we continue to increase discovery efforts. Facilities-related expense decreased by$85,000 from$787,000 during the three months endedMarch 31, 2021 to$702,000 during the current period. Facilities-related expense decreased by$135,000 from$1,517,000 during the six months endedMarch 31, 2021 to$1,382,000 during the current period. This category primarily includes rental costs for our corporate headquarters inPasadena, California . The decrease in facilities related expenses is due to a decrease in building maintenance and repair costs. We expect future facilities related expenses to increase as we continue to increase our headcount & footprint to support our discovery efforts. Other G&A expense increased by$556,000 from$1,355,000 during the three months endedMarch 31, 2021 to$1,911,000 during the current period. Other G&A expense increased by$881,000 from$2,048,000 during the six months endedMarch 31, 2021 to$2,929,000 during the current period. This category consists primarily of travel, communication and technology, office expenses, and franchise and property tax expenses. The increase is due to increased information technology costs to support the Company's increased headcount. Stock compensation expense, a non-cash expense, increased by$16,207,000 from$8,953,000 during the three months endedMarch 31, 2021 to$25,160,000 during the current period. Stock compensation expense, a non-cash expense, increased by$30,836,000 from$11,611,000 during the six months endedMarch 31, 2021 to$42,447,000 during the current period. Stock compensation expense is based upon the valuation of stock options and restricted stock units granted to employees, directors and certain consultants. Many variables affect the amount expensed, including the Company's stock price on the date of the grant, as well as other assumptions. The increase in the current period is due to a performance award that was achieved earlier than anticipated, as well as a modification of certain performance awards to include market conditions. The fair value of market condition-based awards is expensed ratably over the service period and is not adjusted for actual achievement. We generally expect future stock compensation expense to continue to increase as our headcount continues to increase to support our clinical pipeline. Depreciation and amortization expense, a noncash expense, increased by$248,000 from$156,000 during the three months endedMarch 31, 2021 to$404,000 during the current period. Depreciation and amortization expense, a noncash expense, increased by$497,000 from$310,000 during the six months endedMarch 31, 2021 to$807,000 during the current period. The increase is primarily related to amortization of leasehold improvements for our corporate headquarters.
Other Income/Expense
Other income/expense was income of$1,414,000 during the three months endedMarch 31, 2021 compared to$2,813,000 during the current period. Other income/expense was income of$4,735,000 during the six months endedMarch 31, 2021 compared to$3,262,000 during the current period. Other income is primarily related to interest income and realized and unrealized gain/loss on our marketable securities. The increase in other income/expense is due to lower yields on more recently purchased bonds and increase in unrealized loss on our marketable securities offset by a property tax credit the company received during the current period.
Liquidity and Capital Resources
Arrowhead has historically financed its operations through the sale of its equity securities and revenue from its collaboration agreements. 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's plans to expand its facilities with its purchase of land inVerona, Wisconsin , and its entry into a new lease inSan 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. 27 -------------------------------------------------------------------------------- AtMarch 31, 2022 , the Company had cash on hand of approximately$86.4 million as compared to$184.4 million atSeptember 30, 2021 . Cash invested in short-term fixed income securities and marketable securities was$315.5 million atMarch 31, 2022 , compared to$183.4 million atSeptember 30, 2021 . Cash invested in long-term fixed income securities was$201.6 million atMarch 31, 2022 , compared to$245.6 million atSeptember 30, 2021 . The Company also entered into an Open Market Sale Agreement (the "ATM Agreement") inAugust 2020 , pursuant to which the Company may, from time to time, sell up to$250,000,000 in shares of the Company's Common Stock throughJefferies LLC . As ofMarch 31, 2022 , no shares have been sold under the ATM Agreement. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months.
A summary of cash flows for the six months ended
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