10-K 1 arwr-10k_20130930.htm 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2013.

¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-21898

ARROWHEAD RESEARCH CORPORATION

(Exact name of registrant as specified in its charter)

Delaware |  | 46-0408024
(State of incorporation) |  | (I.R.S. Employer Identification No.)

225 S. Lake Avenue, Suite 1050

Pasadena, California 91101

(626) 304-3400

(Address and telephone number of principal executive offices)

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

Title of each class |  | Name of each exchange on which registered
Common Stock, $0.001 par value |  | The NASDAQ Capital Market

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

None

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ |  | Accelerated filer ¨ |  | Non-accelerated filer ¨ |  | Smaller Reporting Company x

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

The aggregate market value of issuer’s outstanding Common Stock held by non-affiliates was approximately $38 million based upon the bid price of issuer’s Common Stock on March 31, 2013. Shares of common stock held by each officer and director and by each person who is known to own 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of December 16, 2013, 38,700,363 shares of the issuer’s Common Stock were outstanding.

TABLE OF CONTENTS

PART I |  |  |  |
I TEM 1. |  | B USINESS |  | 1
I TEM 1A. |  | R ISK F ACTORS |  | 23
I TEM 1B. |  | U NRESOLVED S TAFF C OMMENTS |  | 33
I TEM 2. |  | P ROPERTIES |  | 33
I TEM 3. |  | L EGAL P ROCEEDINGS |  | 33
I TEM 4. |  | M INE S AFETY D ISCLOSURES |  | 33
PART II |  |  |  |
I TEM 5. |  | M ARKET FOR THE R EGISTRANT’S C OMMON E QUITY, R ELATED S TOCKHOLDER M ATTERS AND I SSUER P URCHASES OF E QUITY S ECURITIES |  | 34
I TEM 6. |  | S ELECTED F INANCIAL D ATA |  | 34
I TEM 7. |  | M ANAGEMENT’S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS |  | 35
I TEM 7A. |  | Q UANTITATIVE AND Q UALITATIVE D ISCLOSURES A BOUT M ARKET R ISK |  | 42
I TEM 8. |  | F INANCIAL S TATEMENTS AND S UPPLEMENTARY D ATA |  | 42
I TEM 9. |  | C HANGES IN AND D ISAGREEMENTS WITH A CCOUNTANTS ON A CCOUNTING AND F INANCIAL D ISCLOSURE |  | 42
I TEM 9A. |  | C ONTROLS AND P ROCEDURES |  | 43
I TEM 9B. |  | O THER I NFORMATION |  | 43
PART III |  |  |  |
I TEM 10. |  | D IRECTORS, E XECUTIVE O FFICERS, AND C ORPORATE G OVERNANCE |  | 44
I TEM 11. |  | E XECUTIVE C OMPENSATION |  | 44
I TEM 12. |  | S ECURITY O WNERSHIP OF C ERTAIN B ENEFICIAL O WNERS AND M ANAGEMENT AND R ELATED S TOCKHOLDER M ATTERS |  | 44
I TEM 13. |  | C ERTAIN R ELATIONSHIPS, R ELATED T RANSACTIONS AND D IRECTORS I NDEPENDENCE |  | 44
I TEM 14. |  | P RINCIPAL A CCOUNTANT F EES AND S ERVICES |  | 44
PART IV |  |  |  |
I TEM 15. |  | E XHIBITS AND F INANCIAL S TATEMENT S CHEDULES |  | 44
SIGNATURES |  | F-1
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES |  | F-2

i

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. 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.

ii

PART I

ITEM 1. BUSINESS

Description of Business

OVERVIEW

Arrowhead Research Corporation is a biopharmaceutical company developing targeted RNAi therapeutics. The Company is leveraging its proprietary drug delivery technologies to develop drugs based on the RNA interference mechanism that efficiently silences disease-causing genes. These platforms have yielded several drug candidates under internal and partnered development. Arrowhead technologies also enable partners to create peptide-drug conjugates that specifically home to cell types of interest while sparing off-target tissues. Arrowhead’s pipeline includes clinical programs in chronic hepatitis B virus and partner-based programs in obesity and oncology.

Lead Product Candidate

· | ARC-520 is an RNAi-based therapeutic designed to treat chronic hepatitis B virus (HBV) infection. It is the first drug candidate from Arrowhead’s Dynamic Polyconjugate® siRNA delivery platform. It is designed to treat chronic HBV infection by reducing the expression and release of new viral particles and key viral proteins with the goal of achieving a functional cure. The Company completed its planned enrollment in a Phase 1 clinical trial in 2013 and expects to begin a Phase 2a trial in the first half of 2014 and a Phase 2b trial in the second half of 2014.

Platform Technologies

· | The Dynamic Polyconjugate (DPC®) platform is a small RNA delivery system that may be targeted to address multiple organ systems and cell types. It is a modular system that may be optimized on a target-by-target basis and has been demonstrated to promote multi-log gene knockdown, induce efficient endosomal escape, and has a favorable safety profile using a variety of siRNA molecules.

· | Arrowhead’s Homing Peptides platform is a vast, proprietary library of short peptides that have demonstrated rapid and specific internalization into a wide variety of cell types. This library is being mined for the potential targeting of RNAi therapeutics using the DPC delivery system as well as to enable partners to target traditional small molecule or peptide drugs.

Pipeline Development Strategy

Arrowhead’s internal drug pipeline is intended to drive value directly through the clinical development of novel therapeutics and to provide proof of concept for our platform technologies. Our core areas of focus for expanding our internal pipeline of RNAi therapeutics are: (1) develop intravenous (“IV”) administered liver-targeted candidates; (2) develop subcutaneously administered liver-targeted candidates; and (3) explore extra-hepatic targets, including oncology.

We actively seek collaboration and licensing agreements with leading biopharmaceutical companies to augment their pipelines through the application of our technologies and to advance the development and commercialization of our own technology platforms and drug candidates. Partnerships are intended to provide access to external expertise and capital to complement our internal development and create commercialization opportunities in areas outside of our core focus.

1

Recent Events

Arrowhead made significant progress on product and platform development during fiscal 2013 and focused our resources on advancing targeted RNAi therapeutics based on the DPC delivery system. The following are highlights of this progress:

· | Published data showing first ever cholesterol-siRNA mediated gene knockdown in primates using a novel DPC co-injection strategy;

· | Strengthened our balance sheet and expanded our institutional shareholder base with equity financings totaling $107.5 million in gross proceeds since the period ended September 30, 2012;

· | Signed a collaboration and license agreement with Shire AG providing them access to the Homing Peptide technology to develop peptide-targeted therapeutics for a rare disease target;

· | Strategically focused internal resources on expanding our pipeline of DPC-enabled RNAi therapeutics, while terminating development of the RONDEL delivery platform and its clinical candidate, CALAA-01;

· | Published preclinical data showing that a single injection of ARC-520 induces multi-log reductions of viral RNA, proteins, and viral DNA;

· | Expanded patent protection of ARC-520 and DPC platform extending through 2032;

· | Presented data on ARC-520 at the Annual Meeting of the American Association for the Study of Liver Diseases (AASLD) demonstrating reduction of key HBV antigens and DNA, and evidence of immune reactivation in a chimpanzee with chronic HBV infection;

· | Completed planned enrollment in a Phase 1 clinical trial indicating ARC-520 is generally safe and well-tolerated at all six dose levels studied, enabling the company to proceed with its plans to initiate a Phase 2a clinical trial;

· | Submitted for ethics and regulatory permission to initiate a Phase 2a pilot efficacy clinical trial in chronic HBV patients; and

· | Advanced our preclinical pipeline of RNAi therapeutics to include a lead program against an orphan liver disease.

Acquisition of Roche RNAi business

The last few years have brought substantial change to Arrowhead’s research and development (R&D) capabilities and strategy. We have transitioned from being a nanotechnology holding company in multiple industries to a focused biotech model. We are now a unified RNAi therapeutics company, developing novel drugs that silence disease causing genes based on our broad RNAi and peptide technology platforms.

The most significant step in this transition was our 2011 acquisition of Roche’s RNAi therapeutics business, which included the Dynamic Polyconjugate, or DPC, delivery system that we use in our hepatitis B drug candidate, ARC-520. Roche built this business unit in a manner that only a large pharmaceutical company is capable of: backed by expansive capital resources, they systematically acquired technologies, licensed expansive IP, attracted leading scientists, developed new technologies internally, and built state-of-the-art facilities. At a time when the markets were questioning whether RNAi could become a viable therapeutic modality, we saw great promise in the technology broadly and the quality of what Roche built specifically. The acquisition provided us with three primary sources of value:

(1) | Broad freedom to operate within three siRNA formats, canonical, meroduplex, and dicer substrate siRNA structures;

(2) | Best-in-class small RNA delivery system, the targetable DPC platform; and

(3) | A state-of-the-art R&D facility in Madison, Wisconsin, including a large team of scientists experienced in RNAi and siRNA delivery.

2

We see this as a powerful combination of intellectual property, R&D infrastructure, and RNAi delivery experts. It provided us with the tools we needed to build an independent and broad RNAi company. We believe we are the only company with access to all three siRNA structures and this enables us to optimize the RNAi trigger on a target-by-target basis. Our DPC delivery system enables us to deliver siRNA efficiently to hepatocytes and non-hepatic tissues in a highly specific manner. Our R&D team and facility enable rapid innovation and drive to the clinic, as evidenced by the speed at which we have advanced the ARC-520 program. As we look at the RNAi space, we do not see any company with as powerful and complete a combination of assets and capabilities as ours.

We have made great strides since the acquisition. We brought ARC-520 into the clinic, completed a Phase 1 trial, and we are in the process of initiating a Phase 2 trial. Additionally, we have made important advances in the DPC delivery technology. This includes new generations of DPCs capable of inducing deep and durable gene knockdown with various constructs designed for both IV and subcutaneous administration. A key to DPC’s potency, and one of its differentiating qualities, is a polymer backbone designed to induce efficient endosomal escape. This allows more of the siRNA to get into the cytosol where it can engage the cell’s RNAi machinery. We have also taken advantage of our DPC’s targetable nature and have made substantial progress toward extra-hepatic delivery.

Delivering outside the liver is important for maximizing the value of DPCs and to continue to differentiate Arrowhead from its competitors. Toward those ends, we have active programs to identify and evaluate targeting ligands that may be used with DPCs. As part of this initiative, in April 2012 we acquired Alvos Therapeutics, a privately held company that licensed a large platform of proprietary human-derived homing peptides from MD Anderson Cancer Center. This library contains peptides discovered through screening in human patients, and we are actively determining whether we could use these peptides to target DPCs.

We have focused our resources behind the DPC platform and our focus is entirely on advancing ARC-520 through the clinic and developing additional DPC-enabled RNAi therapeutics. Additionally, Arrowhead now has the infrastructure, expertise, IP portfolio, and management that we believe is necessary to attract and support a broad range of partnerships and research collaborations with large biopharma companies from discovery stage through clinical trials.

Pipeline Overview

Our internal preclinical and clinical development programs are designed to create value directly through our proprietary candidates. These programs also drive value to the technology platforms as proof of concept for the power of the programs to enable innovative new therapies.

3

Internal Clinical Program

ARC-520 – Hepatitis B Virus Infection

According to the World Health Organization, 360 million people worldwide are chronically infected with hepatitis B virus, of which 500,000 to 1,000,000 people die each year from HBV related liver disease. Chronic HBV infection is defined by the presence of hepatitis B surface antigen (HBsAg) for more than 6 months. In the immune tolerant phase of chronic infection, which can last for many years, the infected person typically produces very high levels of viral DNA and viral antigens. However, the infection is not cytotoxic and the carrier may have no symptoms of illness. Over time, the ongoing production of viral antigens causes inflammation and necrosis, leading to elevation of liver enzymes such as alanine and aspartate transaminases, hepatitis, fibrosis, and liver cancer (HCC). If untreated, as many as 25% to 40% of chronic carriers develop cirrhosis or HCC. Antiviral therapy is generally prescribed when liver enzymes become elevated.

The current standard of care for treatment of chronic HBV infection is a daily oral dose of nucleotide/nucleoside analogs (NUCs) or a regimen of interferon injections 2 to 7 times weekly for approximately one year. NUCs are generally well-tolerated, but patients may need lifetime treatment because viral replication often rebounds upon cessation of treatment. Interferon therapeutics can result in a functional cure in 10-20% of some patient types, but treatment is often associated with significant side effects, including severe flu-like symptoms, marrow suppression, and autoimmune disorders.

We see the need for a next generation HBV treatment with fewer side effects, that eliminates the need for interferon based treatment, has a finite treatment period and an attractive dosing regimen, and one that can be used at earlier stages of disease. We believe a novel therapeutic approach that can effectively treat or provide a functional cure (development of patient antibodies against HBsAg) has the potential to take significant market share and may expand the available market to include patients that are currently untreated.

ARC-520 is an siRNA therapeutic intended for delivery to the active site of infection using our proprietary Dynamic Polyconjugate (DPC) technology. ARC-520 consists of two siRNA duplexes, each conjugated to a cholesterol derivative to enhance liver delivery and cellular uptake. We have designed ARC-520 to be co-administered with an active excipient, a masked, hepatocyte targeted polymeric amine. Once the siRNAs and the active excipient are taken up by the hepatocytes, the polymeric amines are unmasked in the endosome and disrupt the endosomal membrane, releasing the siRNA to the cytoplasm where it can engage the RNAi machinery of the cell.

The siRNAs in ARC-520 are designed to target multiple components of HBV production including the pregenomic RNA that would be reverse transcribed to generate the viral DNA. The siRNAs intervene at the mRNA level, upstream of where NUCs act, and target the mRNAs that produce HBsAg proteins, the viral polymerase, the core protein that forms the capsid, the pre-genomic RNA and the HBeAg. NUCs are effective at reducing production of viral particles, but are ineffective at controlling production of viral antigens and other HBV gene products. A reduction of viral antigens is considered necessary to effective therapy because their presence is thought to be a major contributor to repression of the immune system and the persistence of liver disease secondary to HBV infection.

4

Chronic HBV Untreated:

ARC-520 Versus NUC Intervention:

5

Efficacy data in mouse models of HBV infection show that ARC-520 is capable of reducing HBsAg by greater than 3 log (99.9%), HBV DNA by approximately 3 logs, and HBeAg to the limit of detection. Pharmacologic effects persist for approximately one month after a single dose of ARC-520. Safety data in rodents and non-human primates indicate an acceptable safety margin.

Additional preclinical data in a chimpanzee chronically infected with HBV demonstrate that intravenous administration of two doses (2 mg/kg on day 1, and 3 mg/kg on day 15) of ARC-520, resulted in substantial and sustained reductions in HBV DNA, HBeAg, and HBsAg, which did not return to baseline until study day 43, 43, and 71, respectively. In addition, an increase in serum alanine transaminase (ALT) occurred 4 weeks after the second dose, coincident with the nadir of circulating HBsAg. This is suggestive of a therapeutic immunological flare, which is thought to be part of a cascade that under chronic therapy may lead to HBsAg seroconversion and functional cure. Observed increases in key chemokine/cytokine mRNAs are also consistent with a T-cell mediated immunological event.

Arrowhead completed its planned enrollment in a Phase 1 trial in the fall of 2013. The study was designed to characterize the safety profile of ARC-520 across a range of doses and evaluate pharmacokinetics. It was a single-center, randomized, double-blind, placebo-controlled, single dose-escalation, first-in-human study of ARC-520 administered intravenously to healthy adult volunteers. All subjects received either placebo or ARC-520 in doses ranging from 0.01 mg/kg to 2 mg/kg. The study was planned to enroll 36 subjects in six cohorts of six subjects each, with 2 subjects receiving placebo and 4 receiving ARC-520. The study successfully enrolled all 36 subjects (24 received ARC-520, 12 placebo) at a single center in Melbourne, Australia. All subjects received their full, assigned dose and there were no discontinuations for adverse events or otherwise.

Based on pre-clinical studies, including GLP toxicology, it is expected that if any clinically significant or dose-limiting toxicities were to occur, they would be observed within the first 24-48 hours after administration, and would be apparent in elevations in blood chemistries. The anticipated organs of interest for potential toxicity and the resultant chemistries are liver (ALT), kidney (creatinine, urea), and muscle (CK, AST, LDH, Troponin I). In the Phase 1 study, laboratory results have not indicated any organ toxicity involving the liver, kidney, or muscle in any subject.

There have been no serious or severe adverse events reported in any subject. Overall, adverse events have been consistent with those typically seen in normal volunteer studies, including in placebo subjects. The most common events reported were upper respiratory infection, (which were not unexpected as the trial was enrolled during the Australian winter), and headache. The only other event reported in more than one subject was mild lightheadedness. Neither occurrence was accompanied by any changes in vital signs, laboratories or physical examinations. Adverse events appear to have been randomly scattered across all six dosing groups with no apparent dose-related increases in occurrence rate or severity with the possible exception of mild lightheadedness. Both subjects with mild lightheadedness were in the 2 mg/kg group. Laboratory abnormalities have occurred sporadically across groups and time points pre- and post-dosing. None of these indicate any organ toxicity and the frequency and severity do not appear to be dose-related.

In the first half of 2014, Arrowhead plans to conduct a Phase 2a multicenter, randomized, double-blind, placebo-controlled, dose-escalation study to determine the depth and duration of hepatitis B surface antigen (HBsAg) reduction after a single intravenous dose of ARC-520 in combination with entecavir in patients with chronic HBV infection. The Company has conducted combination studies in mouse models of HBV, and ARC-520 appears to have at least additive and possibly a synergistic effect with entecavir. We also believe that a patient population with adequately controlled viral load, but uncontrolled antigenemia may provide us with a clear signal of ARC-520’s activity.

6

Chronic dose GLP-toxicology studies are underway to support a Phase 2b study planned to begin in the second half of 2014. That study is planned to have clinical sites in the US, Western Europe, Asia, and potentially other regions.

Partner-based Pipeline

Adipotide – Obesity and Metabolic Disorder

Adipotide has been developed by our majority-owned subsidiary, Ablaris Therapeutics, Inc. (“Ablaris”). Arrowhead owns 64% of the fully diluted shares of Ablaris. Adipotide is based on the Homing Peptide™ library developed at MD Anderson Cancer Center, the licensor, which is also funding and managing a Phase 1 clinical trial. Patient recruiting is on-going, and though internal resources are not being expended on this program, the Company continues to monitor its progress to determine whether it can be an attractive licensing candidate.

An Investigational New Drug Application (IND) for Adipotide was filed with the FDA, and patient enrollment began in 2012 as part of a Phase 1 clinical trial to test the safety of the compound in human patients. Our collaborator, MD Anderson Cancer Center in Houston, plans to enroll up to 39 obese prostate cancer patients in the Phase 1 study and has agreed to bear all direct costs of this trial. Up to five dose levels of the drug candidate will be tested in the trial. Three participants will be enrolled at each dose level, with the first group of participants receiving the lowest dose level by injection under the skin once per day for 28 days and each new group receiving a higher dose than the group before it, if no intolerable side effects are seen. This will continue until the highest tolerable dose is found or the study terminates.

Cyclosert and CRLX-101 (formerly IT-101)

The linear cyclodextrin-based drug delivery platform, Cyclosert, was designed for the delivery of small molecule drugs. In December 2008, we completed a Phase 1 trial with IT-101, a conjugate of the linear cyclodextrin polymer and Camptothecin, a potent anti-cancer drug, with a positive safety profile and indications of efficacy.

In June 2009, we entered into a transaction with Cerulean Pharmaceuticals, Inc., a privately held Boston, Massachusetts based company. Cerulean licensed rights to further research and commercialize IT-101 (now known as “CRLX-101”), and the Cyclosert platform for all products except for nucleic acids, tubulysin, cytolysin and second-generation epothilones. In connection with the transaction, we assigned certain patents to Cerulean and Cerulean granted back to us rights necessary to research and commercialize the excluded products.

7

We received an initial payment of $2.4 million, and may receive development and sales milestones, and royalty payments if CRLX-101 or other products based on the Cyclosert platform are successfully developed. Should Cerulean sublicense CRLX-101 to a third party, we are entitled to receive a percentage of any sublicensing income at rates between 10% and 40%, depending on the stage of the drug’s development at the time of sublicensing.

Cerulean has multiple active Phase 2 trials ongoing to study CRLX-101 in several cancer types, including: metastatic stomach, gastroesophageal, esophageal, small cell lung, ovarian, tubal, peritoneal, and renal cell.

Alnylam Pharmaceuticals

In January 2012, Arrowhead granted Alnylam Pharmaceuticals, Inc., (“Alnylam”) a license to utilize the Dynamic Polyconjugate delivery technology for a single RNAi therapeutic product. Alnylam is collaborating with Arrowhead to develop this technology for an undisclosed target in its "Alnylam 5x15" pipeline, which is focused on genetically defined targets and diseases. Alnylam has not publically disclosed what progress, if any, it may have made with respect to this target. Arrowhead is eligible to receive milestone payments up to $18.1 million and royalties on sales from Alnylam.

Shire

In December 2012, Arrowhead signed a research collaboration and license agreement with Shire AG to develop and commercialize targeted peptide-drug conjugates (PDCs) utilizing Arrowhead’s human-derived Homing Peptide platform and Shire’s therapeutic payloads. Arrowhead may receive research funding and could be eligible for development, regulatory, and commercialization milestone payments of up to $32.8 million for each development candidate, plus additional milestone payments for a second indication, and royalties on worldwide sales.

Preclinical Programs

In addition to our clinical candidates and our partner-based programs, we are actively engaged in the discovery and development of additional pre-clinical stage products. Our lead preclinical program is a DPC-enabled RNAi therapeutic targeting an undisclosed orphan liver disease.

We have additional discovery and preclinical programs for intravenous and subcutaneous administered therapeutics targeting the liver,as well as programs targeting extra-hepatic tissues. We focus on disease targets that are well suited for intervention with targeted RNAi therapeutics using our DPC delivery platform. These may include liver disease, oncology, and other therapeutic areas.

RNAi Program

In October 2011, Arrowhead acquired Roche’s RNAi business, including its RNA therapeutic assets, related intellectual property and research facility in Madison, Wisconsin. We believe that these assets position Arrowhead as one of the most advanced and broadest RNAi therapeutics companies in the world. Arrowhead possesses the following siRNA assets:

· | Non-exclusive license from Alnylam to use canonical siRNAs in oncology, respiratory diseases, metabolic diseases and certain liver diseases. This includes a sub-license from Isis Pharmaceuticals granting Arrowhead a license for siRNA chemical modifications for these specific disease areas.

· | Non-exclusive license from City of Hope Comprehensive Cancer Center to Dicer substrate and Meroduplex siRNAs. The Dicer technology may provide advantages over canonical siRNAs in certain circumstances. In addition, different siRNA formats may trigger RNAi more or less efficiently on a target-by-target basis.

· | Patent estate covering the Dynamic Polyconjugate siRNA delivery system.

· | Access to certain patents on targeting siRNA drugs with antibodies and small molecules.

8

· | State-of-the-art laboratory facilities in Madison, Wisconsin, managed by long-term leaders in oligonucleotide therapeutics and delivery, including a small animal research facility and an offsite primate colony.

· | Intellectual property covering Roche’s internally developed liposomal nanoparticle drug delivery technology.

We believe this represents one of the broadest siRNA drug technology and delivery portfolios in the field.

RNA Interference & the Benefits of siRNA Therapeutics

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. 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. Mediated by small interfering RNAs (siRNA), RNAi-based therapeutics can leverage this natural pathway of gene silencing to potentially target and shut down specific disease causing genes.

Small molecule and antibody drugs have proven effective at inhibiting certain cell surface, intracellular, and extracellular targets. However, certain drug targets such as intranuclear genes and some proteins have proven difficult to inhibit with traditional drug-based and biologic therapeutics. Developing effective drugs for these targets would have the potential to address large underserved markets for the treatment of many diseases. Using the ability to specifically silence any gene, RNAi therapeutics may be able to address previously “undruggable” targets, unlocking the market potential of such targets.

9

Mechanism of RNA interference:

Advantages of RNAi as a Therapeutic Modality

· | Silences the expression of disease causing genes;

· | Potential to address any target in the transcriptome including previously "undruggable" targets;

· | Rapid lead identification;

· | High specificity;

· | Opportunity to use multiple RNA sequences in one drug product for synergistic silencing of related targets; and

· | siRNAs are uniquely suited for personalized medicine through target and cell specific delivery and gene knockdown.

Addressing the siRNA Delivery Challenge

To date, the primary challenge to the development of siRNA therapeutics has been delivering the fragile, often immunogenic and otherwise rapidly cleared siRNA molecules, into the cytoplasm of the cell, where RNAi activity occurs. This hurdle has prevented siRNA therapeutics from reaching full potential. Many companies have attempted to overcome the delivery challenge. Most early systems involved cholesterol conjugates or liposomes. However, development in humans has been limited due to toxicity and immunogenicity of these approaches when studied in clinical trials.

10

To address the delivery challenge, Arrowhead has a leading team of researchers with extensive siRNA therapeutic know-how and an advanced delivery system. The DPC system is modular and may be optimized on a target-by-target basis. Importantly, it also may be targeted to address a variety of tissues, including those outside of the liver.

The Dynamic Polyconjugate siRNA Delivery System

The DPC delivery system represents an innovative solution to the siRNA delivery problem, specifically designed to overcome barriers to systemic administration of siRNA. Developed by our scientists in Madison, Wisconsin, the inspiration for DPC technology came from the physical characteristics of viruses, nature’s own nanoparticles for nucleic acid delivery. Viruses are efficient at finding their target cells and delivering their nucleic acid payload to the proper cellular compartment. Key features of viruses are their small size, their overall negative surface charge, their specificity for particular cell types based on receptors unique to that cell, and their ability to disassemble and release their nucleic acid cargo to the proper cell compartment in response to cellular triggers. All of these features are incorporated into DPC technology.

DPCs are small nanoparticles, 5-20 nanometers (nm) in size, with an amphipathic polymer backbone. Arrowhead has a library of polymers that may be employed with the system, enabling optimization based on factors such as preferred mode of administration, pharmacokinetics, and target tissue. Shielding agents such as polyethylene glycol and targeting ligands may be reversibly attached to the polymer backbone. In some constructs, the siRNA payload is attached to the DPC, while in other constructs, the siRNA circulates attached to a different carrier. When attached, the DPC construct protects the siRNA payload while allowing the polymer to circulate in the blood without creating undue toxicity. The targeting ligand guides it to the cell of interest where, together with the siRNA, it is taken up into a membrane-enclosed cellular compartment known as an endosome. The polymer is selected for its ability to disrupt the endosomal membrane, which allows the siRNA to be released into the cytoplasm. There, it engages the cell’s RNAi machinery, ultimately resulting in knockdown of target gene expression. This lytic chemistry of the DPC polymeric backbone is modified, or “masked”, using proprietary chemistry. Masking of the polymer’s lytic chemistry accomplishes two interrelated objectives that are critical to in vivo siRNA delivery:

· | Reduction of toxicity by controlling when the membrane lytic property of the polymer is activated.

· | Inhibition of non-specific interactions with blood components and non-targeted cell types.

11

Single Molecule DPCs:

12

DPCs using Co-injection Strategy

Arrowhead has developed multiple forms of the prototypical DPC delivery system. Our ARC-520 clinical candidate utilizes a formulation where the siRNA is conjugated to cholesterol and is not attached to the DPC. Pre-clinical studies have shown co-injection of liver-targeted DPC polymer together with siRNA conjugated to a lipophilic moiety, such as cholesterol, results in a >500-fold increase in the potency when compared to the siRNA-cholesterol alone. This formulation retains the potent endosomal escape capabilities of Arrowhead's DPC platform, simplifies drug manufacturing, and creates new targeting opportunities.

DPCs for Subcutaneous Administration

A DPC formulation for subcutaneous administration has also been developed using Arrowhead’s latest proprietary polymer masking technology. Using DPCs to deliver siRNA, high-level target gene knockdown is observed at low siRNA doses with limited toxicity in rodents and non-human primates. Arrowhead studies have shown knockdown of 99% in monkeys after a single injection of 1 mg/kg, >90% at 0.5 mg/kg, and 80% in mice at 0.05 mg/kg, which represents greater knockdown at lower doses than reported results of other clinical candidates. PK and biodistribution studies indicate that the new masking technology is highly stable, allowing for maximal bioavailability and long circulation times. Arrowhead is developing this formulation for use in multiple therapeutic areas where chronic dosing may be required.

13

Homing Peptide Program

In April 2012, Arrowhead acquired Alvos Therapeutics, Inc. (“Alvos”). Alvos licensed a discovery platform and large library of proprietary human-derived Homing Peptides from the MD Anderson Cancer Center. This discovery platform is designed to identify targeting agents, such as peptides, that selectively accumulate in primary and metastatic tumors, associated vasculature, and to 30 normal tissue types. Such targeting agents are of interest for drug development because they hold the promise of shepherding drugs into specific cells while sparing others. This new platform was acquired because it fit well into our existing business. One of the key advantages of our DPC delivery systems is its ability to be targeted. With a vast proprietary targeting library of our own, we believe that we can enhance the value of our RNAi programs and differentiate our capabilities from those of our competitors.

In addition, we believe that the homing peptide sequences can be applied to non-RNA therapeutics almost as a by-product of our work targeting RNAi drugs and present attractive value to potential partners. The platform has the potential to allow partners to:

· | Develop therapeutic agents that hunt down and destroy known tumors, as well as distant unidentified metastases;

· | Convert cancer therapeutics that generally interact with most cells in the body to “smart” drugs that accumulate primarily at tumor sites and affect cancer cells preferentially, thereby improving the toxicity and side effects of currently used cancer drugs; and

· | Selectively target non-cancer therapeutics to virtually any tissue type in the body where they can have the desired pharmacologic effect.

This platform is potentially powerful in the specificity of the large number of unique targeting sequences and in their origin from human screening. In addition, because of the human-based identification process, there is lower risk that animal model data will not translate. Our proprietary library of 42,000 unique targeting sequences can be used with our own delivery platforms, as well as with small molecule drugs. This platform has achieved clinical proof of concept in targeting metastatic prostate cancer with the first sequence tested in humans.

Importantly, the method used identifies peptides that are rapidly internalized into cells. These peptide-receptor pairs hold the promise of shuttling therapeutic payloads preferentially and directly into those cells. The ability to target and deliver cytotoxins would address some of the problems with current cancer therapeutics by limiting side effects and increasing efficacy.

In order to discover receptors and peptide sequences that target them, a technique called in vivo phage display is employed. Over the past several years, phage display screening has been conducted at MD Anderson Cancer Center in end-stage cancer patients with primary and metastatic tumors under rigorous ethical standards. To our knowledge, they are the only group in the world that is generating this type of human-derived data. Direct screening in human cancer patients has the potential to eliminate some of the uncertainty that has plagued current discovery methods with animal models. This strategy sought to map the human vasculature into “zip codes” and has discovered a large number of novel receptors that are expressed only on the cell surface of tumor sites and nowhere else. The library can be increased further through continuing work with MD Anderson to screen additional patients.

Arrowhead is working to apply this technology to targeting our proprietary siRNA delivery vehicles. Our DPC delivery platform is highly attractive in part because it has been shown to be well tolerated, effective, capable of delivering RNAs to multiple organ systems, and it is targetable. The Homing Peptide library provides our targeted RNAi therapeutic program with a powerful new source of flexibility. The library is also valuable to enable partners, through license and collaboration deals, to create a new class of therapeutics, Peptide-Drug Conjugates, or PDCs. By linking the Homing Peptides to traditional small molecule drugs, potential partners may be able to transform a therapeutic that interacts with most cells in the body into one that interacts preferentially with the cell of choice. We believe that this transition from untargeted to targeted drugs is a paradigm shift for cancer therapeutics and that our new library puts us at the forefront of this transformation. We do not currently intend to build our own pipeline of PDCs, but do intend to work with partners to apply our targeting sequences to their drugs. We believe that this specific targeting will enable partners to make existing generics safer and more effective and help make their proprietary drugs better. Given the large number of approved APIs for oncology and the thousands of Homing Peptide sequences that we now have, there are many potential combinations of targeting sequence and drug molecules.

14

PDCs share the promise of the original class of guided therapeutics, antibody-drug conjugates or ADCs, in that they could increase efficacy and decrease toxicity relative to current standard of care oncology products. Benefits of PDCs as a class are as follows:

· | They are potentially faster, cheaper, and simpler to make than ADCs, making them attractive development projects for biopharmaceutical companies;

· | Their targets are expressed on a high percentage of multiple tumor types, giving them a larger potential commercial market than genetically targeted agents that are efficacious in only a small subset of patient populations; and

· | The use of Homing Peptides that were discovered in human cancer patients as the targeting moieties for PDCs potentially increases clinical probability of success.

We believe this unique mix of benefits will be attractive to potential partners in the biopharmaceutical industry. This technology has the potential to facilitate the rapid development of multiple new product candidates, each of which could meet a critical unmet medical need. In addition, screening in man has broad applicability in other therapeutic areas of interest to the biopharmaceutical industry.

Intellectual Property

The Company controls approximately 51 issued patents (14 for DPCs; 9 for hydrodynamic gene delivery; 26 for Homing Peptides; and 2 from Calando), including European validations, and 29 patent applications (13 for DPCs; 8 for Homing Peptides; and 8 from Calando). The pending applications have been filed throughout the world, including, in the United States, Argentina, Australia, Brazil, Canada, Chile, China, Europe, the Arab States of the Gulf, Israel, India, Japan, Republic of Korea, Mexico, Peru, Philippines, Russian Federation, Singapore, Thailand, Taiwan and Venezuela.

siRNAs

The Company owns patents directed to siRNAs targeted to reduce expression of hepatitis B viral proteins as well the RRM2 gene. Calando owns a U.S. issued patent (in addition to a patent in Singapore) directed to siRNAs targeted to reduce expression of endothelial PAS domain protein 1 (EPAS1). Calando has also licensed patents from Alnylam relevant to siRNA therapeutics for its products.

Patent Group | Estimated Year of Expiration
siRNAs
Patent directed to HIF-2 alpha (EPAS1) siRNAs | 2030
Patent directed to HBV siRNAs | 2032
Patent directed to RRM2 siRNAs | 2031

15

DPCs

The DPC related patents have issued in the United States, Australia, Canada, Europe (France, Germany, Italy, Spain, Switzerland, United Kingdom), India, Japan, Mexico, New Zealand, Philippines, Russia, South Korea, Singapore, and South Africa. The Company also controls a number of patents directed to hydrodynamic nucleic acid delivery, which issued in the United States, Australia and Europe (validated in Austria, Belgium, Switzerland, Germany, Denmark, Spain, Finland, France, the United Kingdom, Hungary, Ireland, Italy, Netherlands and Sweden). The approximate year of expiration for each of these various groups of patents are set forth below:

Patent Group | Estimated Year of Expiration
Dynamic Polyconjugates® (DPC®)
Membrane Active Polymers | 2027
Membrane Active Polymers – Additional Iterations | 2024
Copolymer Systems | 2024
Polynucleotide-Polymer Composition | 2024
Polynucleotide-Polymer Composition – Additional Iterations | 2031
Polyampholyte Delivery | 2017
pH Labile Molecules | 2020
Endosomolytic Polymers | 2020
Hydrodynamic delivery
First iterations | 2015
Second iteration | 2020
Third iteration | 2024

The RNAi and nanoparticle drug delivery patent landscapes are complex and rapidly evolving. As such, we may need to obtain additional patent licenses prior to commercialization of our candidates. You should review the factors identified in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Homing Peptides

We also control patents related to our Homing Peptide platforms, related to Adipotide, our drug candidate for the treatment for obesity and related metabolic disorders. Approximately five of these patents are United States patents and the remaining patents are validated in Belgium, Switzerland, Germany, Spain, France, the United Kingdom, Ireland, Greece, Italy, Netherlands, Portugal, Sweden and Turkey.

Patent Group | Estimated Year of Expiration
Adipotide®
Targeting moieties and conjugates | 2021
Targeted Pharmaceutical Compositions | 2021
Homing Peptides
EphA5 Targeting Peptides | 2027
IL-11R Targeting Peptides | 2022

16

Non-Exclusively Licensed Patents

Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (“Roche”) and the Company entered into a Stock and Asset Purchase Agreement on October 21, 2011 in which Roche assigned to Arrowhead its entire rights under certain licenses for example: the License and Collaboration Agreement between Roche and Alnylam Pharmaceuticals, Inc. (“Alnylam”) dated July 8, 2007 (the “Alnylam License”); the Non-Exclusive Patent License Agreement between Roche and MDRNA, Inc. dated February 12, 2009 (“MDRNA License”); and the Non-Exclusive License Agreement between Roche and City of Hope dated September 19, 2011 (the “COH License”) (Collectively the “RNAi Licenses”). The RNAi Licenses provide the Company with non-exclusive, worldwide, perpetual, irrevocable, royalty-bearing rights and the right to sublicense a broad portfolio of intellectual property relating to the discovery, development, manufacture, characterization, and use of therapeutic products that function through the mechanism of RNA interference for specified targets.

Core Patents relating to RNAi

The RNAi Licenses include patents relating to the general structure, architecture, and design of double-stranded oligonucleotide molecules, which engage RNA interference mechanisms in a cell. These rights include the “Tuschl II” patents, including issued U.S. Patent Nos. 7,056,704; 7,078,196; 7,078,196; 8,329,463; 8,362,231; 8,372,968; and 8,445,327; “Tuschl I” patents, including U.S. Patent Nos. 8,394,628 and 8,420,391; and allowed “Tuschl I” patent application, U.S. Publication No. 2011024446; “City of Hope” patents, including U.S. Patent No. 8,084,599; and “Kreutzer-Limmer” patents assigned to Alnylam, including U.S. Patent Nos. 7,829,693; 8,101,594; 8,119,608; 8,202,980; and 8,168,776.

Thomas Tuschl is the first named inventor on “Tuschl I” and “Tuschl II.” “Tuschl I” refers to the patents arising from the patent application entitled “The Uses of 21-23 Sequence-Specific Mediators of Double-Stranded RNA Interference as a Tool to Study Gene Function and as a Gene-Specific Therapeutic.” “Tuschl II” patents refer to the patents and patent applications arising from the patent application entitled “RNA Interference Mediating Small RNA Molecules.” “City of Hope” is the first named assignee of certain core siRNA patents. The second named assignee of these patents is Integrated DNA Technologies, Inc. Kreutzer-Limmer patents refer to the Alnylam patents and patent applications, relating to core siRNA IP, which includes inventors, Roland Kreutzer and Stefan Limmer.

Chemical modifications of double-stranded oligonucleotides

The RNAi Licenses also include patents related to modifications of double-stranded oligonucleotides, including modifications to the base, sugar, or internucleoside linkage, nucleotide mimetics, and end modifications, which do not abolish the RNAi activity of the double-stranded oligonucleotides. Also included are patents relating to modified double-stranded oligonucleotides, such as meroduplexes described in in U.S. Publication No. 20100209487 assigned to Marina Biotech (f/k/a MDRNA, Inc.), and microRNAs described in U.S. Patent Nos. 7,582,744; 7,674,778, and 7,772,387 assigned Alnylam. The RNAi Licenses also include rights from INEX/Tekmira relating to lipid-nucleic acid particles, and oligonucleotide modifications to improve pharmacokinetic activity including resistance to degradation, increased stability, and more specific targeting of cells from Alnylam and ISIS Pharmaceuticals, Inc.

Manufacturing techniques for the double-stranded oligonucleotide molecules or chemical modifications

The RNAi Licenses also include patents relating to the synthesis and manufacture of double-stranded oligonucleotide molecules for use in RNA interference, as well as chemical modifications of such molecules, as described above. These include methods of synthesizing the double-stranded oligonucleotide molecules such as in the core “Tuschl I” allowed U.S. Application No. 12/897,749, the core “Tuschl II” U.S. Patent Nos. 7,056,704; 7,078,196; and 8,445,327; and Alnylam’s U.S. Patent Nos. 8,168,776, as well as methods of making chemical modifications of the double-stranded oligonucleotides such as described in Alnylam’s U.S. Patent No. 7,723,509 and INEX’s U.S. Patent Nos. 5,976,567; 6,858,224; and 8,484,282. Patent applications are currently pending that further cover manufacturing techniques for double-stranded oligonucleotide molecules or chemical modifications.

Uses and Applications of Double-Stranded Oligonucleotide Molecules or Chemical modifications

The RNAi Licenses also include patents related to uses of the double-stranded oligonucleotides that function through the mechanism of RNA interference. These include for example, the core “Tuschl I” U.S. Patent No. 8,394,628 and “Tuschl II” U.S. Patent No. 8,329,463; Alnylam’s U.S. Patent Nos. 7,763,590; 8,101,594, and 8,119,608, and City of Hope‘s U.S. Patent No. 8,084,599. Other more specific uses have been acquired and patent applications are currently pending that cover additional end uses and applications of double-stranded oligonucleotides functioning through RNA interference.

17

License Agreements

Cerulean License

The linear cyclodextrin-based drug delivery platform, Cyclosert, was designed for the delivery of small molecule drugs. In December 2008, we completed a Phase 1 trial with IT-101, a conjugate of Calando’s linear cyclodextrin polymer and Camptothecin, a potent anti-cancer drug, with a positive safety profile and indications of efficacy.

On June 23, 2009, we entered into a transaction with Cerulean related to Cyclosert and IT-101 (the “Cerulean Transaction”). In the Cerulean Transaction, we granted Cerulean an irrevocable, perpetual, royalty bearing worldwide license with the right to sublicense, under certain patent rights and know-how in the field of human diseases solely in order to: (a) conduct research and development on the Linear Cyclodextrin System, including making improvements thereto, in order to research and commercialize our clinical asset IT-101 (now known as “CRLX-101”), as well as certain other products in which no therapeutic agent is specifically defined (the “Cerulean Products”); (b) research, develop, make, have made, use, market, offer to sell, distribute, sell and import CRLX-101 and Cerulean Products; and (c) use, copy, modify and distribute certain know-how for those purposes. In the Cerulean Transaction, we retained all rights with respect to products in which a therapeutic agent is a (i) tubulysin, (ii) cytolysin, (iii) second generation epothilone or (iv) nucleic acid (hereinafter “Calando Products”).

The Cerulean Transaction also involved the sale and assignment by us of certain patents directed to Cyclosert and CRLX-101 (the “Cerulean Assigned Patents”) to Cerulean. Cerulean then granted back to us an exclusive, irrevocable, perpetual, royalty free, worldwide license, with the right to grant sublicenses, under the Cerulean Assigned Patents solely to the extent necessary to research and commercialize products in which each therapeutic agent is a cytolysin, tubulysin, second generation epothilone or any nucleic acid.

The Cerulean Transaction resulted in an initial payment to Calando of $2.4 million. Cerulean is obligated to pay development milestone payments of up to $2.75 million if CRLX-101 progresses through clinical trials and receives marketing approval. If approved, we are also entitled to receive up to an additional $30 million in sales milestone payments, plus single digit royalties on net sales. Should Cerulean sublicense CRLX-101 to a third party, we are entitled to receive a percentage of any sublicensing income at rates between 10% and 40%, depending on the stage of the drug’s development at the time of sublicensing.

Cerulean is obligated to further pay development milestone payments of up to $3 million for each Cerulean Product that progresses through clinical trials and receives marketing approval. If Cerulean Products are approved, we are entitled to receive up to an additional $15 million in sales milestone payments, plus single digit royalties on net sales. Should Cerulean sublicense a Cerulean Product to a third party, we are entitled to receive a percentage of any sublicensing income at a rate in the tens.

The terms of the agreements of the Cerulean Transactions are tied to the expiration of certain controlled patent rights and Cerulean Assigned Patents. Cerulean may terminate the agreements on thirty (30) days’ notice and unless there is a drug safety concern, would be obligated to re-assign the CRLX-101 IND back to us and provide us with an exclusive license thereto under the Cerulean Assigned Patents.

On August 5, 2013, Calando terminated and Cerulean assumed all of Calando’s rights in a license from the California Institute of Technology (“Caltech”) under intellectual property related to linear cyclodextrin-based drug delivery technology (the “Caltech License”). Notwithstanding the termination of Calando’s rights under the Caltech License (including those to the retained Calando Products), Cerulean remains contractually obligated to make all of the aforementioned milestone, sublicensing and royalty payments to Calando.

Calando is no longer responsible for the costs associated with prosecution of the patents of the Caltech License. However, Cerulean may offset any costs it incurs prosecuting the Caltech License-associated patents from payments that are due to Calando.

18

University of Texas MD Anderson Cancer Center License

In December 2010, we obtained an exclusive worldwide license from at the University of Texas MD Anderson Cancer Center in Houston, Texas (“UTMDACC”) related to Adipotide technology (the “UTMDACC License”). The UTMDACC License granted us a royalty-bearing, exclusive right (with the right to sublicense) under certain UTMDACC patents to develop and commercialize certain products in the fields of: 1) therapeutics, diagnostics and research services that both (i) incorporate peptides that specifically target adipose tissue, and (ii) are used to treat, diagnose or research solely either (a) obesity, overweight and/or (b) metabolic conditions related to, caused by and/or associated with obesity and overweight, e.g., diabetes; and 2) cancer therapies, diagnostics and research products associated with a specific targeting moiety. We also have rights to certain improvements to the technology.

In consideration for the license, we paid UTMDACC an upfront fee of $2 million and are obligated to pay annual fees initially equal to $50,000 increasing up to a maximum of $100,000, with such annual fees creditable against milestone payments.

We may be obligated to pay development milestone payments of up to $8.3 million for each UTMDCC licensed product that progresses through clinical trials and receives U.S. marketing approval. Additional EU and Japanese approval milestone payments are in the low single digit million dollar range. If a commercial drug is developed and approved, royalty payments on net sales of UTMDACC licensed products are in the low single digit range. Should we sublicense or partner a UTMDACC licensed product, UTMDACC would receive partnering fee percentages in the range of single digits to the twenties, depending on the stage of development of the partnered UTMDACC licensed product.

The term of the UTMDACC License is linked to the last to expire patents licensed therein or 15 years if a licensed product contains only licensed know-how. We are obligated to actively and effectively attempt to commercialize the UTMDACC Technology and submit to UTMDACC a Phase 2 clinical trial protocol within two years of obtaining an approved IND. We are also obligated to commence a Phase 2 clinical trial within four years and a Phase 3 clinical trial within seven years of approval of an IND. However, we may obtain yearly extensions of time upon the payment of an increasing fee in the range of tens of thousands of dollars up to several hundred thousand dollars. We also have diligence obligations with respect to any UTMDACC Improvements later added to the license.

Research and Development Facility

Arrowhead operates a research and development facility in Madison, Wisconsin. This facility was built and equipped by Roche and was part of our acquisition of their RNA therapeutics business. Since the acquisition in 2011, we have integrated all research and development operations into that facility. A summary of the facility is provided below:

· | Approximately 40 scientists;

· | State-of-the-art laboratories: 24,000 total sq. ft. of lab space;

· | Complete small animal facility;

· | Primate colony housed at the Wisconsin National Primate Research Center, an affiliate of the University of Wisconsin;

· | In-house histopathology capabilities;

· | Animals models for metabolic, viral, and oncologic diseases;

· | Animal efficacy and safety assessment;

· | Polymer, siRNA, and small molecule synthesis and analytics capabilities (HPLC, NMR, MS, etc.);

· | Polymer and siRNA PK, biodistribution, clearance methodologies; and

· | Confocal microscopy, flow cytometry, Luminex platform, clinical chemistry analytics.

Research and Development Expenses

Research and development expenses consist of costs incurred in discovering, developing and testing our clinical candidates and platform technologies. R&D expenses also include costs related to clinical trials, including costs of Contract Research Organizations to recruit patients and manage clinical trials. Other costs associated with clinical trials include manufacturing of clinical supplies, as well as GLP toxicology studies necessary to support clinical trials, both of which are outsourced to cGMP-compliant manufactures and GLP-compliant laboratories. Total research and development expense for fiscal 2013 was $12.3 million, an increase from $8.7 million in 2012.

19

We employ approximately 40 employees in an R&D function, primarily working from our facility in Madison, Wisconsin. These employees are engaged in various areas of research on Arrowhead candidate and platform development including synthesis and analytics, PK/biodistribution, formulation, CMC and analytics, tumor and extra-hepatic targeting, bioassays, live animal research, toxicology/histopathology, clinical and regulatory operations, and other areas. Salaries and payroll-related expenses for our R&D activities were $3.6 million during fiscal 2013 and $3.3 million in fiscal 2012. Laboratory supplies including animal-related costs for in-vivo studies were $1.4 million and $1.1 million in fiscal 2013 and 2012, respectively.

Costs related to manufacture of clinical supplies, GLP toxicology studies and other outsourced lab studies, as well as clinical trial costs were $5.8 million and $2.6 million in fiscal 2013 and 2012 respectively.

Facility-related costs, primarily rental costs for our leased laboratory in Madison, Wisconsin were $0.7 million and $0.8 million in fiscal 2013 and 2012, respectively. Other research and development expenses were $0.8 million and $0.9 million in fiscal 2013 and 2012, respectively. These expenses are primarily related to consulting fees, technology license fees and sponsored research.

Government Regulation

Governmental authorities in the U.S. and other countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of drugs and biologic products. All of our foreseeable product candidates are expected to be regulated as drug products.

In the U.S., the FDA regulates drug products under the Federal Food, Drug and Cosmetic Act (the “FDCA”), and other laws within the Public Health Service Act. Failure to comply with applicable U.S. requirements, both before and after approval, may lead to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecutions. Before drug products are marketed they must be approved by the FDA. The steps required before a novel drug product is approved by the FDA include: (1) pre-clinical laboratory, animal, and formulation tests; (2) submission to the FDA of an Investigational New Drug Application (“IND”) for human clinical testing, which must become effective before human clinical trials may begin; (3) adequate and well-controlled clinical trials to establish the safety and effectiveness of the product for each indication for which approval is sought; (4) submission to the FDA of a New Drug Application (“NDA”); (5) satisfactory completion of a FDA inspection of the manufacturing facility or facilities at which the drug product is produced to assess compliance with cGMP; and FDA review and finally (6) approval of an NDA.

Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. The results of the pre-clinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions, such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Once an IND is in effect, each clinical trial to be conducted under the IND must be submitted to the FDA, which may or may not allow the trial to proceed.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified physician-investigators and healthcare personnel. Clinical trials are typically conducted in three defined phases, but the phases may overlap or be combined. Phase 1 usually involves the initial administration of the investigational drug or biologic product to healthy individuals to evaluate its safety, dosage tolerance and pharmacodynamics. Phase 2 usually involves trials in a limited patient population, with the disease or condition for which the test material is being developed, to evaluate dosage tolerance and appropriate dosage; identify possible adverse side effects and safety risks; and preliminarily evaluate the effectiveness of the drug or biologic for specific indications. Phase 3 trials usually further evaluate effectiveness and test further for safety by administering the drug or biologic candidate in its final form in an expanded patient population. Our product development partners, the FDA, or we may suspend clinical trials at any time on various grounds, including any situation where we believe that patients are being exposed to an unacceptable health risk or are obtaining no medical benefit from the test material.

20

Assuming successful completion of the required clinical testing, the results of the pre-clinical trials and the clinical trials, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. Before approving an application, the FDA will usually inspect the facilities where the product is manufactured, and will not approve the product unless cGMP compliance is satisfactory. If the FDA determines the NDA is not acceptable, the FDA may outline the deficiencies in the NDA and often will request additional information. If the FDA approves the NDA, certain changes to the approved product, such as adding new indications, manufacturing changes or additional labeling claims are subject to further FDA review and approval. The testing and approval process requires substantial time, effort and financial resources, and approval on a timely basis, if at all, cannot be guaranteed.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for this type of disease or condition will be recovered from sales in the U.S. for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other application to market the same drug for the same indication, except in very limited circumstances, for seven years.

In addition, regardless of the type of approval, we and our partners are required to comply with a number of FDA requirements both before and after approval. For example, drug makers are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements concerning advertising and promotion for our products. In addition, quality control and manufacturing procedures must continue to conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money and effort in all areas of regulatory compliance, including production and quality control to comply with cGMP. In addition, discovery of problems, such as safety problems, may result in changes in labeling or restrictions on a product manufacturer or NDA holder, including removal of the product from the market.

Corporate Information

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms the “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 collectively to Arrowhead Madison Inc. (“Madison”), Calando Pharmaceuticals, Inc. (“Calando”), Ablaris Therapeutics, Inc. (“Ablaris”), and Tego Biosciences Corporation (“Tego”), as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, and Alvos Therapeutics, Inc. (“Alvos”) and Agonn Systems, Inc. (“Agonn”),which were merged into Arrowhead during 2013. (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”), which was dissolved during 2013, and Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, (5) the term “Common Stock” refers to Arrowhead’s Common Stock, (6) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock and the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock. All Arrowhead share and per share data have been adjusted to reflect a one for ten reverse stock split effected on November 17, 2011.

Arrowhead was originally incorporated in South Dakota in 1989, and was reincorporated in Delaware in 2000. The Company’s principal executive offices are located at 225 South Lake Avenue, Suite 1050, Pasadena, California 91101, and its telephone number is (626) 304-3400. We operate a 24,000 square foot research and development facility in Madison, Wisconsin. As of September 30, 2013, Arrowhead had 54 full-time employees.

21

Other Business Interests

Leonardo Biosystems, Inc.

Leonardo is a drug delivery company that employs a novel multi-stage drug delivery mechanism aimed at dramatically increasing targeting efficiency of pharmaceuticals. Arrowhead has an approximately 3% ownership interest in Leonardo. Leonardo’s silicon micro-particulate technology involves transporting a therapeutic agent past multiple biological barriers using multiple carriers, each optimized for a specific barrier. Leonardo’s proprietary primary vehicles are designed to preferentially accumulate at tumor vasculature. Secondary carriers are then released from the primary carriers that are designed to accumulate around tumor cells and release their therapeutic payloads. Pre-clinical testing in animal disease models suggests that Leonardo’s platform enables significantly increased targeting of tumors and also provides sustained release of cancer therapies. Further development of Leonardo’s technology is dependent on cash resources available to Leonardo.

Unidym, Inc.

In January 2011, Arrowhead sold Unidym, Inc. to Wisepower Co., Ltd., a publicly traded, Seoul, Korea-based electronics company (KOSDAQ: 040670). Unidym was a majority-owned subsidiary that developed nanotechnology-enabled materials to be used in the manufacturing of certain electronics components. Upfront consideration consisted of stock and convertible bonds originally valued at $5,000,000. Additional cash earn-out payments of up to $140 million are possible based on cumulative sales and licensing milestones, and up to 40% of licensing revenue.

22

ITEM 1A. RISK FACTORS

You should carefully consider the risks discussed below and all of the other information contained in this report in evaluating us and an investment in our securities. If any of the following risks and uncertainties should occur, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our Common Stock could decline. Additionally, we note that we are a development stage company and we have accrued net losses annually since inception. We urge you to consider our likelihood of success and prospects in light of the risks, expenses and difficulties frequently encountered by entities at similar stages of development.

Risks Related to Our Company

Drug development is time consuming, expensive and risky.

We are focused on technology related to new and improved pharmaceutical candidates. Product candidates that appear promising in the early phases of development, such as in animal and early human clinical trials, often fail to reach the market for a number of reasons, such as:

— | Clinical trial results may be unacceptable, even though preclinical trial results were promising;

— | Inefficacy and/or harmful side effects in humans or animals;

— | The necessary regulatory bodies, such as the U.S. Food and Drug Administration, may not approve our potential product for the intended use; and

— | Manufacturing and distribution may be uneconomical.

For example, the positive pre-clinical results for ARC-520 in animals may not be replicated in human clinical studies or it may be found to be unsafe in humans. Additionally, clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which often delays, limits, or prevents further clinical development or regulatory approvals of potential products. Clinical trials can take many years to complete, including the process of study design, clinical site selection and the enrollment of patients. As a result, we can experience significant delays in completing clinical studies, which can increase the cost of developing a drug candidate. If our drug candidates are not successful in human clinical trials, we may be forced to curtail or abandon certain development programs. If we experience significant delays in commencing or completing our clinical studies, we could suffer from significant cost overruns, which could negatively affect our capital resources and our ability to complete these studies.

There are substantial risks inherent in attempting to commercialize new drugs, and, as a result, we may not be able to successfully develop products for commercial use.

Our research and development efforts involve therapeutics based on RNA interference and peptide targeting, which are largely unproven technologies. Our scientists and engineers are working on developing technology in various stages. However, such technology’s commercial feasibility and acceptance are unknown. Scientific research and development requires significant amounts of capital and takes a long time to reach commercial viability, if it can be achieved at all. To date, our research and development projects have not produced commercially viable drugs, and may never do so. During the research and development process, we may experience technological barriers that we may be unable to overcome. Because of these uncertainties, it is possible that no commercial products will be successfully developed. If we are unable to successfully develop commercial products, we will be unable to generate revenue or build a sustainable or profitable business.

23

Our drug candidates are in the early stages of our development and because we have a short development history with both DPCs and Homing Peptides, there is a limited amount of information about us upon which you can evaluate our business and prospects.

We have not begun to market or generate revenues from the commercialization of any products. We have only a limited history upon which one can evaluate our targeted therapeutic business and prospects as our drug candidates are still at an early stage of development. Thus, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan, we will need to successfully:

— | Execute product development activities using unproven technologies;

— | Build, maintain and protect a strong intellectual property portfolio;

— | Receive FDA approval and gain market acceptance for the development and commercialization of any drugs we develop;

— | Develop and maintain successful strategic relationships; and

— | Manage our spending and cash requirements as our expenses are expected to increase in the near term due to preclinical and clinical trials.

If we are unsuccessful in accomplishing these objectives, we may not be able to develop products, raise capital, expand our business or continue our operations.

We may be unable to attract revenue-generating collaborations with other pharmaceutical and biotech companies to advance our drug candidates.

Our business strategy includes obtaining collaborations with other pharmaceutical and biotech companies to support the development of our therapeutic siRNA and other drug candidates. We may not be able to attract such partners, and even if we are able to enter into such partnerships, the terms may be less favorable than anticipated. Further, entering into partnership agreements may limit our commercialization options and/or require us to share revenues and profits with our partners.

We will need to achieve commercial acceptance of our drug candidates to generate revenues and achieve profitability.

Even if our research and development efforts yield technologically feasible applications, we may not successfully develop commercial products. Drug development takes years of study in human clinical trials prior to regulatory approval, and, even if we are successful, we may not be so on a timely basis. During our development period, superior competitive technologies may be introduced which could diminish or extinguish the potential commercial uses for our drug candidates. Additionally, the degree to which the medical community and consumers will adopt any product we develop is uncertain. The rate and degree of market acceptance of our products will depend on a number of factors, including the establishment and demonstration in the medical community of the clinical efficacy and safety of our products and their potential advantage over alternative treatments. We cannot predict whether significant commercial market acceptance for our products, if approved, will ever develop, and we cannot reliably estimate the projected size of any such potential market. Our revenue growth and achievement of profitability will depend substantially on our ability to introduce products that will be accepted by the medical community. If we are unable to cost-effectively achieve acceptance of our technology among the medical establishment and patients, or if the associated products do not achieve wide market acceptance, our business will be materially and adversely affected.

Risks Related to Our Financial Condition

We have a history of net losses, and we expect to continue to incur net losses and may not achieve or maintain profitability.

We have incurred net losses since our inception, including net losses of $27.9 million for the year ended September 30, 2013 and a cumulative net loss since inception of approximately $181.6 million. We expect that our operating losses will continue as we continue our drug development and discovery efforts. To achieve profitability, we must, either directly or through licensing and/or partnering relationships, successfully develop and obtain regulatory approval for one or more drug candidates and effectively manufacture, market and sell any drugs we successfully develop. Even if we successfully commercialize drug candidates that receive regulatory approval, we may not be able to realize revenues at a level that would allow us to achieve or sustain profitability.

24

Accordingly, we may never generate significant revenue and, even if we do generate significant revenue, we may never achieve profitability.

We will require substantial additional funds to complete our research and development activities.

Our business currently does not generate the cash that is necessary to finance our operations. Subject to the success of the research and development programs of our company and our partners, and potential licensing or partnering transactions, we will likely need to raise additional capital to:

— | Fund research and development activities relating to our development of our drug candidates, including pre-clinical and preclinical trials and manufacturing to support these efforts;

— | Fund our general and admini strative activities;

— | Pursue licensing opportunities for our technologies;

— | Protect our intellectual property; and

— | Retain our management and technical staff.

Our future capital needs depend on many factors, including:

— | The scope, duration and exp enditures associated with our research and development;

— | The extent to which our R&D and clinical efforts are successful, and clinical trial requirements;

— | The outcome of potential partnering or licensing transactions, if any;

— | Competing technologica l developments;

— | Our proprietary patent position, if any, in our products; and

— | The regulatory approval process for our drug candidates.

We will need to raise additional funds through public or private equity offerings, debt financings or additional strategic alliances and licensing arrangements in the future to continue our operations. We may not be able to obtain additional financing on terms favorable to us, if at all. General market conditions may make it very difficult for us to seek financing from the capital markets, and the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, further dilution to our stockholders will result, which may substantially dilute the value of your investment. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, may involve restrictive covenants that could limit our flexibility in conducting future business activities and, in the event of insolvency, would be paid before holders of equity securities received any distribution of corporate assets. We may be required to relinquish rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us, in order to raise additional funds through alliance, joint venture or licensing arrangements. If adequate funds are not available, we may have to further delay, reduce or eliminate one or more of our planned activities. These actions would likely reduce the market price of our common stock.

The investment of our cash, cash equivalents and fixed income marketable securities is subject to risks which may cause losses and affect the liquidity of these investments.

At September 30, 2013, we had $10.7 million in fixed income marketable securities. These investments are in corporate bonds nearing maturity, but our investments may also include commercial paper, securities issued by the U.S. government obligations, certificates of deposit and money market funds meeting the criteria of our investment policy, which is focused on the preservation of our capital. These investments are subject to general credit, liquidity, and market and interest rate risks. We may realize losses in the fair value of these investments or a complete loss of these investments, which would have a negative effect on our consolidated financial statements. In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would suffer. The market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity and financial condition.

We may not be able to effectively secure first-tier technologies when competing against other investors.

Our success may require that we acquire new or complimentary technologies. However, we compete with a substantial number of other companies that may also compete for technologies we desire. In addition, many venture capital firms and other institutional investors, as well as other pharmaceutical and biotech companies, invest in companies seeking to commercialize various types of emerging technologies. Many of these companies have greater financial, scientific and commercial resources than us. Therefore, we

25

may not be able to secure the technologies we desire. Furthermore, should any commercial undertaking by us prove to be successful, there can be no assurance competitors with greater financial resources will not offer competitive products and/or technologies.

Risks associated with reliance on Third Parties

We will need to establish additional relationships with strategic and development partners to fully develop and market our products.

We do not possess all of the financial and development resources necessary to develop and commercialize products that may result from our technologies on a mass scale. Unless we expand our product development capacity and enhance our internal marketing capability, we will need to make appropriate arrangements with strategic partners to develop and commercialize current and future products. If we do not find appropriate partners, or if our existing arrangements or future agreements are not successful, our ability to develop and commercialize products could be adversely affected. Even if we are able to find collaborative partners, the overall success of the development and commercialization of product candidates in those programs will depend largely on the efforts of other parties and is beyond our control. In addition, in the event we pursue our commercialization strategy through collaboration, there are a variety of technical, business and legal risks, including:

— | A development partner would likely gain access to our proprietary information, potentially enabling the partner to develop products without us or design around our intellectual property;

— | We may not be able to control the amount and timing of resources that our collaborators may be willing or able to devote to the development or commercialization of our drug candida tes or to their marketing and distribution; and

— | Disputes may arise between us and our collaborators that result in the delay or termination of the research, development or commercialization of our drug candidates or that result in costly litigation or a rbitration that diverts our management’s resources.

The occurrence of any of the above events or other related events not foreseen by us could impair our ability to generate revenues and harm our business and financial condition.

We may lose a considerable amount of control over our intellectual property and may not receive anticipated revenues in strategic transactions, particularly where the consideration is contingent on the achievement of development or sales milestones.

Our business model has been to develop new technologies and to exploit the intellectual property created through the research and development process to develop commercially successful products. For example, Calando has licensed a portion of its technology to Cerulean Pharma, Inc. and has ceased internal technical and business development activities. A significant portion of the potential value from these licenses is tied to the achievement of the development and sales milestones, which we cannot control. Similarly, the majority of the consideration, up to $140 million, potentially payable by Wisepower in connection with our sale of Unidym is tied to the achievement of commercialization milestones, which we cannot control. Although Wisepower and Cerulean are required to use certain minimum efforts to achieve the post-closing milestones, we cannot control whether they actually achieve these milestones. If the acquirers fail to achieve performance milestones, we may not receive a significant portion of the total value of any sale, license or other strategic transaction.

We rely on outside sources for various components and processes for our products.

We rely on third parties for various components and processes for our product candidates. We may not be able to achieve multiple sourcing because there may be no acceptable second source, other companies may choose not to work with us, or the component or process sought may be so new that a second source does not exist, or does not exist on acceptable terms. There may be a disruption or delay in the performance of our third-party contractors, suppliers or collaborators which is beyond our control. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected. Therefore, it is possible that our business plans will have to be slowed down or stopped completely at times due to our inability to obtain required raw materials, components and outsourced processes at an acceptable cost, if at all, or to get a timely response from vendors.

26

We have limited manufacturing capability and must rely on third-party manufacturers to manufacture our clinical supplies and commercial products, if and when approved, and if they fail to meet their obligations, the development and commercialization of our products could be adversely affected.

We have limited manufacturing capabilities and experience. ARC-520 and our other drug candidates are composed of multiple components and require specialized formulations for which scale-up and manufacturing could be difficult. We also have limited experience in such scale-up and manufacturing requiring us to depend on a limited number of third parties, who may not be able to deliver in a timely manner, or at all. In order to develop products, apply for regulatory approvals and commercialize our products, we will need to develop, contract for, or otherwise arrange for the necessary manufacturing capabilities. Our internal manufacturing capabilities are limited to small-scale production of material for use in in vitro and in vivo experiments that is not required to be produced under current good manufacturing practice, or cGMP, standards. There are a limited number of manufacturers that supply synthetic siRNAs. There are risks inherent in pharmaceutical manufacturing that could affect the ability of our contract manufacturers to meet our delivery time requirements or provide adequate amounts of material to meet our needs. Included in these risks are synthesis and purification failures and contamination during the manufacturing process, which could result in unusable product and cause delays in our development process, as well as additional expense to us.

Additionally, our product candidates have not yet been manufactured for commercial use. If any of our product candidates become approved for commercial sale, we will need to establish third-party manufacturing capacity. A third-party manufacturing partner may require us to fund capital improvements to support the scale-up of manufacturing and related activities. The third-party manufacturer may not be able to establish scaled manufacturing capacity for an approved product in a timely or economic manner, if at all. If a manufacturer is unable to provide commercial quantities of such an approved product, we will have to successfully transfer manufacturing technology to a different manufacturer. Engaging a new manufacturer for such an approved product could require us to conduct comparative studies or utilize other means to determine bioequivalence of the new and prior manufacturers’ products, which could delay or prevent our ability to commercialize such an approved product. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if we are unable to establish alternative arrangements on a timely basis or on acceptable terms, the development and commercialization of such an approved product may be delayed or there may be a shortage in supply. Any inability to manufacture our product candidates or future approved drugs in sufficient quantities when needed would seriously harm our business.

Manufacturers of our approved products, if any, must comply with current good manufacturing practices (cGMP) requirements enforced by the U.S. Food and Drug Administration and other foreign health authorities through facilities inspection programs. These requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our approved products, if any, may be unable to comply with these cGMP requirements and with other FDA, state, and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturer’s failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, which would seriously harm our business.

We rely on third parties to conduct our clinical trials, and if they fail to fulfill their obligations, our development plans may be adversely affected.

We rely on independent clinical investigators, contract research organizations and other third-party service providers to assist us in managing, monitoring and otherwise carrying out our clinical trials. We have contracted, and we plan to continue to contract with certain third-parties to provide certain services, including site selection, enrollment, monitoring and data management services. Although we depend heavily on these parties, we do not control them and therefore, we cannot be assured that these third-parties will adequately perform all of their contractual obligations to us. If our third-party service providers cannot adequately and timely fulfill their obligations to us, or if the quality and accuracy of our clinical trial data is compromised due to failure by such third-party to adhere to our protocols or regulatory requirements or if such third-parties otherwise fail to meet deadlines, our development plans may be delayed or terminated.

27

Risks related to managing our operations

Our success depends on the attraction and retention of senior management and scientists with relevant expertise.

Our future success depends to a significant extent on the continued services of our key employees, including Dr. Anzalone, our President and Chief Executive Officer, Dr. Bruce Given, our Chief Operating Officer, Dr. David Lewis, our Chief Scientific Officer, and Kenneth Myszkowski, our Chief Financial Officer. We do not maintain key man life insurance for any of our executives. Our ability to execute our strategy also will depend on our ability to continue to attract and retain qualified scientists and management. If we are unable to find, hire and retain qualified individuals, we could have difficulty implementing our business plan in a timely manner, or at all.

Members of our senior management team and Board may have a conflict of interest in also serving as officers and/or directors of our Subsidiaries.

While we expect that our officers and directors who also serve as officers and/or directors of our Subsidiaries will comply with their fiduciary duties owed to our stockholders, they may have conflicting fiduciary obligations to our stockholders and the minority stockholders of our Subsidiaries. Specifically, Dr. Anzalone, our President and CEO as well as Dr. Mauro Ferrari, an Arrowhead board member, are board members of Leonardo, a drug delivery company in which Arrowhead owns a 3% interest. Drs. Anzalone and Ferrari own a noncontrolling interest in Leonardo. Douglass Given, a member of our board of directors, is the brother of Bruce Given, our Chief Operating Officer. To the extent that any of our directors choose to recuse themselves from particular Board actions to avoid a conflict of interest, the other members of our Board of Directors will have a greater influence on such decisions.

Our business and operations could suffer in the event of information technology system failures.

Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. Such events could cause interruption of our operations. For example, the loss of pre-clinical trial data or data from completed or ongoing clinical trials for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach were to result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.

Risks related to our development, regulatory approval, and marketing of our product candidates

The manufacture and sale of human therapeutic products are governed by a variety of statutes and regulations. There can be no assurance that our product candidates will obtain regulatory approval.

The sale of human therapeutic products in the U.S. and foreign jurisdictions is subject to extensive and time consuming regulatory approval which requires:

· | controlled research and human clinical testing;

· | establishment of the safety and efficacy of the product for each use sought;

· | government review and approval of a submission containing manufacturing, pre-clinical and clinical data;

· | adherence to Good Manufacturing Practice Regulations during production and storage; and

· | control of marketing activities, including advertising and labeling.

The product candidates we currently have under development will require significant development, pre-clinical and clinical testing and investment of significant funds before their commercialization. Some of our product candidates, if approved, will require the completion of post-market studies. There can be no assurance that such products will be developed and approved. The process of completing clinical testing and obtaining required approvals is likely to take a number of years and require the use of substantial resources. If we fail to obtain regulatory approvals, our operations will be adversely affected. Further, there can be no assurance that product candidates employing a new technology will be shown to be safe and effective in clinical trials or receive applicable regulatory approvals.

28

Investors should be aware of the risks, problems, delays, expenses and difficulties which we may encounter in view of the extensive regulatory environment which affects our business in any jurisdiction where we develop product candidates.

If testing of a particular product candidate does not yield successful results, then we will be unable to commercialize that product candidate.

We must demonstrate our product candidates’ safety and efficacy in humans through extensive clinical testing. Our research and development programs are at an early stage of development. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of any products, including the following:

· | the results of pre-clinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;

· | safety and efficacy results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;

· | after reviewing test results, we may abandon projects that we might previously have believed to be promising;

· | we or our regulators, may suspend or terminate clinical trials because the participating subjects or patients are being exposed to unacceptable health risks; and

· | our product candidates may not have the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.

Clinical testing is very expensive, can take many years, and the outcome is uncertain. The data collected from our clinical trials may not be sufficient to support approval of our product candidates by the regulatory authorities. The clinical trials of our product candidates may not be completed on schedule, and the regulatory authorities may not ultimately approve any of our product candidates for commercial sale. If we fail to adequately demonstrate the safety and efficacy of a product candidate, this would delay or prevent regulatory approval of the product candidate, which could prevent us from achieving profitability.

It may take us longer than we are currently projecting to complete our clinical trials, and we may not be able to complete them at all.

Although for planning purposes, we project the commencement, continuation and completion of our clinical trials, a number of factors, including scheduling conflicts with participating clinicians and clinical institutions, and difficulties in identifying or enrolling patients who meet trial eligibility criteria, may cause significant delays. We may not commence or complete clinical trials involving any of our product candidates as projected or may not conduct them successfully.

Even if we achieve regulatory approval, future regulatory reviews or inspections may result in the suspension or withdrawal of one or more of our products, closure of a facility or enforcement of substantial fines.

If regulatory approval to sell any of our product candidates is received, regulatory agencies may, nevertheless, limit the categories of patients who can use them. In addition, regulatory agencies subject a marketed product, its manufacture and the manufacturers’ facilities to continual review and periodic inspection. If previously unknown problems with a product or manufacturing and laboratory facility are discovered or we fail to comply with applicable regulatory approval requirements, a regulatory agency may impose restrictions on that product or on us. The agency may require the withdrawal of the product from the market, closure of the facility or enforcement of substantial fines.

Our ability to successfully commercialize human therapeutic products may depend in part on reimbursement for the cost of such products and related treatments from government health administration authorities, private health coverage insurers and other organizations.

Third-party payers are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and adequate third-party coverage may not be available to establish price levels sufficient for us to realize an appropriate return on our investment in product development. When we partner our product candidates we will typically be relying on that partner to obtain cost reimbursement from third parties for the product candidate.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by clinical trial participants, consumers, health-care providers, pharmaceutical companies, or others selling our products. If we cannot successfully defend ourselves against these claims, we may incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

· | decreased demand for our product candidates;

· | impairment of our business reputation;

29

· | withdrawal of clinical trial participants;

· | costs of related litigation;

· | substantial monetary awards to patients or other claimants;

· | loss of revenues; and

· | the inability to commercialize our product candidates.

Although we currently have liability insurance for our clinical trials our insurance coverage may not be sufficient to reimburse us for all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.

The successful commercialization of our product candidates, if approved will depend in part on the extent to which government authorities and health insurers establish adequate reimbursement levels and pricing policies.

Sales of any approved drug candidate will depend in part on the availability of coverage and reimbursement from third-party payers such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. Accordingly, coverage and reimbursement may be uncertain. Adoption of any drug candidate by the medical community may be limited if third-party payers will not offer coverage. Additionally, significant uncertainty exists as to the reimbursement status of newly approved drugs. Cost control initiatives may decrease coverage and payment levels for any new drug and, in turn, the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payers. Any denial of private or government payer coverage or inadequate reimbursement could harm our business and reduce our revenue.

In addition, both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care, as well as hold public hearings on these matters, which has resulted in certain private companies dropping the prices of their drugs. Further federal and state proposals and healthcare reforms are likely, which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in potential coverage and reimbursement levels for our product candidates, if approved and commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

If future reimbursement for approved product candidates, if any, is substantially less than we project, or rebate obligations associated with them are substantially increased, our business and commercial opportunities could be materially and adversely impacted.

Risks Related to Our Patents, Licenses and Trade Secrets

Our ability to protect our patents and other proprietary rights is uncertain, exposing us to the possible loss of competitive advantage.

We have licensed rights to pending patents and have filed and expect to continue to file patent applications. Researchers sponsored by us may also file patent applications that we choose to license. If a particular patent is not granted, the value of the invention described in the patent would be diminished. Further, even if these patents are granted, they may be difficult to enforce. Even if successful, efforts to enforce our patent rights could be expensive, distracting for management, cause our patents to be invalidated, and frustrate commercialization of products. Additionally, even if patents are issued and are enforceable, others may independently develop similar, superior or parallel technologies to any technology developed by us, or our technology may prove to infringe upon patents or rights owned by others. Finally, patent prosecution is expensive, and we may be forced to curtail prosecution if our cash resources are limited. Thus, the patents held by or licensed to us may not afford us any meaningful competitive advantage. If we are unable to derive value from our licensed or owned intellectual property, the value of your investment may decline.

Our Subsidiaries are party to technology license agreements with third parties that require us to satisfy obligations to keep them effective and, if these agreements are terminated, our technology and our business would be seriously and adversely affected.

Through our Subsidiaries, we are party to license agreements with University of Texas MD Anderson Cancer Center, Alnylam Pharmaceuticals, Inc. and other entities to incorporate their proprietary technologies into our drug products under development. These license agreements require us to pay royalties and satisfy other conditions, including conditions in some cases related to the commercialization of the licensed technology. We may not be able to successfully incorporate these technologies into marketable

30

products or, if we do, sales may not be sufficient to recover the amounts that we are obligated to pay to the licensors. If we fail to satisfy our obligations under these agreements, the terms of the licenses may be materially modified, such as by rendering currently exclusive licenses non-exclusive, or may give our licensors the right to terminate their respective agreement with us, which would limit our ability to implement our current business plan and harm our business and financial condition.

We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products.

Because the intellectual property landscape in the fields in which we participate is rapidly evolving and interdisciplinary, it is difficult to conclusively assess our freedom to operate without infringing on third party rights. However, we are currently aware of certain patent rights held by third parties that, if found to be valid and enforceable, could be alleged to render one or more of our business lines infringing. If a claim should be brought and is successful, we may be required to pay substantial damages, be forced to abandon any affected business lines and/or seek a license from the patent holder. In addition, any patent infringement claims brought against us, whether or not successful, may cause us to incur significant expenses and divert the attention of our management and key personnel from other business concerns. These could negatively affect our results of operations and prospects. We cannot be certain that patents owned or licensed by us or our Subsidiaries will not be challenged by others.

In addition, if our potential products infringe the intellectual property rights of third parties, these third parties may assert infringement claims against our customers, and we may be required to indemnify our customers for any damages they suffer as a result of these claims. The claims may require us to initiate or defend protracted and costly litigation on behalf of customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be unable to continue selling such products.

We license patent rights from third-party owner and we rely on such owners to obtain, maintain and enforce the patents underlying such licenses.

We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful for our business. In particular, we have obtained licenses from, among others, Alnylam and the University of Texas MD Anderson Cancer Center. We also expect to enter into additional licenses to third-party intellectual property in the future.

Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Our technology licensed from various third parties may be subject to government rights and retained rights of the originating research institutions.

We license a portion of our technology from government-funded sources such as the University of Texas MD Anderson Cancer Center. Our other licensors may have obligations to government agencies or universities. Under their agreements, a government agency or university may obtain certain rights over the technology that we have developed and licensed, including the right to require that a compulsory license be granted to one or more third parties selected by the government agency.

In addition, our licensors often retain certain rights under their agreements with us, including the right to use the underlying technology for noncommercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and scholarly disclosures of information relating to the technology. It is difficult to monitor whether our licensors limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse.

31

Risks Related to our Stock

Stockholder equity interest may be substantially diluted in any additional financing.

Our certificate of incorporation authorizes the issuance of 145,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, on such terms and at such prices as our Board of Directors may determine. As of September 30, 2013, we had 32,489,444 shares of Common Stock issued and outstanding. The issuance of additional securities in financing transactions by us or through the exercise of options or warrants will dilute the equity interests of our existing stockholders, perhaps substantially, and might result in dilution in the tangible net book value of a share of our Common Stock, depending upon the price and other terms on which the additional shares are issued.

Our Common Stock price has fluctuated significantly over the last several years and may continue to do so in the future, without regard to our results of operations and prospects.

Because we are a development stage company, there are few objective metrics by which our progress may be measured. Consequently, we expect that the market price of our Common Stock will likely continue to fluctuate significantly. We may not generate substantial revenue from the license or sale of our technology for several years, if at all. In the absence of product revenue as a measure of our operating performance, we anticipate that investors and market analysts will assess our performance by considering factors such as:

— | Announcements of developments related to our business;

— | Our ability to enter into or extend investigation phase, development phase, commercialization phase and other agreements with new and/or existing partners;

— | Announcements regar ding the status of any or all of our collaborations or products;

— | Market perception and/or investor sentiment regarding our technology;

— | Announcements regarding developments in the RNA interference or biotechnology fields in general;

— | Market perception and/or announcements regarding other companies developing products in the field of RNA interference;

— | The issuance of competitive patents or disallowance or loss of our patent rights; and

— | Variations in our operating results.

We will not have control over many of these factors but expect that they may influence our stock price. As a result, our stock price may be volatile and such volatility could result in the loss of all or part of your investment. Additionally, in the past, when the market price of a stock has been volatile, holders of that stock have often initiated securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

The market for purchases and sales of our Common Stock may be limited, and the sale of a limited number of shares could cause the price to fall sharply.

Although our Common Stock is listed for trading on the NASDAQ Capital Market, at various times our securities have been relatively thinly traded. Investor trading patterns could serve to exacerbate the volatility of the price of our stock. For example, mandatory sales of our Common Stock by institutional holders could be triggered if an investment in our Common Stock no longer satisfies their investment standards and guidelines. It may be difficult to sell shares of our Common Stock quickly without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could result in major fluctuations in the price of the stock.

32

If securities or industry analysts do not publish research reports about our business or if they make adverse recommendations regarding an investment in our stock, our stock price and trading volume may decline.

The trading market for our Common Stock can be influenced by the research and reports that industry or securities analysts publish about our business. Currently, coverage of our Company by industry and securities analysts is limited. Investors have many investment opportunities and may limit their investments to companies that receive greater coverage from analysts. If additional industry or securities analysts do not commence coverage of the Company, the trading price of our stock could be negatively impacted. If one or more of the analysts downgrade our stock or comment negatively on our prospects, our stock price may decline. If one or more of these analysts cease to cover our industry or us or fails to publish reports about the Company regularly, our Common Stock could lose visibility in the financial markets, which could also cause our stock price or trading volume to decline.

We do not intend to declare cash dividends on our Common Stock.

We will not distribute cash to our stockholders unless and until we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. The time frame for that is unpredictable and investors should not expect dividends in the near future, if at all.

Our Board of Directors has the authority to issue shares of “blank check” preferred stock, which may make an acquisition of the Company by another company more difficult.

We have adopted and may in the future adopt certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of the Company that a holder of our Common Stock might consider in its best interest. Specifically, our Board of Directors, without further action by our stockholders, currently has the authority to issue up to 5,000,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred). Such preferred stock may have rights, including economic rights, senior to our Common Stock.

ITEM 1B. | UNRESOLVED STAFF COMMENTS

None.

ITEM 2. | PROPERTIES

At September 30, 2013, we had leases for our corporate headquarters, located in Pasadena, California, and our research facility in Madison, Wisconsin. The Company does not own any real property. The following table summarizes the company’s leased facilities:

| Office Space |  |  | Monthly Rent |  |  | Lease Commencement |  |  | Lease Term |
Pasadena, California |  | 5,300 sq. ft. |  |  | $ | 13,000 |  |  |  | August 16, 2012 |  |  |  | 5.5 years |
Madison, Wisconsin |  | 24,000 sq. ft. |  |  | $ | 56,500 |  |  |  | February 16, 2009 |  |  |  | 10 Years |

ITEM 3. | LEGAL PROCEEDINGS

None.

ITEM 4. | MINE SAFETY DISCLOSURES

Not applicable.

33

PART II

ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our Common Stock is traded on the NASDAQ Stock Market under the symbol “ARWR”. The following table sets forth the high and low sales prices for a share of the Company’s Common Stock during each period indicated. On November 17, 2011, the Company effected a 1 for 10 reverse stock split. The share prices in the table below are shown on a post-split basis.

| Fiscal Year Ended September 30, |
| 2013 |  |  | 2012 |
| High |  |  | Low |  |  | High |  |  | Low |
1st Quarter | $ | 2.63 |  |  | $ | 2.01 |  |  | $ | 7.50 |  |  | $ | 3.60 |
2nd Quarter |  | 2.42 |  |  |  | 1.78 |  |  |  | 6.38 |  |  |  | 4.13 |
3rd Quarter |  | 2.35 |  |  |  | 1.69 |  |  |  | 7.14 |  |  |  | 3.12 |
4th Quarter |  | 6.05 |  |  |  | 1.96 |  |  |  | 3.84 |  |  |  | 2.60 |

Shares Outstanding

At December 16, 2013, 38,700,363 shares of the Company’s Common Stock were issued and outstanding, and were owned by 275 stockholders of record, based on information provided by the Company’s transfer agent.

Dividends

The Company has never paid dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future.

Securities Authorized for Issuance Under the Equity Compensation Plans

The disclosure required under this item related to equity compensation plans is incorporated by reference from Item 12, under the caption “Equity Compensation Plan Information” in this Annual Report on Form 10-K.

Sales of Unregistered Securities

All information under this Item has been previously reported on our Current Reports on Form 8-K.

Repurchases of Equity Securities

We did not repurchase any shares of our Common Stock during fiscal 2013 or fiscal 2012.

ITEM 6. | SELECTED FINANCIAL DATA

As a “Smaller Reporting Company,” we are not required to provide this information.

34

ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of Business

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms the “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 collectively to Arrowhead Madison Inc. (“Madison”), Calando Pharmaceuticals, Inc. (“Calando”), Ablaris Therapeutics, Inc. (“Ablaris”), and Tego Biosciences Corporation (“Tego”), as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, and Alvos Therapeutics, Inc. (“Alvos”), and Agonn Systems, Inc. (“Agonn”),which were merged into Arrowhead during 2013. (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”), which was dissolved during 2013, and Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, and (5) the term “Common Stock” refers to Arrowhead’s Common Stock and the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock. All Arrowhead share and per share data have been adjusted to reflect a one for ten reverse stock split effected on November 17, 2011.

Overview

Arrowhead Research Corporation is a biopharmaceutical company developing targeted RNAi therapeutics. The Company is leveraging its proprietary drug delivery technologies to develop targeted drugs based on the RNA interference mechanism that efficiently silence disease-causing genes. These platforms have yielded several drug candidates under internal and partnered development. Arrowhead technologies also enable partners to create peptide-drug conjugates that specifically home to cell types of interest while sparing off-target tissues. Arrowhead’s pipeline includes clinical programs in chronic hepatitis B virus and obesity and partner-based programs in oncology.

Critical Accounting Policies and Estimates

Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the United States 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 are important to the portrayal of our consolidated financial statements and 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 and new accounting standards.

Revenue Recognition

Revenue from product sales are 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.

We 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, and various milestone and future product royalty or profit-sharing payments.

Revenue associated with research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. Revenue from up-front license fees, milestones and product royalties are recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.

35

Business Combinations

In October 2011, we acquired all of the outstanding common stock of Roche Madison, Inc. and certain related intellectual property assets for a $50,000 promissory note and 1,288,158 shares of Arrowhead Common Stock, an estimated consideration value of $5.1 million on the date of the acquisition. We assigned the value of the consideration to the tangible assets and identifiable intangible assets and the liabilities assumed on the basis of their fair values on the date of acquisition. The excess of net assets over the consideration was recorded as a nonoperating gain.

In April 2012, we acquired all of the outstanding common stock of Alvos Therapeutics, Inc. in exchange for the issuance of 315,457 shares of Arrowhead Common Stock, valued at $2.0 million at the time of acquisition. The consideration was assigned to its tangible and intangible assets, and liabilities based on estimated fair values at the time of acquisition.

The allocation of value to certain items, including property and equipment, intangible assets and certain liabilities require management judgment, and is based upon the information available at the time of acquisition.

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 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.

Impairment of Intangible assets

Intangible assets consist of in-process research and development, patents and license agreements acquired in conjunction with a business 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 recognize stock-based compensation expense based on the grant date fair value using the Black-Scholes options pricing model, which requires us to make assumptions regarding certain variables including the risk-free interest rate, expected stock price volatility, and the expected life of the award. The assumptions used in calculating stock-based compensation expense represent management’s best estimates, but these estimates involve inherent uncertainties, and if factors change or the Company used different assumptions, its stock-based compensation expense could be materially different in the future.

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. For example, at September 30, 201 3, a 25% change in the value of the Company’s stock price would affect the value of the derivative liability by approximately $1.2 million to $1.3 million, depending on other inputs.

36

Reverse Stock Split

As of November 17, 2011, the Company effected a 1 for 10 reverse stock split (the “reverse stock split”). As a result of the reverse stock split, each ten shares of the Company’s Common Stock issued and outstanding immediately prior to the reverse split were combined into one share of Common Stock. Also, as a result of the Reverse Stock Split, the per share exercise price of, and the number of shares of Common Stock underlying outstanding Company stock options, warrants, preferred stock and any Common Stock based equity grants outstanding immediately prior to the reverse stock split was proportionally adjusted, based on the one-for-ten split ratio, in accordance with the terms of such options, warrants or other Common Stock based equity grants as the case may be. No fractional shares of Common Stock were issued in connection with the reverse stock split. Stockholders instead received cash payment in lieu of any fractional shares. Unless otherwise noted, all share and per share amounts in these have been retrospectively adjusted to reflect the reverse stock split.

Full Year Review

During 2013, the Company made substantial progress with its lead clinical candidate, ARC-520, for the treatment of chronic hepatitis B infection. In July 2013, the Company began a Phase 1 clinical trial in Australia in healthy volunteers to characterize the safety profile of ARC-520. This trial completed enrollment in October 2013, and the Company is preparing for a Phase 2a pilot efficacy study for chronically infected HBV patients. The Company continues to develop other clinical candidates for future clinical trials, focusing on intravenous-administered liver targets, as well as subcutaneous liver targets. The Company has partnered programs in oncology and obesity. The Company’s research and development efforts are concentrated at our research facility in Madison, Wisconsin. Clinical candidates are tested through GLP toxicology studies at outside laboratories, and drug materials for such studies, and for 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 trials, including plan design, patient recruiting, and follow up. These outside costs, relating to the preparation and administration of clinical trials, are referred to as program costs, and as the Company is successful in the progression of its clinical candidates, program costs will increase.

Results of Operations

The Company had a net loss of $31.7 million for the year ended September 30, 201 3, compared to a net loss of $22.1 million for the year ended September 30, 201 2, an increase of $4.4 million.

The increase in the net loss was the result of a number of factors. From an operating standpoint, the main factor was higher R&D expenses of $3.3 million for preclinical GLP toxicology studies and cGMP drug manufacturing in preparation of the clinical trial for ARC-520, as well as costs for the Phase 1 clinical trial of ARC-520. General and administrative expenses were lower in 2013 by $2.9 million, but this change was primarily due to the prior year write down of certain receivables from minority interest companies. Salaries and payroll related expenses increased nominally in 2013, primarily due to headcount increases and general salary adjustments. In 2013, the Company recorded a noncash impairment expense of $1.3 million to write off certain patents as a result of a termination of a license agreement. Other expense was higher in 2013 by $6.1 million primarily due to noncash losses from the change in value of derivatives, as well as the write down of a note receivable obtained as part of our disposition of Unidym in 2011. Details of the results of operations are presented below.

Revenues

Total revenue was $290,000 for the year ended September 30, 2013 and $147,000 for the year ended September 30, 2012. Revenue is primarily composed of amortization of up-front patent license fee payments. In addition, the Company had collaboration revenue of $115,000 during the year ended September 30, 2013.

Operating Expenses

The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. For purposes of comparison, the amounts for the years ended September 30, 201 3 and 201 2 are shown in the table below.

37

Salary and Payroll-Related Expenses—Fiscal 201 3 compared to Fiscal 201 2

The Company employs scientific, technical and administrative staff at its corporate offices and its research facility. Salaries and payroll-related expense consists of salary and related benefits. Salary and benefits include two major categories: general and administrative (G&A) compensation expense, and research and development (R&D) compensation expense, based on the primary activities of each employee. The following table provides detail of salary and related benefits expenses for the years ended September 30, 201 3 and 201 2.

(in thousands)

|  | Twelve months Ended September 30, 2013 |  |  | % of Expense Category |  | Twelve months Ended September 30, 2012 |  |  | % of Expense Category |  | Increase (Decrease)
| $ |  |  | %
| G&A—compensation-related | $ | 3,075 |  |  |  | 46 | % |  | $ | 3,107 |  |  |  | 48 | % |  | $ | (32 | ) |  |  | -1 | %
| R&D—compensation-related |  | 3,593 |  |  |  | 54 | % |  |  | 3,308 |  |  |  | 52 | % |  |  | 285 |  |  |  | 9 | %
| Total | $ | 6,668 |  |  |  | 100 | % |  | $ | 6,415 |  |  |  | 100 | % |  | $ | 253 |  |  |  | 4 | %

During the year ended September 30, 201 3, G&A compensation expense decreased $32,000, a decline of 1%. During the year ended September 30, 201 3, R&D compensation expense increased $285,00 0. Compensation expense for R&D employees is primarily composed of the personnel costs at our R&D facility in Madison, Wisconsin. During 2013, the Company hired two additional employees. The Company plans to further increase its workforce to accelerate research and development efforts to add additional clinical candidates to its pipeline.

General & Administrative Expenses—Fiscal 201 3 compared to Fiscal 201 2

The following table provides details of our general and administrative expenses for the years ended September 30, 201 3 and 201 2.

(in thousands)

|  | Twelve months Ended September 30, 2013 |  |  | % of Expense Category |  | Twelve months Ended September 30, 2012 |  |  | % of Expense Category |  | Increase (Decrease)
| $ |  |  | %
| Professional/outside services | $ | 1,319 |  |  |  | 38 | % |  | $ | 1,802 |  |  |  | 28 | % |  | $ | (483 | ) |  |  | -27 | %
| Patent expense |  | 941 |  |  |  | 27 | % |  |  | 1,023 |  |  |  | 16 | % |  |  | (82 | ) |  |  | -8 | %
| Facilities and related |  | 170 |  |  |  | 5 | % |  |  | 120 |  |  |  | 2 | % |  |  | 50 |  |  |  | 42 | %
| Travel |  | 440 |  |  |  | 13 | % |  |  | 369 |  |  |  | 6 | % |  |  | 71 |  |  |  | 19 | %
| Business insurance |  | 216 |  |  |  | 6 | % |  |  | 202 |  |  |  | 3 | % |  |  | 14 |  |  |  | 7 | %
| Communication and Technology |  | 184 |  |  |  | 5 | % |  |  | 196 |  |  |  | 3 | % |  |  | (12 | ) |  |  | -6 | %
| Office expenses |  | 110 |  |  |  | 3 | % |  |  | 91 |  |  |  | 1 | % |  |  | 19 |  |  |  | 21 | %
| Other |  | 109 |  |  |  | 3 | % |  |  | 2,636 |  |  |  | 41 | % |  |  | (2,527 | ) |  |  | -96 | %
| Total | $ | 3,489 |  |  |  | 100 | % |  | $ | 6,439 |  |  |  | 100 | % |  | $ | (2,950 | ) |  |  | -46 | %

Professional/outside services include legal, accounting and other outside services retained by the Company. All periods include normally occurring legal and accounting expenses related to SEC compliance and other corporate matters. Professional/outside services expense was $1.3 million during the year ended September 30, 201 3, compared to $1.8 million in the comparable prior period. The decrease in professional services relate to lower legal and consulting costs at Arrowhead, as well as a decline in those costs as they relate to our subsidiary, Calando, for which we have curtailed activities.

Patent expense was $941,000 during the year ended September 30, 201 3, compared to $1,023,000 in the comparable prior period. During 2013, Calando reduced its patent expense cost by curtailing patent prosecution costs for non-strategic patents. In August 2013, Calando terminated its license agreement with Caltech, and its rights and obligations thereto. Accordingly patent expense related to Calando is expected to be negligible going forward. The Company continues to invest in patent protection for its DPC technology, related product candidates and other RNAi technology through patent filings throughout the world. The Company expects to extend and maintain protection for its current portfolios and file new patent applications as technologies are developed and improved.

38

Facilities and related expense was $170,000 during the year ended September 30, 201 3, compared to $120,000 in the comparable prior period. Facilities and related expense within general and administrative expenses primarily relate to rental costs associated with the Company’s headquarters in Pasadena, California. Facilities expense increased as the Company moved into a new corporate headquarters in August 2012, which costs are higher than the smaller temporary office space that was occupied in fiscal 2012.

Travel expense was $44 0,000 during the year ended September 30, 201 3, compared to $369,000 in the comparable prior period. Travel expense increased due to general increased level of activities, particularly increased drug manufacturing, and clinical trial activities, as well as travel between the corporate office in Pasadena and our R&D facility in Madison. Travel expense includes costs related to travel by Company personnel for operational business meetings at other company locations, business initiatives and collaborations throughout the world with other companies, marketing, investor relations, fund raising and public relations purposes.

Business insurance expense was $216,00 0 during the year ended September 30, 201 3, compared to $202,000 in the comparable prior period. The company experienced rate decreases in its Directors and Officers insurance coverage, which was offset by additional insurance costs primarily related to specific insurance purchased to cover insurance requirements of our clinical trials for ARC-520.

Communication and technology expense was $184,000 during the year ended September 30, 201 3, compared to $1 96,000 in the comparable prior period. The decrease was primarily due to lower information technology consulting costs, which include normally recurring support for the Company’s network and other systems. No major system-related upgrades were undertaken in fiscal 2013. IT consulting fees can fluctuate depending on issues that arise with software and/or other on-going software projects.

Office expenses are administrative costs to facilitate the operations of the Company’s office facilities in Pasadena and include office supplies, copier/printing costs, postage/delivery, professional dues/memberships, books/subscriptions, staff amenities, and professional training. Office expenses were $110,00 0 during the year ended September 30, 201 3, compared to $91,000 in the comparable prior period. The increase in office expenses was due to non-capitalized office furniture, research journals/articles and other miscellaneous administrative expenses.

Other expense was $109,000 during the year ended September 30, 201 3 compared to $2.6 million in the comparable prior period. During the year ended September 30, 2012, the Company recorded reserves against receivable from its unconsolidated affiliates, Nanotope and Leonardo in the amount of $2.5 million.

Research and Development Expenses—Fiscal 201 3 compared to Fiscal 201 2

R&D expenses are related to the Company’s on-going research and development efforts, primarily related to its laboratory research facility in Madison, Wisconsin, and also include outsourced R&D services. The following table provides details of research and development expense for the years ended September 30, 201 3 and 201 2.

(in thousands)

|  | Twelve months Ended September 30, 2013 |  |  | % of Expense Category |  | Twelve months Ended September 30, 2012 |  |  | % of Expense Category |  | Increase (Decrease)
| $ |  |  | %
| Outside labs & contract services | $ | 2,512 |  |  |  | 29 | % |  | $ | 787 |  |  |  | 15 | % |  | $ | 1,725 |  |  |  | 219 | %
| In vivo studies |  | 303 |  |  |  | 3 | % |  |  | 302 |  |  |  | 6 | % |  |  | 1 |  |  |  | 0 | %
| Drug manufacturing |  | 2,187 |  |  |  | 24 | % |  |  | 1,256 |  |  |  | 22 | % |  |  | 931 |  |  |  | 74 | %
| Consulting |  | 259 |  |  |  | 3 | % |  |  | 375 |  |  |  | 7 | % |  |  | (116 | ) |  |  | -31 | %
| License, royalty & milestones |  | 322 |  |  |  | 4 | % |  |  | 274 |  |  |  | 5 | % |  |  | 48 |  |  |  | 18 | %
| Laboratory supplies & services |  | 1,058 |  |  |  | 12 | % |  |  | 794 |  |  |  | 15 | % |  |  | 264 |  |  |  | 33 | %
| Clinical trials |  | 1,093 |  |  |  | 13 | % |  |  | 599 |  |  |  | 11 | % |  |  | 494 |  |  |  | 82 | %
| Facilities and related |  | 732 |  |  |  | 8 | % |  |  | 787 |  |  |  | 15 | % |  |  | (55 | ) |  |  | -7 | %
| Sponsored research |  | 188 |  |  |  | 2 | % |  |  | 185 |  |  |  | 3 | % |  |  | 3 |  |  |  | 2 | %
| Other research expenses |  | 52 |  |  |  | 1 | % |  |  | 32 |  |  |  | 1 | % |  |  | 20 |  |  |  | 63 | %
| Total | $ | 8,706 |  |  |  | 100 | % |  | $ | 5,391 |  |  |  | 101 | % |  | $ | 3,315 |  |  |  | 61 | %

Outside lab and contract services expense was $2,512,000 during the year ended September 30, 201 3, compared to $787,000 in the comparable prior period. The increase is primarily due to GLP toxicology studies related to ARC-520, our hepatitis B clinical

39

candidate in preparation for a Phase 1 clinical trial. Additionally, we initiated long-term toxicology studies to support a Phase 2b, multi-dose clinical study for ARC-520. As ARC-520 and other clinical candidates progress through clinical trials, outside lab and contract service expense is expected to increase. Outside toxicology work can and will fluctuate depending on the number of clinical candidates the Company is developing and on the specific needs of each development candidate.

In vivo studies expense was $303,00 0 during the year ended September 30, 201 3, compared to 302,000 in the comparable prior period. The current period expense relates to preclinical animal studies at our Madison research facility, as the Company tests formulations of new potential clinical candidates.

Drug manufacturing expense was $2.2 million during the year ended September 30, 201 3, compared to $1.3 million in the comparable prior period. Drug manufacturing expense for fiscal 2013 was related to the manufacturing campaign to produce materials for the ARC-520 GLP toxicology studies and the Phase 1 clinical trial. The Company is utilizing outside manufactures to produce these components. In the prior year, approximately half of the drug manufacturing expense was related to the production of polymer components for RONDEL. Further development of RONDEL and CALAA-01 has been suspended as the Company focuses on its DPC delivery platform. Manufacturing costs related to ARC-520 are expected to continue as the Company prepares for a multi-dose Phase 2b clinical trial. Also, as the Company develops other clinical candidates, it will incur related manufacturing costs for toxicology studies and future clinical trials.

Consulting expense was $259,000 during the year ended September 30, 201 3, compared to $375,000 in the comparable prior period. During fiscal 2012, the Company retained the services of a former Alvos employee to consult in the transition and this contract was not renewed in 2013. Additionally, the Company scaled back its strategic advisory board, replacing it with a clinical advisory board, to address the Company’s needs with respect to ARC-520. The timing of such consulting expenses resulted in less costs in 2013.

License, royalty & milestone expense was $322,000 during the year ended September 30, 201 3, compared to $274,000 in the comparable prior period. The licensing fees, royalty and milestones expenses in fiscal 2013 was related to a one-time $100,000 milestone payment due at the start of the ARC-520 clinical trial, and a one-time payment related to gain access to certain targeting technology from our acquisition of Alvos. The prior year expense was primarily related to a one-time milestone payment made related to the Ablaris clinical trial.

Laboratory supplies and services expense was $1,058,000 during the year ended September 30, 2013, compared to $794,000 in the comparable prior period. This increase in expense is associated with research and development efforts related to pre-clinical programs including siRNA synthesis for the identification and screening of new liver and extra-hepatic targets, subcutaneous formulations to be utilized in therapeutic areas where chronic dosing may be required and assessing the interaction of ARC-520 with other hepatitis therapeutics.

Clinical trial expense was $1,093,000 during the year ended September 30, 2013, compared to $599,000 in the comparable prior period. Expenses relating to clinical trials are increasing as the Company advances ARC-520. In fiscal 2013, the Company began a Phase 1 clinical trial for ARC-520 in healthy volunteers which completed enrollment in October 2013. In fiscal 2014, the Company submitted for ethics and regulatory permission to initiate a Phase 2a pilot efficacy clinical trial in chronic HBV patients and expects to conduct a Phase 2a clinical trial in fiscal 2014.

R&D facilities expense was $732,000 during the year ended September 30, 2013, compared to $787,000 in the comparable prior period and relates to rent for a research building, but also includes related property tax, utilities, and repairs and maintenance as may be required from time to time. Facilities expenses were fairly constant during the year and as compared to the prior period, with minor fluctuations in repairs and maintenance, electricity, property taxes and common area maintenance.

Sponsored research expense was $188,000 during the year ended September 30, 2013, compared to $185,000 in the comparable prior period. Sponsored research expense in both periods relates solely to research conducted at the University of Cincinnati for our obesity program. Such research expense is dependent upon studies undertaken, and vary based on needs and priority of the program.

40

Other research expense was $52,000 during the year ended September 30, 2013, compared to $32,000 in the comparable prior period. The increase primarily relates to the costs of other laboratory services, primarily waste disposal costs, which vary based on the type and level of R&D activity.

Stock-based compensation expense

Stock-based compensation expense, a noncash expense, was $1,536,000 during the year ended September 30, 201 3, compared to $1,241,000 during the comparable prior period. Stock-based compensation expense is based upon the valuation of stock options 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. Based on the additional options granted to new and existing employees in fiscal 2013, compensation expense has increased from the prior year.

Depreciation and amortization expense

Depreciation and amortization expense, a noncash expense, was $1,751,00 0 during the year ended September 30, 201 3, compared to $1,749,000 during the comparable prior period. The majority of depreciation and amortization expense relates to depreciation on lab equipment obtained as part of the acquisition of Roche Madison. In addition, the Company records depreciation on leasehold improvements at its Madison research facility. Depreciation and amortization expense is essentially unchanged from the prior year. Calando patents were written down during the year and recorded as impairment expense, thus amortization of those patents has been completed. This decrease was mostly offset by increased depreciation expense from newly acquired lab equipment capitalized in fiscal 2013.

Other Income / Expense

Other income / expense increased from expense of $1.0 million in fiscal 201 2 to $7.1 million in fiscal 201 3. The increase in other expense during fiscal 201 3 was primarily due to a noncash expense of $5.3 million for the change in value of derivatives. This expense was caused by the method of accounting for certain warrants issued by the Company that have price adjustment features. The change in value of derivatives is impacted by the fair value calculation, based upon various inputs, but principally susceptible to a change in the Company’s stock price, which was the factor that drove the change in expense, primarily during the fourth quarter of fiscal 2013. Additionally, the Company recorded expense of $1.0 million related to the write down of a note receivable related to the sale of our former subsidiary, Unidym. Finally, the Company recorded a loss of $641,000 related to expenses at its minority equity investments, Leonardo and Nanotope. During fiscal 2012, the Company recorded several nonrecurring items: Impairment of its investment in its unconsolidated affiliate, Nanotope of $1.4 million, a loss on the disposal of fixed assets of $1.1 million, and a gain recorded upon the acquisition of Roche Madison of $1.6 million, and an impairment of its investment in Leonardo of $0.2 million. An additional component of other income/expense in fiscal 2012 was the change in value of derivatives, which was a gain of $387,000.

Liquidity and Cash Resources

As a development stage company, Arrowhead has historically financed its operations through the sale of securities of Arrowhead and its Subsidiaries. Research and development activities have required significant capital investment since the Company’s inception, and are expected to continue to require significant cash investment in fiscal 201 4, and beyond.

At September 30, 201 3, the Company had cash on hand of approximately $19.1 million. Excess cash invested in fixed income securities was $10.7 million. Subsequent to September 30, 2013, the Company closed an additional financing generating $60 million in net proceeds from the sale of equity. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months.

Cash and cash equivalents increased $15.7 million during fiscal 201 3 from $3.4 million at September 30, 201 2 to $19.1 million at September 30, 201 3. The Company invested excess cash balances of $10.7 million in marketable securities at September 30, 2013.

Cash used in operating activities was $19.0 million, which represents the on-going expenses of its research and development programs and corporate overhead. Cash outlays were primarily composed of the following: salary and payroll-related expenses were $7.0 million, general and administrative costs were $3.6 million, and research and development costs were $8.7 million. Cash expenses were minimally offset by cash received from revenues of $0.3 million.

41

Cash used by investing activities was $9.5 million, primarily related to cash investments in fixed income securities of $10.7 million, offset by proceeds from the sale of investments of $1.4 million, related to securities of Wisepower received in the sale of Unidym in 2011. Capital expenditures were $0.3 million.

Cash provided by financing activities of $44.3 million includes $44.5 million of cash received from equity financings by the Company, offset by principal payments on capital leases of $0.2 million. The equity financings included the sale of common stock and warrants issued in December 2012 for proceeds of $3.8 million, the sale of common stock and warrants issued in the January 2013 for proceeds of $3.3 million and cash received from the sale of common and preferred stock issued in May 2013 with proceeds of $35.3 million. .The exercise of warrants during fiscal 2013 resulted in additional cash inflow of $2.1 million.

Recent Financing Activity / Sources of Capital:

On October 11, 2013, the Company closed a securities offering with certain institutional investors (the “Purchasers”), pursuant to which the Company sold 3,071,672 shares of common stock, (the “Shares”), at a purchase price of $5.86 per share, and 46,000 shares of Series C Convertible Preferred Stock (the “Preferred Shares”), at a purchase price of $1,000 per share. The Preferred Shares are convertible into shares of common stock at a conversion price of $5.86 per share of common stock. The aggregate purchase price paid by the Purchasers for the Shares and Preferred Shares was $64,000,000 and the Company received net proceeds of approximately $60,000,000, after advisory fees and offering expenses.

In May 2013, the Company sold 14.3 million shares of Arrowhead common stock at a price of $1.83 per share, and 9,900 shares of Arrowhead series B convertible preferred stock at a price of $1,000 per share. The series B preferred stock is convertible into common stock at a conversion price of $1.83. Gross proceeds were $36 million.

On January 25, 2013, the Company sold 1.7 million units at a price of $2.12 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.14 as of June 30, 2013. Gross proceeds from the offering were $3.5 million; net proceeds were $3.3 million after deducting commissions and other offering expenses.

On December 6, 2012, the Company sold 1.8 million units at a price of $2.26 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.12 as of June 30, 2013. Gross proceeds from the offering were $4.1 million; net proceeds were $3.8 million after deducting commissions and other offering expenses.

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.

Off-Balance Sheet Arrangements

As of September 30, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “Smaller Reporting Company,” we are not required to provide this information.

ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in Item 15 of this Annual Report Form 10-K.

ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

42

ITEM 9A. | CONTROLS AND PROCEDURES.

Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K (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 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.

Management’s Annual Report on Internal Control over Financial Reporting

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. This process includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management’s Assessment of the Effectiveness of our Internal Control over Financial Reporting

Management has evaluated the effectiveness of our internal control over financial reporting as of September 30, 201 3. In conducting its evaluation, management used the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under such framework, management has concluded that our internal control over financial reporting was effective as of September 30, 201 3.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year ended September 30, 201 3, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. | OTHER INFORMATION

None

43

PART III

ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information called for by this Item is incorporated by reference from our 2013 Proxy Statement.

ITEM 11. | EXECUTIVE COMPENSATION

The information called for by this Item is incorporated by reference from our 2013 Proxy Statement.

ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information called for by this Item is incorporated by reference from our 2013 Proxy Statement.

ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information called for by this Item is incorporated by reference from our 2013 Proxy Statement.

ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by this Item is incorporated by reference from our 2013 Proxy Statement.

PART IV

ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:

(1) | Financial Statements.

See Index to Financial Statements and Schedule on page F-1.

(2) | Financial Statement Schedules.

See Index to Financial Statements and Schedule on page F-1. All other schedules are omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

(3) | Exhibits.

The following exhibits are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K:

Exhibit Number |  |  |  | Incorporated by Reference Herein
| Description |  | Form |  | Date
2.1 |  | Stock and Asset Purchase Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011† |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as Exhibit 2.1 |  | December 20, 2011
3.1 |  | Certificate of Incorporation of InterActive Group, Inc., a Delaware corporation, dated December 15, 2000 |  | Schedule 14C, as Exhibit A |  | December 22, 2000

44

Exhibit Number |  |  |  | Incorporated by Reference Herein
| Description |  | Form |  | Date
3.2 |  | Certificate of Amendment to Certificate of Incorporation of InterActive Group, Inc. (effecting, among other things a change in the corporation’s name to “Arrowhead Research Corporation”), filed with the Secretary of State of the State of Delaware on January 12, 2004 |  | Schedule 14C, as Exhibit 1 |  | December 22, 2003
3.3 |  | Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated January 25, 2005 |  | Form 10-QSB for the quarter ended December 31, 2004, as Exhibit 3.4 |  | February 11, 2005
3.4 |  | Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated October 13, 2009 |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 3.4 |  | December 22, 2009
3.5 |  | Series A Certificate of Designations, dated October 25, 2011 |  | Current Report on Form 8-K, as Exhibit 3.1 |  | October 26, 2011
3.6 |  | Certificate of Amendment to Certificate of Incorporation of Arrowhead Research Corporation, dated November 17, 2011 |  | Current Report on Form 8-K, as Exhibit 3.1 |  | November 17, 2011
3.7 |  | Bylaws |  | Schedule 14C, as Exhibit B |  | December 22, 2000
3.8 |  | Amendment No. 1 to the Bylaws of Arrowhead Research Corporation |  | Current Report on Form 8-K, as Exhibit 3.1 |  | April 27, 2010
3.9 |  | Form of Series B Certificate of Designations, dated on or about May 1, 2013 |  | Current Report on Form 8-K, as Exhibit 3.1 |  | April 30, 2013
3.10 |  | Form of Series C Certificate of Designations, dated on or about October 10, 2013 |  | Current Report on Form 8-K, as Exhibit 3.1 |  | October 10, 2013
4.1 |  | Form of Registration Rights Agreement, July and August 2009 |  | Current Report on Form 8-K, as Exhibit 10.2 |  | July 17, 2009
4.2 |  | Form of Registration Rights Agreement, dated December 11, 2009 |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 4.2 |  | December 22, 2009
4.4 |  | Form of Common Stock Warrant expiring in September 2013 |  | Current Report on Form 8-K, as Exhibit 10.2 |  | September 11, 2008
4.5 |  | Form of Warrant to Purchase Capital Stock expiring June 2014 |  | Current Report on Form 8-K, as Exhibit 4.1 |  | July 17, 2009

45

Exhibit Number |  |  |  | Incorporated by Reference Herein
| Description |  | Form |  | Date
4.6 |  | Form of Warrant to Purchase Capital Stock expiring December 2014 |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 4.7 |  | December 22, 2009
4.7 |  | Form of Warrant to Purchase Common Stock expiring May 2017 |  | Current Report on Form 8-K, as Exhibit 4.1 |  | May 30, 2007
4.8 |  | Form of Warrant to Purchase Common Stock expiring December 2015 |  | Current Report on Form 8-K, as Exhibit 4.1 |  | June 18, 2010
4.9 |  | Form of Registration Rights Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 20, 2011 |  | Current Report on Form 8-K, as Exhibit 10.2 |  | October 26, 2011
4.11 |  | Form of Warrant to Purchase Shares of Capital Stock of Arrowhead Research Corporation expiring September 16, 2015 |  | Current Report on Form 8-K, as Exhibit 4.1 |  | September 22, 2010
4.12 |  | Form of Warrant to Purchase Shares of Common Stock Expiring August 13, 2016 |  | Current Report on Form 8-K, as Exhibit 4.1 |  | August 13, 2012
4.13 |  | Form of Common Stock Certificate |  | Amendment No. 2 to Registration Statement on Form S-1, as Exhibit 4.7 |  | September 11, 2009
4.14 |  | Form of Series A Preferred Stock Certificate |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as Exhibit 4.13 |  | December 20, 2011
4.15 |  | Form of Series B Preferred Stock Certificate* |  |  |  |
4.16 |  | Form of Warrant to Purchase Shares of Common Stock expiring August 17, 2016 |  | Current Report on Form 8-K, as exhibit 4.2 |  | August 13, 2012
4.17 |  | Form of Warrant to Purchase Shares of Common Stock expiring December 12, 2017 |  | Current Report on Form 8-K, as exhibit 4.2 |  | December 12, 2012
4.18 |  | Form of Warrant to Purchase Shares of Common Stock expiring January 30, 2018 |  | Current Report on Form 8-K, as exhibit 4.2 |  | January 30, 2013
4.19 |  | Form of Series C Preferred Stock Certificate* |  |  |  |
10.1** |  | Arrowhead Research Corporation (fka InterActive, Inc.) 2000 Stock Option Plan |  | Schedule 14C, as Exhibit D |  | December 22, 2000
10.2** |  | Arrowhead Research Corporation 2004 Equity Incentive Plan, as amended |  | Schedule 14C, as Annex A |  | January 12, 2012
10.3** |  | Executive Incentive Plan, adopted December 12, 2006 |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.11 |  | December 14, 2006
10.4** |  | Compensation Policy for Non-Employee Directors, as amended |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.12 |  | December 14, 2006

46

Exhibit Number |  |  |  | Incorporated by Reference Herein
| Description |  | Form |  | Date
10.5** |  | Employment Agreement between Arrowhead and Dr. Christopher Anzalone, dated June 11, 2008 |  | Current Report on Form 8-K, as Exhibit 10.1 |  | June 13, 2008
10.6** |  | Amendment to Employment Agreement between Arrowhead and Dr. Christopher Anzalone, effective May 12, 2009 |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as Exhibit 10.8 |  | December 22, 2009
10.8 |  | Form of Unsecured Convertible Promissory Note Agreement, dated November 26, 2008 |  | Current Report on Form 8-K, as Exhibit 10.1 |  | December 3, 2008
10.9 |  | Platform Agreement by and between Calando Pharmaceuticals, Inc. and Cerulean Pharma Inc., dated as of June 23, 2009 † |  | Form 10-Q for the quarter ended June 30, 2009, as Exhibit 10.1 |  | August 10, 2009
10.10 |  | IT-101 Agreement by and between Calando Pharmaceuticals, Inc. and Cerulean Pharma, Inc., dated as of June 23, 2009† |  | Form 10-Q for the quarter ended June 30, 2009, as Exhibit 10.2 |  | August 10, 2009
10.21 |  | Form of Series A Subscription Agreement between Arrowhead Research Corporation and certain investors |  | Current Report on Form 8-K, as Exhibit 10.3 |  | October 26, 2011
10.22 |  | Form of Purchase Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 20, 2011 |  | Current Report on Form 8-K, as Exhibit 10.1 |  | October 26, 2011
10.23 |  | Form of Common Stock Subscription Agreement between Arrowhead Research Corporation certain Investors, dated October 21, 2011 |  | Current Report on Form 8-K, as Exhibit 10.4 |  | October 26, 2011
10.24 |  | Non-Exclusive License Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011† |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as Exhibit 10.33 |  | December 20, 2011
10.25 |  | Form of Investor Subscription Agreement between Arrowhead Research Corporation and Lincoln Park Capital Fund, LLC, dated October 24, 2011 |  | Current Report on Form 8-K, as Exhibit 10.1 |  | October 27, 2011
10.26 |  | License and Collaboration Agreement, dated July 8, 2007 † |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as Exhibit 10.35 |  | December 20, 2011
10.27 |  | Collaboration Agreement by and among Alnylam Pharmaceuticals, Inc. and F. Hofmann-La Roche Ltd and Hoffman-La Roche Inc., dated October 29, 2009 † |  | Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as Exhibit 10.36 |  | December 20, 2011
10.28 |  | Office Lease Agreement |  | Quarterly Report on Form 10-Q, as Exhibit 10.1 |  | May 8, 2012
10.29 |  | Form of Securities Purchase Agreement between Arrowhead Research Corporation and certain Investors |  | Current Report on Form 8-K, as Exhibit 99.1 |  | August 10, 2012
10.30 |  | Form of Subscription Agreement between Arrowhead Research Corporation and certain Investors |  | Current Report on Form 8-K, as Exhibit 99.1 |  | December 12, 2012

47

Exhibit Number |  |  |  | Incorporated by Reference Herein
| Description |  | Form |  | Date
10.31 |  | Form of Subscription Agreement between Arrowhead Research Corporation and certain Investors |  | Current Report on Form 8-K, as Exhibit 99.1 |  | January 30, 2013
10.32 |  | Form of Securities Purchase Agreement between Arrowhead Research Corporation and certain Investors |  | Current Report on Form 8-K, as Exhibit 10.1 |  | April 30, 2013
21.1 |  | List of Subsidiaries* |  |  |  |
23.1 |  | Consent of Independent Public Registered Accounting Firm* |  |  |  |
24.1 |  | Power of Attorney (contained on signature page) |  |  |  |
31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |  |  |  |
31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |  |  |  |
32.1 |  | Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*** |  |  |  |
32.2 |  | Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*** |  |  |  |
101.INS |  | XBRL Instance Document* |  |  |  |
101.SCH |  | XBRL Schema Document* |  |  |  |
101.CAL |  | XBRL Calculation Linkbase Document* |  |  |  |
101.LAB |  | XBRL Label Linkbase Document* |  |  |  |
101.PRE |  | XBRL Presentation Linkbase Document* |  |  |  |
101.DEF |  | XBRL Definition Linkbase Document* |  |  |  |

* | Filed herewith

** | Indicates compensation plan, contract or arrangement.

*** | Furnished herewith

† | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 18th day of December 2013.

ARROWHEAD RESEARCH CORPORATION
B y: | /S/ Christopher Anzalone
| Christopher Anzalone
| Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature |  | Title |  | Date
/S/ Christopher Anzalone |  | Chief Executive Officer, President and |  | December 18, 2013
Christopher Anzalone |  | Director (Principal Executive Officer) |  |
/S/ Kenneth A. Myszkowski |  | Chief Financial Officer (Principal |  | December 18, 2013
Kenneth A. Myszkowski |  | Financial and Accounting Officer) |  |
/S/ Douglass Given |  | Chairman of the Board of Directors |  | December 18, 2013
Douglass Given |  |  |  |
/S/ Mauro Ferrari |  | Director |  | December 18, 2013
Mauro Ferrari |  |  |  |
/S/ Edward W. Frykman |  | Director |  | December 18, 2013
Edward W. Frykman |  |  |  |
/S/ Charles P. McKenney |  | Director |  | December 18, 2013
Charles P. McKenney |  |  |  |
/S/ Michael S. Perry |  | Director |  | December 18, 2013
Michael S. Perry |  |  |  |

F- 1

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Report of Independent Registered Public Accounting Firm |  | F-3 |
Consolidated Balance Sheets of Arrowhead Research Corporation and Subsidiaries, September 30, 2013 and 2012 |  | F-4 |
Consolidated Statements of Operations of Arrowhead Research Corporation and Subsidiaries for the years ended September 30, 2013 and 2012 and the period from May 7, 2003 (inception) through September 30, 2013 |  | F-5 |
Consolidated Statement of Stockholders’ Equity of Arrowhead Research Corporation and Subsidiaries for the period from May 7, 2003 (inception) through September 30, 2013 |  | F-6 |
Consolidated Statements of Cash Flows of Arrowhead Research Corporation and Subsidiaries for the years ended September 30, 2013 and 2012 and the period from May 7, 2003 (inception) through September 30, 2013 |  | F-9 |
Notes to Consolidated Financial Statements of Arrowhead Research Corporation and Subsidiaries |  | F-12 |

F- 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Arrowhead Research Corporation

We have audited the accompanying consolidated balance sheets of Arrowhead Research Corporation (a Delaware corporation) and Subsidiaries (the “Company”) as of September 30, 201 3 and 201 2 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended September 30, 201 3, and 201 2 and for the period from May 7, 2003 (inception) through September 30, 201 3. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arrowhead Research Corporation and Subsidiaries as of September 30, 201 3 and 201 2, and the consolidated results of their operations and their cash flows for the years ended September 30, 201 3 and 201 2, and for the period from May 7, 2003 (inception) through September 30, 201 3 in conformity with accounting principles generally accepted in the United States of America.

Rose, Snyder & Jacobs LLP

Encino, California

December 16, 2013

F- 3

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Balance Sheets

| September 30, 2013 |  |  | September 30, 2012 |
ASSETS |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |
Cash and cash equivalents | $ | 19,114,444 |  |  | $ | 3,377,288 |
Trade receivable |  | 75,000 |  |  |  | 9,375 |
Other receivables |  | 8,663 |  |  |  | 9,930 |
Prepaid expenses and other current assets |  | 615,351 |  |  |  | 618,130 |
Short term investments |  | 9,030,261 |  |  |  | 106,500 |
Note receivable, net |  | — |  |  |  | 2,446,113 |
TOTAL CURRENT ASSETS |  | 28,843,719 |  |  |  | 6,567,336 |
PROPERTY AND EQUIPMENT |  |  |  |  |  |  |
Computers, office equipment and furniture |  | 323,376 |  |  |  | 323,376 |
Research equipment |  | 3,452,013 |  |  |  | 3,319,027 |
Software |  | 69,623 |  |  |  | 69,623 |
Leasehold improvements |  | 2,749,409 |  |  |  | 2,749,409 |
|  | 6,594,421 |  |  |  | 6,461,435 |
Less: Accumulated depreciation and amortization |  | (3,081,186 | ) |  |  | (1,565,783 | )
PROPERTY AND EQUIPMENT, NET |  | 3,513,235 |  |  |  | 4,895,652 |
OTHER ASSETS |  |  |  |  |  |  |
Patents and other intangible assets, net |  | 3,240,513 |  |  |  | 4,784,569 |
Derivative asset and other non-current assets |  | 1,732,164 |  |  |  | 280,261 |
TOTAL OTHER ASSETS |  | 4,972,677 |  |  |  | 5,064,830 |
TOTAL ASSETS | $ | 37,329,631 |  |  | $ | 16,527,818 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |
Accounts payable | $ | 1,199,632 |  |  | $ | 877,986 |
Accrued expenses |  | 638,884 |  |  |  | 730,775 |
Accrued salaries and payroll-related expenses |  | 905,771 |  |  |  | 1,127,219 |
Deferred revenue |  | 103,125 |  |  |  | 37,500 |
Derivative liabilities |  | 4,096,363 |  |  |  | 647,213 |
Capital lease obligation |  | 221,345 |  |  |  | 214,801 |
Notes payable |  | 971,557 |  |  |  | 100,000 |
Other current liabilities |  | 588,343 |  |  |  | 1,592,394 |
TOTAL CURRENT LIABILITIES |  | 8,725,020 |  |  |  | 5,327,888 |
LONG-TERM LIABILITIES |  |  |  |  |  |  |
Notes payable, net of current portion |  | 50,000 |  |  |  | 839,421 |
Capital lease obligation, net of current portion |  | 1,061,113 |  |  |  | 1,282,458 |
Other non-current liabilities |  | 1,758,709 |  |  |  | 269,142 |
TOTAL LONG-TERM LIABILITIES |  | 2,869,822 |  |  |  | 2,391,021 |
Commitments and contingencies |  |  |  |  |  |  |
STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |
Arrowhead Research Corporation stockholders' equity: |  |  |  |  |  |  |
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 9,900 and 0 shares issued and outstanding as of September 30, 2013 and 2012, respectively |  | 10 |  |  |  | — |
Common stock, $0.001 par value; 145,000,000 shares authorized; 32,489,444 and 13,579,185 shares issued and outstanding as of September 30, 2013 and 2012, respectively |  | 124,859 |  |  |  | 108,354 |
Additional paid-in capital |  | 193,514,766 |  |  |  | 145,917,968 |
Subscription receivable |  | — |  |  |  | (1,016,000 | )
Accumulated deficit during the development stage |  | (166,140,969 | ) |  |  | (134,997,680 | )
Total Arrowhead Research Corporation stockholders' equity |  | 27,498,666 |  |  |  | 10,012,642 |
Noncontrolling interest |  | (1,763,877 | ) |  |  | (1,203,733 | )
TOTAL STOCKHOLDERS’ EQUITY |  | 25,734,789 |  |  |  | 8,808,909 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 37,329,631 |  |  | $ | 16,527,818 |

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

F- 4

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Operations

|  |  |  |  |  |  |  |  | May 7, 2003 (Inception) to September 30, 2013 |
|  | Year Ended September |  |  |
|  | 2013 |  |  |  | 2012 |  |  |
REVENUE | $ | 290,266 |  |  | $ | 146,875 |  |  | $ | 4,429,100 |
OPERATING EXPENSES |  |  |  |  |  |  |  |  |  |  |
Salaries and payroll-related expenses |  | 6,667,669 |  |  |  | 6,414,921 |  |  |  | 33,059,799 |
General and administrative expenses |  | 3,488,864 |  |  |  | 6,439,323 |  |  |  | 34,842,079 |
Research and development |  | 8,705,627 |  |  |  | 5,391,463 |  |  |  | 51,324,375 |
Stock-based compensation |  | 1,536,271 |  |  |  | 1,241,404 |  |  |  | 15,117,739 |
Depreciation and amortization |  | 1,751,412 |  |  |  | 1,748,975 |  |  |  | 9,160,698 |
Impairment expense |  | 1,308,047 |  |  |  | — |  |  |  | 1,308,047 |
Contingent consideration – fair value adjustments |  | 1,421,652 |  |  |  | — |  |  |  | 1,421,652 |
TOTAL OPERATING EXPENSES |  | 24,879,542 |  |  |  | 21,236,086 |  |  |  | 146,234,389 |
OPERATING LOSS |  | (24,589,276 | ) |  |  | (21,089,211 | ) |  |  | (141,805,289 | )
OTHER INCOME (EXPENSE) |  |  |  |  |  |  |  |  |  |  |
Equity in income (loss) of unconsolidated affiliates |  | (641,141 | ) |  |  | (240,154 | ) |  |  | (1,604,548 | )
Impairment of investment in unconsolidated affiliates |  | — |  |  |  | (1,642,775 | ) |  |  | (1,642,775 | )
Gain on purchase of Roche Madison |  | — |  |  |  | 1,576,107 |  |  |  | 1,576,107 |
Gain (loss) on sale of fixed assets, net |  | (76,388 | ) |  |  | (1,079,377 | ) |  |  | (1,282,853 | )
Realized and unrealized gain (loss) in marketable securities |  | — |  |  |  | (58,091 | ) |  |  | 62,954 |
Interest income (expense), net |  | (97,910 | ) |  |  | 35,966 |  |  |  | 2,652,534 |
Change in value of derivatives |  | (5,300,389 | ) |  |  | 386,892 |  |  |  | (2,018,985 | )
Gain on sale of stock in subsidiary |  | — |  |  |  | — |  |  |  | 2,292,800 |
Other income (expense) |  | (997,975 | ) |  |  | — |  |  |  | (747,975 | )
TOTAL OTHER INCOME (EXPENSE) |  | (7,113,803 | ) |  |  | (1,021,432 | ) |  |  | (712,741 | )
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  | (31,703,079 | ) |  |  | (22,110,643 | ) |  |  | (142,518,030 | )
Provision for income taxes |  | — |  |  |  | — |  |  |  | — |
LOSS FROM CONTINUING OPERATIONS |  | (31,703,079 | ) |  |  | (22,110,643 | ) |  |  | (142,518,030 | )
Loss from discontinued operations |  | (354 | ) |  |  | (80 | ) |  |  | (47,546,996 | )
Gain on disposal of discontinued operations |  | — |  |  |  | — |  |  |  | 4,708,588 |
NET LOSS FROM DISCONTINUED OPERATIONS |  | (354 | ) |  |  | (80 | ) |  |  | (42,838,408 | )
NET LOSS |  | (31,703,433 | ) |  |  | (22,110,723 | ) |  |  | (185,356,438 | )
Net loss attributable to noncontrolling interests |  | 560,144 |  |  |  | 984,795 |  |  |  | 19,379,429 |
NET LOSS ATTRIBUTABLE TO ARROWHEAD | $ | (31,143,289 | ) |  | $ | (21,125,928 | ) |  | $ | (165,977,009 | )
NET LOSS PER SHARE ATTRIBUTABLE TO ARROWHEAD SHAREHOLDERS — BASIC & DILUTED: | $ | (1.30 | ) |  | $ | (1.90 | ) |  |  |  |
Weighted average shares outstanding — basic and diluted |  | 24,002,224 |  |  |  | 11,129,766 |  |  |  |  |

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

F- 5

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statement of Stockholders’ Equity

From inception to September 30, 201 3

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Additional Paid-in Capital |  |  | Subscription Receivable |  |  | Accumulated Deficit during the Development Stage |  |  | Noncontrolling interest |  |  | Totals |
| Common Stock |  |  | Preferred Stock |  |  |  |  |  |  |  |  |  |  |
| Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  |  |  |  |  |  |  |  |  |
Initial Issuance of Stock: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common stock & warrants issued for cash @ $0.01 per unit |  | 300,000 |  |  | $ | 3,000 |  |  |  | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 3,000 |
Common stock & warrants issued for cash @ $10.00 per unit |  | 168,000 |  |  |  | 1,680 |  |  |  | — |  |  |  | — |  |  |  | 1,678,320 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,680,000 |
Stock issuance cost charged to additional paid-in capital |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (168,000 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (168,000 | )
Net loss for period from inception to September 30, 2003 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (95,238 | ) |  |  | — |  |  |  | (95,238 | )
Balance at September 30, 2003 |  | 468,000 |  |  | $ | 4,680 |  |  |  | — |  |  | $ | — |  |  | $ | 1,510,320 |  |  | $ | — |  |  | $ | (95,238 | ) |  | $ | — |  |  | $ | 1,419,762 |
Exercise of stock options |  | 7,500 |  |  |  | 75 |  |  |  | — |  |  |  | — |  |  |  | 14,925 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,000 |
Common stock & warrants issued for cash @ $10.00 per unit |  | 47,500 |  |  |  | 475 |  |  |  | — |  |  |  | — |  |  |  | 474,525 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 475,000 |
Common stock & warrants issued for marketable securities @ $10.00 per unit |  | 50,000 |  |  |  | 500 |  |  |  | — |  |  |  | — |  |  |  | 499,500 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 500,000 |
Stock issuance cost charged to additional paid-in capital |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (96,500 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (96,500 | )
Common stock and warrants issued for cash @ $15.00 per unit |  | 660,879 |  |  |  | 6,609 |  |  |  | — |  |  |  | — |  |  |  | 9,906,573 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,913,182 |
Common stock issued in reverse acquisition |  | 70,553 |  |  |  | 706 |  |  |  | — |  |  |  | — |  |  |  | (151,175 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (150,469 | )
Common stock issued as a gift for $10.90 per share |  | 15,000 |  |  |  | 163 |  |  |  | — |  |  |  | — |  |  |  | 162,587 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 162,750 |
Common stock and warrants issued as stock issuance cost @ $15.00 per unit |  | 35,623 |  |  |  | 356 |  |  |  | — |  |  |  | — |  |  |  | 533,988 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 534,344 |
Stock issuance cost charged to additional paid-in capital |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (991,318 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (991,318 | )
Exercise of stock option @ $2.00 per share |  | 7,500 |  |  |  | 75 |  |  |  | — |  |  |  | — |  |  |  | 14,925 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,000 |
Exercise of stock options @ $10.00 per share |  | 600 |  |  |  | 6 |  |  |  | — |  |  |  | — |  |  |  | 5,994 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,000 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 175,653 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 175,653 |
Net loss for the year ended September 30, 2004 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,528,954 | ) |  |  | 1,777,699 |  |  |  | (751,255 | )
Balance at September 30, 2004 |  | 1,363,155 |  |  | $ | 13,645 |  |  |  | — |  |  | $ | — |  |  | $ | 12,059,997 |  |  | $ | — |  |  | $ | (2,624,192 | ) |  | $ | 1,777,699 |  |  | $ | 11,227,149 |
Exercise of warrants @ $15.00 per share |  | 1,381,289 |  |  |  | 13,813 |  |  |  | — |  |  |  | — |  |  |  | 20,705,522 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 20,719,335 |
Exercise of stock options @ $10.00 per share |  | 2,500 |  |  |  | 25 |  |  |  | — |  |  |  | — |  |  |  | 24,975 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 25,000 |
Common stock issued to purchase Insert Therapeutics share @ $39.80 per share |  | 50,225 |  |  |  | 502 |  |  |  | — |  |  |  | — |  |  |  | 1,999,498 |  |  |  | — |  |  |  | — |  |  |  |  |  |  |  | 2,000,000 |
Common stock issued for services |  | 1,250 |  |  |  | 12 |  |  |  | — |  |  |  | — |  |  |  | 49,988 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 50,000 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 508,513 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 508,513 |
Change in percentage of ownership in subsidiary |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 230,087 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 230,087 |
Net loss for the year ended September 30, 2005 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (6,854,918 | ) |  |  | 121,491 |  |  |  | (6,733,427 | )
Balance at September 30, 2005 |  | 2,798,419 |  |  | $ | 27,997 |  |  |  | — |  |  | $ | — |  |  | $ | 35,578,580 |  |  | $ | — |  |  | $ | (9,479,110 | ) |  | $ | 1,899,190 |  |  | $ | 28,026,657 |
Exercise of stock options |  | 11,579 |  |  |  | 116 |  |  |  | — |  |  |  | — |  |  |  | 341,421 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 341,537 |
Common stock issued @ $48.80 per share |  | 20,485 |  |  |  | 205 |  |  |  | — |  |  |  | — |  |  |  | 999,795 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,000,000 |
Common stock issued @ $38.40 per share |  | 1,500 |  |  |  | 15 |  |  |  | — |  |  |  | — |  |  |  | 57,585 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 57,600 |
Common stock and warrants issued @ $35.00 per unit |  | 559,000 |  |  |  | 5,590 |  |  |  | — |  |  |  | — |  |  |  | 19,539,410 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 19,545,000 |
Common stock issued @ $59.10 per share |  | 2,538 |  |  |  | 25 |  |  |  | — |  |  |  | — |  |  |  | 149,975 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 150,000 |
Common stock issued to purchase Calando Pharmaceuticals, Inc. @ $51.70 per share |  | 20,838 |  |  |  | 208 |  |  |  | — |  |  |  | — |  |  |  | 1,077,125 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,077,333 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,369,478 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,369,478 |
Net loss for the year ended September 30, 2006 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (18,997,209 | ) |  |  | (964,752 | ) |  |  | (19,961,961 | )

F- 6

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Additional Paid-in Capital |  |  | Subscription Receivable |  |  | Accumulated Deficit during the Development Stage |  |  | Noncontrolling interest |  |  | Totals |
| Common Stock |  |  | Preferred Stock |  |  |  |  |  |  |  |  |  |  |
| Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  |  |  |  |  |  |  |  |  |
Balance at September 30, 2006 |  | 3,414,359 |  |  | $ | 34,156 |  |  |  | — |  |  | $ | — |  |  | $ | 59,113,369 |  |  | $ | — |  |  | $ | (28,476,319 | ) |  | $ | 934,438 |  |  | $ | 31,605,644 |
Exercise of stock options |  | 18,616 |  |  |  | 186 |  |  |  | — |  |  |  | — |  |  |  | 434,541 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 434,727 |
Common stock and warrants issued @ $57.80 per unit |  | 284,945 |  |  |  | 2,849 |  |  |  | — |  |  |  | — |  |  |  | 15,149,366 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,152,215 |
Arrowhead’s increase in proportionate share of Insert Therapeutics’ equity |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,401,394 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,401,394 |
Common stock issued for purchase of Carbon Nanotechnologies, Inc. @ $37.70 per share |  | 143,122 |  |  |  | 1,431 |  |  |  | — |  |  |  | — |  |  |  | 5,398,569 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,400,000 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,175,544 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,175,544 |
Net loss for the year ended September 30, 2007 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (29,931,118 | ) |  |  | (781,829 | ) |  |  | (30,712,947 | )
Balance at September 30, 2007 |  | 3,861,042 |  |  | $ | 38,622 |  |  |  | — |  |  | $ | — |  |  | $ | 84,672,783 |  |  | $ | — |  |  | $ | (58,407,437 | ) |  | $ | 152,609 |  |  | $ | 26,456,577 |
Exercise of stock options |  | 10,536 |  |  |  | 106 |  |  |  | — |  |  |  | — |  |  |  | 289,921 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 290,027 |
Common stock and warrants issued at approximately $18.00 per unit |  | 386,398 |  |  |  | 3,867 |  |  |  | — |  |  |  | — |  |  |  | 6,956,718 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,960,585 |
Arrowhead’s increase in proportionate share of Unidym’s equity |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,720,962 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,720,962 |
Common stock issued @ $27.20 per share to Rice University |  | 5,000 |  |  |  | 50 |  |  |  | — |  |  |  | — |  |  |  | 135,950 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 136,000 |
Common stock issued @ $28.30 per share to purchase shares of Unidym, Inc. |  | 7,055 |  |  |  | 71 |  |  |  | — |  |  |  | — |  |  |  | 199,929 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 200,000 |
Common stock issued @ $29.50 per share to purchase MASA Energy, LLC |  | 10,505 |  |  |  | 105 |  |  |  | — |  |  |  | — |  |  |  | 309,895 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 310,000 |
Common stock issued @ $21.90 per share to Unidym for the acquisition of Nanoconduction |  | 11,416 |  |  |  | 114 |  |  |  | — |  |  |  | — |  |  |  | 249,886 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 250,000 |
Common stock issued @ $21.80 per share |  | 1,500 |  |  |  | 15 |  |  |  | — |  |  |  | — |  |  |  | 32,685 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 32,700 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,187,397 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,187,397 |
Net loss for the year ended September 30, 2008 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (27,089,030 | ) |  |  | (152,609 | ) |  |  | (27,241,639 | )
Balance at September 30, 2008 |  | 4,293,452 |  |  | $ | 42,950 |  |  |  | — |  |  | $ | — |  |  | $ | 97,756,126 |  |  | $ | — |  |  | $ | (85,496,467 | ) |  | $ | — |  |  | $ | 12,302,609 |
Common Stock issued @ $5.50 per share to Unidym stockholder in exchange for Unidym’s shares |  | 205,839 |  |  |  | 2,059 |  |  |  | — |  |  |  | — |  |  |  | 1,131,617 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,133,676 |
Common Stock issued @ $5.20 per share to TEL Ventures in exchange for Unidym’s shares |  | 222,222 |  |  |  | 2,222 |  |  |  | — |  |  |  | — |  |  |  | 1,156,111 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,158,333 |
Reclassification of former Unidym mezzanine debt to equity |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,000,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,000,000 |
Arrowhead’s increase in proportionate share of Calando’s equity |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,120,250 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,120,250 |
Common stock and warrants issued @ $3.00 per unit |  | 919,664 |  |  |  | 9,197 |  |  |  | — |  |  |  | — |  |  |  | 2,749,796 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,758,993 |
Change in percentage ownership in subsidiary |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,297 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,297 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,676,170 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,676,170 |
Issuance of Preferred Stock for Subscription in Unidym |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 300,000 |  |  |  | (300,000 | ) |  |  | — |  |  |  | — |  |  |  | — |
Amortization of discount on Unidym Series D Preferred Stock |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 163,960 |  |  |  | — |  |  |  | (163,960 | ) |  |  | — |  |  |  | — |
Net loss for the year ended September 30, 2009 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (19,308,392 | ) |  |  | — |  |  |  | (19,308,392 | )
Balance at September 30, 2009 |  | 5,641,177 |  |  | $ | 56,428 |  |  |  | — |  |  | $ | — |  |  | $ | 110,070,327 |  |  | $ | (300,000 | ) |  | $ | (104,968,819 | ) |  | $ | — |  |  | $ | 4,857,936 |
Exercise of stock options |  | 688 |  |  |  | 7 |  |  |  | — |  |  |  | — |  |  |  | 7,624 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 7,631 |
Issuance of Preferred Stock for Subscription in Unidym |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 300,000 |  |  |  | — |  |  |  | — |  |  |  | 300,000 |
Issuance of Unidym’s common stock to minority shareholders |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 245,345 |  |  |  | — |  |  |  | — |  |  |  | 54,655 |  |  |  | 300,000 |
Common stock and warrants issued @ $6.34 per unit |  | 508,343 |  |  |  | 5,083 |  |  |  | — |  |  |  | — |  |  |  | 3,217,813 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,222,896 |
Common stock and warrants issued @ $13.12 per unit |  | 659,299 |  |  |  | 6,593 |  |  |  | — |  |  |  | — |  |  |  | 7,861,985 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 7,868,578 |
Establish derivative liability |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,169,907 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4,169,907 | )
Common Stock issued to Calando stockholders in exchange for Calando’s shares |  | 122,000 |  |  |  | 1,220 |  |  |  | — |  |  |  | — |  |  |  | (160,667 | ) |  |  | — |  |  |  | — |  |  |  | 159,447 |  |  |  | — |
Common Stock issued to Unidym stockholders in exchange for Unidym’s shares |  | 15,318 |  |  |  | 153 |  |  |  | — |  |  |  | — |  |  |  | (1,435 | ) |  |  | — |  |  |  | — |  |  |  | 1,282 |  |  |  | — |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,582,149 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,582,149 |
Exercise of warrants |  | 225,189 |  |  |  | 2,250 |  |  |  | — |  |  |  | — |  |  |  | 1,063,600 |  |  |  | — |  |  |  | — |  |  |  | 200 |  |  |  | 1,066,050 |

F- 7

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Additional Paid-in Capital |  |  | Subscription Receivable |  |  | Accumulated Deficit during the Development Stage |  |  | Noncontrolling interest |  |  | Totals |
| Common Stock |  |  | Preferred Stock |  |  |  |  |  |  |  |  |  |  |
| Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  |  |  |  |  |  |  |  |  |
Net loss for the year ended September 30, 2010 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,774,048 | ) |  |  | (1,182,990 | ) |  |  | (6,957,038 | )
Balance at September 30, 2010 |  | 7,172,014 |  |  | $ | 71,734 |  |  |  | — |  |  | $ | — |  |  | $ | 119,716,834 |  |  | $ | — |  |  | $ | (110,742,867 | ) |  | $ | (967,406 | ) |  | $ | 8,078,295 |
Exercise of warrants |  | 8,656 |  |  |  | 87 |  |  |  | — |  |  |  | — |  |  |  | 43,192 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 43,279 |
Exercise of stock options |  | 2,700 |  |  |  | 27 |  |  |  | — |  |  |  | — |  |  |  | 13,857 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 13,884 |
Divestiture of Unidym |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 254,275 |  |  |  | 254,275 |
Issuance of preferred stock in subsidiary |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,618,509 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,618,509 |
Change in percentage of ownership in subsidiary |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (849,707 | ) |  |  | — |  |  |  | — |  |  |  | 849,707 |  |  |  | — |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,404,640 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,404,640 |
Common stock issued @ $3.80 per share |  | 1,458,916 |  |  |  | 14,574 |  |  |  | — |  |  |  | — |  |  |  | 4,629,110 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,643,684 |
Issuance of Common Stock for Subscription |  |  |  |  |  |  |  |  |  | — |  |  |  | — |  |  |  | 900,000 |  |  |  | (900,000 | ) |  |  |  |  |  |  |  |  |  |  | — |
Net loss for the year ended September 30, 2011 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,128,885 | ) |  |  | (363,514 | ) |  |  | (3,492,399 | )
Balance at September 30, 2011 |  | 8,642,286 |  |  | $ | 86,422 |  |  |  | — |  |  | $ | — |  |  | $ | 127,476,436 |  |  | $ | (900,000 | ) |  | $ | (113,871,752 | ) |  | $ | (226,938 | ) |  | $ | 12,564,167 |
Exercise of stock options |  | 4,583 |  |  |  | 45 |  |  |  | — |  |  |  | — |  |  |  | 23,788 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 23,833 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,241,404 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,241,404 |
Common stock issued @ $3.80 per share |  | 138,158 |  |  |  | 1,382 |  |  |  | — |  |  |  | — |  |  |  | 523,618 |  |  |  | (100,000 | ) |  |  | — |  |  |  | — |  |  |  | 425,000 |
Common stock issued @ $3.70 per share |  | 675,000 |  |  |  | 6,750 |  |  |  | — |  |  |  | — |  |  |  | 2,241,000 |  |  |  |  |  |  |  | — |  |  |  | — |  |  |  | 2,247,750 |
Common stock issued @ $4.00 per share |  | 100,000 |  |  |  | 1,000 |  |  |  | — |  |  |  | — |  |  |  | 399,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 400,000 |
Common stock issued @ $6.23 per share |  | 83,211 |  |  |  | 83 |  |  |  | — |  |  |  | — |  |  |  | 499,918 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 500,001 |
Common stock issued @ $5.11 per share |  | 97,831 |  |  |  | 98 |  |  |  | — |  |  |  | — |  |  |  | 499,903 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 500,001 |
Common stock and warrants issued @ $2.76 per unit |  | 2,260,869 |  |  |  | 2,261 |  |  |  | — |  |  |  | — |  |  |  | 5,809,979 |  |  |  | (16,000 | ) |  |  |  |  |  |  |  |  |  |  | 5,796,240 |
Common stock issued under Committed Capital Agreement |  | 68,926 |  |  |  | 689 |  |  |  | — |  |  |  | — |  |  |  | (689 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Common stock issued in acquisitions |  | 1,217,159 |  |  |  | 9,332 |  |  |  | — |  |  |  | — |  |  |  | 6,138,498 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,147,830 |
Fractional shares redeemed in reverse stock split |  | (131 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Preferred stock issued @ $1,000 per share |  | — |  |  |  | — |  |  |  | 1,015 |  |  |  | 1 |  |  |  | 1,014,999 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,015,000 |
Preferred stock converted to common stock |  | 275,782 |  |  |  | 276 |  |  |  | (1,015 | ) |  |  | (1 | ) |  |  | (275 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Exercise of Calando stock options |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,000 |  |  |  | 8,000 |
Exercise of warrants |  | 15,511 |  |  |  | 16 |  |  |  | — |  |  |  | — |  |  |  | 50,390 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 50,406 |
Net loss for the year ended September 30, 2012 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (21,125,928 | ) |  |  | (984,795 | ) |  |  | (22,110,723 | )
Balance at September 30, 2012 |  | 13,579,185 |  |  | $ | 108,354 |  |  |  | — |  |  | $ | — |  |  | $ | 145,917,968 |  |  | $ | (1,016,000 | ) |  | $ | (134,997,680 | ) |  | $ | (1,203,733 | ) |  | $ | 8,808,909 |
Exercise of warrants |  | 1,182,451 |  |  |  | 1,183 |  |  |  | — |  |  |  | — |  |  |  | 2,053,416 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,054,599 |
Exercise of stock options |  | 675 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 2,578 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,579 |
Stock-based compensation |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,536,271 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,536,271 |
Subscription payment |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,000 |  |  |  | — |  |  |  | — |  |  |  | 16,000 |
Subscription reversal |  | (267,444 | ) |  |  | (2,674 | ) |  |  | — |  |  |  | — |  |  |  | (997,326 | ) |  |  | 1,000,000 |  |  |  | — |  |  |  | — |  |  |  | — |
Common stock issued @ $4.49 per share to Roche |  | 239,894 |  |  |  | 240 |  |  |  | — |  |  |  | — |  |  |  | 985,809 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 986,049 |
Common stock and warrants issued @ $2.26 per unit |  | 1,825,079 |  |  |  | 1,825 |  |  |  | — |  |  |  | — |  |  |  | 3,814,643 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,816,468 |
Common stock and warrants issued @ $2.12 per unit |  | 1,667,051 |  |  |  | 1,667 |  |  |  | — |  |  |  | — |  |  |  | 3,255,192 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,256,859 |
Common stock issued @ $1.83 per share |  | 14,262,553 |  |  |  | 14,263 |  |  |  | — |  |  |  | — |  |  |  | 25,445,236 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 25,459,499 |
Establish and settlements related to derivative liability |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,600,989 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,600,989 |
Preferred stock issued @ 1,000 per share |  | — |  |  |  | — |  |  |  | 9,900 |  |  |  | 10 |  |  |  | 9,899,990 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,900,000 |
Net loss for the year ended September 30, 2013 |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (31,143,289 | ) |  |  | (560,144 | ) |  |  | (31,703,433 | )
Balance at September 30, 2013 |  | 32,489,444 |  |  | $ | 124,859 |  |  |  | 9,900 |  |  | $ | 10 |  |  | $ | 193,514,766 |  |  | $ | — |  |  | $ | (166,140,969 | ) |  | $ | (1,763,877 | ) |  | $ | 25,734,789 |

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

F- 8

Arrowhead Research Corporation and Subsidiaries

( A Development Stage Company)

Consolidated Statements of Cash Flows

|  |  |  |  |  |  |  |  | May 7, 2003 (Date of inception) to September 30, 2013 |
|  | Year ended September 30, |  |  |
|  | 2013 |  |  |  | 2012 |  |  |
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS: |  |  |  |  |  |  |  |  |  |  |
Net loss | $ | (31,703,433 | ) |  | $ | (22,110,723 | ) |  | $ | (185,356,438 | )
Net (income) loss attributable to noncontrolling interests |  | 560,144 |  |  |  | 984,795 |  |  |  | 19,379,429 |
Net income (loss) attributable to Arrowhead |  | (31,143,289 | ) |  |  | (21,125,928 | ) |  |  | (165,977,009 | )
(Income) loss from discontinued operations |  | 354 |  |  |  | 80 |  |  |  | 42,838,408 |
Realized and unrealized (gain) loss on investments |  | — |  |  |  | 58,091 |  |  |  | (762,954 | )
Charge for bad debt allowance |  | — |  |  |  | 2,497,300 |  |  |  | 2,497,300 |
(Gain) loss from sale of subsidiary |  | — |  |  |  | — |  |  |  | (306,344 | )
(Gain) loss on purchase of Roche Madison |  | — |  |  |  | (1,576,107 | ) |  |  | (1,576,107 | )
(Gain) loss on disposal of fixed assets |  | 76,388 |  |  |  | 1,079,377 |  |  |  | 1,282,853 |
Stock issued for professional services |  | — |  |  |  | — |  |  |  | 741,632 |
Change in value of derivatives |  | 5,300,389 |  |  |  | (386,892 | ) |  |  | 2,018,985 |
Contingent consideration – fair value adjustments |  | 1,421,652 |  |  |  | — |  |  |  | 1,421,652 |
Purchased in-process research and development |  | — |  |  |  | — |  |  |  | 15,851,555 |
Stock-based compensation |  | 1,536,271 |  |  |  | 1,241,404 |  |  |  | 15,117,739 |
Depreciation and amortization |  | 1,751,412 |  |  |  | 1,748,975 |  |  |  | 9,160,698 |
Amortization (accretion) of note discounts, net |  | 128,406 |  |  |  | 9,390 |  |  |  | 129,858 |
Gain on sale of stock in subsidiary |  | — |  |  |  | — |  |  |  | (2,292,800 | )
Noncash impairment expense |  | 2,315,721 |  |  |  | 1,642,775 |  |  |  | 3,958,496 |
Equity in income (loss) of unconsolidated affiliates |  | — |  |  |  | 240,154 |  |  |  | 963,407 |
Noncontrolling interest |  | (560,144 | ) |  |  | (984,795 | ) |  |  | (19,379,429 | )
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |  |  |
Trade receivables |  | (65,625 | ) |  |  | 162,855 |  |  |  | 34,415 |
Other receivables |  | 1,080 |  |  |  | (938,179 | ) |  |  | (2,542,062 | )
Prepaid expenses |  | 44,713 |  |  |  | (338,531 | ) |  |  | (436,386 | )
Other current assets |  | (1,811 | ) |  |  | (30,600 | ) |  |  | (165,566 | )
Accounts payable |  | 321,647 |  |  |  | 291,876 |  |  |  | 819,957 |
Accrued expenses |  | 27,920 |  |  |  | 186,369 |  |  |  | 748,829 |
Other liabilities |  | (187,910 | ) |  |  | 882,296 |  |  |  | 942,251 |
NET CASH USED IN OPERATING ACTIVITIES OF CONTINUING OPERATIONS |  | (19,032,826 | ) |  |  | (15,340,090 | ) |  |  | (94,910,622 | )
CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS: |  |  |  |  |  |  |  |  |  |  |
Purchases of property and equipment |  | (296,880 | ) |  |  | (479,710 | ) |  |  | (4,342,189 | )
Proceeds from sale of investments |  | 1,419,079 |  |  |  | 509,009 |  |  |  | 4,732,688 |
Proceeds from sale of fixed assets |  | 89,505 |  |  |  | 290,312 |  |  |  | 522,192 |
Purchase of marketable securities |  | (10,732,571 | ) |  |  | — |  |  |  | (29,308,486 | )
Proceeds from sale of marketable securities |  | — |  |  |  | — |  |  |  | 18,888,265 |
Cash transferred in acquisitions/divestitures |  | — |  |  |  | 121,033 |  |  |  | (1,579,365 | )
Purchase of MASA Energy, LLC |  | — |  |  |  | — |  |  |  | (250,000 | )
Minority equity investment |  | — |  |  |  | — |  |  |  | (2,000,000 | )
Cash paid for interest in Insert |  | — |  |  |  | — |  |  |  | (10,150,000 | )
Cash obtained from interest in Insert |  | — |  |  |  | — |  |  |  | 10,529,594 |
Proceeds from sale of subsidiaries |  | — |  |  |  | — |  |  |  | 359,375 |
Payment for patents |  | — |  |  |  | — |  |  |  | (303,440 | )
Restricted cash |  | — |  |  |  | — |  |  |  | 50,773 |
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS |  | (9,520,867 | ) |  |  | 440,644 |  |  |  | (12,850,593 | )
CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS: |  |  |  |  |  |  |  |  |  |  |
Principal payments on capital lease obligations |  | (214,801 | ) |  |  | (196,606 | ) |  |  | (411,407 | )
Proceeds from issuance of common stock, preferred stock and warrants, net |  | 44,506,004 |  |  |  | 10,958,231 |  |  |  | 150,759,015 |
Proceeds from issuance of Calando debt |  | — |  |  |  | — |  |  |  | 2,516,467 |
Proceeds from sale of stock in subsidiary |  | — |  |  |  | 8,000 |  |  |  | 20,902,100 |
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS |  | 44,291,203 |  |  |  | 10,769,625 |  |  |  | 173,766,175 |
Cash flows from discontinued operations: |  |  |  |  |  |  |  |  |  |  |
Operating cash flows |  | (354 | ) |  |  | (280 | ) |  |  | (46,004,141 | )
Investing cash flows |  | — |  |  |  | — |  |  |  | 790,625 |
Financing cash flows |  | — |  |  |  | — |  |  |  | (1,677,000 | )
Net cash used in discontinued operations: |  | (354 | ) |  |  | (280 | ) |  |  | (46,890,516 | )
NET INCREASE (DECREASE) IN CASH |  | 15,737,156 |  |  |  | (4,130,101 | ) |  |  | 19,114,444 |
CASH AT BEGINNING OF PERIOD |  | 3,377,288 |  |  |  | 7,507,389 |  |  |  | — |
CASH AT END OF PERIOD |  | 19,114,444 |  |  | $ | 3,377,288 |  |  | $ | 19,114,444 |
Supplementary disclosures: |  |  |  |  |  |  |  |  |  |  |
Interest paid | $ | 42,044 |  |  | $ | 42,269 |  |  | $ | 322,732 |
Taxes paid | $ | — |  |  | $ | — |  |  | $ | 742,500 |

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

F- 9

SUPPLEMENTARY NON CASH TRANSACTIONS

All Arrowhead share amounts have been adjusted to reflect the 1 for 10 reverse stock split effected on November 17, 2011.

On March 23, 2005, Arrowhead purchased 7,375,000 shares of Insert Therapeutics, Inc. common stock from two minority stockholders of Insert for 50,226 newly issued shares of Arrowhead Common Stock valued at $2,000,000 based on the closing market price of Arrowhead Common Stock on NASDAQ on the date of the closing.

On March 31, 2006, Arrowhead purchased 964,000 shares of Calando Pharmaceuticals, Inc. common stock from minority stockholders of Calando for $1,928,000 consisting of 20,838 newly issued shares of Arrowhead Common Stock valued at $1,077,333 plus $850,667 in cash. The 20,838 shares of Arrowhead Common Stock were valued based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 20, 2007, Arrowhead purchased the Series E Preferred Stock of Carbon Nanotechnologies, Inc. in exchange for 143,122 shares of Arrowhead Common Stock with an estimated fair market value of $5,400,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to March 24, 2007, as set forth in the Agreement and Plan of Merger among Unidym, Carbon Nanotechnologies, Inc., Arrowhead, and others.

On April 23, 2008, Arrowhead purchased 200,000 shares of the Common Stock of Unidym Inc., in exchange for 7,054 shares of Arrowhead Common Stock with an estimated fair market value of $200,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 29, 2008, Arrowhead purchased all of the membership units of MASA Energy, LLC for $560,000. The purchase price consisted of 10,504 shares of Arrowhead Common Stock with an estimated fair market value of $310,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing, plus $250,000 in cash.

On August 8, 2008, Unidym acquired all of the outstanding stock of Nanoconduction, Inc. in exchange for 11,411 shares of Arrowhead stock with an estimated fair market value of $250,000.

On June 11, 2009, Arrowhead issued 132,462 shares of Common Stock with an estimated fair market value of $688,802 in exchange for an equal number of Series A Preferred Stock of Unidym, with minority stockholders of Unidym.

On June 25, 2009, Arrowhead issued 194,444 shares of Common Stock with an estimated fair market value of $972,222 in exchange for an equal number of Series C Preferred Stock of Unidym, with a minority stockholder of Unidym.

On September 22, 2009, Arrowhead issued 9,149 shares of Common Stock with an estimated fair market value of $46,662 in exchange for an equal number of Series A Preferred Stock of Unidym with a minority stockholder of Unidym.

On September 28, 2009, Arrowhead issued 64,227 shares of Common Stock with an estimated fair market value of $398,209 in exchange for 5,574 shares of Series A Preferred Stock and 636,699 shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

On September 30, 2009, Arrowhead issued 27,777 shares of Common Stock with an estimated fair market value of $186,111 in exchange for an equal number of Series C-1 Preferred Stock of Unidym, with a minority stockholder of Unidym.

In October and November 2009, Arrowhead issued 15,317 shares of Common Stock with an estimated fair market value of $47,485 in exchange for an equal number of shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

In October and November 2009, Arrowhead issued 114,000 shares of Common Stock with an estimated fair market value of $706,800 in exchange for 2,850,000 shares of Calando’s common stock, with several minority stockholders of Calando. In conjunction with the exchange, Arrowhead also issued 24,000 Warrants to purchase Arrowhead Common Stock in exchange for 600,000 Warrants to purchase Calando common stock.

F- 10

In February 2010, Arrowhead issued 8,000 shares of Common Stock and 2,400 warrants to purchase Arrowhead Common Stock, at an exercise price of $5.00, to several Calando shareholders, in exchange for 200,000 shares of Calando common stock and 60,000 warrants to purchase Calando common stock.

In March 2010, a warrant holder exercised 24,788 warrants to purchase Arrowhead Common Stock, in a cashless exercise, whereby Arrowhead issued to the warrant holder 12,870 shares of Arrowhead Common Stock.

In September 2010, Arrowhead issued warrants to purchase 390,625 shares of Arrowhead Common Stock, at an exercise price of $5.00, to two Calando shareholders, in exchange for 1,562.5 shares of Series A Preferred Stock of Calando Pharmaceuticals, Inc.

On October 21, 2011, Arrowhead entered into a Stock and Asset Purchase Agreement whereby in acquired all of the outstanding common stock of Roche Madison Inc. and certain intellectual property rights in exchange for 1,288,158 shares of Arrowhead Common Stock, a promissory note of $50,000, and potential contingent consideration based on the achievement of certain regulatory milestones, and sales milestones and royalty payments after drug approval.

On April 5, 2012, Arrowhead entered into a Stock Purchase Agreement whereby it acquired all of the outstanding common stock of Alvos Therapeutics, Inc. for 315,457 shares of Arrowhead Common Stock and potential contingent consideration based on the achievement of certain clinical, regulatory and sales milestones.

On October 21, 2012, Arrowhead issued 239,894 shares of Common Stock to Roche in accordance with the terms of the Stock and Asset Purchase Agreement for Roche Madison Inc., to settle a liability of $986,049, which the Company had recorded upon the acquisition.

F- 11

Arrowhead Research Corporation

(A Development Stage Company)

Notes to Consolidated Financial Statements

September 30, 201 3

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms the “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 collectively to Arrowhead Madison Inc. (“Madison”), Calando Pharmaceuticals, Inc. (“Calando”), Ablaris Therapeutics, Inc. (“Ablaris”), and Tego Biosciences Corporation (“Tego”), as well as our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, and Alvos Therapeutics, Inc. (“Alvos”) and Agonn Systems, Inc. (“Agonn”),which were merged into Arrowhead during 2013. (4) the term “Minority Investments” refers collectively to Nanotope, Inc. (“Nanotope”), which was dissolved during 2013, and Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, (5) the term “Common Stock” refers to Arrowhead’s Common Stock, (6) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock and the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock. All Arrowhead share and per share data have been adjusted to reflect a one for ten reverse stock split effected on November 17, 2011.

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Arrowhead Research Corporation is a biopharmaceutical company developing targeted RNAi therapeutics. The Company is leveraging its proprietary drug delivery technologies to develop targeted drugs based on the RNA interference mechanism that efficiently silence disease-causing genes. Arrowhead technologies also enable partners to create peptide-drug conjugates that specifically home to cell types of interest while sparing off-target tissues. Arrowhead’s pipeline includes clinical programs in chronic hepatitis B virus and obesity and partner-based programs in oncology.

Liquidity

Historically, The Company’s primary source of financing has been through the sale of securities of Arrowhead Research Corp. Research and development activities have required significant capital investment since the Company’s inception and we expect our operations to continue to require cash investment in fiscal 2014 and beyond as the Company continues its research and development efforts, as well as clinical trials, and related drug manufacturing.

At September 30, 201 3, the Company had $19.1 million in cash to fund operations. In addition to its cash resources, the Company has invested excess cash in investment grade commercial bonds maturing in less than 18 months. These bonds provide a source of liquidity, although the Company plans to hold them until maturity. At September 30, 2013, the Company had invested $10.8 million in these bonds. During October 2013, the Company completed an additional financing through the sale of equity securities in the amount of $60 million, providing additional liquidity to the Company. During the year ended September 30, 201 3, the Company’s cash position increased by $15.7 million. The Company received cash from the issuance of equity of $44.5 million, cash from the sale of its holdings of stock in Wisepower Co. Ltd of $1.4 million, and cash from licensing revenue of $0.2 million. The Company had cash outflow of $19.8 million related to its continuing operating activities and capital expenditures of $0.3 million.

On October 21, 2011, Arrowhead completed the acquisition of certain RNAi assets from Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd., including intellectual property and a research and development facility in Madison, Wisconsin. At the time of the acquisition, the facility had 41 employees. Due to the costs associated with operating the facility, including personnel costs, rent, research and development expenses, and other costs, cash expenses have increased, and it is expected that the Company will incur higher cash expenses during the remainder of 2013 and beyond, relative to periods prior to the acquisition, as the Company accelerates its preclinical and clinical development efforts.

F- 12

Summary of Significant Accounting Policies

Principles of Consolidation—The consolidated financial statements include the accounts of Arrowhead and its Subsidiaries, Arrowhead Madison, Calando, Ablaris, Tego, and until its disposition in January 2011, Unidym. In 2013, Agonn and Alvos were merged into Arrowhead. Prior to April 2008, Arrowhead’s Subsidiaries included Insert Therapeutics, Inc. (“Insert”), which was merged with Calando in April 2008. The merged entity is majority-owned by Arrowhead and continues to operate under the name of Calando. In January 2011, Arrowhead sold its interests in Unidym to Wisepower, and in December 2009, Tego completed a sale of its assets to Luna Innovations, Inc. Unidym and Tego results are included in the Income (Loss) from Discontinued Operations. Income (Loss) from Discontinued Operations also includes Aonex Technologies, Inc., sold in May 2008, and Nanotechnica, Inc., dissolved in June 2005. All significant intercompany accounts and transactions are eliminated in consolidation, and noncontrolling interests are accounted for in the Company’s financial statements.

Basis of Presentation and Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include valuing the stock of the Subsidiaries, assumptions to calculate stock-based compensation expense, allowance for doubtful accounts, deferred tax asset valuation allowance, derivative assets and liabilities, contingent consideration, noncontrolling interest and useful lives for depreciable and amortizable assets. Actual results could differ from those estimates. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included.

Cash and Cash Equivalents—The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no restricted cash at September 30, 2012 and 2013.

Concentration of Credit Risk—The Company maintains checking accounts for Arrowhead and separate accounts for each Subsidiary at two financial institutions. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.

Investments—the Company invests excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in marketable securities in accordance with FASB ASC 320, Investments – Debt and Equity Securities. This statement requires certain securities to be classified into three categories:

Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.

Trading Securities—Debt and equity securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.

Available-for-Sale—Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.

The Company classifies its investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. At September 30, 2013, the Company classified all of its investments as held-to-maturity.

Held-to-maturity investments are measured and recorded at amortized cost on the Company’s Consolidated Balance Sheet. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary.

As of September 30, 2013, all short-term investments were comprised of corporate bonds with maturity dates of less than one year. Certain investments maturing in excess of twelve months, but less than 24 months are classified as long-term investments. As of

F- 13

September 30, 2013, the amortized cost of such bonds was $10,732,414. For the year ended September 30, 2013, gross unrealized losses were $41,643; gross unrealized gains were $7,500. The total fair value of the investments at September 30, 2013 was $10,698,271.

See further information regarding fair market value of marketable debt securities in Note 11 – Fair Value Measurements, such fair market data is obtained from independent pricing services.

Property and Equipment—Property and equipment are recorded at cost, which may equal fair market value in the case of property and equipment acquired in conjunction with a business acquisition. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term. Long-lived assets, including property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.

Intangible Assets Subject to Amortization—At September 30, 201 3, intangible assets subject to amortization included patents and certain license agreements. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.

In-Process Research & Development (IPR&D)—IPR&D assets represent capitalized on-going research projects that Arrowhead acquired through business combinations. Such assets are initially measured at their acquisition date fair values. The amounts capitalized are being accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of R&D efforts associated with the project. Upon successful completion of a project, Arrowhead will make a determination as to the then remaining useful life of the intangible asset and begin amortization. Based on early adoption of ASU 2012-02, Arrowhead tests its indefinite-lived assets for impairment at least annually, through a two-step process. The first step is a qualitative assessment to determine if it is more likely than not that the indefinite lived assets are impaired. Arrowhead considers relevant events and circumstances that could affect the inputs used to determine the fair value of the intangible assets. If the qualitative assessment indicates that it is more likely than not that the intangible assets is impaired, a second step is performed which is a quantitative test to determine the fair value of the intangible asset. If the carrying amount of the intangible assets exceeds its fair value, an impairment loss is recorded in the amount of that excess. If circumstances determine that it is appropriate, the Company may also elect to bypass step one, and proceed directly to the second step.

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 the achievement of various regulatory approvals or future sales milestones, and royalty payments might be based on drug product sales levels. We record a contingent consideration obligation for such contingent payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models designed to estimate the probability 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. We revalue these contingent consideration obligations each reporting period. 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. Significant 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 we record in any given period.

Equity Investments—Arrowhead had a noncontrolling equity investment in Nanotope, a privately held biotechnology company, which is recorded in Other Assets. Historically, this investment was carried at cost less Arrowhead’s proportionate share of Nanotope’s operating loss for the period since investment. The investment was fully reserved in 2012. During 2013, Nanotope was dissolved.

F- 14

Minority Equity Investments—The Company’s minority equity investment in Leonardo, a privately held biotechnology company, had been recorded in Other Assets, however, an impairment charge was recorded in 2012, and its net book value at September 30, 201 3 is $0. This investment has been accounted for under the cost method of accounting.

Noncontrolling Interests in Majority-Owned Subsidiaries—Operating losses applicable to majority-owned Calando, Ablaris and, prior to its disposal, Unidym have periodically exceeded the noncontrolling interests in the equity capital of either Subsidiary. Such excess losses applicable to the noncontrolling interests have been and are borne by the Company as there is no obligation of the noncontrolling interests to fund any losses in excess of their original investment. There is also no obligation or commitment on the part of the Company to fund operating losses of any Subsidiary whether wholly-owned or majority-owned. The Company allocates the noncontrolling interest’s share of net loss in excess of the noncontrolling interest’s initial investment in accordance with FASB ASC 810-10.

When there is a change in the Company’s proportionate share of a development-stage Subsidiary resulting from additional equity transactions in a Subsidiary, the change is accounted for as an equity transaction in consolidation. To the extent that the increase in the calculated value of the Company’s interest in the equity of the Subsidiary exceeds the Company’s investment in the offering, that increase in value is referred to as the Company’s “increase in its proportionate share of the Subsidiary’s equity” and the amount is recorded as an increase in the Company’s Additional Paid-in Capital.

Revenue Recognition—Revenue from license fees are recorded when persuasive evidence of an arrangement exists, title has passed or services have been rendered, a price is fixed and determinable, and collection is reasonably assured. We may generate revenue from product sales, technology licenses, collaborative research and development arrangements, and research grants. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding and various milestone and future product royalty or profit-sharing payments.

Revenue associated with research and development funding payments under collaborative agreements, is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. Revenue from up-front license fees, milestones and product royalties are recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.

Allowance for Doubtful Accounts—The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed.

Research and Development—Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10.

Earnings (Loss) per Share—Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options issued to employees and consultants and warrants to purchase Common Stock of the Company.

Stock-Based Compensation—The Company accounts for share-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. We use the Black-Scholes option valuation model to estimate the fair value of our 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. We use historical data among other information to estimate the expected price volatility and the expected forfeiture rate.

F- 15

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.

Income Taxes—The Company accounts for income taxes under the liability method, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period.

Recently Issued Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment. ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning on or after September 15, 2012 and earlier adoption is permitted. We adopted this standard in the third quarter of fiscal year 2012. We believe adoption did not have a material effect on our financial statements.

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The adoption of ASU 2011-08 did not have a material impact on our financial position, results of operations or cash flows.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“ASU 2011-04”), which amended ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 was effective for us beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements or disclosures.

NOTE 2. NOTE RECEIVABLE

As part of the proceeds from the sale of Unidym in January 2011, Arrowhead received a Note Receivable from Wisepower (the “Wisepower Note”) in the face amount of $2.5 million. On January 24, 2013, the Company entered into an agreement to sell the Wisepower Note. As consideration for selling the Wisepower Note the Company received 1,570,000 shares of Wisepower stock, (the “First Tranche”). Per the terms of the agreement, the Company was entitled to receive additional consideration (the “Second Tranche”) based on the proceeds realized from the First Tranche, at which time the Company would deliver the Wisepower Note to the Purchaser.

F- 16

As of September 30, 2013, the Company sold all shares of Wisepower from the First Tranche, and realized approximately $1.4 million in proceeds. It is unclear when or if the Company will receive the Second Tranche. The Company recorded the $1.4 million proceeds realized from the First Tranche against the $2.5 million value of the Wisepower Note, and has recorded a reserve for the balance of the receivable of $1.1 million, which is presented as a part of other expense on the Company’s Statement of Operations.

NOTE 3. INVESTMENTS

The Company invests its excess cash balances in short-term and long-term debt securities. Investments at September 30, 2013 consisted of corporate bonds with maturities remaining of less than two years at the time of purchase. The Company may also invest excess cash balances in certificates of deposit, money market accounts, US Treasuries, US government agency obligations, corporate debt securities, and/or commercial paper. The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. At September 30, 2013, all investments were classified as held-to-maturity securities.

The following table summarizes the Company’s short and long-term investments as of September 30, 2013. There were no comparable investments as of September 30, 2012.

| As of September 30, 2013 |
| Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Commercial notes (due within one year) | $ | 9,030,261 |  |  | $ | 7,500 |  |  | $ | (39,281 | ) |  | $ | 8,998,480 |
Commercial notes (due after one year through two years) | $ | 1,702,153 |  |  |  | — |  |  | $ | (2,362 | ) |  | $ | 1,699,791 |
Total | $ | 10,732,414 |  |  | $ | 7,500 |  |  | $ | (41,643 | ) |  | $ | 10,698,271 |

NOTE 4. ACQUISITIONS

Roche Madison

On October 21, 2011, the Company entered into a Stock and Asset Purchase Agreement (the “RNAi Purchase Agreement”) with Hoffmann-La Roche Inc. and F Hoffmann-La Roche Ltd (collectively, “Roche”), pursuant to which the Company purchased from Roche (i) all of the outstanding common stock of Roche Madison Inc. (“Roche Madison”, now “Arrowhead Madison”) and (ii) the intellectual property rights then held by Roche related to its RNAi business and identified in the RNAi Purchase Agreement (the “Transaction”). In consideration for the purchase of Roche Madison and the Roche RNAi assets, the Company issued to Roche a promissory note with a principal value of $50,000 and 1,288,158 shares of Common Stock.

Pursuant to the RNAi Purchase Agreement, Roche has a right of first negotiation on certain product candidates developed by the Company and its affiliates relating to the purchased assets. If the Company proposes to out-license or enters into substantive negotiations to out-license, any Clinical Candidate or Existing Candidate (as such terms are defined in the RNAi Purchase Agreement), the Company must give notice of the Candidate it proposes to out-license and negotiate exclusively and in good faith with Roche for 90 days regarding the applicable out-license. This right of first negotiation applies to all Existing Candidates (as defined in the RNAi Purchase Agreement) and the first five Clinical Candidates for which the Company delivers notice to Roche and subsequently enters into an out-license.

In addition to the consideration paid by the Company as per the closing terms, the Company is obligated to make certain royalty and milestone payments to Roche upon the occurrence of certain events. For certain product candidates that are developed by the Company that are covered by a valid claim by the patent rights transferred in the Transaction for which the Company and Roche do not enter into a licensing arrangement, the Company will be obligated to pay a 3% royalty on Net Sales (as defined in the RNAi Purchase Agreement), provided that the royalty rate may be reduced or offset in certain circumstances. The obligation to pay royalties on such candidates will last until the later of (i) the expiration of the last to expire patent right related to such product candidate that was transferred in the Transaction and (ii) ten years after the first commercial sale of such product candidate.

F- 17

The Company will also be obligated to make cash payments to Roche upon the achievement of various milestones for certain clinical candidates, for which the Company and Roche do not enter into a licensing arrangement, including the first regulatory approval in certain jurisdictions, and upon certain annual sales milestones for candidates that receive regulatory approval. The potential payments range from $2,500,000 to $6,000,000 per milestone. At the time of acquisition, the Company’s estimate of future payments for potential royalties and milestones had a net present value of $84,935 which was recorded as contingent consideration as a part of other noncurrent liabilities. Contingent consideration is calculated by modeling research and development activities for clinical candidates, forecasting timelines to market, and using “peak sales” estimate modeling, cash flows and potential milestone and royalty payments are calculated. The modeling assumes certain success rates, and discount factors related to riskiness of projects and the time value of money to calculate a net present value of future consideration payments to Roche. These estimates are based on many unknown variables that are difficult to estimate, and due to the extended process of drug development prior to marketing of drug candidates, the models must extend many years into the future. Such predictions are inherently uncertain. Each year, the Company re-evaluates its contingent consideration, and if material, makes adjustments to the recorded liability. Any adjustment to the contingent consideration liability is reflected in the Company’s Statement of Operations. As of September 30, 2013, the contingent consideration liability had been increased by $1.4 million, which is recorded as a part of other noncurrent liabilities on the Company’s Consolidated Balance Sheet. For additional information related to our valuation of this obligation, see Note 11, Fair Value Measurements.

The following table summarizes the estimated fair values at the date of acquisition:

Current assets | $ | 432,709 |
Property and equipment |  | 7,215,206 |
Intangible assets |  | 1,174,935 |
Other noncurrent assets |  | 6,264 |
Current liabilities |  | (414,122 | )
Noncurrent liabilities |  | (1,570,072 | )
Gain on purchase |  | (1,576,106 | )
Total purchase consideration | $ | 5,268,814 |

The purchase consideration was composed of the following:

Promissory note due Roche | $ | 50,000 |
Contingent consideration |  | 84,935 |
Shares issued to Roche |  | 5,133,879 |
Total purchase consideration | $ | 5,268,814 |

We estimated the fair value of the assets and liabilities acquired through various valuation techniques including a market approach and an income approach. Because the net identifiable tangible and intangible assets and liabilities were in excess of the purchase price, a gain on the purchase of $1.6 million was recorded. The most significant assets capitalized were research equipment and certain in-process research and development. We believe that we were able to acquire these assets at a reasonable purchase price and generate a gain on the transaction due in part from the seller’s desire to exit the relatively early stage of the RNAi business, as compared to the seller’s other business operations, as well as the seller’s desire to dispose of certain on-going costs associated with the facility, primarily lease costs and personnel costs, which were synergistic to the Company’s strategy to establish a research facility to advance development efforts for its drug product candidates.

F- 18

Alvos Therapeutics

On April 5, 2012, the Company entered into a Stock Purchase Agreement to purchase all of the outstanding shares of Alvos Therapeutics, Inc., (“Alvos”), a privately held company that licensed a large platform of proprietary human-derived Homing Peptides, and the method for their discovery, from MD Anderson Cancer Center. In conjunction with the acquisition, Arrowhead hired one employee from Alvos. In exchange for all of the outstanding shares of Alvos, Arrowhead issued an upfront payment of 315,457 shares of Common Stock. The former Alvos stockholders are also eligible to receive additional issuances of stock valued at up to $23.5 million at the time of issuance based on the future achievement of clinical, regulatory and sales milestones. Based on the Company’s estimate of future payments, a net present value of $88,686 was calculated as contingent consideration, and is recorded as a part of other noncurrent liabilities. Similar to contingent consideration related to the Roche Madison acquisition, a forecasting model was used to determine potential future payments to the former shareholders of Alvos. Each year, the Company re-evaluates its contingent consideration, and if material, makes adjustments to the recorded liability. Any adjustment to the contingent consideration liability is reflected in the Company’s Statement of Operations. No adjustments to this contingent consideration have been made since the date of acquisition. For additional information related to our valuation of this obligation, see Note 11, Fair Value Measurements.

The following table summarizes the estimated fair values at the date of acquisition:

Current assets | $ | 29,332 |
In-process R&D |  | 2,172,387 |
Current liabilities |  | (113,033 | )
Total purchase consideration | $ | 2,088,686 |

The purchase consideration was comprised solely of shares of Arrowhead Common Stock issued to the former shareholders of Alvos Therapeutics, Inc.

Shares issued |  | 315,457 |
Price per share | $ | 6.34 |
Share consideration | $ | 2,000,000 |
Contingent consideration |  | 88,686 |
Total purchase consideration | $ | 2,088,686 |

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of in-process research and development (IPR&D) not subject to amortization, and patents and other intangible assets subject to amortization, which were capitalized as a part of a business combination.

IPR&D represents projects that have not yet received regulatory approval and are required to be classified as indefinite assets until the successful completion or the abandonment of the associated R&D efforts. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in one or more jurisdictions which, individually or combined, are expected to generate a significant portion of the total revenue expected to be earned by an IPR&D project. At that time, we will determine the useful life of the asset, reclassify the asset out of IPR&D and begin amortization. If the associated R&D effort is abandoned the related IPR&D assets will likely be written off and we would record an impairment loss.

Intangible assets subject to amortization include patents capitalized as part of a business combination as well as license agreements capitalized as part of a business combination from the acquisition of Roche Madison.

The license agreements are being amortized over the estimated life remaining at the time of acquisition which was 4 years. Patents are amortized over a period of three years to twenty years. The weighted average original amortization period is twelve years. Amortization of license agreements and patents is expected to be approximately $55,000 for fiscal years 201 4 and 201 5, $13,000 in 2016, and zero thereafter.

F- 19

On August 5, 2013, Calando terminated a License Agreement with the California Institute of Technology (the “License”). The License provided Calando with exclusive rights to develop and commercialize therapeutics based on the linear cyclodextrin drug delivery technology invented at Caltech. The drug delivery technology platforms, CyclosertTM and RONDELTM, as well as the drug candidates IT-101 and CALAA-01, were developed based on the licensed technology. Calando was responsible to direct and pay for the prosecution of the patents and patent applications covered by the License and to progress the technology. In conjunction with a previous business acquisition, the patents covered by this license agreement had been capitalized, and had a net book value of $1.3 million at June 30, 2013. Management has determined that the value of the patents was impaired as of June 30, 2013, and the Company recorded an impairment charge of $1.3 million, and is presented as a part of operating expenses for the year ended September 30, 2013.

We review amounts capitalized as IPR&D for impairment at least annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the event the carrying value of the assets is not expected to be recovered, the assets are written down to their estimated fair values. We continue to test our indefinite-lived IPR&D assets for potential impairment until the projects are completed or abandoned.

The below table provides details on our intangible asset balances:

| Intangible assets not subject to amortization |  |  | Intangible assets subject to amortization |  |  | Total Intangible assets |
Balance at September 30, 2011 | $ | — |  |  | $ | 1,731,211 |  |  | $ | 1,731,211 |
Additions—Madison acquisition |  | 944,935 |  |  |  | 230,000 |  |  |  | 1,174,935 |
Additions—Alvos acquisition |  | 2,172,387 |  |  |  | — |  |  |  | 2,172,387 |
Amortization |  | — |  |  |  | (293,964 | ) |  |  | (293,964 | )
Balance at September 30, 2012 | $ | 3,117,322 |  |  | $ | 1,667,247 |  |  | $ | 4,784,569 |
Impairment |  | — |  |  |  | (1,308,047 | ) |  |  | (1,308,047 | )
Amortization |  | — |  |  |  | (236,009 | ) |  |  | (236,009 | )
Balance at September 30, 2013 | $ | 3,117,322 |  |  | $ | 123,191 |  |  | $ | 3,240,513 |

NOTE 6. INVESTMENT IN SUBSIDIARIES

In addition to 100% ownership interest in Arrowhead Madison Inc., Arrowhead also maintains majority ownership in Calando Pharmaceuticals, Ablaris Therapeutics, Inc., and a minority investment in Leonardo Biosystems, Inc.

Calando Pharmaceuticals, Inc.

Calando is a clinical stage RNAi therapeutics company. On April 17, 2008, Calando merged with and into Insert, with Insert as the surviving company. Prior to the merger, Arrowhead invested an aggregate of $23.2 million in Calando through equity and debt financings. As a condition of the merger, the Preferred Stock of each of Calando and Insert was converted into common stock and the loans were converted to equity. As a result of the merger, shares of Insert common stock were issued to the stockholders of the former Calando, and Insert changed its name to Calando Pharmaceuticals, Inc.

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. Except for one Note in the principal amount of $500,000, all Notes and accrued interest were converted into a total of 2,950 shares of Calando Series A Preferred Stock on June 23, 2009. The remaining Note is due November 26, 2013; see Note 4 for further information.

As of September 30, 201 3, Calando owed to Arrowhead $4.3 million under a series of 8% simple interest notes and advances. It is expected that these loans will either be repaid or converted to equity in the future. The balance of the notes and advances is eliminated in consolidation.

F- 20

As of September 30, 201 3, Arrowhead owned 79% of the outstanding shares of Calando and 76% on a fully diluted basis.

Ablaris Therapeutics, Inc.

Ablaris was formed and began operations in fiscal 2011, based on the license of certain anti-obesity technology developed at the MD Anderson Cancer Center at the University of Texas. During fiscal 2011, Ablaris raised $2.9 million in cash, of which $1.3 million was invested by Arrowhead and $1.6 million was invested by outside investors, through the issuance of Ablaris Series A Preferred stock.

As of September 30, 201 3, Arrowhead owned 64% of the outstanding shares of Ablaris and 64% on a fully diluted basis.

Leonardo Biosystems, Inc.

Leonardo is developing a drug-delivery platform technology based on novel methods of designing porous silicon microparticles that selectively accumulate in tumor vasculature. Arrowhead accounts for its investment in Leonardo using the cost method of accounting. As of September 30, 201 3, Leonardo owed to Arrowhead $1.1 million, which is fully reserved due to the uncertainty of whether such amount will be repaid. As of September 30, 201 3, Arrowhead’s ownership interest in Leonardo was 3%.

NOTE 7. NOTES PAYABLE

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. Except for one Note in the principal amount of $500,000, all Notes and accrued interest were converted into a total of 2,950 shares of Calando Series A Preferred Stock on June 23, 2009. The remaining Note had a 10% interest rate, matured on November 26, 2010, and was renegotiated and extended until November 26, 2013. The terms of the new note include a 10% interest rate and require two times principal payment at maturity. At September 30, 201 3, the Note is reflected on the balance sheet at the maturity amount of $1.0 million less a discount of $28,443.

NOTE 8. STOCKHOLDERS’ EQUITY

At September 30, 201 3, 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, and 5,000,000 shares of Preferred Stock, par value $0.001.

At September 30, 201 3, 32,489,444 shares of Common Stock were outstanding; 9,900 shares of Preferred Stock were outstanding. At September 30, 201 3, 153,200 shares and 3,419,285 shares were reserved for issuance upon exercise of options granted under Arrowhead’s 2000 Stock Option Plan and 2004 Equity Incentive Plan, respectively.

The Preferred Stock is convertible to Common Stock by its holder at its stated conversion price, though the Preferred Stock is not convertible to the extent the holder would beneficially own more than 9.99% of the number of Common Stock immediately after the conversion. The holders of Preferred Stock are eligible to vote with the Common Stock of the Company on an as-converted basis, but only to the extent they are eligible for conversion without exceeding the 9.99% ownership limitation. The Preferred Stock does not carry a coupon, but the Preferred Stock is entitled to receive dividends on a pari passu basis with Common Stock, when and if declared. In any liquidation or dissolution of the Company, the holders of Preferred Stock are entitled to participate in the distribution of the assets, to the extent legally available for distribution, on a pari passu basis with the Common Stock.

On September 30, 2011, the Company sold 1,191,473 shares of Common Stock at a price of $3.80 per share. Cash proceeds received in fiscal 2011 were $4.5 million. On October 4, 2011, the Company completed a second closing of the offering in which the Company sold 138,158 shares of Common Stock at a price of $3.80 per share. Cash proceeds were $525,000.

On October 20, 2011, the Company and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”) entered into a $15 million purchase agreement (the “Purchase Agreement”), whereby LPC agreed to purchase up to $15 million of Common Stock, subject to certain limitations, from time to time during the three-year term of the Purchase Agreement. The Company has the right, in its sole discretion, over a 36-month period to sell up to $15 million of Common Stock (subject to certain limitations) to LPC,

F- 21

depending on certain conditions as set forth in the Purchase Agreement. As of September 30, 201 3, the Company had drawn $1 million from the facility.

On October 21, 2011 and October 24, 2011, the Company entered into Subscription Agreements with certain accredited investors (the “Series A Purchasers”), pursuant to which the Company issued and sold an aggregate of 1,015 shares of Series A Preferred Convertible Stock, $0.001 par value per share, at a purchase price of $1,000 per share. The aggregate purchase price paid for the shares of Series A Preferred was $1,015,000. On February 16, 2012, upon approval by the Company’s shareholders, 1,015 shares of Arrowhead Series A Preferred Convertible Stock, $0.001 par value per share, were converted to 275,782 shares of Common Stock.

On October 21, 2011, the Company entered into a Subscription Agreement with an accredited investor, pursuant to which the Company issued and sold an aggregate of 675,000 shares of Common Stock, $0.001 par value per share, at a purchase price of $3.70 per share. The aggregate purchase price paid by the purchaser for the shares of Common Stock is $2,497,500.

On August 10, 2012 the Company sold 2,260,869 units at a price of $2.76 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.75 shares of common stock at an exercise price of $3.25. Gross proceeds from the offering were $6.2 million excluding offering fees and expenses.

In December 2012, the Company sold 1,825,079 units at a price of $2.26 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.5 shares of common stock. Gross proceeds from the offering were $4.1 million excluding offering fees and expenses. The exercise price of these warrants was $1.83 as of September 30, 2013, and may decrease based on certain specified events. As a result, the Company determined these warrants were ineligible for equity classification. Refer to Note 11 for further discussion regarding these warrants.

In January 2013, the Company sold 1,667,051 units at a price of $2.12 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.5 shares of common stock. Gross proceeds from the offering were $3.5 million excluding offering fees and expenses. The exercise price of these warrants was $1.83 as of September 30, 2013, and may decrease based on certain specified events. As a result, the Company determined these warrants were ineligible for equity classification. Refer to Note 11 for further discussion regarding these warrants.

In May 2013, the Company sold 14.3 million shares of Arrowhead common stock at a price of $1.83 per share and 9,900 shares of Arrowhead series B convertible preferred stock at a price of $1,000 per share. The series B preferred stock is convertible into common stock at a conversion price of $1.83. Gross proceeds were $36 million. No warrants were issued in the May 2013 financing.

As of November 17, 2011, the Company effected a 1 for 10 reverse stock split. As a result of the reverse stock split, each ten shares of the Company’s Common Stock issued and outstanding immediately prior to the reverse stock split was combined into one share of Common Stock. Also, as a result of the reverse stock split, the per share exercise price, and the number of shares of Common Stock underlying Company stock options, warrants, and any Common Stock based equity grants outstanding immediately prior to the reverse stock split was proportionally adjusted, based on the one-for-ten split ratio, in accordance with the terms of such options, warrants or other Common Stock based equity grants as the case may be. No fractional shares of Common Stock were issued in connection with the reverse split. Stockholders received a cash payment in lieu of any fractional shares. All share and per share amounts in these financial statements have been retrospectively adjusted to reflect the reverse stock split.

F- 22

The following table summarizes information about warrants outstanding at September 30, 201 3:

Exercise prices |  | Number of Warrants |  |  | Remaining Life in Years |
$ | 70.60 |  |  |  | 94,897 |  |  |  | 3.6 |
$ | 5.00 |  |  |  | 1,155,023 |  |  |  | 1.2 |
$ | 5.09 |  |  |  | 461,024 |  |  |  | 1.2 |
$ | 1.38 |  |  |  | 187,313 |  |  |  | 2.2 |
$ | 4.16 |  |  |  | 1,000 |  |  |  | 3.2 |
$ | 3.25 |  |  |  | 1,685,870 |  |  |  | 2.9 |
$ | 2.12 |  |  |  | 75,000 |  |  |  | 4.2 |
$ | 1.83 |  |  |  | 742,396 |  |  |  | 4.2 |
Total warrants outstanding |  |  | 4,402,523 |  |  |  |  |

NOTE 9. LEASES

In May 2012, the Company signed a lease for new office space for its corporate headquarters, and moved into the new location in August 2012. The lease has a five-year term; rental costs are approximately $13,000 per month, increasing 3% annually.

The Company’s research facility in Madison, Wisconsin is leased through February 28, 2019. Monthly rental expense is approximately $22,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $13,000 per month. Utilities costs are approximately $15,000 per month. Including monthly payments recorded under a capital lease of approximately $21,000, total monthly costs are approximately $71,000 per month.

Facility and equipment rent expense, related to continuing operations, for the year ended September 30, 201 3 and 201 2 was $534,000 and $480,000, respectively. From inception to date, rent expense was $4,660,000.

As of September 30, 201 3, future minimum lease payments due in fiscal years under capitalized leases are as follows:

201 4 | $ | 256,846 |
201 5 |  | 256,846 |
201 6 |  | 256,846 |
201 7 |  | 256,846 |
201 8 |  | 256,846 |
201 9 and thereafter |  | 107,019 |
Less interest |  | (108,791 | )
Principal |  | 1,282,458 |
Less current portion |  | (221,345 | )
Noncurrent portion | $ | 1,061,113 |

As of September 30, 201 3, future minimum lease payments due in fiscal years under operating leases are as follows:

201 4 | $ | 434,229 |
201 5 |  | 445,921 |
201 6 |  | 457,961 |
201 7 |  | 470,154 |
201 8 |  | 359,370 |
201 9 and thereafter |  | 125,415 |
Total | $ | 2,293,050 |

F- 23

NOTE 10. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, 153,200 shares of Arrowhead’s Common Stock are reserved for issuance upon exercise of non-qualified stock options. No further grants can be made under the 2000 Stock Option Plan. The 2004 Equity Incentive Plan reserves 2,965,185 shares for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards by the Board of Directors to employees, consultants and others. As of September 30, 201 3, there were options granted and outstanding to purchase 152,900 and 2,965,185 shares of Common Stock under the 2000 Stock Option Plan and the 2004 Equity Incentive Plan, respectively. Also, as of September 30, 2013, there were 301,200 shares reserved for options issued outside of equity compensation plans, as inducement grants to new employees. During the year ended September 30, 201 3, 1,459,166 options were granted under the 2004 Equity Incentive Plan, and 50,000 options were granted outside of equity incentive plans as inducement stock options to new employees.

The following tables summarize 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, 201 1 |  | 729,096 |  |  | $ | 9.03 |  |  |  |  |  |  |  |  |
Granted |  | 1,229,500 |  |  |  | 4.40 |  |  |  |  |  |  |  |  |
Cancelled |  | (42,919 | ) |  |  | 11.77 |  |  |  |  |  |  |  |  |
Exercised |  | (4,883 | ) |  |  | 5.20 |  |  |  |  |  |  |  |  |
Balance At September 30, 201 2 |  | 1,910,794 |  |  |  | 6.10 |  |  |  |  |  |  |  |  |
Granted |  | 1,509,166 |  |  |  | 2.03 |  |  |  |  |  |  |  |  |
Cancelled |  | — |  |  |  | — |  |  |  |  |  |  |  |  |
Exercised |  | (675 | ) |  |  | 3.93 |  |  |  |  |  |  |  |  |
Balance At September 30, 201 3 |  | 3,419,285 |  |  | $ | 4.68 |  |  |  | 8.3 years |  |  | $ | 5,811,926 |
Exercisable At September 30, 201 3 |  | 1,306,306 |  |  | $ | 6.55 |  |  |  | 6.7 years |  |  | $ | 1,127,819 |

Stock-based compensation expense for the year ended September 30, 201 3 and 201 2 was $1,536,271 and $1,241,404, respectively. There is no income tax benefit as the Company is currently operating at a loss and an actual income tax benefit may not be realized. The loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The fair value of the options granted by Arrowhead for the years ended September 30, 201 3 and 201 2 is estimated at $2,843,575 and $4,091,117, respectively. No Calando stock options were issued in fiscal 2013; the aggregate fair value of options granted by Calando during the years ended September 30, 201 2 is estimated at $33,690.

The intrinsic value of the options exercised during the years ended September 30, 201 3 and 201 2 was $554 and $0, respectively.

As of September 30, 201 3, the pre-tax compensation expense for all unvested stock options at Arrowhead in the amount of approximately $5,072,252 will be recognized in our results of operations over a weighted average period of 3.1 years. As of September 30, 201 3, the pre-tax compensation expense for all unvested stock options at Calando in the amount of approximately $32,952 will be recognized in our results of operations over a weighted average period of 2.3 years.

F- 24

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 our 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:

| Year ended September 30,
| 201 3 |  | 201 2
Dividend yield | — |  | —
Risk-free interest rate | 0.7% to 2.3% |  | 0.9% to 1.7%
Volatility | 69% |  | 90% - 100%
Expected life (in years) | 5.5 to 6.25 |  | 5.5 to 6.25
Weighted average grant date fair value per share of options granted | $1.88 |  | $3.32

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

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

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

NOTE 11. 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 September 30, 201 3 and September 30, 201 2 for assets and liabilities measured at fair value on a recurring basis:

September 30, 201 3:

| Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Cash and cash equivalents | $ | 19,114,444 |  |  | $ | — |  |  | $ | — |  |  | $ | 19,114,444 |
Marketable securities | $ | 10,698,271 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,698,271 |
Derivative assets | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative liabilities | $ | — |  |  | $ | — |  |  | $ | 4,096,363 |  |  | $ | 4,096,363 |
Acquisition related contingent consideration obligations | $ | — |  |  | $ | — |  |  | $ | 1,595,273 |  |  | $ | 1,595,273 |

F- 25

September 30, 201 2:

| Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Cash and cash equivalents | $ | 3,377,288 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,377,288 |
Marketable securities | $ | 106,500 |  |  | $ | — |  |  | $ | — |  |  | $ | 106,500 |
Derivative assets | $ | — |  |  | $ | — |  |  | $ | 250,250 |  |  | $ | 250,250 |
Derivative liabilities | $ | — |  |  | $ | — |  |  | $ | 647,213 |  |  | $ | 647,213 |
Acquisition related contingent consideration obligations | $ | — |  |  | $ | — |  |  | $ | 173,621 |  |  | $ | 173,621 |

The Company invests its excess cash balances in short and long-term corporate bonds, generally with remaining maturities of less than two years. At September 30, 2013, the Company had short-term investments of $9,030,261, and long-term investments of $1,702,153, for a total of $10,732,414. The fair value of its investment at September 30, 2013 was $10,698,271. The Company expects to hold such investments until maturity, and thus unrealized gains and losses from the fluctuations in the fair value of the securities are not likely to be realized.

As part of the proceeds from the sale of Unidym in January 2011, Arrowhead received a bond from Wisepower in the face amount of $2.5 million. The bond is convertible to Wisepower common stock at a price of $2.00 per share. The conversion feature is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative asset. This was offset somewhat by the portion of the bond that was owed to a third party in the amount of $10,646 as of September 30, 2012, reduced to zero at September 30, 2013. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value of the conversion feature is recorded as a nonoperating gain/loss as change in value of derivatives in Company’s Consolidated Statement of Operations. During the quarter ended March 31, 2013, the trading of Wisepower stock was halted. Trading resumed in July 2013, but the trading price is significantly below the conversion price. The Company determined that the probability of realizing value from the conversion feature was remote, and the derivative asset value has been reduced to zero.

During the year ended September 30, 201 3, the Company recorded a gain from the change in fair value of the derivative asset of $250,250.

The assumptions used in valuing the derivative asset as of September 30, 201 3 and 201 2 were as follows:

| September 30, 201 3 |  | September 30, 201 2
Risk free interest rate | N/A |  | 0.23%
Expected life | N/A |  | 1.3 Years
Dividend yield | N/A |  | none
Volatility | N/A |  | 72%

The following is a reconciliation of the derivative asset for the years ended September 30, 201 3 and 201 2:

Value at September 30, 201 1 | $ | 161,125 |
Receipt of instruments |  | — |
Increase in value |  | 89,125 |
Net settlements |  | — |
Value at October 1, 201 2 | $ | 250,250 |
Receipt of instruments |  | — |
Decrease in value |  | (250,250 | )
Net settlements |  | — |
Value at September 30, 201 3 | $ | — |

As part of an equity financing in June 2010, Arrowhead issued warrants to acquire up to 329,649 shares of Common Stock (the “2010 Warrants”), of which 187,313 warrants were outstanding at September 30, 2013, which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2010 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2010 Warrants, the exercise price of the 2010 Warrants would be reduced to the amount equal to the issuance price of the Common Stock. Similarly, as part of a financing in December 2012, Arrowhead issued

F- 26

warrants to acquire up to 912,543 shares of Common Stock (the “2012 Warrants”) of which 415,761 warrants were outstanding at September 30, 2013, which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2012 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2012 Warrants, the exercise price of the 2012 Warrants would be reduced to the amount equal to the issuance price of the Common Stock. Further, as part of a financing in January 2013, Arrowhead issued warrants to acquire up to 833,530 shares of Common Stock (the “2013 Warrants”) of which 326,635 warrants were outstanding at September 30, 2013 which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2013 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2013 Warrants, the exercise price of the 2013 Warrants would be reduced to the amount equal to the issuance price of the Common Stock. As a result of these features, the 2010 Warrants, the 2012 Warrants, and the 2013 Warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the Warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a nonoperating gain or loss in the Company’s consolidated statement of operations. During the year ended September 30, 2013, the Company recorded a non-cash loss from the change in fair value of the derivative liability of $5,066,591.

The assumptions used in valuing the derivative liability as of September 30, 201 3 and 201 2 were as follows:

2010 Warrants |  | September 30, 2013 |  |  | September 30, 2012
Risk free interest rate |  | 0.33% |  |  | 0.31%
Expected life |  | 2.2 Years |  |  | 3.2 Years
Dividend yield |  | None |  |  | None
Volatility |  | 69% |  |  | 100%
2012 Warrants |  | September 30, 2013 |  |  | September 30, 2012
Risk free interest rate |  | 1.39% |  |  | N/A
Expected life |  | 4.2 Years |  |  | N/A
Dividend yield |  | none |  |  | N/A
Volatility |  | 69% |  |  | N/A
2013 Warrants |  | September 30, 2013 |  |  | September 30, 2012
Risk free interest rate |  | 1.39% |  |  | N/A
Expected life |  | 4.3 Years |  |  | N/A
Dividend yield |  | none |  |  | N/A
Volatility |  | 69% |  |  | N/A

The following is a reconciliation of the derivative liability related to these warrants for the years ended September 30, 201 3 and 201 2:

Value at September 30, 201 1 | $ | 907,233 |
Receipt of instruments |  | — |
Change in value |  | (281,038 | )
Net settlements |  | — |
Value at September 30, 201 2 | $ | 626,195 |
Issuance of instruments |  | 2,153,819 |
Change in value |  | 5,066,591 |
Net settlements |  | (3,754,808 | )
Value at September 30, 201 3 | $ | 4,091,797 |

In conjunction with the financing of Ablaris in fiscal 2011, Arrowhead sold exchange rights to certain investors whereby the investors have the right to exchange their shares of Ablaris for a prescribed number of Arrowhead shares based upon a predefined ratio. The exchange rights have a seven-year term. During the first year, the exchange right allows the holder to exchange one Ablaris share for 0.06 Arrowhead shares (as adjusted for a subsequent reverse stock split). This ratio declines to 0.04 in the second year, 0.03 in the third year and 0.02 in the fourth year. In the fifth year and beyond the exchange ratio is 0.01. Exchange rights for 675,000 Ablaris shares were sold in fiscal 2011, and remain outstanding at September 30, 2013. The exchange rights are subject to derivative

F- 27

accounting as prescribed under ASC 815. Accordingly, the fair value of the exchange rights on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the exchange rights is estimated at the end of each reporting period and the change in the fair value of the exchange rights is recorded as a nonoperating gain or loss in the Company’s Consolidated Statement of Operations. During the year ended September 30, 201 3, the Company recorded a non-cash loss from the change in fair value of the derivative liability of $5,806.

The assumptions used in valuing the derivative liability as of September 30, 201 3 and 201 2 were as follows:

| September 30, 201 3 |  | September 30, 201 2
Risk free interest rate | 1.39% |  | 0.62%
Expected life | 4.3 Years |  | 5.3 Years
Dividend yield | None |  | None
Volatility | 100% |  | 100%

The following is a reconciliation of the derivative liability related to these exchange rights for the years ended September 30, 201 3 and 201 2:

Value at September 30, 201 1 | $ | 30,895 |
Issuance of instruments |  | — |
Change in value |  | (20,520 | )
Value at September 30, 201 2 | $ | 10,375 |
Issuance of instruments |  | — |
Change in value |  | (5,806 | )
Net settlements |  | — |
Value at September 30, 201 3 | $ | 4,569 |

The derivative assets/liabilities are estimated 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. Other inputs have a comparatively insignificant effect.

During the year ended September 30, 201 2, contingent consideration was recorded upon the acquisitions of Roche Madison Inc. and Alvos Therapeutics, Inc., totaling $173,621. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on our own assumptions and experience. Estimating timing to complete the development, and obtain approval of products is difficult, and there are inherent uncertainties in developing a product candidate, such as obtaining U.S. Food and Drug Administration (FDA) and other regulatory approvals. In determining the probability of regulatory approval and commercial success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant 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 we record in any given period. Changes in the fair value of the contingent consideration obligations are recorded in our consolidated statement of operations.

F- 28

The following is a reconciliation of contingent consideration fair value during the years ended September 30, 201 3 and 2012.

Value at September 30, 201 1 | $ | — |
Purchase price contingent consideration |  | 173,621 |
Contingent consideration payments |  | — |
Change in fair value of contingent consideration |  | — |
Value at September 30, 201 2 | $ | 173,621 |
Purchase price contingent consideration |  | — |
Contingent consideration payments |  | — |
Change in fair value of contingent consideration |  | 1,421,652 |
Value at September 30, 201 3 | $ | 1,595,273 |

The fair value of contingent consideration obligations is estimated through valuation models designed to estimate the probability 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 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. Each of these assumptions can have a significant impact on the calculation of contingent consideration.

The carrying amounts of the Company’s other financial instruments, which include accounts receivable, accounts payable, and accrued expenses approximate their respective fair values due to the relatively short-term nature of these instruments. The carrying value of the Company’s debt obligations approximates fair value based on market interest rates.

NOTE 12. INCOME TAXES

The Company utilizes the guidance issued by the FASB for accounting for income taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

For the years ended September 30, 201 3 and 201 2, the Company had consolidated net book losses of $31.7 million and $22.1 million, respectively. The losses result in a deferred income tax benefit which is offset by a deferred tax provision for the valuation allowance for a net deferred provision of zero. Since the Company is a development stage company, management has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets.

As of September 30, 201 2, the Company has available gross federal net operating loss (NOL) carry forwards of $99.5 million and gross state NOL carry forwards of $77.4 million which expire at various dates through 2032. Gross federal NOL carry forwards for 2013 are estimated at $18.7 million, and gross state NOL carry forwards for 2013 are estimated at $32.6 million.

As of September 30, 201 3, federal deferred tax assets were estimated to be $40.2 million. The Company has recorded a full valuation allowance related to all of its net operating loss carry forwards. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for

F- 29

Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected future taxable income.

The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the years ended September 30, 201 3 and 201 2, respectively, and $0 for the period from May 7, 2003 (date of inception) through September 30, 201 3. The Company files income tax returns with the Internal Revenue Service (“IRS”), the state of California and certain other taxing jurisdictions. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for years through fiscal 2007, and by the IRS for the years through fiscal 2008. Our review of prior year tax positions using the criteria and provisions presented by the FASB did not result in a material impact on the Company’s financial position or results of operations.

The provision for income taxes differs from the federal statutory rate due to state income taxes and changes in the valuation allowance for deferred income tax assets.

NOTE 13. EMPLOYEE BENEFIT PLANS

In January 2005, the Company began sponsoring a defined contribution 401(k) retirement savings plan covering substantially all of its employees. The Plan was administered under the “safe harbor” provision of ERISA. Under the terms of the plan, an eligible employee may elect to contribute a portion of their salary on a pre-tax basis, subject to federal statutory limitations. The plan allowed for a discretionary match in an amount up to 100% of each participant’s first 3% of compensation contributed plus 50% of each participant’s next 2% of compensation contributed.

For the years ended September 30, 201 3 and 201 2, we recorded expenses under these plans of approximately $191,947 and $1 62,495, respectively and $807,939 since inception of the Company.

In addition to the employee benefit plans described above, the Company participates in certain customary employee benefits plans, including those which provide health and life insurance benefits to employees.

NOTE 14. SUBSEQUENT EVENTS

On October 11, 2013, the Company closed a securities offering with certain institutional investors (the “Purchasers”), pursuant to which the Company sold 3,071,672 shares of common stock, (the “Shares”), at a purchase price of $5.86 per share, and 46,000 shares of Series C Convertible Preferred Stock (the “Preferred Shares”), at a purchase price of $1,000 per share. The Preferred Shares are convertible into shares of common stock at a conversion price of $5.86 per share of common stock. The aggregate purchase price paid by the Purchasers for the Shares and Preferred Shares was $64 million and the Company received net proceeds of approximately $60 million, after advisory fees and offering expenses.

F- 30