Stock-Based Compensation

6 Months Ended

Mar. 31, 2023

Share-Based Payment Arrangement [Abstract]

Stock-Based Compensation

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”), 173,983 and 3,518,957 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 March 31, 2023.

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 March 31, 2023, the total number of shares reserved for issuance under the 2021 Incentive Plan was 6,126,788 shares, which includes 139,053 shares that were forfeited under the 2013 Plan.

In addition, there were 743,726 shares reserved for options and 738,875 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 March 31, 2023
	2004 Plan	2013 Plan	2021 Plan	Inducement Awards	Total
Granted and outstanding awards:
Options	173,983	1,629,457	35,151	743,726	2,582,317
Restricted stock units	—	1,889,500	1,701,968	738,875	4,330,343
Total	173,983	3,518,957	1,737,119	1,482,601	6,912,660

Stock Option Awards

The following table presents a summary of the stock option activity for the six months ended March 31, 2023:

	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	32,151	33.03
Cancelled or expired	(25,581)	58.07
Exercised	(145,637)	7.50
Outstanding at March 31, 2023	2,582,317	$	21.26	4.5 years	$	30,107,439
Exercisable at March 31, 2023	2,348,193	$	18.75	4.2 years	$	30,100,306

The aggregate intrinsic values represents the amount by which the market price of the underlying stock exceeds the exercise price of the option. The total intrinsic value of the options exercised during the three months ended March 31, 2023 and 2022 was $1.4 million and $10.8 million, respectively. The total intrinsic value of the options exercised during the six months ended March 31, 2023 and 2022 was $3.6 million and $23.3 million, respectively.

Stock-based compensation expense related to stock options outstanding for the three months ended March 31, 2023 and 2022, was $2.2 million and $2.7 million, respectively. Stock-based compensation expense related to stock options for the six months ended March 31, 2023 and 2022 was $4.6 million and $5.7 million, respectively.

As of March 31, 2023, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $7.6 million will be recognized in the Company’s results of operations over a weighted average period of 1.0 year.

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 Back-Scholes option pricing model:

	Six Months Ended March 31,
	2023			2022
Expected dividend yield(1)	—			N/A
Risk-free interest rate(2)	3.69		%	N/A
Expected volatility(3)	86.4		%	N/A
Expected term (in years)(4)	6.25			N/A
Weighted average grant date fair value per share of options granted (5)	$	24.80		N/A

(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 six months ended March 31, 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 Per Share
Outstanding at September 30, 2022	4,069,431	$	62.96
Granted	1,098,544	34.67
Vested	(763,132)	54.20
Forfeited	(74,500)	57.28
Outstanding at March 31, 2023	4,330,343	$	57.62

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 March 31, 2023 and 2022, the Company recorded $18.4 million and $28.2 million of expense related to RSUs, respectively. For the six months ended March 31, 2023 and 2022, the Company recorded $35.4 million and $49.7 million of expense related RSUs, respectively. As of March 31, 2023, there was $153.6 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.5 years.