Arrowhead Pharmaceuticals, Inc. (ARWR) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen welcome to the Arrowhead Research fiscal 2013 second quarter financial results conference call. Throughout today’s recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. I will now hand the conference call over to Vincent Anzalone, Director of Finance and Investor Relations for Arrowhead. Please go ahead Vince.

Thank you, operator. And good afternoon everyone, thank you for joining us today to discuss Arrowhead’s results for its fiscal 2013 second quarter ended March 31, 2013. With us today from management are President and CEO Dr. Christopher Anzalone, Chief Operating Officer and Head of R&D Dr. Bruce Given and Chief Financial Officer, Ken Myszkowski. Management will provide a brief update of the quarter and will then open the call up to your questions. Before we begin, I would like to remind you that comments made today may contain 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. All statements other than statements of historical fact, including without limitation those with respect to Arrowhead’s goals, plans, and strategies, are forward-looking statements and represent management’s current expectations and are inherently uncertain. You should refer to the discussions under Risk Factors in Arrowhead’s annual report on Form 10-K and the company’s quarterly reports on Form 10-Q for additional matters to be considered in this regard. Thus, actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today’s call. With that said, I’d like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company. Chris?

Thanks, Vince. Good afternoon everyone, and thank you for joining us today. As you know our mission is to create powerful new therapies that address real health problems. Raw innovation and execution to our commercial development and necessary engines driving us toward this goal and we made substantial progress on both over the past quarter. Of course these engines require capital to run and we’ve recently announced a $36 million financing from a syndicate of high quality healthcare investors. This gives us the cash runway into 2015 and now we are properly funded to execute on our strategy and accelerate the development of our RNAi-based treatments. We believe our team and technological platform are second to none and now we have the capital to properly fuel that team and technology. Let’s take a closer look at the financing and what we believe it means. This is the first time in the company’s history that Arrowhead has been able to attract this amount of capital and this high quality of fundamental investors. RA Capital led around with a syndicate that included Special Situations Fund, Camber Capital, Sabby Capital, Aquilo Capital, Sphera Global Healthcare Fund and investor Jim Mellon. These fund conducted extensive due diligence over several months and while bring them in was not an ultimate goal in and of itself. This financing is a strong indication that some very sophisticated investors have confidence in our technology, plan and ability to create value. The structure of the financing is also important because it is shareholder friendly. They’re offering us price at the market and included no warrant coverage. This is a welcome step forward and we believe it is unique for a company our size. This financing is a turning point for what it represents and what it enables us to…

Thanks Chris and hello to everyone on the call today. Before I talk about our clinical trial strategy and timeline I want to first review why we believe HBV is an attractive commercial opportunity and disease that is well suited for an RNAi-based intervention. HBV is the world’s most common series liver infection. With an estimated 350 million patients worldwide that are chronically infected that are thoughts to be approximately 2 million patients in the U.S. 14 million in Western Europe over 100 million in the Asia Pacific region and another 220 plus million throughout the rest of the world. HBV can lead to cirrhosis to the liver as responsible for 80% of primary liver cancers globally. The annual death tool for HBV is estimated as high as 1 million. So, this is truly a global disease that imposes an enormous health burden and death toll on both the developed and developing world. The goal of ARC-520 is to provide a functional cure at an immune clearance state characterized by Hepatitis B surface antigen negative serum with or without serum conversion. This goal leads to my next point about why we believe RNAi is uniquely suited to address HBV. Current treatment options include interferon which is difficult to use at a highly disruptive side effects and nucleotide or nucleoside analogs referred to collectively as NUCs. The best NUCs are very good at suppressing viremia and production and release of new viral particles that are not capable of directly suppressing the production and release of viral proteins including s antigen and e antigen. Either interferon nor NUCs provide meaningful rates of functional cure. Many experts in the field believe that addressing both viremia and antigenemia is required to obtain a functional cure. RNAi in general and the siRNAs in ARC-520 specifically…

Thank you, thank you Bruce and good afternoon everyone. As we reported today, our net loss attributable to Arrowhead for the three months ended March 31, 2013 a $6.8 million or $0.41 per share based on 16.5 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead a $5.3 million or $0.50 per share based on 10.7 million weighted average shares outstanding for the three months ended March, 31, 2012. Total operating expenses for the three months ended March, 31, 2013 were $5.4 million compared to $4.9 million for the three months ended March, 31, 2012. Net cash used in operating activities for the first six months and fiscal 2013 were $8.3 million added with $6.9 million in the prior year period. Increased operating expenses in cash used in operating activities reflect preclinical requirements and final I&D enabling steps including G&P manufacturing and GLP toxicology per HBV program. Turning to our balance sheet, our cash position was $3.3 million at March 31, 2013 compared to $3.4 million at September 30, 2012. During the first half of the fiscal year cash outlays for R&D were $6.1 million and cash used in G&A were $2.7 million. Cash inflows during the first half of the fiscal year included $7.1 million from the sale of equity securities and public offerings $400,000 in revenue and $1.2 million in proceeds related to the sale of our former subsidiary (UniDAC). Our shares outstanding at March 31, 2013 were $17 million up $3.4 million from $13.6 million at September 30, 2012. Including the $36 million offering closed last week our common share is currently outstanding $31.3 million and would be $36.7 million inclusive of the conversion of the preferred shares issued. With that brief overview I’ll now turn the call over to Chris for concluding remarks.

Thanks Ken. Before we talk about the concept on multiple shots on goal many times over the last few years. This approach design to open opportunities, mitigate shareholder risk and search for value. Once that value is identified is critical for a company to be nimble and move quickly to fully support it. ARC-520 and the flexible platform that enables it together represent that value and our company is fully aligned to bind them. This is where we are today, this is when our work acquiring technologies and building capabilities begins to pay off and this is why it is a very exciting time with Arrowhead. We believe that ARC-520 is a well thought out candidate from a market and technological standpoint. Approximately one out of every 20 people on the planet is infected with HBV and there is no cure. Our approach is unique and its focused on financing the entire HBV genome and it is the only therapy and development we are aware of that could potentially lead to a functional cure. As I say in billiards there are still a lot of green between the ball and packet but we have first mover advantage. In addition we have substantially de-risked the program. We have a good understanding of the safety profile after many studies in non-human primates and en routes. The final report from the GLP toxicology studies will be available shortly and we have not seen any surprises to-date. We have a good understanding of the potential efficacy after studies in two road models and most recently a chimpanzee with chronic HBV infection. Finally our time is attractive ad we will file this quarter to begin human studies. For all its promise ARC-520 is not our only value driver. The underlying DPC siRNA delivery system is extremely versatile and as the ARC-520 progresses to the clinic we believe it will drive value in the platform that enables it. We have a team of dedicated scientist that strive everyday DPC is even safer and more prudent, including the recent advances with contrast capable of subcutaneous administration in tumor targeting. And now after our recent financing we have a capital needed to accelerate our development programs. We’re committed to raising the profile of the company and firmly believe we are well on our way to becoming the leading developer of RNAi therapeutics. As I mentioned we anticipate several important milestone advance over the next 12 months that we believe we’ll further that goal. Thank you for your interest in Arrowhead Research, and I’d now like to open the call to questions. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) our first question comes from Bob Wasserman with Dawson James Securities. Please go ahead. Bob Wasserman – Dawson James Securities: Hi guys. Congratulations on getting like accomplished this year. And I know it’s only been a couple of days since you completed your I got your recent funding that could you give a little more background a little more color on the Hong Kong study specifically the 2b, the second study would it be larger in size would you do at all sort of Hong Kong or dislocates or may be elaborate a little bit on that task mark?

Well as you might imagine we’re in early Phases of our thought process around that 2b study. Our initial thinking has been that will more likely be a multinational study. Potentially including U.S and European sites not solely Asian sites for instance. But I would have to again advice it’s early days for us. We’re just now actually we’ll be meeting without Clinical Advisory Board in the next few weeks to talk and much greater length about the upcoming Phase 2A study or single dose study in Hon Kong that probably starts around the first quarter of 2014. We will also talk about initial thoughts around the 2B study but I would expect we are still a few months away from having that study more full we planned. Bob Wasserman – Dawson James Securities: Okay. Could you speak a little bit more about why Hong Kong and how that market compares with the U.S and European in terms of Hepatitis B and the incidence and the severity there?

Yeah, that’s a great question. We normally would have thought perhaps about doing our first-in-man study maybe in the U.S or even in Europe and we wanted to go into patients very early on and the issue in the U.S especially is that main of the patients are not pure HBV patients but are also co-infected with other diseases such as HIV or HCV. Bob Wasserman – Dawson James Securities: HCV. Okay.

Yeah. In addition to that those that are solely HBV are sometimes in immigrant communities that have had a tendency not to really readily participate in clinical studies. So the advice that we got from our advisors early on was that a trial that focused on the U.S and even Europe had a high chance of being in the slow and rolling trial. On the other hand in the case of Hong Kong, Hong Kong has about a 30% prevalence Chronic Hepatitis B so it extremely high prevalence it has a wonderful medical system left over from the British that the time of British rule and a very and it has its own regulatory system which is very much a sophisticated western regulatory system. The Hong Kong seems to be an ideal place to be able to enroll a patient study quite quickly. The reason with Australia then for the normal volunteer study when we decided to do volunteers first is just that it’s in the same theatres Hong Kong it’s a there are the regulatory authorities understand each other well and we felt that Australia we could probably also enroll at least some patients with a Chinese background which would be a helpful for the Hong Kong authorities as well. So when you put all that together we wind up doing Phase the normal volunteer Phase 1 study in Australia and then the first human patient study in Hong Kong. Bob Wasserman – Dawson James Securities: So that the Hong Kong theatre has their separate regulatory body as composed to Mainland, China?

Yes it does. Bob Wasserman – Dawson James Securities: Okay. And does that the hospitals there also draw Hep C patients from Mainland, China as well or is it there is enough density on Hong Kong to get the Phase 2 study?

Well, it’s a 30% prevalence in Hong Kong. Bob Wasserman – Dawson James Securities: Okay.

So we were sure that we should be able to enroll this in Hong Kong. Bob Wasserman – Dawson James Securities: Okay. Okay, great. Well thanks a lot. Congratulations again.

Thank you.

Our next question comes from (inaudible), a Private Investor. Please go ahead.

Yes, gentlemen. I just want to return to the issue of Unidym I was I’m a little confused ask on the last conference all about revenues perhaps I should have been more inclusive. Are there any payments do us from that transaction?

Yeah. Thanks very much James it’s a great question. So there are we are working with Wise Power right now the acquirer of Unidym to secure those payments. We are owned and about a million dollars extra on this on the second tranche of the acquisition payment. We are working with them to secure that right now.

Did these payments continue on into the future as far as?

They don’t.

More tranches or whatever?

No, no they don’t so this was the second tranche is a second of two guarantee payments. Payment going forward had to do with milestone with revenue milestones and with royalties. So we don’t have any good visibility on that right now but as we do get better visibility we will certainly in part that to you.

Okay, okay. Well good job on the placement. Congratulations gentlemen.

Thank you very much.

Our next question comes from Grant Zeng with Zacks Investment Research. Please go ahead. Grant Zeng – Zacks Investment Research: Hi guys. Congratulations on the strong quarter especially for the 36 million financing. I just have a two question about the timing of the opportunities that in the Hong Kong study basically so you are going to run opportunities that will be first in a few months. My question that does the Hong Kong study follow the alternative study or that will be run some attorneys needs?

Yeah. And I thought this might not have been a little bit clear because they are fiscal year not a calendar year. So this gives me an opportunity to maybe clarify timing a little bit. But the overall volunteer study in Australia comes first. We will be filing for permission to do that study this quarter we anticipate starting that study in the third quarter. Hopefully early in the third quarter but that will dependent on how long it takes for ethics review and to get the agreement from the Australia and authorities. We are anticipating that study will complete in the calendar fourth quarter. So not in our fiscal fourth quarter but in the calendar fourth quarter. And at the point that we have the data from that study that’s when we will complete our I&D submission to Hong Kong. So the Hong Kong patient study file those after the normal volunteer study it is now simultaneous. Grant Zeng – Zacks Investment Research: Okay. If I was getting the Hong Kong probably we’ll follow their opportunities that would be right?

Yes, sir. Grant Zeng – Zacks Investment Research: Okay, that’s it. Thank you.

You’re welcome.

(Operator Instructions) I’m showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Chris Anzalone for any closing remarks.

Thanks everyone for your interest and we look forward to speaking with you to meet with you later this year.

The conference is now concluded. Thank you attending today’s presentation. You may now disconnect.