ARROWHEAD PHARMACEUTICALS, INC. Description of Business
Unless otherwise noted, (1) the term "Arrowhead" refers toArrowhead Pharmaceuticals, Inc. , aDelaware corporation, (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. ("ArrowheadMadison "), andArrowhead Australia Pty Ltd ("Arrowhead Australia"), (4) the term "Common Stock" refers to Arrowhead's Common Stock, (5) the term "Preferred Stock" refers to Arrowhead's Preferred Stock 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, or 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-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, ARO-LUNG2 as a candidate to treat chronic obstructive pulmonary disorder ("COPD") and ARO-COV for treatment for the current novel coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement withJanssen Pharmaceuticals, Inc. ("Janssen"). ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency ("AATD") was out-licensed toTakeda Pharmaceuticals U.S.A., Inc. ("Takeda") inOctober 2020 . ARO-HBV (JNJ-3989) for chronic hepatitis B virus was out-licensed to Janssen inOctober 2018 . ARO-LPA (AMG 890) for cardiovascular disease was out-licensed to Amgen Inc. ("Amgen") in 2016.
Arrowhead operates lab facilities in
Arrowhead has focused its resources on therapeutics that exclusively utilize the Company's Targeted RNAi Molecule (TRiMTM) platform technology. Therapeutics built on the TRiMTM platform have demonstrated high levels of pharmacologic activity in multiple animal models spanning several therapeutic areas. TRiMTM 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 and tumors; and the potential for improved safety and reduced risk of intracellular buildup, because there are less metabolites from smaller, simpler molecules. During fiscal year 2020, the Company has continued to develop its pipeline and partnered candidates. Regarding the Company's wholly-owned pipeline candidates, the Company dosed its first patients in three of its pipeline candidate studies: ARO-HSD1001, a phase 1/2 clinical study of ARO-HSD; ARO-ENaC1001, a phase 1/2 clinical study of ARO-ENaC and ARO-HIF21001, a phase 1b study of ARO-HIF2. The Company also presented new clinical data on its two cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, at multiple medical meetings, including theEuropean Society of Cardiology Congress and the American Heart Association Scientific Sessions. Finally, the Company is also progressing ARO-LUNG2 toward entering clinical trials and is continuing to perform discovery work to identify new candidates. The Company's partnered candidates under its collaboration agreements also continue to progress. Janssen began dosing patients in a phase 2b triple combination study called REEF-1, designed to enroll up to 450 patients with chronic hepatitis B infection, and in connection with the start of this study Arrowhead earned a$25.0 million milestone payment under the License Agreement ("Janssen License Agreement"). The Company is currently performing discovery, optimization and preclinical research and development for ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 for Janssen as part of the Research Collaboration and Option Agreement ("Janssen Collaboration Agreement"). Under the terms of the Janssen 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, two$25.0 million milestone payments and may receive up to$1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to$1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales. The Company's collaboration agreement with Amgen for Olpasiran (formerly referred to as AMG 890 or ARO-LPA), (the "Second Collaboration and License Agreement" or "Olpasiran Agreement"), continues to progress. InJuly 2020 , Amgen initiated a Phase 2 clinical study, which resulted in a$20.0 million milestone payment to the Company. The Company has received$35.0 million in upfront payments,$21.5 million in 48 -------------------------------------------------------------------------------- the form of an equity investment by Amgen in the Company's Common Stock,$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 eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement. 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. 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 receive an exclusive license to commercialize ARO-AAT with the Company eligible to receive tiered royalties of 20 to 25% on net sales. The Company will receive$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 revenue recognition for these collaboration agreements is discussed further in Note 2 Notes to Consolidated Financial Statements of Part IV, Item 15. Exhibits and Financial Statement Schedules.
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 contracted to third-party manufactures or manufactured
internally. The Company engages third-party contract research organizations
("CROs") to manage clinical trials and works cooperatively with such
organizations on all aspects of clinical trial management, including plan
design, patient recruiting, and follow up. These outside costs, relating to the
preparation for and administration of clinical trials, are referred to as
"candidate costs." If the clinical candidates progress through human testing,
candidate costs will increase.
The Company is actively monitoring the COVID-19 pandemic. The financial results
for the year ended September 30, 2020 were not significantly impacted by
COVID-19. The Company had temporarily paused enrollment in its two ARO-AAT
studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of
screening and enrolling patients during the year ended September 30,
2020 . During the pause in enrollment, patients already enrolled in these studies
continued to be dosed per protocol and continued to come in for their follow up
visits. Additional delays have occurred in the Company's earlier stage programs,
but Company does not expect a material impact to any program's anticipated
timelines. Several of the Company's other clinical candidates are in the
start-up stage (ARO-HSD, ARO-HIF2 and ARO-ENaC), during which significant
clinical costs will continue to be incurred. Additionally, the Company's
operations at its research and development facilities in Madison, Wisconsin and
San Diego, California , as well as its corporate headquarters in Pasadena,
California have continued to operate with limited impact, other than for
enhanced safety measures, including work from home policies. However, the
Company cannot predict the impact of the progression of COVID-19 will have on
future financial 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 ultimately the length of the COVID-19 pandemic.
Net losses were $84.6 million for the year ended September 30, 2020 as compared
to net income of $68.0 million for the year ended September 30, 2019 and net
losses of $54.5 million for the year ended September 30, 2018 . Net losses per
share - diluted were $0.84 for the year ended September 30, 2020 as compared to
net income per share-diluted of $0.69 for the year ended September 30, 2019 and
net losses per share-diluted of $0.65 for the year ended September 30, 2018 . An
increase in research and development and general and administrative expenses
coupled with a decrease in revenue from the license and collaboration agreements
with Janssen were the drivers of the increase in net losses and net losses per
share for the year ended September 30, 2020 , as discussed further below.
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 Arrowhead
Common Stock, and two $25.0 million milestone payments. 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
Company's October 2020 licensing agreement with Takeda will result in a $300.0
million upfront payment expected to be collected in the first fiscal quarter of
2021. Additionally, in December 2019 , the Company completed a securities
offering which generated approximately $250.5 million in net cash proceeds.
These cash proceeds secure the funding needed to continue to advance our
pipeline candidates. The Company had $143.6 million of cash and cash
equivalents, $85.0 million of marketable securities, $86.9 million in short-term
investments, $137.5 million of long term investments and $522.5 million of total
assets as of September 30, 2020 , as compared to $221.8 million , $0 , $36.9
million , $44.2 million and $349.8 million as of September 30, 2019 ,
respectively. 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.
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Critical Accounting Policies and Estimates
Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted inthe United States ("GAAP") in the preparation of our Consolidated Financial Statements. We evaluate our estimates and judgments on an ongoing basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements. For further information, see Note 1, Organization and Significant Accounting Policies, to our Consolidated Financial Statements, which outlines our application of significant accounting policies. Principles of Consolidation-The Consolidated Financial Statements include the accounts of Arrowhead and its Subsidiaries. Arrowhead's primary operating subsidiary is Arrowhead Madison, which is located inMadison, Wisconsin , where the Company's research and development facility is located. All significant intercompany accounts and transactions are eliminated in consolidation. Basis of Presentation and Use of Estimates-The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.Cash and Cash Equivalents-The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Included within Cash and cash equivalents on the Consolidated Balance Sheets is$1.8 million and$1.0 restricted cash atSeptember 30, 2020 andSeptember 30, 2019 , respectively. Amounts included in restricted cash are primarily held as collateral associated with a letter of credit for the Company's lease for its corporate headquarters inPasadena, California . Concentration ofCredit Risk-The Company maintains several bank accounts primarily at two financial institutions for its operations. These accounts are insured by theFederal Deposit Insurance Corporation (FDIC) for up to$250,000 per institution. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.Investments-The Company may invest excess cash balances in short-term and long-term marketable debt securities and equity securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in debt securities in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 320, Investments - Debt and Equity Securities, which requires debt securities to be classified into three categories:
Held-to-maturity-Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.
Trading Securities-Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.
Available-for-Sale-Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders' equity.
The Company classifies its investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the years endedSeptember 30, 2020 , 2019 and 2018, all of the Company's debt securities were classified as held-to-maturity. Held-to-maturity investments are measured and recorded at amortized cost on the Company's Consolidated Balance Sheet. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary. During the year endedSeptember 30, 2020 , the Company purchased shares of mutual funds that invest in marketable debt securities such asU.S. government bonds,U.S. government agency bonds, corporate bonds, and other asset backed debt securities. The Company accounts for these securities using the guidance from FASB ASC 321,Investments-Equity Securities . These securities are recorded on the Company's Consolidated Balance Sheet as "marketable securities" and recorded at fair value. All unrealized gains/losses associated with these securities are recorded in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss). 50
-------------------------------------------------------------------------------- Property and Equipment-Property and equipment are recorded at cost, which may equal fair market value in the case of property and equipment acquired in conjunction with a business acquisition. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term. Long-lived assets, including property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible Assets Subject to Amortization-Intangible assets subject to amortization include certain patents and license agreements. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable and are also reviewed annually to determine whether any impairment is necessary. Contingent Consideration-The consideration for the Company's acquisitions may include future payments that are contingent upon the occurrence of a particular event. For example, milestone payments might be based on the achievement of various regulatory approvals or future sales milestones, and royalty payments might be based on drug product sales levels. The Company records a contingent consideration obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates. Estimated payments are discounted using present value techniques to arrive at an estimated fair value at the balance sheet date. Changes in the fair value of the contingent consideration obligations are recognized within the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows from products upon commercialization, changes in the assumed achievement or timing of any development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. The Company determined the fair value of its contingent consideration obligation to be$0 atSeptember 30, 2020 andSeptember 30, 2019 . Revenue Recognition- OnOctober 1, 2018 , the Company adopted FASB Topic 606 - Revenue for Contracts from Customers which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. The Company's adoption of the new revenue standard did not have a material impact on its Consolidated Financial Statements. The Company has not yet achieved commercial sales of its drug candidates to date, however, the new standard is applicable to the Company's ongoing licensing and collaboration agreements, including those with Amgen, Janssen and Takeda, and the analysis of the impact of this guidance on those agreements is discussed further in Note 2 of Notes to Consolidated Financial Statements of Part IV, Item 15. Exhibits and Financial Statement Schedules. The new revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of the new revenue standard, the Company performs the following five steps: (i) identify the contract; (ii) identify the performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. 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 the Company 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. 51 -------------------------------------------------------------------------------- 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 Clinical Trial Application ("CTA") or a New Drug Application ("NDA") inthe 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 our 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 our Consolidated Statements of Operations and Comprehensive Income (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 pre-clinical program. Milestones or royalties achieved after the Company's 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 new 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 new 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 new 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 the Company determines 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 proportional performance method. Labor hours or costs incurred 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. Certain judgments affect the application of the Company's revenue recognition policy. For example, the Company records short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months, and long-term deferred revenue consists of amounts that the Company does not expect will be recognized in the next 12 months. This estimate is based on the Company's current operating plan and, if the Company's operating plan should change in the future, the Company may recognize a different amount of deferred revenue over the next 12-month period. Allowance forDoubtful Accounts-The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed. Research and Development-Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, overhead directly related to the Company's research and development operations, and costs to acquire technology licenses. Net Income (Loss) per Share-Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and restricted stock units issued to employees. During the years endedSeptember 30, 2020 , 2019 and 2018, the calculation of the effect of dilutive stock options and restricted stock units was 0 shares, 4,748,958 shares, and 0 shares, respectively. During the year endedSeptember 30, 2020 , the calculation of the effect of dilutive stock option and restricted stock units excluded all 52 -------------------------------------------------------------------------------- stock options and restricted stock units granted and outstanding during the period due to their anti-dilutive effect. During the year endedSeptember 30, 2019 , the calculation of the effect of dilutive stock options and restricted stock units excluded 1,007,500 stock options and 11,500 restricted stock units granted and outstanding during the period due to their anti-dilutive effect. During the year endedSeptember 30, 2018 , the calculation of the effect of dilutive stock option and restricted stock units excluded all stock options and restricted stock units granted and outstanding during the period due to their anti-dilutive effect.Stock-Based Compensation-The Company accounts for share-based compensation arrangements in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to be based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. For restricted stock units, the value of the award is based on the Company's stock price at the grant date. For performance-based restricted stock unit awards, the value of the award is based on the Company's stock price at the grant date, with consideration given to the probability of the performance condition being achieved. The Company uses historical data and other information to estimate the expected price volatility for stock option awards and the expected forfeiture rate for all awards. Expense is recognized over the vesting period for all awards and commences at the grant date for time-based awards and upon the Company's determination that the achievement of such performance conditions is probable for performance-based awards. This determination requires significant judgment by management.Income Taxes-The Company accounts for income taxes under the liability method, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period. Leases - The Company determines whether a contract is, or contains, a lease at inception. 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 Consolidated Balance Sheets as Right-of-use assets and Lease liabilities and are measured at the present value of the fixed payments due over the expected lease term minus the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain. 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.
Results of Operations
The following data summarizes our results of operations for the following
periods indicated:
Years ended September 30,
2020 2019 2018
Revenues $ 87,992,066 $ 168,795,577 $ 16,142,321
Operating Income (loss) $ (93,158,803 ) $ 61,190,634 $ (55,936,235 )
Net Income (loss) $ (84,553,226 ) $ 67,974,849 $ (54,450,478 )
Net Income (Loss) per share-Diluted $ (0.84 ) $ 0.69 $ (0.65 )
The decrease in revenue for the year ended September 30, 2020 compared to the
year ended September 30, 2019 was driven by the timing of the recognition of the
$252.6 million initial transaction price associated with our agreements with
Janssen and JJDC as we achieved progress toward completing our performance
obligation under those agreements. The increase in Net Losses during the year
ended September 30, 2020 was driven by this decrease in Revenue and also
increases in Research and Development and General and Administrative Expenses as
our pipeline of clinical candidates has continued to increase.
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Revenue
Total revenue for the years endedSeptember 30, 2020 , 2019, and 2018 was$87,992,066 ,$168,795,577 and$16,142,321 , respectively. Revenue in the current period is primarily related to the recognition of a portion of the$252.6 million initial transaction price associated with our agreements with Janssen and JJDC as we achieved progress towards completing our performance obligation under those agreements. In addition, revenue in the current period consisted of a$20 million milestone payment from Amgen for the initiation of phase 2 clinical study for AMG 890 (ARO-LPA). Revenue for the year endedSeptember 30, 2019 , was also primarily related to the recognition of a portion of the$252.6 million initial transaction price associated with our agreements with Janssen and JJDC. A higher proportion of performance activity was ongoing during the prior period than the current, which resulted in the higher revenue recognized in the prior period. Revenue for the year endedSeptember 30, 2018 , was primarily related to a$10 million milestone payment received from Amgen inAugust 2018 , which was earned following the administration of the first does of AMG 890 (ARO-LPA). Amgen Inc. OnSeptember 28, 2016 , the Company entered into two collaboration and license agreements, and a common stock purchase Agreement with Amgen Inc., aDelaware corporation ("Amgen"). Under one of the license agreements (the "Second Collaboration and License Agreement" or "Olpasiran Agreement"), Amgen has received a worldwide, exclusive license to Arrowhead's novel, RNAi Olpasiran program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the other collaboration and license agreement (the "First Collaboration and License Agreement" or "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. In 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. InJuly 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 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. InJuly 2020 , Amgen initiated a Phase 2 clinical study, which resulted in a$20.0 million milestone payment to the Company. During the years endedSeptember 30, 2020 , 2019 and 2018, the Company recognized$20.1 million ,$0.3 million , and$16.1 million of Revenue associated with its agreements with Amgen, respectively. As ofSeptember 30, 2020 , there were$0 million 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 ("Janssen License Agreement") and a Research Collaboration and Option Agreement ("Janssen Collaboration Agreement") withJanssen Pharmaceuticals, Inc. ("Janssen") part of the Janssen Pharmaceutical Companies of Johnson & Johnson. The Company also entered into a Stock Purchase Agreement ("JJDC Stock Purchase Agreement") withJohnson & Johnson Innovation-JJDC, Inc. ("JJDC"), aNew Jersey corporation. 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 potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company's Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen is wholly responsible for clinical development and commercialization. Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates. These candidates are subject to certain restrictions and do not include candidates that already were in the Company's pipeline. The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, is sufficient to allow the filing of aU.S. Investigational New Drug application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be 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, two$25.0 million milestone payments and may receive up to$1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to$1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales. The Company has evaluated these agreements in accordance with the new revenue recognition requirements that became effective for the Company onOctober 1, 2018 . The adoption of the new revenue standard did not have a material impact on the 54
-------------------------------------------------------------------------------- balances reported when evaluated under the superseded revenue standard. At the inception of these agreements, the Company has 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 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 will be accounted for if and when it is exercised. The Company determined the transaction price totaled approximately$252.6 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the two$25 million milestone payments earned and estimated payments for reimbursable Janssen R&D Services to be performed. The Company has allocated the total$252.6 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services. This revenue will be recognized using a proportional performance method (based on actual labor hours versus estimated total labor hours) beginning inOctober 2018 and ending as the Company's efforts in overseeing the phase 1/2 clinical trial are completed. During the years endedSeptember 30, 2020 and 2019, the Company recognized approximately$65.0 million and$167.5 million of Revenue associated with this performance obligation, respectively. As ofSeptember 30, 2020 , there were$0 in contract assets recorded as accounts receivable and$19.3 million of contract liabilities recorded as current deferred revenue on the Company's Consolidated Balance Sheets. The$19.3 million of current deferred revenue is driven by the upfront payment, the premium paid by JJDC for its equity investment in the Company, and the two$25.0 million milestone payments earned, net of revenue recognized to date. The Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company will be entirely funded by Janssen. During the years endedSeptember 30, 2020 and 2019, the Company recognized$2.9 million and$1.0 million of Revenue associated with these efforts, respectively. As ofSeptember 30, 2020 , there were$0.8 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. 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 years endedSeptember 30, 2020 and 2019 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 relates to 55
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depreciation on lab equipment and leasehold improvements at our research facilities. The following table provides details of research and development expenses for the periods indicated:
(table below in thousands)
Twelve Twelve
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
September September
30, 2020 Category 30, 2019 Category $ %
Salaries $ 26,300 20 % $ 15,502 19 % $ 10,798 70 %
Facilities related 4,136 3 % 2,649 3 % 1,487 56 %
Candidate costs 60,638 47 % 47,062 58 % 13,576 29 %
R&D discovery costs 16,192 13 % 7,901 10 % 8,291 105 %
Total research and
development expense,
excluding non-cash expense $ 107,266 83 % $ 73,114 90 % $ 34,152 47 %
Stock compensation 16,277 13 % 3,515 4 % 12,762 363 %
Depreciation/amortization 5,332 4 % 4,420 6 % 912 21 %
Total research and
development expense $ 128,875 100 % $ 81,049 100 % $ 47,826 59 %
Salaries expense increased by $10,798,000 from $15,502,000 during the year ended
September 30, 2019 to $26,300,000 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.
Facilities expense increased by $1,487,000 from $2,649,000 during the year ended
September 30, 2019 to $4,136,000 during the current period. This category
includes rental costs for our research and development facilities in Madison,
Wisconsin and San Diego, California . This increase is primarily due the
commencement of our sublease in San Diego, California in April 2020 .
Candidate costs increased by $13,576,000 from $47,062,000 during the year ended
September 30, 2019 to $60,638,000 during the current period. This increase is
primarily due to the progression of our pipeline candidates into and through
clinical trials, which results in higher outsourced clinical trial, toxicity
study and manufacturing costs. We anticipate these expenses to continue to
increase as our pipeline of candidates grows and progresses to later phase
clinical trials.
R&D discovery costs increased by $8,291,000 from $7,901,000 during the year
ended September 30, 2019 to $16,192,000 in the current period. This increase is
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.
Stock compensation expense, a non-cash expense, increased by $12,762,000 from
$3,515,000 during the year ended September 30, 2019 to $16,277,000 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 is primarily due to the increased headcount discussed above and a
mix of higher grant date fair values of awards amortizing during the periods due
to the Company's stock price at the time of the grants.
Depreciation and amortization expense, a non-cash expense, increased by $912,000
from $4,420,000 during the year ended September 30, 2019 to $5,332,000 during
the current period. The majority of depreciation and amortization expense
relates to depreciation on lab equipment and leasehold improvements at our
Madison research facility.
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General & Administrative Expenses
The following table provides details of our general and administrative expenses
for the periods indicated:
(table below in thousands)
Twelve Twelve
Months % of Months % of
Ended Expense Ended Expense Increase (Decrease)
September September
30, 2020 Category 30, 2019 Category $ %
Salaries $ 11,781 23 % $ 8,288 31 % $ 3,493 42 %
Professional/outside
services 7,342 14 % 5,605 21 % 1,737 31 %
Facilities related 2,203 4 % 1,434 5 % 769 54 %
Other G&A 3,232 6 % 2,332 9 % 900 39 %
Total general &
administrative expense,
excluding non-cash expense $ 24,558 47 % $ 17,659 67 % $ 6,899 39 %
Stock compensation 27,106 52 % 8,878 33 % 18,228 205 %
Depreciation/amortization 611 1 % 19 0 % 592 3116 %
Total general &
administrative expense $ 52,275 100 % $ 26,556 100 % $ 25,719 97 %
Salaries expense increased by $3,493,000 from $8,288,000 during the year ended
September 30, 2019 to $11,781,000 during the current period. The increase is
primarily driven by annual merit increases, performance bonuses and increased
headcount.
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 $1,737,000 from
$5,605,000 during the year ended September 30, 2019 to $7,342,000 during the
current period. The increases is primarily related to certain patent-related
expenses.
Facilities-related expense increased by $769,000 from $1,434,000 during the year
ended September 30, 2019 to $2,203,000 during the current period. This category
primarily includes rental costs for our corporate headquarters in Pasadena,
California . The increase in the expense is primarily related to costs incurred
as we moved into our new corporate headquarters during the current period.
Other G&A expense increased by $900,000 from $2,332,000 during the year ended
September 30, 2019 to $3,232,000 during the current period. This category
consists primarily of travel, communication and technology, office expenses, and
franchise and property tax expenses. The increase in the expense was due to
increased communication and technology and office expenses associated with our
new corporate headquarters.
Stock compensation expense, a non-cash expense, increased by $18,228,000 from
$8,878,000 during the year ended September 30, 2019 to $27,106,000 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 expense is primarily due to the timing of the achievement of certain
performance-based awards in each period and a mix of higher grant date fair
values of awards amortizing during the periods due to the Company's stock price
at the time of the grants.
Depreciation and amortization expense, a noncash expense, increased by $592,000
from $19,000 during the year ended September 30, 2019 to $611,000 during the
current period. The increase is primarily related to amortization of leasehold
improvements for our new corporate headquarters.
Other Income / Expense
Other income / expense was income of$6,957,768 during the year endedSeptember 30, 2019 compared to income of$8,607,977 during the current period. Interest income has increased in the current period as our investment holdings have grown.
Liquidity and Cash Resources
Arrowhead has historically financed its operations through the sale of its
equity securities. Research and development activities have required significant
capital investment since the Company's inception and are expected to continue to
require significant cash expenditure in the future.
57
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At September 30, 2020 , the Company had cash on hand of approximately $143.6
million as compared to $221.8 million at September 30, 2019 . Cash invested in
short-term fixed income securities and marketable securities was $171.9 million
at September 30, 2020 , compared to $36.9 million at September 30, 2019 . Cash
invested in long-term fixed income securities was $137.5 million at September
30, 2020 , compared to $44.2 million at September 30, 2019 . The Company also
entered into an Open Market Sale Agreement (the "ATM" agreement), pursuant to
which the Company may, from time to time, sell up to $250,000,000 in shares of
the Company's common stock through Jefferies LLC . As of the year ended September
30, 2020 , no shares have been issued 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 years ended September 30, 2020 , 2019, and 2018
as follows:
Years ended September 30,
2020 2019 2018
Cash Flow from:
Operating Activities $ (95,391,570 ) $ 173,034,923 $ (47,223,417 )
Investing Activities (240,777,764 ) (47,746,007 ) (7,434,963 )
Financing Activities 257,947,873 66,381,999 59,953,026
Net Increase (decrease) in cash and cash
equivalents (78,221,461 ) 191,670,915 5,294,646
Cash and cash equivalents at beginning of
period 221,804,128 30,133,213 24,838,567 Cash and cash equivalents at end of period 143,582,667 221,804,128 30,133,213
During the year endedSeptember 30, 2020 , the Company used$95.4 million in cash from operating activities, which was primarily related to the ongoing expenses of the Company's research and development programs and general and administrative expenses. Cash used in investing activities was$240.8 million , which was primarily related to the purchase of investments of$279.0 million and property and equipment of$12.0 million , partially offset by maturities of fixed-income securities of$50.1 million . Cash provided by financing activities of$257.9 million was driven by the securities financing inDecember 2019 , which generated$250.5 million in net cash proceeds, as well as$7.5 million in cash received from stock option exercises. During the year endedSeptember 30, 2019 , the Company generated$173.0 million in cash from operating activities, which was primarily related to the$175.0 million upfront payment and the two$25.0 million milestone payments received from Janssen, and the premium JJDC paid on the Company's common stock during the period. These inflows were partially offset by approximately$66.5 million of cash used for the ongoing expenses of the Company's research and development programs and general and administrative expenses. Cash used in investing activities was$47.7 million , which was primarily related to purchases of fixed-income investments of$90.3 million partially offset by maturities of fixed-income investments of$54.5 million . Cash provided by financing activities of$66.4 million was driven by the equity investment the Company received from JJDC during the period. During the year endedSeptember 30, 2018 , the Company used$47.2 million in cash from operating activities, which was primarily related to$57.2 million used for the on-going expenses of its research and development programs and general and administrative expenses, offset by the$10 million milestone payment for the AMG 890 (ARO-LPA) Agreement with Amgen. Cash used in investing activities was$7.4 million , which was primarily related to maturities of fixed-income investments of$46.1 million offset by purchases of fixed-income securities of$52.1 million . Cash provided by financing activities of$60.0 million was driven by the$56.6 million of cash generated from the underwritten public offering inJanuary 2018 . Contractual Obligations In the table below, we set forth our enforceable and legally binding obligations and future commitments atSeptember 30, 2020 for the categories shown, as well as obligations related to contracts in such categories that we are likely to continue. Some of the figures that we include in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the obligations we will actually pay in future periods may vary from those reflected in the table. The following 58 -------------------------------------------------------------------------------- table does not include any future obligations that may be owed under existing license agreements, as the certainty of achieving the relevant milestones that would trigger these payments is currently unknown. Payments due by Period More than 5 Total Less than 1 Year 1-3 Years 3-5 Years Years Long-Term Debt - - - - - Capital Leases - - - - - Operating Leases 32,311,207 3,091,901 7,260,044 6,627,966 15,331,296 Unconditional Purchase Obligations 77,965,922 60,176,232 17,789,690 - - Other Long-Term Liabilities - - - - - Total$ 110,277,129 $ 63,268,133 $ 25,049,734 $ 6,627,966 $ 15,331,296
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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