Stock-Based Compensation

3 Months Ended

Dec. 31, 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 3,991,304 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 December 31, 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 December 31, 2022, the total number of shares reserved for issuance under the 2021 Incentive Plan was 7,155,527 shares, which includes 136,972 shares that were forfeited under the 2013 Plan.

In addition, there were 762,150 shares reserved for options and 739,625 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 December 31, 2022
	2004 Plan	2013 Plan	2021 Plan	Inducement Awards	Total
Granted and outstanding awards:
Options	175,083	1,685,543	3,000	762,150	2,625,776
Restricted stock units	—	2,305,761	918,795	739,625	3,964,181
Total	175,083	3,991,304	921,795	1,501,775	6,589,957

Stock Option Awards

The following table presents a summary of the stock option activity for the three months ended December 31, 2022:


	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at September 30, 2022	2,721,384	$	20.73
Granted	—	—
Cancelled or expired	(13,875)	45.57
Exercised	(81,733)	7.04
Outstanding at December 31, 2022	2,625,776	$	21.02	4.7	$	61,867,396
Exercisable at December 31, 2022	2,346,710	$	17.83	4.4	$	60,525,256

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 December 31, 2022. The total intrinsic value of the options exercised during the three months ended December 31, 2022 and 2021 was $2.3 million and $12.5 million, respectively.

Stock-based compensation expense related to stock options oustanding for the three months ended December 31, 2022 and 2021, was $2.4 million and $3.0 million, respectively.

As of December 31, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $9.5 million will be recognized in the Company’s results of operations over a weighted average period of 1.3 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. No options were granted during the three months ended December 31, 2022 and 2021.

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 Per Share
Outstanding at September 30, 2022	4,069,431	$	62.96
Granted	18,875	31.77
Vested	(98,250)	51.70
Forfeited	(25,875)	44.70
Outstanding at December 31, 2022	3,964,181	$	63.31

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.

For the three months ended December 31, 2022 and 2021, the Company recorded stock-based compensation expense of $17.0 million and $21.5 million, respectively, related to shares of RSUs. As of December 31, 2022, there was $128.3 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.2 years.