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4-Traders Homepage  >  Equities  >  Nasdaq  >  Arrowhead Pharmaceuticals Inc    ARWR

ARROWHEAD PHARMACEUTICALS INC (ARWR)
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ARROWHEAD PHARMACEUTICALS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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02/09/2018 | 10:17pm CEST
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," "could," "estimate," or "continue" or the negative 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 businesses, 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. As such, our actual results
may differ significantly 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 described in other documents we file from time to time with the Securities
and Exchange Commission ("SEC"), including subsequent quarterly reports on Form
10-Q. 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.

Overview 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, or RNAi, is a mechanism present in living cells that
inhibits the expression of a specific gene, thereby affecting the production of
a specific protein. Deemed to be one of the most important recent discoveries in
life science with the potential to transform medicine, the discoverers of RNAi
were awarded a Nobel Prize in 2006 for their work. Arrowhead's RNAi-based
therapeutics leverage this natural pathway of gene silencing. The company's
pipeline includes ARO-HBV for chronic hepatitis B virus, ARO-AAT for liver
disease associated with alpha-1 antitrypsin deficiency (AATD), ARO-APOC3 and
ARO-ANG3 for hypertriglyceridemia, ARO-Lung1 for an undisclosed pulmonary
target, ARO-HIF2 for renal cell carcinoma, ARO-F12 for hereditary angioedema and
thromboembolic disorders, and ARO-AMG1 for an undisclosed genetically validated
cardiovascular target under a license and collaboration agreement with Amgen,
Inc., a Delaware corporation ("Amgen"). ARO-LPA (AMG 890) for cardiovascular
disease was out-licensed to Amgen in 2016.

Arrowhead operates a lab facility in Madison, Wisconsin, where the Company's
research and development activities, including the development of RNAi
therapeutics, are based. The Company's principal executive offices are located
in Pasadena, California.

In fiscal 2017, Arrowhead refocused its resources on therapeutics that
exclusively utilize the company's Targeted RNAi Molecule (TRiMTM) platform
technology. Therapeutics built on the TRiMTM platform have demonstrated high
levels of pharmacologic activity in multiple animal models spanning several
therapeutic areas. TRiMTM enabled therapeutics offer several potential
advantages over prior generation and competing technologies, including:
simplified manufacturing and reduced costs; multiple routes of administration
including subcutaneous injection and inhaled administration; the ability to
target multiple tissue types including liver, lung, and tumors; and the
potential for improved safety and reduced risk of intracellular buildup, because
there are less metabolites from smaller, simpler molecules. As part of an R&D
day in September 2017, the Company introduced its new TRiMTM platform and made
the following announcements regarding its pipeline candidates:

- ARO-AAT, Arrowhead's second generation subcutaneously administered

clinical candidate for the treatment of alpha-1 antitrypsin deficiency

liver disease, achieved up to 92% knockdown in monkeys, thought to be near

complete suppression of hepatic production of the alpha-1 antitrypsin

        protein. In non-GLP rat and monkey exploratory toxicology studies, no
        changes in clinical chemistries or histopathology suggestive of organ
        toxicity were observed at doses up to 300 mg/kg (100x expected human
        dose).

- ARO-HBV, Arrowhead's third generation subcutaneously administered clinical

candidate for the treatment of chronic hepatitis B virus infection,

achieved up to 99.9% knockdown of hepatitis B surface antigen (HBsAg),

e-antigen (HBeAg), and HBV DNA in rodent models. In a non-GLP rat

exploratory toxicology study, no changes in clinical chemistries or

histopathology changes suggestive of organ toxicity were observed at doses

        up to 300 mg/kg (75-100x expected human dose).


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- Arrowhead has expanded its cardiovascular disease portfolio utilizing the

TRiM™ platform. ARO-APOC3, targeting apolipoprotein C-III, and ARO-ANG3,

targeting angiopoietin-like protein 3 (ANGPTL3) will be added to ARO-LPA

(AMG 890) and ARO-AMG1, which are both partnered with Amgen. ARO-APOC3 and

ARO-ANG3 will both be developed for the treatment of hypertriglyceridemia.

- ARO-Lung1, the first generation candidate against an undisclosed gene

target in the lung, reached almost 90% target knockdown following inhaled

administration in rodents.

- The ARO-HIF2 candidate targeting renal cell carcinoma achieved 85% target

gene knockdown in a rodent tumor model.

During the first quarter of fiscal 2018, the Company filed Clinical Trial Applications (CTAs) for ARO-AAT and ARO-HBV to begin a phase 1 clinical study and a phase 1 / 2 clinical study for each program, respectively. These applications represent the first of five planned regulatory submissions to advance our pipeline candidates into clinical trials over the next 12 months.

The Company's collaboration agreements with Amgen also continue to progress as
it relates to the ARO-LPA (AMG 890) and ARO-AMG1 candidates. Under the terms of
the agreements taken together, the Company has received $35 million in upfront
payments and $21.5 million in the form of an equity investment by Amgen in the
Company's Common Stock, and could receive up to $617 million in option payments
and development, regulatory and sales milestone payments. The Company is further
eligible to receive single-digit royalties for sales of products under the
ARO-AMG1 agreement and up to low double-digit royalties for sales of products
under the ARO-LPA (AMG 890) Agreement.

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 contracted to third-party manufactures when cGMP production is
required. 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 "program costs". If the
clinical candidates progress through human testing, program costs will
increase.

Net losses were $13.2 million and $12.1 million during the three months ended
December 31, 2017 and 2016, respectively. Diluted losses per share were $0.18
and $0.17 during the three months ended December 31, 2017 and 2016,
respectively.

The Company strengthened its liquidity and financial position through an equity
offering completed in January 2018, which generated approximately $56.7 million
of net cash proceeds for the Company.  These cash proceeds secured the funding
needed to continue to advance our preclinical and clinical candidates. The
Company had $11.5 million of cash and cash equivalents, $39.2 million of
short-term investments and $88.2 million of total assets as of December 31,
2017, as compared to $24.8 million, $40.8 million and $104.0 million as of
September 30, 2017, respectively. Based upon the Company's current cash
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

Management makes certain judgments and uses certain estimates and assumptions
when applying GAAP in the preparation of our Consolidated Financial Statements.
We evaluate our estimates and judgments on an ongoing basis and base our
estimates on historical experience and on assumptions that we believe to be
reasonable under the circumstances. Our experience and assumptions form the
basis for our judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may vary from what
we anticipate and different assumptions or estimates about the future could
change our reported results. We believe the following accounting policies are
the most critical to us, in that they require our most difficult, subjective or
complex judgments in the preparation of our consolidated financial statements.
For further information, see Note 1, Organization and Significant Accounting
Policies, to our Consolidated Financial Statements, which outlines our
application of significant accounting policies.

Revenue Recognition

Revenue from product sales is recorded when persuasive evidence of an arrangement exists, title has passed and delivery has occurred, a price is fixed and determinable, and collection is reasonably assured.

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The Company may generate revenue from technology licenses, collaborative research and development arrangements, research grants and product sales. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, manufacturing and development services and various milestone and future product royalty or profit-sharing payments. These agreements are generally referred to as "multiple element arrangements".



The Company applies the accounting standard on revenue recognition for multiple
element arrangements. The fair value of deliverables under the arrangement may
be derived using a best estimate of selling price if vendor specific objective
evidence and third-party evidence is not available. Deliverables under the
arrangement will be separate units of accounting if a delivered item has value
to the customer on a standalone basis and if the arrangement includes a general
right of return for the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the Company's
control.



The Company recognizes upfront license payments as revenue upon delivery of the
license only if the license has standalone value from any undelivered
performance obligations and that value can be determined. The undelivered
performance obligations typically include manufacturing or development services
or research and/or steering committee services. If the fair value of the
undelivered performance obligations can be determined, then these obligations
would be accounted for separately. If the license is not considered to have
standalone value, then the license and other undelivered performance obligations
would be accounted for as a single unit of accounting.  In this case, the
license payments and payments for performance obligations are recognized as
revenue over the estimated period of when the performance obligations are
performed or deferred indefinitely until the undelivered performance obligation
is determined.



Whenever the Company determines that an arrangement should be accounted for as a
single unit of accounting, the Company determines the period over which the
performance obligations will be performed and revenue will be recognized.
Revenue is recognized using a proportional performance or straight-line method.
The proportional performance method is used when the level of effort required to
complete performance obligations under an arrangement can be reasonably
estimated. The amount of revenue recognized under the proportional performance
method is determined by multiplying the total payments under the contract,
excluding royalties and payments contingent upon achievement of milestones, by
the ratio of the level of effort performed to date to the estimated total level
of effort required to complete performance obligations under the arrangement. If
the Company cannot reasonably estimate the level of effort to complete
performance obligations under an arrangement, the Company recognizes revenue
under the arrangement on a straight-line basis over the period the Company is
expected to complete its performance obligations. Significant management
judgment is required in determining the level of effort required under an
arrangement and the period over which the Company is expected to complete its
performance obligations under an arrangement.



Many of the Company's collaboration agreements entitle the Company to additional
payments upon the achievement of development, regulatory and sales
performance-based milestones. If the achievement of a milestone is considered
probable at the inception of the collaboration, the related milestone payment is
included with other collaboration consideration, such as upfront fees and
research funding, in the Company's revenue calculation. Typically, these
milestones are not considered probable at the inception of the collaboration. As
such, milestones will typically be recognized in one of two ways depending on
the timing of when the milestone is achieved. If the milestone is achieved
during the performance period, then the Company will only recognize revenue to
the extent of the proportional performance achieved at that date, or the
proportion of the straight-line basis achieved at that date, and the remainder
will be recorded as deferred revenue to be amortized over the remaining
performance period. If the milestone is achieved after the performance period
has completed and all performance obligations have been delivered, then the
Company will recognize the milestone payment as revenue in its entirety in the
period the milestone was achieved.



Deferred revenue will be classified as part of Current or Long-Term Liabilities
in the accompanying Consolidated Balance Sheets based on the Company's estimate
of the portion of the performance obligations regarding that revenue will be
completed within the next 12 months divided by the total performance period
estimate. This estimate is based on the Company's current operating plan and, if
the Company's operating plan should change in the future, the Company may
recognize a different amount of deferred revenue over the next 12-month period.

Impairment of Long-lived Assets

We review long-lived assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of assets may not be
fully recoverable or that our assumptions about the useful lives of these assets
are no longer appropriate. If impairment is indicated, recoverability is
measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.

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Impairment of Intangible assets

Intangible assets consist of license agreements and patents acquired in
conjunction with a business or asset acquisition. Intangible assets are
monitored for potential impairment whenever events or circumstances indicate
that the carrying amount may not be recoverable, and are also reviewed annually
to determine whether any impairment is necessary. Based on ASU 2012-02, the
annual review of intangible assets is performed via a two-step process. First, a
qualitative assessment is performed to determine if it is more likely than not
that the intangible asset is impaired. If required, a quantitative assessment is
performed and, if necessary, impairment is recorded.

Stock-Based Compensation

We account for stock-based compensation arrangements in accordance with FASB ASC
718, which requires the measurement and recognition of compensation expense for
all share-based payment awards to be based on estimated fair values. The Company
uses the Black-Scholes option valuation model to estimate the fair value of its
stock options at the date of grant. The Black-Scholes option valuation model
requires the input of subjective assumptions to calculate the value of stock
options. For restricted stock units, the value of the award is based on the
Company's stock price at the grant date. For performance-based restricted stock
unit awards, the value of the award is based on the Company's stock price at the
grant date. The Company uses historical data and other information to estimate
the expected price volatility for stock option awards and the expected
forfeiture rate for all awards. Expense is recognized over the vesting period
for all awards, and commences at the grant date for time-based awards and upon
the Company's determination that the achievement of such performance conditions
is probable for performance-based awards. This determination requires
significant judgement by management.

Derivative Assets and Liabilities

We account for warrants and other derivative financial instruments as either
equity or assets/liabilities based upon the characteristics and provisions of
each instrument. Warrants classified as equity are recorded as additional
paid-in capital on our Consolidated Balance Sheet and no further adjustments to
their valuation are made. Some of our warrants were determined to be ineligible
for equity classification because of provisions that may result in an adjustment
to their exercise price. Warrants classified as derivative liabilities and other
derivative financial instruments that require separate accounting as assets or
liabilities are recorded on our Consolidated Balance Sheet at their fair value
on the date of issuance and are revalued on each subsequent balance sheet date
until such instruments are exercised or expire, with any changes in the fair
value between reporting periods recorded as other income or expense. We estimate
the fair value of these assets/liabilities using option pricing models that are
based on the individual characteristics of the warrants or instruments on the
valuation date, as well as assumptions for expected volatility, expected life
and risk-free interest rate. Changes in the assumptions used could have a
material impact on the resulting fair value. The primary input affecting the
value of our derivatives liabilities is the Company's stock price.

Contingent Consideration

The consideration for our acquisitions often includes future payments that are
contingent upon the occurrence of a particular event. For example, milestone
payments might be based on progress of clinical development, the achievement of
various regulatory approvals or future sales milestones, and royalty payments
might be based on drug product sales levels. The Company records a contingent
consideration obligation for such contingent payments at fair value on the
acquisition date. The Company estimates the fair value of contingent
consideration obligations through valuation models designed to estimate the
probability of the occurrence of such contingent payments based on various
assumptions and incorporating estimated success rates. Estimated payments are
discounted using present value techniques to arrive at estimated fair value at
the balance sheet date. Changes in the fair value of our contingent
consideration obligations are recognized within our Consolidated Statements of
Operations. Changes in the fair value of the contingent consideration
obligations can result from changes to one or multiple inputs, including
adjustments to the discount rates, changes in the amount or timing of expected
expenditures associated with product development, changes in the amount or
timing of cash flows from products upon commercialization, changes in the
assumed achievement or timing of any development milestones, changes in the
probability of certain clinical events and changes in the assumed probability
associated with regulatory approval. These fair value measurements are based on
significant inputs not observable in the market. Substantial judgment is
employed in determining the appropriateness of these assumptions as of the
acquisition date and for each subsequent period. Accordingly, changes in
assumptions could have a material impact on the amount of contingent
consideration expense the Company records in any given period.

                                       21

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Results of Operations

The following data summarize our results of operations for the following periods
indicated:



                                         Three Months Ended       Three Months Ended
                                          December 31, 2017       December 31, 2016
   Revenue                              $         3,509,821     $        4,365,496
   Operating Loss                               (13,813,348 )          (14,901,887 )
   Net Loss                                     (13,198,878 )          (12,086,108 )
   Loss per Share (Basic and Diluted)   $             (0.18 )   $           

(0.17 )


Our operating results were relatively consistent period over period. Operating
Expenses were reduced given our clinical trial discontinuation in 2016, however
this reduction was more than offset by reductions in Other Income and Revenue
discussed further below.

Revenue

Total revenue was $3,509,821 and $4,365,496 for the three months ended December
31, 2017 and 2016, respectively. Revenue in the current period is primarily
related to the upfront payments received from Amgen in 2016 that we are
recognizing as Revenue as performance is completed for the ARO-LPA (AMG-890) and
ARO-AMG1 Agreements. The decrease in our Revenue during the three months ended
December 31, 2017 was driven by a reduction in the amount of Revenue recognized
associated with the $30 million upfront payment received from Amgen associated
with the ARO-LPA (AMG-890) Agreement. We recognized Revenue from the ARO-LPA
(AMG-890) Agreement on a straight-line basis as performance was completed from
November 2016 thru October 2017.

Under the terms of the ARO-LPA (AMG 890) Agreement, the Company has granted a
worldwide, exclusive license to ARO-LPA (AMG 890) . The collaboration between
the Company and Amgen is governed by a joint research committee comprised of an
equal number of representatives from each party; however, Amgen has the final
decision making authority regarding ARO-LPA (AMG 890) in this committee. The
Company is also responsible for assisting Amgen in the oversight of certain
development and manufacturing activities, most of which are to be covered at
Amgen's cost. The Company has determined that the significant deliverables under
the ARO-LPA (AMG 890) Agreement include the license and the oversight of certain
of the development and manufacturing activities. The Company also determined
that, pursuant to the accounting guidance governing revenue recognition on
multiple element arrangements, the license and collective undelivered activities
and services do not have standalone value due to the specialized nature of the
activities and services to be provided by the Company. Therefore, the
deliverables are not separable and, accordingly, the license and undelivered
services are being treated as a single unit of accounting. The Company
recognized revenue on a straight-line basis from November 18, 2016 (the
Hart-Scott-Rodino clearance date) through October 31, 2017, which is the date
where the significant development and manufacturing related deliverables were
completed. The Company received the upfront payment of $30 million due under
this agreement in November 2016. The initial $30 million payment was recorded as
Deferred Revenue, and $2.7 million of this was amortized into Revenue during the
three months ended December 31, 2017. During the three months ended December 31,
2016, $3.7 million of this payment was amortized into Revenue. The initial $30
million payment has been fully recognized, and no balance remains in Deferred
Revenue as of December 31, 2017.

Under the terms of the ARO-AMG1 Agreement, the Company has granted an option to
a worldwide, exclusive license to ARO-AMG1, an undisclosed genetically validated
cardiovascular target. The collaboration between the Company and Amgen is
governed by a joint steering committee comprised of an equal number of
representatives from each party. The Company is also responsible for developing,
optimizing and manufacturing the candidate through certain preclinical efficacy
and toxicology studies to determine whether the candidate the Company has
developed meets the required criteria as defined in the agreement (the
"Arrowhead Deliverable"). If this is achieved, Amgen will then have the option
to an exclusive license for the intellectual property generated through the
Company's development efforts, and will likely assume all development,
regulatory and commercialization efforts for the candidate upon the option
exercise. The Company has determined that the significant deliverables under the
ARO-AMG1 Agreement include the license, the joint research committee and the
development and manufacturing activities toward achieving the Arrowhead
Deliverable. The Company also determined that, pursuant to the accounting
guidance governing revenue recognition on multiple element arrangements, the
license and collective undelivered activities and services do not have
standalone value due to the specialized nature of the activities and services to
be provided by the Company. Therefore, the deliverables are not separable and,
accordingly, the license and undelivered services are being treated as a single
unit of accounting. The Company will recognize revenue on a straight-line basis
from October 1, 2016, through September 30, 2018. The due date for achieving the
Arrowhead Deliverable is September 28, 2018. The Company received the upfront
payment of $5 million due under this agreement in September 2016. The initial $5
million payment was recorded as Deferred Revenue, and $0.6 million of this was
amortized into Revenue during the three months ended December 31, 2017. During
the three months ended December 31, 2016, $0.6 million of this payment was
amortized into Revenue. Of the initial $5 million payment, $1.9 million remains
in Deferred Revenue as of December 31, 2017.

                                       22

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The Company also entered into a separate services agreement and separate
statements of work with Amgen to provide certain services related to process
development, manufacturing, materials supply, discovery studies, and other
consulting services related to ARO-LPA (AMG 890) and ARO-AMG-1. During the three
months ended December 31, 2017, these work orders generated approximately $0.2
million of Revenue.

Operating Expenses

The analysis below details the operating expenses and discusses the expenditures
of the Company within the major expense categories. Certain reclassifications
have been made to prior period operating expense categories to conform to the
current period presentation. For purposes of comparison, the amounts for the
three months ended December 31, 2017 and 2016 are shown in the tables below.

Research and Development Expenses - Three months ended December 31, 2017 compared to the three months ended December 31, 2016

R&D expenses are related to the Company's on-going 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 facility in Madison, Wisconsin, including facility
costs and laboratory-related expenses. The following table provides details of
research and development expense for the periods indicated:

(in thousands, except percentages)


                             Three                             Three
                            Months                            Months
                             Ended        % of Expense         Ended        % of Expense          Increase (Decrease)
                           December                          December
                           31, 2017         Category         31, 2016         Category             $                %
Laboratory supplies &
services                  $       947                11 %   $       837                 9 %   $        110             13 %
In vivo studies                   680                 8 %           461                 5 %            219             48 %
Outside labs & contract
services                           73                 1 %           132                 1 %            (59 )          -45 %
Toxicity/efficacy
studies                         1,884                22 %           515                 5 %          1,369            266 %
Drug manufacturing              3,345                40 %         2,225                23 %          1,120             50 %
Clinical trials                   821                10 %         4,679                49 %         (3,858 )          -82 %
License, royalty &
milestones                         19                 0 %             -                 0 %             19            N/A
Facilities and related            594                 7 %           592                 6 %              2              0 %
Other research expenses            69                 1 %            86                 1 %            (17 )          -20 %
Total                     $     8,432               100 %   $     9,527               100 %   $     (1,095 )          -11 %


Laboratory supplies and services expense increased by $110,000 from $837,000
during the three months ended December 31, 2016 to $947,000 during the current
period. The increase in laboratory supplies and services is a result of
additional supply purchases necessary to support the expansion of the Company's
preclinical pipeline as well as the development of the subcutaneous versions of
its drug candidates.

In vivo studies expense increased by $219,000 from $461,000 during the three
months ended December 31, 2016 to $680,000 during the current period. In vivo
expense can vary depending on the stage of preclinical candidates, the nature
and amount of testing required and the cost variation of different in vivo
testing models. The increase in in vivo studies in the current period is a
result of additional discovery studies being conducted for the Company's
subcutaneous candidates.

Outside labs and contract services expense decreased by $59,000 from $132,000
during the three months ended December 31, 2016 to $73,000 during the current
period. The decrease in outside labs and contract services in the current period
is a result of additional discovery work being conducted in-house for the
Company's subcutaneous candidates.

Toxicity/efficacy studies expense increased by $1,369,000 from $515,000 during
the three months ended December 31, 2016 to $1,884,000 during the current
period. This category includes IND-enabling toxicology studies as well as
post-IND toxicology studies, such as long-term toxicology studies, and other
efficacy studies. The increase primarily relates to toxicology studies for
ARO-AAT and ARO-HBV as each candidate moves toward clinical trials. We
anticipate this expense to increase as we prepare to enter clinical trials with
our new subcutaneous drug candidates.

                                       23

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Drug manufacturing expense increased by $1,120,000 from $2,225,000 during the
three months ended December 31, 2016 to $3,345,000 during the current
period. The increase primarily relates to manufacturing campaigns for ARO-AAT
and ARO-HBV as each candidate moves toward clinical trials. We anticipate this
expense to increase as we prepare to enter clinical trials with our new
subcutaneous drug candidates.

Clinical trials expense decreased by $3,858,000 from $4,679,000 during the three
months ended December 31, 2016 to $821,000 during the current period. The
decrease is primarily due to the discontinuation of our previous clinical
candidates, and the close out of those studies. We anticipate this expense to
increase as we prepare to enter clinical trials with our new subcutaneous drug
candidates.

License, royalty and milestones expense increased by $19,000 from $0 during the
three months ended December 31, 2016 to $19,000 during the current period. This
category includes milestone payments which can vary from period to period
depending on the nature of our various license agreements, and the timing of
reaching various development milestones requiring payment. No significant
milestones were achieved in either period.

Facilities expense was consistent at $592,000 during the three months ended December 31, 2016 and $594,000 during the current period. This category includes rental costs for our research and development facility in Madison, Wisconsin.

Other research expense decreased by $17,000 from $86,000 during the three months
ended December 31, 2016 to $69,000 during the current period. The decrease
primarily relates to small non-recurring research expenses that occurred in the
previous period.

Salaries - Three months ended December 31, 2017 compared to the three months ended December 31, 2016

The Company employs scientific, technical and administrative staff at its
corporate offices and its research facility. Salaries and payroll-related
expense consists of salary, bonuses, payroll taxes and related benefits. Salary
and payroll-related expenses include two major categories based on the primary
activities of each employee: research and development (R&D) compensation expense
and general and administrative (G&A) compensation expense. The following table
provides details of salary and payroll-related expenses for the periods
indicated:

(in thousands, except percentages)



                          Three                          Three
                         Months           % of          Months           % of
                          Ended         Expense          Ended         Expense           Increase (Decrease)
                        December                       December
                        31, 2017        Category       31, 2016        Category          $                %
R&D -
compensation-related   $     2,811             71 %   $     3,249             76 %   $     (438 )            -13 %
G&A -
compensation-related         1,175             29 %         1,027             24 %          148               14 %
Total                  $     3,986            100 %   $     4,276            100 %   $     (290 )             -7 %




R&D compensation expense decreased by $438,000 from $3,249,000 during the three
months ended December 31, 2016 to $2,811,000 during the current period. The
decrease is primarily due to the reduction in force in December 2016 associated
with the discontinuation of our previous clinical candidates.

G&A compensation expense increased by $148,000 from $1,027,000 during the three
months ended December 31, 2016 to $1,175,000 during the current period.
Additional headcount and salary adjustments accounted for the majority of the
change in the current period.

                                       24
--------------------------------------------------------------------------------

General & Administrative Expenses - Three months ended December 31, 2017 compared to the three months ended December 31, 2016

The following table provides details of our general and administrative expenses for the periods indicated:

(in thousands, except percentages)


                           Three                             Three
                          Months                            Months
                           Ended        % of Expense         Ended        % of Expense         Increase (Decrease)
                         December                          December
                         31, 2017         Category         31, 2016         Category            $                %

Professional/outside

services                $       665                40 %   $       695                38 %   $      (30 )            -4 %
Patent expense                  348                21 %           287                16 %           61              21 %
Facilities and
related                          80                 5 %            81                 4 %           (1 )            -1 %
Travel                          172                10 %           180                10 %           (8 )            -4 %
Business insurance              133                 8 %           148                 8 %          (15 )           -10 %
Communication and
Technology                      135                 8 %           134                 7 %            1               1 %
Office expenses                  97                 6 %           314                17 %         (217 )           -69 %
Other                            41                 3 %            15                 1 %           26             173 %
Total                   $     1,671               100 %   $     1,854               100 %   $     (183 )           -10 %


Professional/outside services include legal, accounting, consulting and other
outside services retained by the Company. All periods include normally recurring
legal and audit expenses related to SEC compliance and other corporate matters.
Professional/outside services expense decreased by $30,000 from $695,000 during
the three months ended December 31, 2016 to $665,000 during the current period.
The decrease primarily related to small non-recurring professional fee charges
incurred in 2016.

Patent expense increased by $61,000 from $287,000 during the three months ended
December 31, 2016 to $348,000 during the current period. The Company continues
to invest in patent protection for its product candidates and other RNAi
technology through patent filings in numerous countries. The Company expects to
extend and maintain protection for its current portfolios, as appropriate, and
file new patent applications as technologies are developed and improved.
Expenses can vary from period to period as patents proceed through their
prosecution life cycle.

Facilities-related expense remained consistent at $81,000 and $80,000 in the
three months ended December 31, 2016 and 2017, respectively. Facilities expense
relates to recurring expenses associated with our corporate headquarters in
Pasadena, California.

Travel expense decreased by $8,000 from $180,000 during the three months ended
December 31, 2016 to $172,000 during the current period. Travel expense
decreased due to the discontinuation of our clinical trials in November 2016 and
reduction in R&D headcount. We anticipate this expense to increase as we prepare
to enter clinical trials with our new subcutaneous drug candidates.

Business insurance expense decreased by $15,000 from $148,000 during the three
months ended December 31, 2016 to $133,000 during the current period. Business
insurance costs decreased primarily due to the disconintuation of our clinical
trials in November 2016.

Communication and technology was consistent at $134,000 and $135,000 during the three months ended December 31, 2016 and 2017, respectively. This category includes costs associated with the Company's IT infrastructure.

Office expense decreased by $217,000 from $314,000 during the three months ended
December 31, 2016 to $97,000 during the current period. These expenses relate to
conferences/training, office supplies, miscellaneous administrative expenses,
and expenses related to office expansions at our R&D facility in Madison and our
corporate headquarters in Pasadena. The decrease is primarily related to moving
expenses for the Company's move to its facility in Madison, Wisconsin in late
2016.

Other expense increased by $26,000 from $15,000 during the three months ended
December 31, 2016 to $41,000 during the current period. This category consists
primarily of conference attendance fees, franchise and property tax expenses and
marketing expenses. The increase in other expense is primarily related to
conference attendance fees recorded during the three months ended December 31,
2017.

                                       25
--------------------------------------------------------------------------------

Stock-based compensation expense

Stock-based compensation expense, a noncash expense, was $2,424,442 and
$2,092,541 during the three months ended December 31, 2016 and 2017,
respectively. Stock-based 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 decrease in the expense is primarily due to lower grant date fair values of
recent awards due to the Company's stock price.

Depreciation and amortization expense

Depreciation and amortization expense, a noncash expense, was $1,185,611 and
$1,141,173 during the three months ended December 31, 2016 and 2017,
respectively. The majority of depreciation and amortization expense relates to
depreciation on lab equipment at our Madison research facility. In addition, the
Company records depreciation on leasehold improvements at its Madison research
facility and its Pasadena corporate headquarters. The expense was relatively
consistent period to period.

Other income / expense

Other income / expense was income of $2,815,779 and $614,470 during the three
months ended December 31, 2016 and 2017, respectively. The primary component of
other income during the three months ended December 31, 2016 was a change in the
value of derivative liabilities related to certain warrants with a price
adjustment feature, necessitating derivative accounting. The fluctuations were
primarily driven by changes in the Company's stock price, which had a
corresponding impact to the valuation of the underlying warrants. Additionally,
the Company recorded $1.3 million in other income due to an insurance settlement
related to one of the Company's recent litigation cases. The settlement amount
was received during the three months ended December 31, 2016.

Liquidity and Cash Resources

Arrowhead has historically financed its operations through the sale of its securities. Research and development activities have required significant capital investment since the Company's inception and are expected to continue to require significant cash investment.

At December 31, 2017, the Company had cash on hand of approximately $11.5
million as compared to $24.8 million at September 30, 2017. Excess cash invested
in fixed income securities was $39.2 million at December 31, 2017, compared to
$40.8 million at September 30, 2017. Additionally, on January 22, 2018, the
Company sold 11,500,000 shares of Common Stock in a fully underwritten public
offering, at a public offering price of $5.25 per share. Net proceeds to the
Company were approximately $56.7 million after deducting underwriting
commissions and discounts and other offering expenses payable by the
Company. 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 three months ended December 31, 2017 and 2016 is as follows:

© Edgar Online, source Glimpses

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