UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒
x			QUARTERLY REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2021~~

2022

☐
o			TRANSITION REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 001-38042

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

~~Delaware~~	~~46-0408024~~
Delaware		46-0408024
(State or other jurisdiction of ~~incorporation)~~ incorporation or organization)		(I.R.S. Employer Identification No.)

177 E. Colorado Blvd, Suite 700

Pasadena, California 91105

(626) 304-3400

(Address and telephone number of principal executive offices)

Former name, former address, and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, ~~Par Value~~par value $0.001 per share

ARWR

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”,~~filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒x

The number of shares of the registrant’s common stock outstanding as of ~~August 2, 2021~~July 28, 2022 was ~~104,259,256.~~

105,848,963.

	~~Page(s)~~


			Page(s)
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS			1

Consolidated Balance Sheets (Unaudited)			1

Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)			2

Consolidated Statements of Stockholders’ Equity and Noncontrolling Interest			3

Consolidated Statements of Cash Flows			4

Notes to Consolidated Financial Statements			5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17 19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			27 30

ITEM 4. CONTROLS AND PROCEDURES			27 30

PART II — OTHER INFORMATION			28 32

ITEM 1. LEGAL PROCEEDINGS			28 32

ITEM 1A. RISK FACTORS			28 32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			28 32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			28 32

ITEM 4. MINE SAFETY DISCLOSURES			28 32

ITEM 5. OTHER INFORMATION			28 32

ITEM 6. EXHIBITS			29 33

SIGNATURE			30 34

PART I. FINANCIAL INFORMATION

~~ITEM 1.~~

ITEM 1. FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)


	(unaudited) June 30, 2021			September 30, 2020				(unaudited) June 30, 2022		September 30, 2021
ASSETS							ASSETS
CURRENT ASSETS							CURRENT ASSETS
Cash and cash equivalents	$	325,981		$	143,583		Cash and cash equivalents	$	139,439	$	184,434
Accounts receivable		671			845		Accounts receivable	239		10,255
Prepaid expenses		7,276			4,250		Prepaid expenses	6,761		4,362
Other current assets		1,696			1,782		Other current assets	8,892		2,191
Marketable securities		126,407			85,020		Marketable securities	—		126,728
Short term investments		63,924			86,890		Short term investments	277,057		56,627
TOTAL CURRENT ASSETS		525,955			322,370		TOTAL CURRENT ASSETS	432,388		384,597
Property and equipment, net		47,786			30,881		Property and equipment, net	71,904		48,675
Intangible assets, net		14,088			15,363		Intangible assets, net	12,387		13,663
Long term investments		128,376			137,487		Long term investments	165,920		245,595
Operating Lease - Right-of-use assets		18,450			16,138
Right-of-use assets							Right-of-use assets	68,908		17,346
Other assets		272			265		Other assets	275		272
TOTAL ASSETS	$	734,927		$	522,504		TOTAL ASSETS	$	751,782	$	710,148
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY							LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES							CURRENT LIABILITIES
Accounts payable	$	10,037		$	6,829		Accounts payable	$	5,894	$	9,457
Accrued expenses		29,525			5,405		Accrued expenses	32,499		14,001
Accrued payroll and benefits		3,648			8,061		Accrued payroll and benefits	2,648		9,773
Lease liabilities		1,290			1,095		Lease liabilities	2,883		2,250
Deferred revenue		150,934			19,291		Deferred revenue	84,288		111,055
TOTAL CURRENT LIABILITIES		195,434			40,681		TOTAL CURRENT LIABILITIES	128,212		146,536
LONG-TERM LIABILITIES							LONG-TERM LIABILITIES
Lease liabilities, net of current portion		22,854			20,044		Lease liabilities, net of current portion	78,231		23,295
Deferred revenue, net of current portion		79,749			-		Deferred revenue, net of current portion	71,162		131,495
TOTAL LONG-TERM LIABILITIES		102,603			20,044		TOTAL LONG-TERM LIABILITIES	149,393		154,790
Commitments and contingencies (Note 7)							Commitments and contingencies (Note 7)	0		0
STOCKHOLDERS’ EQUITY							STOCKHOLDERS’ EQUITY
Arrowhead Pharmaceuticals, Inc. stockholders’ equity:							Arrowhead Pharmaceuticals, Inc. stockholders’ equity:
Common stock, $0.001 par value; 145,000 shares authorized; 104,209 and 102,376 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively		197			195
Common stock, $0.001 par value; 145,000 shares authorized; 105,795 and 104,327 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively							Common stock, $0.001 par value; 145,000 shares authorized; 105,795 and 104,327 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	198		197
Additional paid-in capital		1,017,949			965,410		Additional paid-in capital	1,189,113		1,053,386
Accumulated other comprehensive income		62			18
Accumulated other comprehensive loss							Accumulated other comprehensive loss	(140)		(69)
Accumulated deficit		(581,318	)		(503,844	)	Accumulated deficit	(735,244)		(644,692)
TOTAL ARROWHEAD PHARMACEUTICALS INC. STOCKHOLDERS' EQUITY							TOTAL ARROWHEAD PHARMACEUTICALS INC. STOCKHOLDERS' EQUITY	453,927		408,822
Noncontrolling Interest							Noncontrolling Interest	20,250		—
TOTAL STOCKHOLDERS’ EQUITY		436,890			461,779		TOTAL STOCKHOLDERS’ EQUITY	474,177		408,822
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	734,927		$	522,504
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY							TOTAL LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY	$	751,782	$	710,148

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

(In thousands, except per share amounts)


	Three Months Ended June 30,						Nine Months Ended June 30,							Three Months Ended June 30,				Nine Months Ended June 30,
	2021			2020			2021			2020				2022		2021		2022		2021
REVENUE	$	45,891		$	27,376		$	100,004		$	80,359		REVENUE	$	32,412	$	45,891	$	211,656	$	100,004
OPERATING EXPENSES													OPERATING EXPENSES
Research and development		59,325			32,573			140,576			85,390		Research and development	72,180		59,325		213,930		140,576
General and administrative expenses		18,434			10,749			43,581			38,009		General and administrative expenses	33,141		18,434		92,403		43,581
TOTAL OPERATING EXPENSES		77,759			43,322			184,157			123,399		TOTAL OPERATING EXPENSES	105,321		77,759		306,333		184,157
OPERATING INCOME (LOSS)		(31,868	)		(15,946	)		(84,153	)		(43,040	)	OPERATING INCOME (LOSS)	(72,909)		(31,868)		(94,677)		(84,153)
OTHER INCOME (EXPENSE)
OTHER INCOME													OTHER INCOME
Interest income, net		1,280			2,335			4,972			6,920		Interest income, net	1,240		1,280		3,450		4,972
Other income (expense)		664			-			1,707			-		Other income (expense)	(377)		664		675		1,707
TOTAL OTHER INCOME (EXPENSE)		1,944			2,335			6,679			6,920
TOTAL OTHER INCOME													TOTAL OTHER INCOME	863		1,944		4,125		6,679
INCOME (LOSS) BEFORE INCOME TAXES		(29,924	)		(13,611	)		(77,474	)		(36,120	)	INCOME (LOSS) BEFORE INCOME TAXES	(72,046)		(29,924)		(90,552)		(77,474)
Provision for income taxes		-			-			-			-		Provision for income taxes	—		—		—		—
NET INCOME (LOSS)		(29,924	)		(13,611	)		(77,474	)		(36,120	)	NET INCOME (LOSS)	(72,046)		(29,924)		(90,552)		(77,474)
NET INCOME (LOSS) PER SHARE - BASIC	$	(0.29	)	$	(0.13	)	$	(0.75	)	$	(0.36	)	NET INCOME (LOSS) PER SHARE - BASIC	$	(0.68)	$	(0.29)	$	(0.86)	$	(0.75)
NET INCOME (LOSS) PER SHARE - DILUTED	$	(0.29	)	$	(0.13	)	$	(0.75	)	$	(0.36	)	NET INCOME (LOSS) PER SHARE - DILUTED	$	(0.68)	$	(0.29)	$	(0.86)	$	(0.75)
Weighted average shares outstanding - basic		104,099			101,843			103,569			100,184		Weighted average shares outstanding - basic	105,753		104,099		105,273		103,569
Weighted average shares outstanding - diluted		104,099			101,843			103,569			100,184		Weighted average shares outstanding - diluted	105,753		104,099		105,273		103,569
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:													OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments		(40	)		454			44			216		Foreign currency translation adjustments	(33)		(40)		(71)		44
COMPREHENSIVE INCOME (LOSS)	$	(29,964	)	$	(13,157	)	$	(77,430	)	$	(35,904	)	COMPREHENSIVE INCOME (LOSS)	$	(72,079)	$	(29,964)	$	(90,623)	$	(77,430)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity

and Noncontrolling Interest

(unaudited)

(In thousands, except per share amounts)

	Common Stock		Amount ($)		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Non-controlling Interest			Totals
Balance at March 31, 2020		101,748	$	194	$	936,354		$	(629	)	$	(441,800	)	$	(555	)	$	493,564
Stock-based compensation		-		-		10,046			-			-			-			10,046
Exercise of stock options		303		-		2,133			-			-			-			2,133
Common stock - restricted stock units vesting		200		-		(1	)		-			-			-			(1	)
Foreign currency translation adjustments		-		-		-			454			-			-			454
Net income (loss) for the three months ended June 30, 2020		-		-		-			-			(13,611	)		-			(13,611	)
Balance at June 30, 2020		102,251	$	194	$	948,532		$	(175	)	$	(455,411	)	$	(555	)	$	492,585

	Common Stock		Amount ($)		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Totals							Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at March 31, 2021		104,020	$	196	$	996,645		$	102		$	(551,394	)	$	445,549					Balance at March 31, 2021	104,020	$	196	$	996,645	$	102	$	(551,394)	$	—	$	445,549
Stock-based compensation		-		-		18,549			-			-			18,549					Stock-based compensation	—	—		18,549		—		—		—		18,549
Exercise of stock options		161		1		2,755			-			-			2,756					Exercise of stock options	161	1		2,755		—		—		—		2,756
Common stock - restricted stock units vesting		28		-		-			-			-			-					Common stock - restricted stock units vesting	28	—		—		—		—		—		—
Foreign currency translation adjustments		-		-		-			(40	)		-			(40	)				Foreign currency translation adjustments	—	—		—		(40)		—		—		(40)
Net income (loss) for the three months ended June 30, 2021		-		-		-			-			(29,924	)		(29,924	)				Net income (loss) for the three months ended June 30, 2021	—	—		—		—		(29,924)		—		(29,924)
Balance at June 30, 2021		104,209	$	197	$	1,017,949		$	62		$	(581,318	)	$	436,890					Balance at June 30, 2021	104,209	$	197	$	1,017,949	$	62	$	(581,318)	$	—	$	436,890

	Common Stock		Amount ($)		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Non-controlling Interest			Totals
Balance at September 30, 2019		95,506	$	187	$	664,086		$	(391	)	$	(419,291	)	$	(555	)	$	244,036
Stock-based compensation		-		-		27,510			-			-			-			27,510
Exercise of stock options		989		1		6,463			-			-			-			6,464
Common stock - restricted stock units vesting		1,156		1		(1	)		-			-			-			-
Common stock - issued for cash		4,600		5		250,474			-			-			-			250,479
Foreign currency translation adjustments		-		-		-			216			-			-			216
Net income (loss) for the nine months ended June 30, 2020		-		-		-			-			(36,120	)		-			(36,120	)
Balance at June 30, 2020		102,251	$	194	$	948,532		$	(175	)	$	(455,411	)	$	(555	)	$	492,585

	Common Stock		Amount ($)		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Totals
Balance at September 30, 2020		102,376	$	195	$	965,410		$	18		$	(503,844	)	$	461,779
Stock-based compensation		-		-		42,051			-			-			42,051
Exercise of stock options		981		1		10,489			-			-			10,490
Common stock - restricted stock units vesting		852		1		(1	)		-			-			-
Foreign currency translation adjustments		-		-		-			44			-			44
Net income (loss) for the nine months ended June 30, 2021		-		-		-			-			(77,474	)		(77,474	)
Balance at June 30, 2021		104,209	$	197	$	1,017,949		$	62		$	(581,318	)	$	436,890


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at March 31, 2022	105,702	$	198	$	1,115,373	$	(107)	$	(663,198)	$	—	$	452,266
Stock-based compensation	—	—		33,391		—		—		—		33,391
Exercise of stock options	53	—		599		—		—		—		599
Common stock - restricted stock units vesting	40	—		—		—		—		—		—
Foreign currency translation adjustments	—	—		—		(33)		—		—		(33)
Interest in joint venture	—	—		39,750		—		—		20,250		60,000
Net income (loss) for the three months ended June 30, 2022	—	—		—		—		(72,046)		—		(72,046)
Balance at June 30, 2022	105,795	$	198	$	1,189,113	$	(140)	$	(735,244)	$	20,250	$	474,177


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at September 30, 2020	102,376	$	195	$	965,410	$	18	$	(503,844)	$	—	$	461,779
Stock-based compensation	—	—		42,051		—		—		—		42,051
Exercise of stock options	981	1		10,489		—		—		—		10,490
Common stock - restricted stock units vesting	852	1		(1)		—		—		—		—
Foreign currency translation adjustments	—	—		—		44		—		—		44
Net income (loss) for the nine months ended June 30, 2021	—	—		—		—		(77,474)		—		(77,474)
Balance at June 30, 2021	104,209	$	197	$	1,017,949	$	62	$	(581,318)	$	—	$	436,890


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at September 30, 2021	104,327	$	197	$	1,053,386	$	(69)	$	(644,692)	$	—	$	408,822
Stock-based compensation	—	—		91,697		—		—		—		91,697
Exercise of stock options	497	—		4,281		—		—		—		4,281
Common stock - restricted stock units vesting	971	1		(1)		—		—		—		—
Foreign currency translation adjustments	—	—		—		(71)		—		—		(71)
Interest in joint venture	—	—		39,750		—		—		20,250		60,000
Net income (loss) for the nine months ended June 30, 2022	—	—		—		—		(90,552)		—		(90,552)
Balance at June 30, 2022	105,795	$	198	$	1,189,113	$	(140)	$	(735,244)	$	20,250	$	474,177

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands, except per share amounts)


	Nine Months Ended June 30,							Nine Months Ended June 30,
	2021			2020				2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:							CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(77,474	)	$	(36,120	)	Net income (loss)	$	(90,552)	$	(77,474)
Stock-based compensation		42,051			27,510		Stock-based compensation	91,697		42,051
Depreciation and amortization		5,763			4,168		Depreciation and amortization	7,761		5,763
Unrealized (gains) losses on marketable securities							Unrealized (gains) losses on marketable securities	5,755		(1,387)
Amortization/(accretion) of note premiums/discounts		142			653		Amortization/(accretion) of note premiums/discounts	2,013		142
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable		174			(21,031	)	Accounts receivable	10,016		174
Prepaid expenses and other current assets		(2,895	)		(863	)	Prepaid expenses and other current assets	(8,876)		(2,895)
Deferred revenue		211,392			(56,530	)	Deferred revenue	(87,100)		211,392
Accounts payable		3,208			(3,576	)	Accounts payable	(3,563)		3,208
Accrued expenses		13,682			(54	)	Accrued expenses	1,713		13,682
Other		(702	)		1,302		Other	3,672		685
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		195,341			(84,541	)	NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(67,464)		195,341
CASH FLOWS FROM INVESTING ACTIVITIES:							CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(15,368	)		(10,067	)	Purchases of property and equipment	(20,066)		(15,368)
Purchases of investments		(95,195	)		(193,964	)	Purchases of investments	(223,391)		(95,195)
Proceeds from sale of investments		87,130			29,148		Proceeds from sale of investments	201,595		87,130
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(23,433	)		(174,883	)	NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(41,862)		(23,433)
CASH FLOWS FROM FINANCING ACTIVITIES:							CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercises of stock options		10,490			6,464		Proceeds from the exercises of stock options	4,331		10,490
Proceeds from the issuance of common stock		-			250,479
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		10,490			256,943
Proceeds from investment in joint venture							Proceeds from investment in joint venture	60,000		—
NET CASH PROVIDED BY FINANCING ACTIVITIES							NET CASH PROVIDED BY FINANCING ACTIVITIES	64,331		10,490
NET INCREASE (DECREASE) IN CASH		182,398			(2,481	)	NET INCREASE (DECREASE) IN CASH	(44,995)		182,398
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		143,583			221,804		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	184,434		143,583
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	325,981		$	219,323		CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	139,439	$	325,981

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware 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 to Arrowhead Madison Inc. (“Arrowhead Madison”), Visirna Therapeutics Inc. ("Visirna"), and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (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~~Arrowhead’s Common Stock.

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Recent Developments

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-HSD for liver disease, ARO-ENaC~~ARO-ENaC2 for cystic fibrosis, ~~ARO-HIF2 for renal cell carcinoma,~~ ARO-DUX4 for facioscapulohumeral muscular dystrophy, ~~ARO-LUNG2 for chronic obstructive pulmonary disorder, and~~ ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne ~~pathogens.~~pathogens, ARO-C3 for complement mediated diseases, ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary conditions and ARO-MMP7 for idiopathic pulmonary fibrosis. ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”) in November 2021. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ~~ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are~~JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for ~~undisclosed liver-expressed targets under a collaboration agreement~~patients with ~~Janssen Pharmaceuticals, Inc. (“Janssen”)~~non-alcoholic steatohepatitis (NASH).ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. ~~JNJ3989~~JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 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 Madison, Wisconsin and San Diego, California, where the Company’s research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, California.

During the first three quarters of fiscal ~~year 2021,~~2022, the Company continued to develop and advance its pipeline and partnered ~~candidates. The Company announced positive interim~~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 in adults with familial chylomicronemia syndrome (FCS);

ii)entered into an exclusive license agreement with GSK for ARO-HSD;

iii)Janssen presented clinical data ~~on (i) AROAAT2002, an open-label~~from REEF-1, a Phase ~~2 clinical~~2b study of ~~ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being co-developed with Takeda as~~different combination regimens, including JNJ-73763989 (JNJ-3989), formerly called ARO-HBV, and/or JNJ-56136379 (JNJ-6379), and a ~~treatment~~nucleos(t)ide analog (NA) for the ~~rare genetic liver disease associated with AATD, (ii) AROHSD1001,~~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-HSD,~~ARO-C3, the Company’s ~~investigational RNAi~~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 and held a groundbreaking ceremony on the site. The site is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company's process development and analytical activities. The Company also announced that it received awards for up to $16 million in tax increment financing from the city of Verona, and up to $2.5 million in refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs. Additionally, The Company entered into a ~~treatment~~lease agreement for a new 144,000 square foot laboratory and office facility in San Diego, California to support discovery activities;

vii)completed enrollment in Phase 2b ARCHES-2 study of investigational ARO-ANG3 for patients with ~~alcohol-related~~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 ~~nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH), and (iii) AROHIF21001, a~~dosed the first patients in the Phase ~~1b dose-finding~~2 GATEWAY clinical study of ~~ARO-HIF2,~~investigational ARO-ANG3 for the treatment of patients with homozygous familial hypercholersterolemia;

xi)entered into definitive agreements to form a joint venture, Visirna Therapeutics, Inc. (“Visirna”) with Vivo Capital (“Vivo”) through which the Company and Vivo intend to expand the reach of innovative medicines in Greater China;

xii)hosted a pulmonary research & development (R&D) Day to discuss the Company’s ~~investigational~~emerging pipeline of pulmonary targeted RNA interference (RNAi) therapeutic candidates that leverage its proprietary Targeted RNAi ~~therapeutic being developed~~Molecule (TRIMTM) platform, including an announcement of its previously undisclosed candidate designed to reduce expression of matrix metalloproteinase 7 (MMP7) as a potential treatment for patients with clear cell renal cell carcinoma. The Company also presented preclinical data on the development of ARO-DUX4, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with facioscapulohumeral muscular dystrophy (FSHD), at the 28th Annual FSHD Society International Research Congress. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3idiopathic pulmonary fibrosis (IPF); and ARO-ANG3, and presented positive clinical data from the Phase 1/2 clinical studies of ARO-APOC3 and ARO-ANG3 at the American Heart Association Scientific Sessions 2020. The Company filed two Investigational New Drug Applications with the United States Food and Drug Administration (the “FDA”) to begin a Phase 2b clinical study of ARO-APOC3

xiii)in patients with severe hypertriglyceridemia and a Phase 2b clinical study of ARO-ANG3 in patients with mixed dyslipidemia, and initiated these two Phase 2b clinical studies in the third quarter of fiscal year 2021. In July 2021, the Company voluntarily paused AROENaC1001, a Phase 1/2 clinical study of ARO-ENaC, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with cystic fibrosis, after receiving a preliminary update from an ongoing chronic toxicology study in rats that contained unexpected signals of local lung inflammation. New screening, enrollment and any further dosing of investigational ARO-ENaC have been paused pending additional data from ongoing nonclinical toxicology studies. The Company announced two collaborations during the first three quarters of fiscal year 2021: a collaborationconjunction with Takeda, to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease and a collaboration with Horizon to develop ARO-XDH, an investigational RNAi therapeutic for uncontrolled gout. In July 2021, the Company received Breakthrough Therapy designationannounced results from the FDA for ARO-AAT, which is a process designed to expedite the development and review of drugs that are intended to treat a serious life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The Company also earned a $10 million payment in connection with Janssen’s exercise of its option right for ARO-JNJ1 in May 2021, which option grants Janssen all rights, including licenses, and obligations to develop and commercialize ARO-JNJ1. See Note 2 for more information regarding the Company’s collaboration and license agreements.

~~The Company’s~~ partnered candidates under its collaboration agreements also continued 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. 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 Company’s Research Collaboration and Option Agreement with Janssen (“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 Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead Common Stock, and three milestone payments totaling $60.0 million, which include a $10 million payment for Janssen’s exercise of its option right for ARO-JNJ1 in May 2021. The Company may receive up to $1.6 billion in additional development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in additional development and sales milestone payments for the 3 additional targets 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.

~~The Company’s collaboration agreement with Amgen for~~ ~~Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”)~~ ~~continues to progress.~~ ~~In July 2020, Amgen initiated~~ a Phase 2 clinical study ~~which resulted in a $20.0 million milestone payment to~~(AROAAT-2002) of investigational fazirsiran (TAK-999/ARO-AAT) for the ~~Company.~~ ~~The Company has received $35.0 million in upfront payments, $21.5 million~~treatment of liver disease associated with alpha-1 antitrypsin deficiency (AATD), and was recently published in the ~~form~~New England Journal of Medicine (NEJM) and presented in an ~~equity investment by Amgen in~~oral presentation at The International Liver Congress™ 2022 - The Annual Meeting of 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 royaltiesEuropean Association for ~~sales~~the Study of ~~products under~~ the ~~Olpasiran~~Liver (EASL). ~~Agreement.~~

~~On October 7, 2020, the Company entered into an Exclusive License and Co-Funding Agreement with Takeda (the “Takeda License Agreement”). Under the Takeda License Agreement,~~ Takeda and the Company will co-develop the Company’s ARO-AAT program. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the 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. In January 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.

On June 18, 2021, the Company entered into a Collaboration and License Agreement (the “Horizon License Agreement”) with Horizon Therapeutics Ireland DAC (“Horizon”). Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational 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 revenue recognition for these collaboration agreements is discussed further in Note 2 below.~~

The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended June 30, ~~2021~~2022 were not significantly impacted by COVID-19. ~~During fiscal year 2020,~~Operationally, the Company ~~had temporarily paused~~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 two ARO-AAT studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of screening and enrolling patients. 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. Additionally, theclinical 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 ~~to operate~~ 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 ~~ultimately~~ the length and severity of the COVID-19 pandemic.

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern. Historically, the Company’s primary sources of financing have been through the sale of its securities and revenue from its licensing and collaboration agreements. Research and development activities have required significant capital investment since the Company’s ~~inception. The Company expects its operations~~inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded significantly. Additionally, significant capital investment ~~to pursue its research and development goals, including~~will be required as the Company’s pipeline matures into later stage clinical trials, as well as with the Company’s plans to increase its internal manufacturing capabilities, and ~~related drug manufacturing.~~

expand its footprint in Verona, Wisconsin and San Diego, California.

At June 30, ~~2021,~~2022, the Company had $~~326.0~~$139.4 million in cash and cash equivalents (including ~~$2.4~~$7.4 million in restricted cash), ~~$63.9~~$277.1 million in short-term investments, $~~126.4~~ ~~million~~$0 in marketable securities and ~~$128.4~~$165.9 million in long-term investments to fund operations. $60 million of our cash balance resulted from the formation of our joint venture, Viserna. During the nine months ended June 30, ~~2021,~~2022, the Company’s cash and investments balance ~~increased~~decreased by ~~$191.7~~$31.0 million, which was primarily ~~the result of the $300.0~~ ~~million upfront payment from the Takeda License Agreement, partially offset by~~due to cash being used to fund the Company’s ~~research~~operations, partially offset by the $120.0 million upfront payment received from GSK, and ~~development operations~~$60 million cash infusion to Viserna.

In total, the Company remains eligible for $4.9 billion in developmental, regulatory and ~~general~~sales milestones and ~~administrative expenses.~~

various royalties on net sales from its licensing and collaboration agreements. The revenue recognition for these collaboration agreements is discussed further in Note 2 below.

Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements that have significantly impacted this Quarterly Report on Form 10-Q, beyond those disclosed in the Company’s most recent Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In ~~November 2018,~~our opinion, the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-18 Collaborative Arrangements (Topic 808). This update provides clarification~~unaudited consolidated financial statements have been prepared on the ~~interaction between Revenue Recognition (Topic 606)~~same basis as audited consolidated financial statements and ~~Collaborative Arrangements (Topic 808) including the alignment~~include all adjustments, consisting of ~~unit of account guidance between the two topics. ASU 2018-18 became effective~~only normal recurring adjustments, necessary for the ~~Company on October 1, 2020~~fair presentation of our financial position, results of operations, comprehensive income and ~~did~~cash flows. The interim results are not ~~have a material impact on its Consolidated Financial Statements.~~

In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard requires that certain implementation costs for cloud computing arrangements are capitalized and amortized over the termnecessarily indicative of the ~~associated hosted cloud computing arrangement service. Capitalized implementation costs~~results of operations to be expected for the year ending September 30, 2022 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries, as well as the accounts of Visirna, a variable interest entity for which we are ~~classified~~the primary beneficiary. All intercompany balances and transactions have been eliminated in ~~prepaid expenses and other assets. The amortization~~consolidation. For consolidated entities where we own or are exposed to less than 100% of the ~~capitalized asset is presented~~economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the ~~same line~~percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on ~~the statement of operations and comprehensive loss as the fees~~Form 10-K for the ~~associated hosted cloud computing arrangement service and not included~~year ended September 30, 2021, filed with depreciation or amortization expense related to property and equipment or intangible assets. Cash flows related to capitalized implementation costs are presented in cash flows used in operating activities. ASU 2018-15 became effective for the ~~Company on October 1, 2020 and did not have a material impact on its Consolidated Financial Statements.~~

SEC.

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into 2 collaboration and license agreements and a common stock purchase agreement with Amgen. Under the Second Collaboration and License Agreement ~~or Olpasiran 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 ~~other~~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. InUnder 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 nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized $0 and ~~$20.0~~$0 of revenue associated with its agreement with Amgen, respectively. ~~During the nine months ended June 30, 2021 and 2020, the Company recognized $0 and $20.0 million of revenue, respectively.~~ As of June 30, ~~2021,~~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.

Janssen Pharmaceuticals, Inc.

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 iswas responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen Collaboration Agreement, Janssen ~~will be~~was able to select three new targets against which Arrowhead ~~will~~would develop clinical candidates. These candidates ~~are~~were subject to certain restrictions and do not include candidates that already were in the Company’s pipeline. The Company ~~will~~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, iswould have been sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen ~~will~~would have the option to take an exclusive license. If the option iswas exercised, Janssen ~~will be~~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 ~~three~~ milestone and option payments totaling $~~60.0~~$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 ~~$1.9~~$0.6 billion in development and sales milestone payments for the ~~3 additional targets~~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 ended June 30, 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 ~~Topic~~Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~Customers. At the inception of these agreements, the Company identified 1 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.

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. ~~This revenue~~The Company has recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed. Future milestones and royalties achieved will be recognized ~~using a proportional performance method (based on actual costs incurred versus total estimated costs incurred) beginning~~ in ~~October 2018 and ending as the Company’s efforts in overseeing the Phase 1/2 clinical trial are completed.~~their entirety when earned. During the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized approximately $0 ~~million~~ and ~~$6.9 million~~$0 of revenue associated with this performance obligation, respectively. During the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized approximately ~~$20.2 million~~$0 and ~~$57.9~~$20.2 million of revenue associated with this performance obligation, respectively. As of June 30, ~~2021,~~2022, there were ~~$0.4 million~~$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 ~~begun to conduct~~conducted its discovery, optimization and preclinical research and development of ~~ARO-JNJ1,~~JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company ~~will be~~have been entirely funded by Janssen. During the three months ended June 30, ~~2021~~2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ~~2020,~~ARO-JNJ3) under the Janssen Collaboration Agreement as reported in the second quarter of 2022. During the three months ended June 30, 2022 and 2021, the Company recognized ~~$0.2~~$0.0 million and ~~$0.4~~$0.2 million of revenue associated with these efforts, respectively. During the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized ~~$0.5~~$0.1 million and ~~$2.4~~$0.5 million of revenue associated with these efforts, respectively. In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $10.0 million milestone payment to the Company. This $10 million milestone payment was recognized entirely during the three months ended June 30, 2021. As of June 30, ~~2021,~~2022, there were ~~$0.3 million~~$0 of ~~contract~~contract assets recorded as accounts receivable and $0 of contract liabilities recorded as ~~curren~~tcurrent deferred revenue on the Company’s Consolidated Balance Sheets. ~~Sheets.~~

Takeda Pharmaceuticals U.S.A., Inc.

On October 7, 2020, the Company entered into ~~the Takeda~~an Exclusive License ~~Agreement~~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. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, ~~with~~while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales. In January 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 ~~Topic~~Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~Customers. At the inception of the Takeda License Agreement, the Company identified 1 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 1 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.~~commercialization outside the United States. Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States. The Company ~~will co-fund certain~~considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of ~~the development~~account within Topic 808, and ~~commercialization costs that Takeda manages, 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 ~~approximately~~ $300.0 million, which includes the upfront payment. The Company has excluded any future ~~estimated~~ milestones ~~royalties,~~ or ~~profit-sharing payments~~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 ~~costs incurred~~patient visits completed versus total estimated ~~costs incurred~~visits completed for the ~~Takeda R&D Services)~~ongoing SEQUOIA and AROAAT2002 clinical studies). Revenue for the three months ended June 30, 2022 and 2021 was $25.5 million and ~~2020 was~~ $35.7 million, ~~and $0,~~ respectively. Revenue for the nine months ended June 30, 2022 and 2021 was $67.1 million and ~~2020 was~~ $69.3 million, ~~and $0,~~ respectively. As of June 30, ~~2021,~~2022, there were $0 in contract assets recorded as accounts receivable, ~~$150.9~~$71.0 million in contract liabilities recorded as deferred revenue and ~~$79.7~~$71.2 million in contract liabilities recorded as deferred revenue, net of the current ~~portion.~~

portion, and $7.8 million in contract liabilities recorded as accrued expenses. The $7.8 million in accrued expenses was primarily driven by co-development and co-commercialization activities.

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon. Under the Horizon

License Agreement, Horizon ~~has~~ received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational 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 ~~Topic~~Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~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 ~~represent~~represented 1 distinct bundle and, thus, 1 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 ~~approximately~~ $40.0 million, ~~which includes~~including the upfront payment. The Company ~~will exclude~~has excluded any future estimated milestones ~~royalties,~~ or ~~profit-sharing payments~~royalties, from this transaction price to date. The Company will allocate the total $40.0 million initial transaction price to its 1 distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services. Revenue will be recognized ~~using~~on a ~~proportional~~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 ~~method. At~~obligation. Revenue for the three months ended June 30, 2022 and 2021 ~~no amounts~~was $6.7 million and $0, respectively. Revenue for the nine months ended June 30, 2022 and 2021 was $20.0 million and $0, respectively. As of June 30, 2022, there were $0 million in contract assets recorded as accounts receivable, $13.3 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 nine months ended June 30, 2022 and 2021, the Company recognized $1.3 million and $0 with these efforts, respectively. As of June 30, 2022, there were $0.0 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 or Consolidated Statements~~Sheets.

Glaxosmithkline Intellectual Property (No. 3) Limited

On November 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 ~~Operations~~greater China, for which the Company retained rights to develop and ~~Comprehensive Income (Loss)~~commercialize. Beyond the Company’s Phase 1/2 study of (ARO-HSD), aswhich 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 ~~not performed~~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 1 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 1 distinct bundle and, thus, one performance obligation. Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory.

The Company determined the initial transaction price totaled $120.0 million, including the upfront payment. The $120.0 million upfront payment was collected in January 2022. The Company has excluded any ~~substantive Horizon~~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 nine months ended June 30, 2022. Revenue for the nine months ended June 30, 2022 and 2021 was $120.0 million and $0, respectively. As of June 30, 2022, there were $0 in contract assets recorded as accounts receivable, $0 in contract liabilities recorded as deferred revenue.

Joint Venture and License Agreement with Visirna Therapeutics, Inc.

On April 25, 2022, the Company entered into a License Agreement (the “Visirna License Agreement”) with Visirna Therapeutics, Inc. (“Visirna”), pursuant to which Visirna received an exclusive license to develop, manufacture and commercialize four of Arrowhead’s RNAi-based investigational cardiobolic medicines in Greater China (including the People’s Republic of China, Hong Kong, Macau and Taiwan).Pursuant to a Share Purchase Agreement entered into simultaneously with the Visirna License Agreement (the “Visirna SPA”), the Company acquired a majority stake in Visirna (after accounting for shares reserved for Visirna’s employee stock ownership plan) as partial consideration for the Visirna License Agreement.Under the Visirna SPA, entities affiliated with Vivo Capital (“Vivo”) also acquired a minority stake in Visirna in exchange for $60 million in upfront capital to support the operations of Visirna.As further consideration under the Visirna License Agreement, the Company is also eligible to receive potential royalties on commercial sales.

The Company has determined that Visirna is a variable interest entity upon its formation and as of June 30, 2022, and it has been determined that Arrowhead is the primary beneficiary; accordingly, Arrowhead consolidates the financial statements of Visirna.

NOTE 3. PROPERTY AND EQUIPMENT

The following table summarizes the Company’s major classes of property and equipment:

	June 30, 2021			September 30, 2020
	(In thousands)							June 30, 2022		September 30, 2021
Computers, office equipment and furniture	$	1,163		$	662
								(In thousands)
Computers, software, office equipment and furniture							Computers, software, office equipment and furniture	$	2,210	$	2,170
Research equipment		23,972			20,654		Research equipment	31,678		27,500
Software		509			631
Leasehold improvements		42,934			25,238		Leasehold improvements	42,017		41,524
Construction in Progress							Construction in Progress	22,338		345
Land							Land	2,996		—
Total gross fixed assets		68,578			47,185		Total gross fixed assets	101,239		71,539
Less: Accumulated depreciation and amortization		(20,792	)		(16,304	)	Less: Accumulated depreciation and amortization	(29,335)		(22,864)
Property and equipment, net	$	47,786		$	30,881		Property and equipment, net	$	71,904	$	48,675

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$1.6~~$2.2 million and ~~$1.1~~$1.6 million, respectively. Depreciation and amortization expense for property and equipment for the nine months ended June 30, 2022 and 2021 was $6.5 million and ~~2020 was~~ $4.5 million, respectively. Construction in Progress relates to the Company’s Verona and ~~$2.9 million, respectively.~~

San Diego research facilities. Land relates to the Company’s Verona, Wisconsin research facility.

NOTE 4. INVESTMENTS

Investments at June 30, ~~2021~~2022 primarily consisted of commercial paper and corporate bonds that have maturities of less than 36 months and a certificate of ~~deposit~~deposit. Cash and ~~marketable equity securities.~~cash equivalents consist of cash on hand and commercial paper purchased with 90-days or less remaining to maturity. The Company’s corporate bonds consist of both short-term and long-term bonds and are classified as “held-to-maturity” on the Company’s Consolidated Balance Sheets. The Company’s certificate of deposit matures in less than 2412 months and is classified as “held-to-maturity” on the Company’s Consolidated Balance ~~Sheet.~~Sheet,’. The Company’s marketable equity securities ~~consist~~consisted of mutual funds that primarily invest in U.S. government bonds, U.S. government agency bonds, corporate bonds and other asset-backed debt securities. Dividends from these funds ~~are~~were automatically ~~reinvested.~~re-invested. In April 2022, all marketable securities were sold for $122.3 million. The Company may also invest excess cash balances in money market accounts, ~~government-sponsored enterprise~~and these securities ~~and/or commercial paper.~~would be classified as cash and cash equivalents on the Company’s Consolidated Balance Sheet. The Company accounts for its ~~held to maturity~~“held-to-maturity” investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities and its marketable equity securities in accordance with ASC 321, Investments – Equity Securities.

We did not record any impairment charges related to our marketable debt securities during the three and nine months ended June 30, 2022.

The following tables summarize the Company’s short-term and long-term investments and marketable securities as of June 30, ~~2021~~2022 and September 30, ~~2020~~2021 by measurement ~~category.~~

Held to Maturity

As of June 30, 2021

(In thousands)

Amortized
Cost

Gross
Unrealized
Gains

��
Gross
Unrealized
Losses

Fair Value

Commercial notes (due within one year)

$
63,924

$
711

$
-

$
64,635

Commercial notes (due within one through three years)

$
78,376

$
1,996

$
-

$
80,372

Certificate of deposit (due within two years)

$
50,000

$
-

$
-

$
50,000

Total

$
192,300

$
2,707

$
-

$
195,007

As of September 30, 2020

(In thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Commercial notes (due within one year)

$
86,890

$
1,590

$
-

$
88,480

Commercial notes (due within one through three years)

$
137,487

$
4,573

$
(79
)

$
141,981

Total

$
224,377

$
6,163

$
(79
)

$
230,461

category:


	As of June 30, 2022
	(In thousands)
	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Classified as Cash Equivalents
Commercial notes (due within ninety days)	$	25,325	$	11	$	—	$	25,336
Classified as Held to Maturity
Commercial notes (due within one year)	$	227,057	$	21	$	(1,588)	$	225,490
Commercial notes (due within one through three years)	$	165,920	$	—	$	(6,380)	$	159,540
Certificate of deposit (due within one year)	$	50,000	$	—	$	—	$	50,000
Classified as Marketable Securities
Marketable securities	$	—	$	—	$	—	$	—
Total	$	468,302	$	32	$	(7,968)	$	460,366

	As of September 30, 2021
	(In thousands)
	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Classified as Held to Maturity
Commercial notes (due within one year)	$	56,627	$	803	$	—	$	57,430
Commercial notes (due within one through three years)	$	195,595	$	1,151	$	(103)	$	196,643
Certificate of deposit (due within one through two years)	$	50,000	$	—	$	—	$	50,000
Classified as Marketable Securities
Marketable securities	$	127,481	$	—	$	(753)	$	126,728
Total	$	429,703	$	1,954	$	(856)	$	430,801

Fair Value

As of June 30, 2021

(In thousands)

Cost

Realized
Gains/(Losses)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Marketable securities

$
125,000

$
1,796

$
204

$
(593
)

$
126,407

Total

$
125,000

$
1,796

$
204

$
(593
)

$
126,407

As of September 30, 2020

(In thousands)

Cost

Realized
Gains/(Losses)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Marketable securities

$
85,000

$
95

$
-

$
(75
)

$
85,020

Total

$
85,000

$
95

$
-

$
(75
)

$
85,020

~~Realized gains for marketable securities recorded at fair value consist of dividends received and re-invested into the associated fund.~~

NOTE 5. INTANGIBLE ASSETS

Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition, which was 21 years, and the accumulated amortization of the asset is ~~$0.9~~$1.1 million. The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition, which was 14 years, and the accumulated

amortization of the assets is ~~$9.8~~$11.4 million. Amortization expense for the three months ended June 30, ~~2021~~2022 and ~~2020~~2021 was $0.4 million and $0.4 million, respectively. Amortization expense for the nine months ended June 30, ~~2021~~2022 and ~~2020~~2021 was $1.3 million and $1.3 million, respectively. Amortization expense is expected to be $0.4 million for the remainder of ~~2021, $1.7 million in~~ fiscal2022, $1.7 million in 2023, $1.7 million in 2024, $1.7 million in 2025, $1.7 million in 2026 and ~~$6.9~~$5.2 million thereafter.

The following table provides details on the Company’s intangible asset balances:

Intangible
assets
subject to
amortization

(in thousands)

Balance at September 30, 2020

$
15,363

Impairment

-

Amortization

(1,275
)
Balance at June 30, 2021

$
14,088


	Intangible Assets Subject to Amortization
	(in thousands)
Balance at September 30, 2021	$	13,663
Impairment	—
Amortization	(1,276)
Balance at June 30, 2022	$	12,387

NOTE 6. STOCKHOLDERS’ EQUITY

At June 30, ~~2021,~~2022, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.

At June 30, ~~2021,~~ ~~104,209,347~~2022, 105,795,456 shares of Common Stock were outstanding. At June 30, ~~2021, 15,381,164~~2022, 13,942,716 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules.

In August 2020, the Company 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, acting as the sales agent and/or principal, in an at-the-market offering. The Company is not required to sell shares under the ATM Agreement. The Company will pay Jefferies LLC a commission of up to 3.0% of the aggregate gross proceeds received from all sales of the common stock under the ATM Agreement. Unless otherwise terminated, the ATM Agreement continues until the earlier of selling all shares available under the ATM Agreement or December 2, 2022. At June 30, 2022, no shares have been sold under the ATM Agreement.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were 0no contingent liabilities recorded as of ~~the nine months ended~~ June 30, ~~2021.~~

~~Purchase~~ 2022.

Commitments

~~In the normal course of business,~~

On December 20, 2021, the Company ~~enters into various~~completed a purchase ~~commitments for~~of 13 acres of land in the ~~manufacture of drug components, for toxicology studies and for clinical studies. As of June 30, 2021, these future commitments were estimated at approximately $177.4 million, of~~Verona Technology Park in Verona, Wisconsin, which ~~approximately $39.0 million~~ is ~~expected~~planned to be ~~incurred during~~ the ~~remainder~~site of ~~fiscal year 2021.~~

an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility to support process development and analytical activities. Arrowhead intends to invest between $200 million and $250 million into the buildout of the facilities. As part of this acquisition, the Company also entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the TIF district, and will be reimbursed by the City of Verona by future tax increment revenue generated from the developed property. The total amount of funding that City of Verona will pay as reimbursements under the TIF program for these improvements is not guaranteed and will depend on future tax revenues generated from the developed property.

Technology License Commitments

The Company has licensed from third parties the rights to use certain technologies for its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon a new drug application and upon certain sales level milestones. These milestone payments could amount to the mid to upper double-digit millions of dollars. During the three and nine months ended June 30, 2022 and 2021, the Company did 0tnot reach any milestones. ~~During the three and nine months ended June 30, 2020, the Company accrued milestone payments of $0 and $0.9 million, respectively, related to the progression of the ARO-ENaC program. In~~Under certain agreements, the Company may be required to make mid to high single-digit percentage royalty payments based on a percentage of ~~the~~ sales of the relevant products.

NOTE 8. LEASES

Leases

In April 2019, the Company entered into a lease for its corporate headquarters in Pasadena, California. The 91 month office building lease between the Company and 177 Colorado Owner, LLC is for approximately 24,000 square feet of office space located at 177 E. Colorado Blvd, Pasadena, California. The increased capacity of this new office space compared to the Company’s prior corporate headquarters ~~was intended to~~will accommodate increased personnel as the Company’s pipeline of drug candidates expands and moves closer to market. Lease payments began on September 30, 2019 and are estimated to total approximately $8.7 million over the term. The lease expires on April 30, 2027. The Company has paid approximately $3.5 million for leasehold improvements, net of tenant improvement allowances. The lease contains an option to renew for 1 ~~additional~~ term of five years. The exercise of this option was not determined to be reasonably certain and thus was not included in lease liabilities on the Company’s Consolidated Balance Sheet at June 30, ~~2021.~~2022. On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office space at the same location for its corporate headquarters. Lease payments for the expansion began in July 2021 and the lease for the expansion expires in April 2027. The lease payments for the expansion are expected to total $6.9 million. The Company ~~anticipates paying~~has paid approximately ~~$4.2~~$4.0 million of leasehold improvements, net of tenant improvement allowances, for the lease expansion. ~~The increased capacity of this additional office space~~

~~compared to the Company’s current corporate headquarters is intended to accommodate increased personnel as the Company’s pipeline of drug candidates continues to expand and move closer to market.~~

In January 2016, the Company entered into a lease for its research facility in Madison, Wisconsin. The lease iswas for approximately 60,000 square feet of office and laboratory space and ~~has~~had an expiration date of September 30, 2026. The lease was amended in January 2019 and May 2020 to expand the rentable square feet by an additional 40,000 ~~total~~ square feet and to extend the lease expiration date to September 30, 2031. Lease payments are estimated to total approximately $26.2 million for the term. The Company incurred approximately $11.0 million of leasehold improvements for the additional 40,000 square feet, net of tenant improvement allowances. The lease contains 2 options to renew for two ~~additional~~ terms of five years. The exercise of these options were not determined to be reasonably certain and thus was not included in lease liabilities on the Company’s Consolidated Balance Sheet at June 30, ~~2021.~~2022. In November 2020 and December 2020, the Company entered into amendments to expand the rentable square space by an additional 10,743 square feet and these amendments added a total of approximately $1.2 million of lease payments for the remainder of the term.

In March 2020, the Company entered into a sublease agreement ~~(the “Sublease”) with Halozyme, Inc.~~ for additional research and development facility space in San Diego, California. The Sublease provides additional space needed to accommodate the recent growth of the Company’s personnel and discovery efforts. The Sublease is for approximately 21,000 rentable square feet. The term of the Sublease commenced on April 1, 2020 and will end on January 14, 2023. Sublease payments are estimated to total approximately $2.0 million over the term.

On November 19, 2021, the Company entered into a new lease for a San Diego, California research facility. The 15-year lease is for approximately 144,000 square feet of office and research and development laboratory space to be constructed in San Diego, California. This lease will replace the Company’s current research facility sublease for property located in San Diego, California. The increased capacity of this new facility compared to the Company’s current research facility in San Diego will accommodate increased personnel for the Company’s expanding pipeline of current and future drug candidates. The estimated rent commencement date for the lease is in March 2023, after construction and leasehold improvements have been completed. The lease payments, which begin on the rent commencement date, will be approximately $119.0 million over the initial 15-year term. The Company also estimates payments for operating expenses to be approximately $3.0 million for the first year of the lease, and these payments will continue throughout the initial 15-year term. The Company expects to pay approximately $31.0 million for leasehold improvements, net of tenant improvement allowances. Pursuant to the lease, within twelve months of the expiration of the initial 15-year term, the

Company has the option to extend the lease for up to 1 additional ten-year term, with certain annual increases in base rent. .

Operating lease cost during the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$1.6~~$3.4 million and ~~$0.8~~$1.6 million, respectively. Operating lease cost during the nine months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$3.6~~$6.0 million and ~~$1.7~~$3.6 million, respectively. Variable lease costs for the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$0.1~~$0.2 million and ~~$0.2~~$0.1 million, respectively. Variable lease costs for the nine months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$0.6~~$0.5 million and $0.6 million, respectively. There was 0no short-term lease cost during the three and nine months ended June 30, ~~2021~~2022 and ~~2020.~~

2021.

The following table presents ~~maturities~~payments of operating lease liabilities on an undiscounted basis as of June 30, ~~2021:~~

2022:

	(in thousands)
2021 (remainder of fiscal year)	$	964
2022		4,522
					(in thousands)
2022 (remainder of fiscal year)				2022 (remainder of fiscal year)	$	1,309
2023		4,624		2023	5,802
2024		4,523		2024	8,094
2025		4,649		2025	11,800
2026 and thereafter		17,422
2026				2026	12,313
2027 and thereafter				2027 and thereafter	114,109
Total	$	36,704		Total	$	153,427
Less imputed interest	$	(12,560	)	Less imputed interest	$	(72,313)
Total operating lease liabilities (includes current portion)	$	24,144		Total operating lease liabilities (includes current portion)	$	81,114

Cash paid for the amounts included in the measurement of the operating lease liabilities on the Company’s Consolidated Balance Sheet and included in Other changes in operating assets and liabilities within cash flows from operating activities on the Company’s Consolidated ~~Statement~~Statements of Cash ~~Flow~~Flows for the nine months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$2.2~~$3.4 million and ~~$1.1~~$2.2 million, respectively. The weighted-average remaining lease term and weighted-average discount rate for all leases as of June 30, ~~2021~~2022 was ~~8.3~~7.3 years and 8.5%, respectively.

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of June 30, ~~2021, 429,141~~2022, 216,607 and ~~5,293,368~~4,114,999 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, and restricted stock ~~awards and performance unit/share~~unit awards to employees, consultants and others. No further grants may be made under the 2004 Equity Incentive Plan. As of June 30, ~~2021,~~2022, there were options granted and outstanding to purchase ~~429,141~~216,607 and ~~2,127,918~~1,806,987 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were ~~3,165,450~~2,308,012 restricted stock units granted and outstanding under the 2013 Incentive Plan. ~~Also, as~~As of June 30, ~~2021,~~2022, there were ~~1,001,516~~816,248 shares reserved for options and ~~636,700~~682,500 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. On March 18, 2021, the Company’s stockholders approved the Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan (“2021 Incentive Plan”), which authorizes 8,000,000 shares (subject to certain adjustments) to be awarded for grants of stock options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of Arrowhead’s Common Stock. The maximum number of shares authorized under the 2021 Incentive Plan will be (i) reduced by any shares subject to awards made under the 2013 Incentive Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 Incentive Plan as of January 1, 2021 that, after January 1, 2021, are canceled, expired, forfeited or otherwise not issued under such awards (other than as a result of being tendered or withheld to pay the exercise price or withholding taxes in connection with any such awards) or settled in cash. As of June 30, ~~2021,~~2022, there were ~~options granted and outstanding to purchase 18,000~~3,000 shares of Common Stock reserved for options and ~~43,500~~1,507,267 shares of Common Stock reserved for restricted stock units granted and outstanding under the 2021 Incentive Plan. As of June 30, ~~2021,~~2022, the total number of ~~authorized~~ shares available under the 2021 Incentive Plan was ~~8,020,439~~6,627,845 shares, which includes ~~81,939~~119,612 shares that were forfeited under the 2013 Incentive Plan.

Stock Options

The following table summarizes information about stock options:

	Number of Options Outstanding			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Balance at September 30, 2020		4,539,403		$	16.67
										Number of Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Balance at September 30, 2021									Balance at September 30, 2021	3,456,239	$	19.60
Granted		186,000		65.57					Granted	—	—
Cancelled		(167,609	)	34.86					Cancelled	(106,801)	43.68
Exercised		(981,219	)	10.69					Exercised	(506,596)	8.45
Balance at June 30, 2021		3,576,575		$	20.00	5.9 years	$	224,666,017
Exercisable at June 30, 2021		2,417,915		$	11.18	4.7 years	$	173,212,122
Balance at June 30, 2022									Balance at June 30, 2022	2,842,842	$	20.60	5.1 years	$	55,434,252
Exercisable at June 30, 2022									Exercisable at June 30, 2022	2,370,089	$	16.14	4.6 years	$	52,941,990

Stock-based compensation expense related to stock options for the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$3.2~~$2.6 million and ~~$2.7~~$3.2 million, respectively. Stock-based compensation expense related to stock options for the nine months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$9.6~~$8.3 million and ~~$6.8~~$9.6 million, respectively. For non-qualified stock options, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The grant date fair value of the options granted by the Company for the three months ended June 30, 2022 and 2021 was $0 and ~~2020 was~~ $0.9 ~~million and $3.4~~ million, respectively. The grant date fair value of the options granted by the Company for the nine months ended June 30, 2022 and 2021 was $0 and ~~2020 was~~ $9.0 million, ~~and $30.0 million,~~ respectively.

The intrinsic value of the options exercised during the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$10.2~~$1.6 million and ~~$9.5~~$10.2 million, respectively. The intrinsic value of the options exercised during the nine months ended June 30, 2022 and 2021 was $24.9 million and ~~2020 was~~ $63.0 million, ~~and $39.8 million,~~ respectively.

As of June 30, ~~2021,~~2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of ~~$31.3~~$14.9 million will be recognized in the Company’s results of operations over a weighted average period of ~~2.7~~ ~~years~~.

1.7 years.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The assumptions used to value stock options are as follows:


	Nine Months Ended June 30,					Nine Months Ended June 30,
	2021		2020			2022	2021
Dividend yield		-		-	Dividend yield	N/A	—
Risk-free interest rate	0.4 – 1.1%		0.4 – 1.8%		Risk-free interest rate	N/A	0.4% - 1.1%
Volatility	86.2 – 90.4%		90.5 – 91.9%		Volatility	N/A	86% - 90.4%
Expected life (in years)		6.25		6.25	Expected life (in years)	N/A	6.25
Weighted average grant date fair value per share of options granted	$	48.64	$	38.12	Weighted average grant date fair value per share of options granted	N/A	$	48.64

The dividend yield is 0zero as the Company currently does not pay a dividend.

The risk-free interest rate is based on that of the U.S. Treasury bond.

Volatility is estimated based on volatility average of the Company’s Common Stock price.

Restricted Stock Units

Restricted stock units (“RSUs”), including time-based, market condition-based, and ~~performance-based~~performance condition-based awards, have been granted under the Company’s 2013 Incentive Plan, 2021 Incentive Plan, and as inducements grants granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules. At vesting, each outstanding RSU will be exchanged for one share of the Company’s Common Stock. RSU awards generally vest subject to the satisfaction of service requirements or the satisfaction of both service requirements and achievement of certain performance targets.

The following table summarizes the activity of the Company’s RSUs:

	Number of RSUs			Weighted- Average Grant Date Fair Value
Unvested at September 30, 2020		3,524,025		$	44.11
							Number of RSUs	Weighted- Average Grant Date Fair Value Per Share
Unvested at September 30, 2021						Unvested at September 30, 2021	3,831,850	$	61.24
Granted		1,488,450			75.29	Granted	1,691,367	56.73
Vested		(851,825	)		30.41	Vested	(962,188)	49.10
Forfeited		(315,000	)		39.93	Forfeited	(95,625)	69.32
Unvested at June 30, 2021		3,845,650		$	59.55
Unvested at June 30, 2022						Unvested at June 30, 2022	4,465,404	$	61.97

During the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded ~~$15.4~~$33.7 million and ~~$7.4~~$15.4 million of expense related to RSUs, respectively. During the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded ~~$32.5~~$83.4 million and ~~$20.7~~$32.5 million of expense related to RSUs, respectively. Such expense is included in stock-based compensation expense in the Company’s Consolidated ~~Statement~~Statements of Operations and Comprehensive Income (Loss). For RSUs, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

For RSUs, the grant date fair value of the award is based on the Company’s closing stock price at the grant date, with consideration given to the probability of achieving performance conditions for performance-based awards. The grant date fair value of the RSUs granted by the Company for the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$3.1~~$42.5 million and ~~$5.9~~$3.1 million, respectively. The grant date fair value of the RSUs granted by the Company for the nine months ended June 30, 2022 and 2021 was $95.2 million and ~~2020 was~~ $112.1 million, ~~and $141.8 million,~~ respectively.

As of June 30, ~~2021,~~2022, the pre-tax compensation expense for all unvested RSUs in the amount of ~~$123.5~~$190.3 million will be recognized in the Company’s results of operations over a weighted average period of 2.7 years. Unvested RSUs that we have deemed not probable of vesting as of June 30, 2021, have the potential of generating an additional $70.1 million of pre-tax compensation expense if we deem them probable of vesting in a future reporting period.

NOTE 10. FAIR VALUE MEASUREMENTS

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table summarizes fair value measurements at June 30, ~~2021~~2022 and September 30, ~~2020~~2021 for assets and liabilities measured at fair value on a recurring ~~basis.~~

basis:

June 30, ~~2021~~

2022:

Level 1

Level 2

Level 3

Total

(in thousands)

Cash and cash equivalents

$
325,981

$
-

$
-

$
325,981

Marketable securities

$
126,407

$
-

$
-

$
126,407

Short-term investments (held to maturity)

$
-

$
64,635

$
-

$
64,635

Long-term investments (held to maturity)

$
-

$
130,372

$
-

$
130,372

Contingent consideration

$
-

$
-

$
-

$
-


	Level 1		Level 2		Level 3		Total
	(in thousands)
Classified as Cash and cash equivalents
Commercial Notes	$	—	$	25,336	$	—	$	25,336
Classified as Marketable Securities
Marketable securities	$	—	$	—	$	—	$	—
Classified as Held to Maturity
Short-term investments	$	—	$	225,490	$	—	$	225,490
Long-term investments	$	—	$	159,540	$	—	$	159,540
Certificate of deposits	$	50,000	$	—	$	—	$	50,000
Classified as Contingent Consideration
Contingent consideration	$	—	$	—	$	—	$	—

September 30, ~~2020~~:

Level 1

Level 2

Level 3

Total

(in thousands)

Cash and cash equivalents

$
143,583

$
-

$
-

$
143,583

Marketable securities

$
85,020

$
-

$
-

$
85,020

Short-term investments (held to maturity)

$
-

$
88,480

$
-

$
88,480

Long-term investments (held to maturity)

$
-

$
141,981

$
-

$
141,981

Contingent consideration

$
-

$
-

$
-

$
-

2021:


	Level 1		Level 2		Level 3		Total
	(in thousands)
Classified as Marketable Securities
Marketable securities	$	126,728	$	—	$	—	$	126,728
Classified as Held to Maturity
Short-term investments	$	—	$	57,430	$	—	$	57,430
Long-term investments	$	—	$	196,643	$	—	$	196,643
Certificate of deposit	$	50,000	$	—	$	—	$	50,000
Classified as Contingent Consideration
Contingent consideration	$	—	$	—	$	—	$	—

NOTE 11. SUBSEQUENT EVENTS

None.

~~ITEM 2.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the Securities and Exchange Commission (“SEC”), including ~~our~~this Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2020, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and this Quarterly Report on Form 10-Q.~~June 30, 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~~

events.

Description of Business

Overview

~~Arrowhead has focused its resources on therapeutics that exclusively utilize~~

During the ~~Company’s Targeted RNAi Molecule (TRiM~~^TM~~) platform technology. Therapeutics built on the TRiM~~^TM ~~platform have demonstrated high levels~~first three quarters of ~~pharmacologic activity in multiple animal models spanning several therapeutic areas. TRiM~~^TM enabled therapeutics offer several potential advantages over prior generation and competing technologies, including: simplified manufacturing and reduced costs; multiple routes of administration including subcutaneous injection and inhaled administration; the ability to target multiple tissue types including liver, lung 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 2021,~~2022, the Company continued to develop and advance its pipeline and partnered ~~candidates. The Company announced positive interim~~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 in adults with familial chylomicronemia syndrome (FCS);

ii)entered into an exclusive license agreement with GSK for ARO-HSD;

v)presented additional interim clinical data from AROHSD1001, AROAAT2002, and AROAPOC31001;

vii)completed enrollment in Phase 2b ARCHES-2 study of investigational ARO-ANG3 for patients with ~~alcohol-related~~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;

~~The Company’s~~ partnered candidates under its collaboration agreements also continued 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. 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 Company’s Research Collaboration and Option Agreement with Janssen (“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 Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead Common Stock, and three milestone payments totaling $60.0 million, which include a $10 million payment for Janssen’s exercise of its option right for ARO-JNJ1 in May 2021. The Company may receive up to $1.6 billion in additional development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in additional 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 on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

~~The Company’s collaboration agreement with Amgen for~~ ~~Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”)~~ ~~continues to progress.~~ ~~In July 2020, Amgen initiated~~ a Phase 2 clinical study ~~which resulted in a $20.0 million milestone payment to~~(AROAAT-2002) of investigational fazirsiran (TAK-999/ARO-AAT) for the ~~Company.~~ ~~The Company has received $35.0 million in upfront payments, $21.5 million~~treatment of liver disease associated with alpha-1 antitrypsin deficiency (AATD), and was recently published in the ~~form~~New England Journal of Medicine (NEJM) and presented in 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.oral presentation at The ~~Company is eligible to receive up to low double-digit royalties for sales of products under the~~ International Liver Congress™ 2022 -

~~Olpasiran~~
~~Agreement.~~

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 revenue recognition for these collaboration agreements is discussed further in Note 2~~Annual Meeting of the ~~Notes to Consolidated Financial Statements~~European Association for the Study of ~~Part I, Item 1.~~ ~~Financial Statements~~ ~~of this Quarterly Report on Form 10-Q.~~

~~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 manufacturers 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.~~

Liver (EASL).

Net losses were $72.0 million for the three months ended June 30, 2022 as compared to net losses of $29.9 million for the three months ended June 30, ~~2021~~2021. Net losses were $90.6 million for the nine months ended June 30, 2022 as compared to net losses of ~~$13.6 million for the three months ended June 30, 2020. Net losses were~~ $77.5 million for the nine months ended June 30, ~~2021~~2021. Net losses per share-diluted were $0.68 for the three months ended June 30, 2022 as compared to net losses ~~of $36.1 million for the nine months ended June 30, 2020. Net losses~~ per share-diluted ~~were~~of $0.29 for the three months ended June 30, ~~2021~~2022. Net losses per share-diluted were $0.86 for the nine months ended June 30, 2022 as compared to net losses per share-diluted of ~~$0.13 for the three months ended June 30, 2020. Net losses per share-diluted were~~ $0.75 for the nine months ended June 30, ~~2021 as compared to net losses per share-diluted of $0.36 for the nine months ended June 30, 2020.~~2021. The increase in net losses for the three ~~and nine~~ months ended June 30, ~~2021~~2022 was due to an increase in research and development and general and administrative expenses as the Company’s pipeline of candidates has expanded and progressed through clinical trial phases, partially offset by an increase in revenue from the Company’s license and collaboration agreements, primarily from the Takeda ~~collaboration.~~

License Agreement (as defined below) and the Horizon License Agreement (as defined 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 ~~three~~four milestone payments totaling ~~$60.0~~$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. T~~he Company’s October 2020 licensing agreement with~~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 ~~collected~~received in ~~the beginning of the second quarter of 2021.~~ January 2022.The Company had ~~$326.0~~$139.4 million of cash and cash equivalents, ~~$126.4 million of marketable securities, $63.9~~$277.1 million in short-term investments, ~~$128.4~~$165.9 million of long term investments and ~~$734.9~~$751.8 million of total assets as of June 30, ~~2021,~~2022, as compared to ~~$143.6~~$184.4 million of cash and cash equivalents, ~~$85.0~~$126.7 million of marketable securities, ~~$86.9~~$56.6 million in short-term investments, ~~$137.5~~$245.6 million of long term investments and ~~$522.5~~$710.1 million of total assets as of September 30, ~~2020, respectively.~~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 June 30,

2021

2020

(in thousands, except per share
amounts)

Revenues

$
45,891

$
27,376

Operating Income (loss)

$
(31,868
)

$
(15,946
)
Net Income (loss)

$
(29,924
)

$
(13,611
)
Net Income (Loss) per Share-Diluted

$
(0.29
)

$
(0.13
)

Nine Months Ended June 30,

2021

2020

(in thousands, except per share
amounts)

Revenues

$
100,004

$
80,359

Operating Income (loss)

$
(84,153
)

$
(43,040
)
Net Income (loss)

$
(77,474
)

$
(36,120
)
Net Income (Loss) per Share-Diluted

$
(0.75
)

$
(0.36
)


	Three Months Ended June 30,
	2022		2021
	(in thousands, except per share amounts)
Revenues	$	32,412	$	45,891
Operating income (loss)	$	(72,909)	$	(31,868)
Net income (loss)	$	(72,046)	$	(29,924)
Net income (loss) per share-diluted	(0.68)		(0.29)


	Nine Months Ended June 30,
	2022		2021
	(in thousands, except per share amounts)
Revenues	$	211,656	$	100,004
Operating income (loss)	$	(94,677)	$	(84,153)
Net income (loss)	$	(90,552)	$	(77,474)
Net income (loss) per share-diluted	(0.86)		(0.75)

The increase in revenue for the ~~three and~~nine months ended June 30, 2022 compared to the nine months ended June 30, 2021 ~~compared to the three and nine months ended June 30, 2020~~ was driven by the revenue recognized for the Takeda collaboration. The increase in net losses during the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 was driven by an increase in research and development expenses as our pipeline of clinical candidates has continued to increase and progress through clinical trial phases, partially offset by an increase in revenue from the GSK, Takeda and Horizon License ~~Agreement.~~

Agreements.

Revenue

Total revenue for the three months ended June 30, 2022 and 2021 ~~and 2020~~ was ~~$45.9~~$32.4 million and ~~$27.4~~$45.9 million, respectively. Total revenue for the nine months ended June 30, 2022 and 2021 was $211.7 million and ~~2020 was~~ $100.0 million, ~~and $80.4 million,~~ respectively. Revenue for the three months ended June 30, 2021 is primarily related to the recognition of $35.7 million of revenue associated with the Takeda License Agreement and the $10 million milestone payment from Janssen for ARO-JNJ1. Revenue for the nine months ended June 30, ~~2021~~2022 is primarily related to the recognition of ~~$69.3~~the $120.0 million of revenue associated with the ~~Takeda~~upfront payment received from GSK under the GSK License Agreement in the ~~recognition~~second quarter of a portion of the $252.7 million initial transaction price associated with our agreements with Janssen and JJDC for the progress we achieved towards completing our performance obligations under those agreements, and the $10 million milestone payment from Janssen for ARO-JNJ1.

2022.

Amgen Inc.

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 ~~or Olpasiran 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 ~~other~~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. InUnder 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 nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized $0 and ~~$20.0~~$0 of revenue associated with its agreement with Amgen, respectively. ~~During the nine months ended June 30, 2021 and 2020, the Company recognized $0 and $20 million of revenue, respectively.~~ As of June 30, ~~2021,~~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.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into ~~the Janssen~~a License Agreement (the “Janssen License Agreement”) and ~~the Janssen~~a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”) with Janssen, part of the Janssen 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 iswas responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen

Collaboration Agreement, Janssen ~~will be~~was able to select three new targets against which Arrowhead ~~will~~would develop clinical candidates. These candidates ~~are~~were subject to certain restrictions and do not include candidates that already were in the Company’s pipeline. The Company ~~will~~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, iswould have been sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen ~~will~~would have the option to take an exclusive license. If the option iswas exercised, Janssen ~~will be~~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 ~~three~~ milestone and option payments totaling ~~$60.0~~$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 ~~$1.9~~$0.6 billion in development and sales milestone payments for the ~~three additional targets~~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 ended June 30, 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 ~~Topic~~Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~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.

Takeda Pharmaceuticals U.S.A., Inc.

candidate being developed as a treatment for liver disease associated with alpha-1

antitrypsin deficiency. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, ~~with~~while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales. In January 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 ~~Topic~~Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~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.~~commercialization outside the United States. Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States. The Company ~~will co-fund certain~~considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of ~~the development~~account within Topic 808, and ~~commercialization costs that Takeda manages, and~~as such, these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.

portion, and $7.8 million in contract liabilities recorded as accrued expenses. The $7.8 million in accrued expenses was primarily driven by co-development and co-commercialization activities.

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon. Under the Horizon License Agreement, Horizon ~~has~~ received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational 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 ~~Topic~~Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from ~~Customers, which became effective for the Company on October 1, 2018.~~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 ~~represent~~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.

and the associated Horizon R&D Services. Revenue will be recognized ~~using~~on a ~~proportional~~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 ~~method. At~~obligation. Revenue for the three months ended June 30, 2022 and 2021 ~~no amounts~~was $6.7 million and $0, respectively. Revenue for the nine months ended June 30, 2022 and 2021 was $20.0 million and $0, respectively. As of June 30, 2022, there were $0 million in contract assets recorded as accounts receivable, $13.3 million in contract liabilities recorded as deferred revenue.

Glaxosmithkline Intellectual Property (No. 3) Limited

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.

Joint Venture and License Agreement with Visirna Therapeutics, Inc.

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 nine months ended June 30, ~~2021~~2022 and ~~2020~~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 in Madison, Wisconsin and San 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~~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:

(table below in thousands)

	Three					Three
	Months Ended		% of Expense			Months Ended		% of Expense			Increase (Decrease)						Three Months Ended June 30, 2022		% of Expense Category				Three Months Ended June 30, 2021			% of Expense Category			Increase (Decrease)
	June 30, 2021		Category			June 30, 2020		Category			$		%				Three Months Ended June 30, 2022								$	% of Expense Category			%
Salaries	$	8,518		14	%	$	4,861		15	%	$	3,657		75	%	Salaries	$	11,243	% of Expense Category		16	%	Three Months Ended June 30, 2021			$	8,518		14		%	$	2,725		32	%
Facilities related		1,306		2	%		1,209		4	%		97		8	%	Facilities related	$	3,827	5	%			$	1,306		2		%	$	2,521		193		%
Candidate costs		31,468		53	%		15,755		48	%		15,713		100	%	Candidate costs	$	31,732	44	%			$	31,468		54		%	$	264		1		%
R&D discovery costs		10,082		17	%		4,070		13	%		6,012		148	%	R&D discovery costs	$	15,081	21	%			$	10,082		17		%	$	4,999		50		%
Total research and development expense, excluding non-cash expense		51,374		87	%		25,895		80	%		25,479		98	%	Total research and development expense, excluding non-cash expense	$	61,883	86	%			$	51,374		87		%	$	10,509		20		%
Stock compensation		6,530		11	%		5,296		16	%		1,234		23	%	Stock compensation	$	8,098	11	%			$	6,530		11		%	$	1,568		24		%
Depreciation/amortization		1,421		2	%		1,382		4	%		39		3	%	Depreciation/amortization	$	2,200	3	%			$	1,421		2		%	$	779		55		%
Total research and development expense	$	59,325		100	%	$	32,573		100	%	$	26,752		82	%	Total research and development expense	$	72,181	100	%			$	59,325		100		%	$	12,856		22		%

Nine

Nine

Months
Ended

% of
Expense

Months
Ended

% of
Expense

Increase (Decrease)

June 30, 2021

Category

June 30, 2020

Category

$

%

Salaries

$
25,375

18
%

$
13,173

15
%

$
12,202

93
%
Facilities related

4,456

3
%

2,653

3
%

1,803

68
%
Candidate costs

67,152

48
%

44,901

53
%

22,251

50
%
R&D discovery costs

20,295

14
%

11,540

14
%

8,755

76
%
Total research and development expense, excluding non-cash expense

$
117,278

84
%

$
72,267

85
%

$
45,011

62
%
Stock compensation

18,421

13
%

9,411

11
%

9,010

96
%
Depreciation/amortization

4,877

4
%

3,712

4
%

1,165

31
%
Total research and development expense

$
140,576

100
%

$
85,390

100
%

$
55,186

65
%


	Nine Months Ended June 30, 2022		% of Expense Category		Nine Months Ended June 30, 2021		% of Expense Category		Increase (Decrease)
									$		%
Salaries	$	33,641	16	%	$	25,375	18	%	$	8,266	33	%
Facilities related	7,644		4	%	$	4,456	3	%	$	3,188	72	%
Candidate costs	101,789		47	%	$	67,152	48	%	$	34,637	52	%
R&D discovery costs	40,347		19	%	$	20,295	14	%	$	20,052	99	%
Total research and development expense, excluding non-cash expense	$	183,421	86	%	$	117,278	83	%	$	66,143	56	%
Stock compensation	$	23,958	11	%	$	18,421	13	%	$	5,537	30	%
Depreciation/amortization	$	6,551	3	%	$	4,877	4	%	$	1,674	34	%
Total research and development expense	$	213,930	100	%	$	140,576	100	%	$	73,354	52	%

Salaries expense increased by ~~$3,657,000~~$2,725,000 from ~~$4,861,000~~$8,518,000 during the three months ended June 30, ~~2020~~2021 to ~~$8,518,000~~$11,243,000 during the current period. Salaries expense increased by ~~$12,202,000~~$8,266,000 from ~~$13,173,000~~$25,375,000 during the nine months ended June 30, ~~2020~~2021 to ~~$25,375,000~~$33,641,000 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 ~~$97,000~~$2,521,000 from ~~$1,209,000~~$1,306,000 during the three months ended June 30, ~~2020~~2021 to ~~$1,306,000~~$3,827,000 during the current period. Facilities expense increased by ~~$1,803,000~~$3,188,000 from ~~$2,653,000~~$4,456,000 during the nine months ended June 30, ~~2020~~2021 to ~~$4,456,000~~$7,644,000 during the current period. This category includes rental costs for our research and development facilities in Madison, Wisconsin and San Diego, California. ~~This~~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. The increase in facilities expense is ~~primarily~~ due to the ~~commencement~~recognition of ~~our sublease in~~rent expense from the San Diego ~~California in April 2020 and the lease expansion at our Madison facility in May 2020.~~

research facility.

Candidate costs increased by ~~$15,713,000~~$264,000 from ~~$15,755,000~~$31,468,000 during the three months ended June 30, ~~2020~~2021 to ~~$31,468,000~~$31,732,000 during the current period. Candidate costs increased by ~~$22,251,000~~$34,637,000 from ~~$44,901,000~~$67,152,000 during the nine months ended June 30, ~~2020~~2021 to ~~$67,152,000~~$101,789,000 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.~~

trials, in addition to unforeseen inflationary pressure on goods and services.

R&D discovery costs increased by ~~$6,012,000~~$4,999,000 from ~~$4,070,000~~$10,082,000 during the three months ended June 30, ~~2020~~2021 to ~~$10,082,000~~$15,081,000 in the current period. R&D discovery costs increased by ~~$8,755,000~~$20,052,000 from ~~$11,540,000~~$20,295,000 during the nine months ended June 30, ~~2020~~2021 to ~~$20,295,000~~$40,347,000 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.

Stock compensation expense, a non-cash expense, increased by ~~$1,234,000~~$1,568,000 from ~~$5,296,000~~$6,530,000 during the three months ended June 30, ~~2020~~2021 to ~~$6,530,000~~$8,098,000 during the current period. Stock compensation expense, a non-cash expense, increased by ~~$9,010,000~~$5,537,000 from ~~$9,411,000~~$18,421,000 during the nine months ended June 30, ~~2020~~2021 to ~~$18,421,000~~$23,958,000 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.~~above. 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 ~~$39,000~~$779,000 from ~~$1,382,000~~$1,421,000 during the three months ended June 30, ~~2020~~2021 to ~~$1,421,000~~$2,200,000 during the current period. Depreciation and amortization expense, a non-cash expense, increased by ~~$1,165,000~~$1,674,000 from ~~$3,712,000~~$4,877,000 during the nine months ended June 30, ~~2020~~2021 to ~~$4,877,000~~$6,551,000 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 and increase our footprint expansions 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 Ended		% of Expense			Months Ended		% of Expense			Increase (Decrease)							Three Months Ended June 30, 2022		% of Expense Category				Three Months Ended June 30, 2021			% of Expense Category			Increase (Decrease)
	June 30, 2021		Category			June 30, 2020		Category			$			%				Three Months Ended June 30, 2022								$	% of Expense Category			%
Salaries	$	2,570		14	%	$	2,633		25	%	$	(63	)		-2	%	Salaries	$	3,175	% of Expense Category		10	%	Three Months Ended June 30, 2021			$	2,570		14		%	$	605		24	%
Professional/outside services		379		2	%		2,020		19	%		(1,641	)		-81	%	Professional/outside services	1,576		5	%			379			2		%	1,197			316		%
Facilities related		610		3	%		446		4	%		164			37	%	Facilities related	703		2	%			610			3		%	93			15		%
Other G&A		2,278		12	%		746		7	%		1,532			205	%	Other G&A	1,992		6	%			2,278			12		%	(286)			(13)		%
Total general & administrative expense, excluding non-cash expense		5,837		32	%		5,845		54	%		(8	)		159	%	Total general & administrative expense, excluding non-cash expense	$	7,446	23	%			$	5,837		31		%	$	1,609		28		%
Stock compensation		12,020		65	%		4,750		44	%		7,270			153	%	Stock compensation	25,292		76	%			12,020			66		%	13,272			110		%
Depreciation/amortization		577		3	%		154		1	%		423			275	%	Depreciation/amortization	403		1	%			577			3		%	(174)			(30)		%
Total general & administrative expense	$	18,434		100	%	$	10,749		100	%	$	7,685			586	%	Total general & administrative expense	$	33,141	100	%			$	18,434		100		%	$	14,707		80		%

	Nine					Nine
	Months Ended		% of Expense			Months Ended		% of Expense			Increase (Decrease)							Nine Months Ended June 30, 2022		% of Expense Category				Nine Months Ended June 30, 2021			% of Expense Category			Increase (Decrease)
	June 30, 2021		Category			June 30, 2020		Category			$			%				Nine Months Ended June 30, 2022								$	% of Expense Category			%
Salaries	$	8,411		19	%	$	9,747		26	%	$	(1,336	)		-14	%	Salaries	$	10,365	% of Expense Category		11	%	Nine Months Ended June 30, 2021			$	8,411		19		%	$	1,954		23	%
Professional/outside services		4,199		10	%		5,519		15	%		(1,320	)		-24	%	Professional/outside services	6,083		7	%			4,199			10		%	1,884			45		%
Facilities related		2,127		5	%		1,657		4	%		470			28	%	Facilities related	2,085		2	%			2,127			5		%	(42)			(2)		%
Other G&A		4,326		10	%		2,531		6	%		1,795			71	%	Other G&A	4,921		5	%			4,326			10		%	595			14		%
Total general & administrative expense, excluding non-cash expense	$	19,063		44	%	$	19,454		51	%	$	(391	)		-2	%	Total general & administrative expense, excluding non-cash expense	$	23,454	25	%			$	19,063		44		%	$	4,391		23		%
Stock compensation		23,631		54	%		18,099		48	%		5,532			31	%	Stock compensation	67,739		74	%			23,631			54		%	44,108			187		%
Depreciation/amortization		887		2	%		456		1	%		431			95	%	Depreciation/amortization	1,210		1	%			887			2		%	323			36		%
Total general & administrative expense	$	43,581		100	%	$	38,009		100	%	$	5,572			15	%	Total general & administrative expense	$	92,403	100	%			$	43,581		100		%	$	48,822		112		%

Salaries expense ~~decreased~~increased by ~~$63,000~~$605,000 from ~~$2,633,000~~$2,570,000 during the three months ended June 30, ~~2020~~2021 to ~~$2,570,000~~$3,175,000 during the current period. Salaries expense ~~decreased~~increased by ~~$1,336,000~~$1,954,000 from ~~$9,747,000 during the nine months ended June 30, 2020 to~~ $8,411,000 ~~during the current period. The decrease of $1,336,000~~ during the nine months ended June 30, 2021 ~~as compared~~ to $10,365,000 during the ~~nine months ended June 30, 2020~~current period. This increase is primarily due to ~~higher annual performance bonuses awarded~~an increase in ~~December 2019.~~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.~~

pipeline, in addition to inflationary pressures in the labor market.

Professional/outside services include legal, accounting, consulting, patent expenses, business insurance expenses and other outside services retained by the Company. Professional/outside services expense ~~decreased~~increased by ~~$1,641,000~~1,197,000 from ~~$2,020,000~~$379,000 during the three months ended June 30, ~~2020~~2021 to ~~$379,000~~$1,576,000 during the current period. Professional/outside services expense ~~decreased~~increased by ~~$1,320,000~~$1,884,000 from ~~$5,519,000~~$4,199,000 during the nine months ended June 30, ~~2020~~2021 to ~~$4,199,000~~$6,083,000 during the current period. We expect future professional/outside services expense to increase as we continue to increase discovery efforts. The ~~decrease~~increase in professional/outside services expense is ~~primarily related~~due to ~~the timing of certain patent-related expenses.~~

intellectual property and general legal fees.

Facilities-related expense increased by ~~$164,000~~$93,000 from ~~$446,000~~$610,000 during the three months ended June 30, ~~2020~~2021 to ~~$610,000~~$703,000 during the current period. Facilities-related expense ~~increased~~decreased by ~~$470,000~~$42,000 from ~~$1,657,000~~$2,127,000 during the nine months ended June 30, ~~2020~~2021 to ~~$2,127,000~~$2,085,000 during the current period. This category primarily includes rental costs for our corporate headquarters in Pasadena, California. The increase in ~~both periods was~~facilities related expenses is due to ~~the additional space leased for our corporate headquarters to accommodate~~ an increase in ~~headcount.~~

building maintenance and repair costs. We expect future facilities related expenses to increase as we continue to increase our headcount and footprint to support our discovery efforts.

Other G&A expense ~~increased~~decreased by ~~$1,532,000~~$286,000 from ~~$746,000~~$2,278,000 during the three months ended June 30, ~~2020~~2021 to ~~$2,278,000~~$1,992,000 during the current period. Other G&A expense increased by ~~$1,795,000~~$595,000 from ~~$2,531,000~~$4,326,000 during the nine months ended June 30, ~~2020~~2021 to ~~$4,326,000~~$4,921,000 during the current period. This category consists primarily of travel, communication and technology, office expenses, and franchise and property tax expenses. The ~~increase~~decrease during the three months ended June 30, 2022 and 2021 is due to ana decrease in consulting expenses from the prior year. The increase ~~in headcount at~~during the ~~Company’s corporate headquarters.~~

nine months ended June 30, 2022 and 2021 is due to software and software implementation costs..

Stock compensation expense, a non-cash expense, increased by ~~$7,270,000~~$13,272,000 from ~~$4,750,000~~$12,020,000 during the three months ended June 30, ~~2020~~2021 to ~~$12,020,000~~$25,292,000 during the current period. Stock compensation expense, a non-cash expense, increased by ~~$5,532,000~~$44,108,000 from ~~$18,099,000~~$23,631,000 during the nine months ended June 30, ~~2020~~2021 to ~~$23,631,000~~$67,739,000 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~~decreased by ~~$423,000~~$174,000 from ~~$154,000~~$577,000 during the three months ended June 30, ~~2020~~2021 to ~~$577,000~~$403,000 during the current period. Depreciation and amortization expense, a noncash expense, increased by ~~$431,000~~$323,000 from ~~$456,000~~$887,000 during the nine months ended June 30, ~~2020~~2021 to ~~$887,000~~$1,210,000 during the current period. The ~~increase~~decrease in depreciation expense in the current quarter is ~~primarily related~~due to ~~amortization~~reclassification of ~~leasehold improvements for our corporate headquarters.~~

certain depreciation from general and administrative to research and development.

Other ~~Income/Expense~~

Income

Other ~~income/expense was~~ income ~~of $2,335,000~~decreased by $1,080,000 from $1,944,000 during the three months ended June 30, ~~2020 compared~~2021 to ~~income of $1,944,000~~$863,000 during the current period. Other ~~income/expense was~~ income ~~of $6,920,000~~decreased by $2,554,000 from $6,679,000 during the nine months ended June 30, ~~2020~~2021 compared to ~~income of $6,679,000~~$4,125,000 during the current period. Other income is primarily related to interest income and realized and unrealized gain/loss on our marketable securities.

The decrease in other income is due to lower yields on more recently purchased bonds and increase in realized loss on the sale of 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 plans to expand its facilities with its purchase of land in Verona, Wisconsin, and its entry into a new lease in San Diego, California. Each of these expansions is designed to increase the ~~future.~~

Company’s internal manufacturing and discovery capabilities, and each will require significant capital investment.

At June 30, ~~2021,~~2022, the ~~Company had~~Company's cash ~~on hand of~~and cash equivalents totalled approximately ~~$326.0~~$139.4 million as compared to ~~$143.6~~$184.4 million at September 30, ~~2020.~~2021. Cash invested in short-term fixed income securities and marketable securities was ~~$190.3~~$277.1 million at June 30, ~~2021,~~2022, compared to ~~$171.9~~$183.4 million at September 30, ~~2020.~~2021. Cash invested in long-term fixed income securities was ~~$128.4~~$165.9 million at June 30, ~~2021,~~2022, compared to ~~$137.5~~$245.6 million at September 30, ~~2020.~~2021. The Company also entered into an Open Market Sale Agreement (the “ATM ~~agreement”~~Agreement”) in August 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 through Jefferies LLC. As of June 30, ~~2021,~~2022, no shares have been ~~issued~~sold under the ATM ~~agreement.~~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 nine months ended June 30, ~~2021~~2022 and ~~2020~~2021 is as follows:

Nine Months Ended

Nine Months Ended

June 30, 2021

June 30, 2020

(in thousands)

Cash Flow from:

Operating Activities

195,341

(84,541
)
Investing Activities

(23,433
)

(174,883
)
Financing Activities

10,490

256,943

Net Increase (decrease) in cash and cash equivalents

182,398

(2,481
)
Cash and cash equivalents at beginning of period

143,583

221,804

Cash and cash equivalents at end of period

325,981

219,323


	Nine Months Ended June 30, 2022	Nine Months Ended June 30, 2021
	(in thousands)
Cash flow from:
Operating activities	(67,464)	195,341
Investing activities	(41,862)	(23,433)
Financing activities	64,331	10,490
Net increase (decrease) in cash and cash equivalents	(44,995)	182,398
Cash and cash equivalents at beginning of period	184,434	143,583
Cash and cash equivalents at end of period	139,439	325,981

During the nine months ended June 30, 2022, cash flow used by operating activities was $67.5 million, which was primarily due to the receipt of the $120.0 million upfront payment from GSK, offset by the ongoing expenses related to the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $41.9 million, which was primarily related to the purchase of property and equipment of $20.1 million and net sales of investments of $21.8 million. Cash provided by financing activities of $64.3 million was primarily related to the formation of our joint venture, Viserna, as well as cash received from stock option exercises.

During the nine months ended June 30, 2021, cash flow provided by operating activities was $195.3 million, which was primarily due to the $300 million payment received under the Takeda License Agreement, ~~and the $10 million milestone payment from Janssen for ARO-JNJ1,~~ partially offset by ongoing expenses of the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $23.4 million, which was primarily related to the purchase of property and equipment of $15.4 million, partially offset by the net ~~purchase~~sales of investments of $8.1 million. Cash provided by financing activities of $10.5 million was related to cash received from stock option exercises.

~~During~~

On December 20, 2021, the ~~nine~~Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is planned to be the site of an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility to support process development and analytical activities. Arrowhead intends to invest between $200 million and $250 million into the buildout of the facilities. As part of this acquisition, the Company also entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the TIF district, and will be reimbursed by the City of Verona by future tax increment revenue generated from the developed property. The total amount of funding that City of Verona will pay as reimbursements under the TIF program for these improvements is not guaranteed and will depend on future tax revenues generated from the developed property.

Capital Resources and Material Cash Requirements

A summary of our capital resources and material cash requirements is presented in Item 7 of our Annual Report on Form 10-K for our fiscal year ended September 30, 2021. Other than as described above, there were no material changes to our capital resources and material cash requirements during the three months ended June 30, 2020, the Company used $84.5 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 $174.9 million, which was primarily related to the purchase of fixed-income investments of $194.0 million and property and equipment of $10.1 million, partially offset by the maturity of $29.1 million of fixed-income securities. Cash provided by financing activities of $256.9 million was driven by the Company’s securities financing in December 2019, which generated $250.5 million in net cash proceeds, as well as $6.5 million in cash received from stock option exercises.

~~Off-Balance Sheet Arrangements~~

~~We do not have any off-balance sheet arrangements.~~

2022.

~~ITEM 3.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report on Form 10-K for the year ended September 30, ~~2020.~~

2021.

~~ITEM 4.~~

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized

and reported within the time periods specified in ~~SEC~~Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer where appropriate, to allow timely decisions regarding required disclosure.

No change in the Company’s internal controls over financial reporting (as defined in ~~Rule~~Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

~~ITEM 1.~~

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty. There have been no material developments in the legal proceedings that we disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended September 30, ~~2020.~~

2021.

~~ITEM 1A.~~

ITEM 1A. Risk Factors

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended September 30, ~~2020.~~2021 as updated by our Quarterly Report on Form 10-Q for the period ended March 31, 2022. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, ~~2020,~~2021 and in Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2022, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business.

~~ITEM 2.~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

~~ITEM 3.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~ITEM 4.~~

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

~~ITEM 5.~~

ITEM 5. OTHER INFORMATION

~~None.~~

None.

~~ITEM 6.~~

ITEM 6. EXHIBITS

Exhibit Number	~~Document Description~~
Exhibit Number		Document Description
~~10.1~~		Form of Performance RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*
31.1*
~~10.2~~	Form of Stock Option Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*

~~10.3~~	Form of RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*

~~10.4~~	~~Collaboration and License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Horizon Therapeutics Ireland DAC, dated June 18, 2021~~*†

~~31.1~~	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002

~~31.2~~ 31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*2002

~~32.1~~ 32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**2002

~~32.2~~ 32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**2002

~~101.INS~~ 101.INS*		Inline XBRL Instance Document

~~101.SCH~~ 101.SCH*		Inline XBRL Taxonomy Extension Schema Document* Document

~~101.CAL~~ 101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document*Document

~~101.LAB~~ 101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document*Document

~~101.PRE~~ 101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document*Document

~~101.DEF~~ 101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document*Document

~~104~~ 104*		The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL (included as Exhibit 101)*

*	~~Filed herewith~~

**	~~Furnished herewith~~

_________________

†*Filed herewith.

Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.

**Furnished herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August ~~5, 2021~~

4, 2022


			ARROWHEAD PHARMACEUTICALS, INC.

			By:						/s/ Kenneth A. Myszkowski
									Kenneth A. Myszkowski Chief Financial Officer
									(Principal Financial Officer and Duly Authorized Officer)

Held to Maturity	As of June 30, 2021
	(In thousands)
	Amortized Cost		Gross Unrealized Gains		��	Gross Unrealized Losses			Fair Value
Commercial notes (due within one year)	$	63,924	$	711		$	-		$	64,635
Commercial notes (due within one through three years)	$	78,376	$	1,996		$	-		$	80,372
Certificate of deposit (due within two years)	$	50,000	$	-		$	-		$	50,000
Total	$	192,300	$	2,707		$	-		$	195,007

	As of September 30, 2020
	(In thousands)
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Commercial notes (due within one year)	$	86,890	$	1,590		$	-		$	88,480
Commercial notes (due within one through three years)	$	137,487	$	4,573		$	(79	)	$	141,981
Total	$	224,377	$	6,163		$	(79	)	$	230,461

	Nine Months Ended			Nine Months Ended
	June 30, 2021			June 30, 2020
	(in thousands)
Cash Flow from:
Operating Activities		195,341			(84,541	)
Investing Activities		(23,433	)		(174,883	)
Financing Activities		10,490			256,943
Net Increase (decrease) in cash and cash equivalents		182,398			(2,481	)
Cash and cash equivalents at beginning of period		143,583			221,804
Cash and cash equivalents at end of period		325,981			219,323