Stock-Based Compensation

12 Months Ended

Sep. 30, 2022

Share-Based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION

The Company has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan (the “2004 Plan”) and 2013 Incentive Plan (the “2013 Plan”), 175,083 and 4,072,137 shares, respectively, of the Company’s common stock are reserved for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants and others as of September 30, 2022.

On March 18, 2021, the Company’s Board of Directors approved the Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan (the “2021 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 the Company’s common stock. The maximum number of shares authorized under the 2021 Plan will be (i) reduced by any shares subject to awards made under the 2013 Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 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 September 30, 2022, the total number of shares reserved for issuance under the 2021 Incentive Plan was 7,190,077 shares, which includes 131,897 shares that were forfeited under the 2013 Plan.

In addition, there were 778,425 shares reserved for options and 838,625 shares reserved for restricted stock units issued as inducement grants to new employees granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules.

The following table presents a summary of awards outstanding:


	As of September 30, 2022
	2004 Plan	2013 Plan	2021 Plan	Total
Granted and outstanding awards:
Options	175,083	2,543,301	3,000	2,721,384
Restricted stock units	—	3,145,886	923,545	4,069,431
Total	175,083	5,689,187	926,545	6,790,815

Stock Option Awards

The following table presents a summary of the stock option activity for the year ended September 30, 2022:


	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at September 30, 2021	3,456,239	$	19.60
Granted	—	—
Cancelled or expired	(128,635)	47.73
Exercised	(606,220)	8.55
Outstanding at September 30, 2022	2,721,384	$	20.73	4.9	$	48,114,746
Exercisable at September 30, 2022	2,351,641	$	16.93	4.5	$	46,889,825

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the stock option exercise price) that would have been received by the stock option holders had all stock options been exercised on September 30, 2022. The total intrinsic value of the options exercised during the years ended September 30, 2022, 2021, and 2020 was $27.6 million, $66.9 million and $44.1 million, respectively.

Stock-based compensation expense related to stock options for the years ended September 30, 2022, 2021, and 2020 was $10.8 million, $12.4 million and $9.7 million, respectively.

As of September 30, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $12.0 million will be recognized in the Company’s results of operations over a weighted average period of 1.5 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, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The following table provides the assumptions used in the calculation of grant-date fair values of these stock options based on the Black-Scholes option pricing model:


	Year Ended September 30,
	2022(5)	2021		2020
Expected dividend yield(1)	—	—		—
Risk-free interest rate(2)	N/A	0.4 – 1.1%		0.40 – 1.8%
Expected volatility(3)	N/A	86.2 – 90.4%		90.0 – 92.0%
Expected term (in years)(4)	N/A	6.25		6.25
Weighted-average grant date fair value per share	N/A	$	48.64	$	36.35

(1) The dividend yield is zero as the Company currently does not pay a dividend.

(2) The risk-free interest rate is based on that of the U.S. Treasury yields with equivalent terms in effect at the time of the grant..

(3) Volatility is estimated based on volatility average of the Company’s common stock price.

(4) The expected term represents the period of time that stock options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior.

(5) No options were granted during the year ended September 30, 2022.

Restricted Stock Units

Restricted stock units (“RSUs”), including market-based, time-based and performance-based awards, have been granted under the Company’s 2013 and 2021 Plans and as inducements grants granted outside of the Company’s equity-based compensation plans. 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
Outstanding as of September 30, 2021	3,831,850	$	61.24
Granted	1,396,170	57.18
Vested	(1,027,088)	49.88
Forfeited	(131,501)	64.44
Outstanding as of September 30, 2022	4,069,431	$	62.96

The fair value of RSUs was determined based on the closing price of the Company’s common stock on the grant date, with consideration given to the probability of achieving service and/or performance conditions for awards.

On July 8, 2022, the Company revised the equity award made to its Chief Executive Officer on January 1, 2022 consisting of 800,000 shares, equal in value of $38.4 million, that was 100% market-based awards. The revised awards consist of 99,521 RSUs and 149,282 performance-based RSUs. No incremental expense resulted from the modification. The fair values of these awards were estimated on the date of grant using a closed-form valuation model (Monte-Carlo).

For the years ended September 30, 2022, 2021 and 2020, the Company recorded stock-based compensation expense of $113.6 million, $64.2 million and $33.7 million, respectively, related to shares of RSUs. As of September 30, 2022, there was $140.7 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.4 years.