Arcturus Therapeutics Holdings Inc. (ARCT) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Arcturus Therapeutics Holdings Second Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.I would now like to turn the conference over to your host, Neda Safarzadeh, Head of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Thank you for joining Arcturus’ earnings conference call. We are excited for this opportunity to discuss Arcturus’ second quarter 2019 operating results.We are joined today by Joseph Payne, our President and Chief Executive Officer; and Andy Sassine, our Chief Financial Officers. Dr. Pad Chivukula, our Chief Scientific and Chief Operating Officer is also on the line and will be available to address questions during the Q&A session.Joe will kick off the call with a high level overview of Arcturus’ market opportunity and the strategic roadmap. He will then review the Company's most recent partnership announcements and review important milestones for our clinical development activities. Next, Andy will be discussing the second quarter financial results and recap recent developments towards strengthening the Company's balance sheet. Finally, we will open the call for your questions.Before we begin, I would like to remind everyone that except for statements of historical facts, the statements made by management and any responses to questions on this conference call constitute forward-looking statements that involve substantial risks and uncertainties for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995.Any statements, other than statements of historical fact, included in this communication regarding strategy, future operations, the status of preclinical and clinical development programs, the potential success of clinical development programs, and the Company’s future cash and financial position are forward-looking statements. Actual results and performance could differ materially from those projected in any forward-looking statements as a result of many factors, including without limitation an inability to develop and product candidates, unexpected clinical results and general market conditions that may prevent such achievements or performance. Such statements are based on management's current expectations and involve risks and uncertainties including those disclosed under the heading Risk Factors in Arcturus' Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 18, 2019 and Arcturus' quarterly report on Form 10-Q filed with the SEC on August 14, 2019, and in subsequent filings with or submissions to the SEC.Except as otherwise required by law, Arcturus disclaims any intention or obligation to update or revise any forward-looking statements, which speak only as of the date they were made, whether as a result of a new information, future circumstances, or otherwise.I will now turn the call over to Joe.

Thank you, Neda.Good afternoon and thank you for joining us for our second quarter results conference call. This is our Arcturus’ first ever quarterly earnings conference call. And we are very pleased with this opportunity to tell you our story about our mission to develop life-saving therapies for patients and to provide an update on our programs.We have had a productive few months, raising capital to fund our operations after redomiciling the Company in the U.S., we expanded and amended our present collaboration, resulting in substantial monies being received, including $30 million from Ultragenyx in June and $4 million from CureVac in July. We received $3.3 million from Synthetic Genomics, and the CF Foundation has increased its commitment to $15 million.On top of this, we recently broadened our investor base, bringing in approximately $13 million from institutional offerings. And Andy, of course, will provide a more detailed financial review, later in the call.Well, we are indeed seeing progress with messenger RNA therapeutics. Messenger RNA molecules create and build life. That is what they do. And getting a messenger RNA molecule to where it needs to be, safely and effectively will not only be a significant scientific achievement in medicine, but it will also have a transformational impact on the pharmaceutical industry. And at Arcturus, building and creating life-changing proteins inside a human being is our primary objective. And we believe the LUNAR technology is a platform delivery system that will allow us to go after targets in multiple areas including the liver, lung, ophthalmology, infectious disease, and vaccines.We continue to make progress on our proprietary pipeline with our first IND anticipated in Q1 2020 that is just around the corner. And we are aiming to file a second IND in late 2020. And when we include our partnered program with Ultragenyx, there is the potential for a total of three INDs based on Arcturus technology to be filed in 2020.So, now, let me talk about LUNAR-OTC, which is our most advanced clinical candidate from our wholly-owned clinical pipeline. It's also known as ARCT-810, which will be the subject of our first IND application. We are developing 810 to treat ornithine transcarbamylase deficiency, which we also refer to as OTC deficiency. And OTCD is the most common urea cycle disorder where you have neurotoxic ammonia being converted to water soluble urea that can be excreted in the urine. And the deficiency and OTC causes elevated blood ammonia, which can lead to neurological damage, coma, and death.The present standard of care involves a strict diet of low-protein and high-fluid intake, plus ammonia scavengers like sodium phenylbutyrate. It does not effectively prevent spikes of ammonia, however. So, sadly, many OTC deficiency patients are typically referred for liver transplants.Now, our LUNAR-OTC program aims to restore the enzyme function in the liver with the potential to restore normal urea cycle activity, detoxify the ammonia, prevent the neurological damage and remove the need for liver transplantation. And we believe there's 10,000 worldwide OTC patients, which represents a $500 million potential annual sales market.Importantly, Arcturus recently received Orphan Drug Designation from the U.S. FDA in late June. We have completed the manufacturing of drug substance and drug product using our proprietary processes. We have now completed multiple batches of LUNAR-formulated OTC mRNA drug product at 10 grams each. And we believe the current inventory is sufficient to support IND-enabling studies and early clinical development.We have also initiated GLP tox studies in two species that we expect to complete before year-end. And in parallel, we have scheduled to manufacture the first batches of GMP drug products that we can use in clinical trials.Moving on to our CF program. We are very -- or were very excited to announce on August 1st, the Cystic Fibrosis Foundation has increased its commitment to $15 million, and that was in conjunction with an amended agreement to advance LUNAR-CF, which is a novel messenger RNA therapeutics formulated with Arcturus’ LUNAR delivery technology. The goal of this multiyear program is to create mRNA therapies to treat people with cystic fibrosis. We want to develop methods to deliver RNA into the cells of the lung, and file an IND application for a therapeutic candidate.This was a collaboration that began in 2016. And with this expanded collaboration, we are now sufficiently funded to advance the LUNAR-CF program to IND submission. And we expect a development candidate nomination in the first quarter of 2020. And together with the CF Foundation, we can then expect to file an IND in late 2020.As a reminder, cystic fibrosis has a worldwide prevalence of about 70,000 patients. CF is caused by genetic mutations in the CFTR gene that mucus buildup in lung airways. So, a messenger RNA replacement therapy has the potential to deliver a new fresh copy of the transporter CFTR into these lungs of CF patients, independent of any genotype. So, we estimate the Class 1 CF market potential is $900 million of annual sales. And we look forward to providing future updates as this program advances.Arcturus and Ultragenyx originally signed a license agreement in 2015 to develop messenger RNA therapeutic candidates for certain rare disease targets. And this past June, we announced an expanded collaboration to discover and develop messenger RNA, DNA and siRNA therapeutics for up to 12 rare disease targets. Under the terms of the expanded agreement, Ultragenyx paid $6 million in cash to Arcturus and purchased 2.4 million shares of common stock at $10 per share. Ultragenyx is now, Arcturus' largest shareholder and has a seat on the Company's Board, in addition to an observer role.The first disclosed indication under the collaboration is glycogen storage disease type 3. And an IND application for this mRNA therapeutic program, also known as UX053 is expected to be filed in 2020. We are indeed excited to expand our partnership with Ultragenyx as we work together to find transformative solutions for rare diseases.I want to take a moment now to emphasize some data that Arcturus recently presented on our LUNAR technology and more specifically on the biochemical properties of our lipids. We believe these data are very, very relevant as they reflect well on the strong safety profile of our technology, as well as on our competitive positioning.The data that we presented demonstrates that the key Arcturus lipid that makes up the major portion of the LUNAR technology is quickly biodegraded with the half life of 20 hours. We have shown that we can safely administer 8 weekly doses of LUNAR-formulated non-coding RNA at 3 mg/kg. And we can do this in primates for a total of 24 mg/kg over two months. To put this in perspective, the FDA approved dose for what is considered to be the existing clinical gold standard for lipid nanoparticle RNA delivery is only 0.3 mg/kg, once every 3 weeks dosing.As we think about the second half of 2019, the remainder of this year, we plan to participate in numerous scientific conferences, including the OTS or the, all the Oligonucleotide Therapeutics Society conference in October, and also the International mRNA Health Conference that’s held in Berlin. And we will provide you with an update when we have more details there.We have signed multiple partnership agreements that both validate our technology and provide financial backing to fund our research. The aggregate of these agreements contains more than $1 billion in potential milestones and royalties to Arcturus. We've been able to build upon track records in 2019, and expanding our collaborations with both the CF Foundation and with Ultragenyx, resulting in additional payments to Arcturus as well as an increase in committed resources for the programs covered.Our business development activities toward growing our platform continue to be a high priority. We have several ongoing evaluations with potential partners and continue to collect new and promising data as we consider licensing our technologies, especially our LUNAR technology to enable large nucleic acid medicines. This includes replicon RNA, gene editing RNA, next generation DNA therapeutics. And we will of course provide you updates as these business development activities mature.I will now turn the call over to Andy Sassine for a financial review. Andy?

Thank you, Joe, and good afternoon, everyone.We issued a press release earlier today that included a financial update on the second quarter ended June 30, 2019, which I will briefly summarize.Collaboration revenue was $10.2 million during the quarter ended June 30, 2019 compared to $2.4 million in the comparable period in 2018. Approximately $7 million is nonrecurring revenue from three one-time events. First, we recognized $3.3 million from our Synthetic Genomics agreement related to sublicense revenues from multiple parties; second, we recognized $3 million from our partner CureVac in connection with the Termination Agreement related to the OTC program; finally, we recognized approximately $1 million from Ultragenyx agreement as nonrecurring revenues.Operating expenses were $10.7 million in the quarter ended June 30, 2019 compared to $12.5 million in the quarter ended June 30, 2018. The June 2018 quarter included approximately $5 million in expenses related to the proxy event last year.Net loss for the quarter ended June 30, 2019 was approximately $700,000, or $0.07 per basic and diluted weighted average shares outstanding, compared with a net loss of $10 million or $0.99 per share in the comparable period in 2018.At June 30, 2019, Arcturus had cash and cash equivalents totaling $55.8 million, compared to $36.7 million at December 31, 2018. The majority of the increase was due to the expanded collaboration agreement, we announced with Ultragenyx Pharmaceuticals in June. We received $30 million from Ultragenyx comprised of a $24 million equity investments at $10 per share in a $6 million upfront payment.Subsequent to the end of the fiscal quarter, we announced three significant transactions, which further improved our liquidity. First, we received a $4 million payment from CureVac at the end of July in connection with the Termination Agreement for the co-development of ARCT-810 as a therapy for OTC deficiency. Second, we announced two registered direct offerings of our common stock and $11.50 per share to certain institutional investors that in the aggregate raised net proceeds of $12.2 million. The two offerings were for an aggregate of 1,145,653 shares of common stock. This was the first institutional offering completed by Arcturus, and we are grateful for the strong support from our existing and new shareholders. Finally, the Cystic Fibrosis Foundation increased their commitment up to $15 million to fund LUNAR-CF program through IND. We anticipate receiving the first payment of $4 million by the end of August. In total, we added an additional $20 million in cash since the end of the quarter, and we believe our cash resources should be sufficient to support our operations through the end of fiscal year 2020.If we take into account, the three aforementioned transactions, our common shares outstanding would be 14.3 million shares, approximately. For further details on our financials, including our results for the six-month period ended June 30, 2019, please refer to our most recent Form 10-Q filed with the SEC, yesterday.I will now turn the call back to Joe to wrap up our presentation and answer questions from analysts.

Thanks, Andy, and Pad and Neda, and thank you to all the broader team at Arcturus. This is a very exciting time for Arcturus. We believe that the progress we are making on our pipeline, combined with the success of our business development and financial activities, will serve to reinforce our position as a leader in RNA medicines. We are energized by all the activity, as you can understand and all the progress happening around the Company and our delivery platform. And we look forward to a productive second half of the year and further meaningful news flow in 2020.We will now open the call to your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Ed Arce with H.C. Wainwright. Please proceed with your questions.

Hi, Joe and team, and congrats on all the recent progress, especially the new collaborations. Couple of questions for me. First, I would like if you could review again the data, in particular to the delivery of your proprietary lipids. I think that is quite key to the overall platform. And if you could review and perhaps expand upon that a bit, especially relative to not only the standard of care you mentioned, but just a broader space. Thanks.

Hi, Ed. Thanks for the question. Just to reiterate, it sounds like you want some more color on the advancements we've made with respect to data pertaining to our delivery. And I'll give the first crack of that. And Pad, feel free to chime in. But, I think first and foremost, we recently shared our -- the biodegradability of our lipid in our LUNAR technology. And this is, of course, very important because accumulation of lipids, after multiple dosing, can be a significant concern with respect to toxicology. So, it's ideal to have a lipid mediated delivery system that does its job and then degrades rapidly and prevents this accumulation from occurring. And we've reported a 20-hour half life. And to put some color on that, that is not 20 days. So, you can imagine, if you're trying to design a therapeutic that's being dosed a weekly or biweekly that it would be a significant concern if perhaps your lipid is still around after three weeks, right? So, just to confirm that our lipid half life that we've evaluated and shared that data recently is 20 hours. And so, that just gives us more flexibility with respect to dosing and the timing of dosing.Other than that, Pad, is there any other additional…?

No. Thanks, Joe. The only other thing I would add is that we've provided data in our deck previously that we do -- our ARCT therapy for OTC is delivered by IV administration, and we gave substantial uptake into liver hepatocytes, both the rodent species and non-human primates.

Right. And this uptake is in the periportal -- includes the periportal portion of the liver, where we feel it's a very important portion of the liver that's responsible for the urea cycle disorders, including ornithine transcarbamylase deficiency.

Great. That's helpful. So, the other question I had, I guess, is around your lead program, the OTC that you have now for a first quarter IND, first quarter next year. Wondering if you could just go over what's left to be completed between now and then, what specifically are you working on the progress of that, and if there's any sort of gating factors to the work that's left to be completed?

Great question, Ed. Pad, why don’t you provide some color there?

Thanks, Joe. Yes. So, our team is diligently working with outside medical writers and vendors and various regulatory consultants to efficiently and strategically assemble our first IND filing. We made obviously some key hires and brought on experienced folks over the last quarter, putting us in great position as we approach our first-in-human studies with our LUNAR program. We’ll actually look forward to reporting our success and filing the IND in the first quarter of 2020.

And then, with respect to -- I did highlight on the call the status of our GLP tox studies and our drug substance and drug product manufacturing efforts and timeline there as well.

[Operator Instructions] Our next question from someone of Kumar Raja with Brookline Capital. Please proceed with your question.

So, maybe on ARCT-810, obviously one of your competitors, Translate, they had a setback earlier this year, they had a clinical hold. Then, it was lifted, but they are allowed to do a single ascending dose. So, what I’m trying to get a sense here is like, what are you guys doing in terms of preclinical studies so that you’re able to move very smoothly in the clinic as well as able to dose escalate?

Hi, Kumar. This is Pad, and I'll answer that question. Obviously, we don't know the specifics related to the clinical hold for Translate. What we understand is there were both clinical and non-clinical issues. But for ARCT-810, well, we're not prepared to discuss our non-clinical strategy currently. But we are connecting a very thorough characterization of the safety profile with non-clinical studies that support our clinical studies designed first-in-human for the LUNAR platform in OTC patients. We had feedback from the FDA in regards to our non-clinical plan and we’ve incorporated that into our studies. We believe our non-clinical and clinical approaches for ARCT-810 first-in-human should put us in great position to conduct our [indiscernible] portions into the clinic without any incident.

And in terms of the LUNAR-CF, obviously, in the CF patients, we see excess of mucus there. What are your expectation in terms of nebulization as a delivery vehicle there? How effectively you think you can get a drug there? And also, you guys are trying to do some ferret model studies, how does that reflect compared to what we see in humans?

Sure. Pad, why don’t you address that?

Sure. So, what we've shown so far is of course, we've collected and shared data on the stability of the LUNAR formulation in CF serum of patients. And we observed the disability of the mRNAs improved greatly with our platform. So, does that address -- have you seen some of our data that we presented?

Yes. I have.

Because of that, we think we have a great platform technology that can address the mucus question.

You guys have talked a little bit about the lipid degradation earlier in the call. You guys are making some progress in ophthalmology also. So, I wanted to get a sense what is the expectation in terms of lipid degradation/accumulation in the eye, how it is different from like liver or epithelial cells in the lungs? And also, are you -- what are your expectations? Do you think you will need intravitreal injection or you think you will be able to come up with a topical formulation for ophthalmology indications?

Hey. Thanks, Kumar. LUNAR delivery to the eye, at least our proof of concept studies that we've completed internally has been achieved with intravitreal injections, so not topical or intravenous injections. With respect to the degradation data of the lipid technology, we have collected and presented lipid degradation data for intravenously dosed LUNAR formulations, and we reported that 20-hour half-life or in vivo half-life for the ATX lipid. But, we have not shared our lipid degradation data for inhaled or intravitreal injected LUNAR formulations. Although, we are encouraged by the intravenous data that we've shared. And we believe that we have not only designed our lipids from the very onset to be biodegradable.

Okay, great. Congratulations, once again. Thank you.

Thanks, Kumar.

Our next question comes from line of Wangzhi Li with Ladenburg Thalmann. Please proceed with your question.

Hi. Thanks for taking my question and also congratulations on the quarter. I want to follow up on the lipid periods [ph] question because the key differentiation of your LUNAR platform on the other nanoparticle technology. So, as you mentioned the half-life of 20 hours, maybe give me more context, what is the FDA guidance or preference in terms of what kind of timeframe of lipid period or half-life in optimal or desired in context of Translate Bio’s IND hold for this kind of use?

Sure. So, I think, it'll help -- first of all, to clarify or help people understand the half-life of the OTC itself. So, ornithine transcarbamylase is this enzyme that resides in hepatocytes in the liver. And once you build or create and make this enzyme, it lasts a long time. It has a half-life of over 10 days, approximately 12 days. So, just theoretically, I think it's helpful to understand that your lipid delivery technology needs to remove and degrade and clear from the system before the next injection, but because the ornithine transcarbamylase enzyme itself lasts for so long, that it’s attractive theoretically to see that our half-life for the lipid delivery technology is only 20 hours. And then, to put some additional color, there's other -- the lipids like MC3 that have data as well, that you can look to as a standard to compare to. And that's injected once every three weeks. Okay?

So, maybe a little bit early by [indiscernible] the OTC program Phase 1, any color on the trial design at the moment in terms of dose frequency or how many dose you are going to try?

With respect to the clinical trial design, Pad why don't you answer that?

Sure. Wangzhi, this is Pad. Yes. I think, it's too early to give you that sort of granularity around our clinical trial design. As you know, we're rapidly progressing in completing our GLP tox top studies, and we’ll be filing IND soon. So, but it is definitely premature to provide that sort of granularity. But, we will be updating the market sooner about that.

Yes. We have met with multiple regulatory agencies on both continents and received their guidance and feedback with respect to some aspects of our clinical plan. And we do plan to go directly into patients. But, as for additional details, pertaining to that clinical plan, those haven't been disclosed, as Pad mentioned. We can provide more detail at a later time.

And then, to shift gears to the LUNAR-CF program, the CF Foundation committed to $15 million for R&D. Maybe, if you can provide a more color on what really triggers that commitment and what remains to be done before you file IND late next year?

Sure. We have messaged that we plan to nominate a development candidate again in the first quarter of 2020 and an IND at year-end of 2020. As for the timing of other aspects of that program, we haven't disclosed those details. But, I assume that as the program ages, we will be sure to update the markets accordingly.

And what it triggers -- I know you started the collaboration a while ago, so I guess what really triggers this commitment from the foundation for $15 million investment?

Yes. I think, obviously this collaboration has been going on for a few years. And they're impressed by the progress that we're making in the first half of the grant, and they want to -- and the data they’ve seen. And because of that day one to support us to develop this program into the clinic.

Yes. The most interesting or impressive data that we've collected is functional delivery of several different types of messenger RNA molecules to bronchial epithelial cells. This means that we're not only -- our delivery technology is not only getting to these cells, but getting inside of them and breaking out of the endosome and delivering the messenger RNA itself in mice.

Got it. Last question is for the CF program, you are going to nebulizer. Right?

That is correct. Yes. We plan to -- now, with respect to which specific inhalation medical device, that we have not disclosed that yet. At some point, but we have not disclosed which one we’re going to proceed with yet.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Joe Payne for any closing remarks.

Okay. It sounds like that's all the time we have today. Thank you all for participating in Arcturus' first quarterly conference. We appreciate the time you've taken to listen, and we look forward to our next call. Bye for now.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.