Arrowhead Pharmaceuticals, Inc. (ARWR) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals' Fiscal 2016 Third Quarter Financial Results Conference Call. [Operator Instructions] I will now hand the conference call over to Patrick O'Brien, General Counsel for Arrowhead. Please go ahead, Patrick.

Thanks, Tamra, Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2016 third quarter ended June 30, 2016. With us today from management are President and CEO, Dr. Christopher Anzalone, who will provide an overview of the quarter; Dr. Bruce Given, our Chief Operating Officer and Head of R&D who will discuss our clinical programs; and Ken Myszkowski, our Chief Financial Officer who will give a review of the financials. We will then open up the call to your questions. Before we begin I'd like to remind you that comments made during today's call 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. These include, but are not limited to, statements regarding the anticipated safety and/or efficacy of ARC-520, ARC-521, ARC-AAT, ARC-F12, ARC-LTA, ARC- HIF2 and our other programs, as well as anticipated timing for study enrollment and completion, and the potential for regulatory and commercial success. They represent management's current expectations and are inherently uncertain. Thus actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today's call. 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. With that said, I'd like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company. Chris?

Thanks Patrick. Good afternoon, everyone. And thank you for joining us today. Patrick is still in for Vince, whose wife Hillary apparently is making a habit of giving birth on the days of our quarterly conference calls. So welcome to the world Nicholas and Tino Anzalone. I'd like to start with our announcement today that we raised $45 million of equity capital. With did this with the small and targeted syndicate of high quality biotech focused institutions. This financing was oversubscribed and priced at market. I think these are important considerations particularly in the current capital markets. And we are proud we've been able to execute the transaction and appreciative of the trust these institutions have in Arrowhead. With any equity financing there is balance we hope to strike between accessing the capital we need to build value by moving our programs forward, and limiting dilution in order to maximize shareholder return. We stopped at $45 million because it strikes that balance. We wanted to strengthen our balance sheet now and increase our runaway to each potential inflection points while we work on certain preclinical business development opportunities. Let's take a look at both sides of that equation and start with milestones we can reach with the current and new capital. In addition to $45 million of capital, we'll get us into third calendar quarter of 2017. Between now and then we expect to reach a number of milestones including but not limited to the following. Single dose patient data with ARC-521, multiple dose patient data with ARC-521, readouts on some of the phase 2 ARC-520 studies, collaborations with additional therapeutic agents in MONARCH, single dose healthy volunteer ARC-AAT data, single dose patient ARC-AAT data, complete enrollment of the first ARC-AAT Phase 2 study and nomination of an additional clinical candidate. As you can see we have sufficient runway to hit several potential catalysts to get comfortable with our capital resources. But if the current offerings are oversubscribed and priced at market without a discount why stop at $45 million? Why not further strengthen our balance sheet with additional capital? The answer is that we wanted to limit dilution while we continue to pursue some possible preclinical discovery stage collaborations. Let's take a closer look at that concept. We have believed for sometime that once we build out our discovery and development capabilities and gain clinical validation for our various technology platform, we will enter a period marked by rapid pipeline expansion. We are in that period now. Because of the versatility of our technologies there are substantially more opportunities than we can support independently. This is a natural part of the growth process for a platform company. We anticipated that this time would come and over the last few quarters we made a strategic shift to seek preclinical discovery stage development partnerships that could expand the reach of our technologies in areas that are outside of our core focus or beyond our current capabilities and financial resources. In order to attract the highest quality partners, we've also selectively grown our headcount across key departments and will move to a larger research and development facility before yearend that will allow us to grow rapidly. With our robust and versatile drug discovery development engine, we now see Arrowhead as a partner of choice for companies interested in expanding into RNAi therapeutics. We've said on conference call this year that we believe we have access to capital through a variety of sources. This continues to be true. And in fact we are in active discussions around preclinical discovery stage collaborations. Of course, we cannot predict to provide guidance on the timing or magnitude of these types of agreement or guarantee that they will come to fruition. But they are a focus for us and represent an important part of our ongoing financing strategy. Now I'd like to turn to a brief review of some of the highlights of the last quarter before I turn the call over to Bruce Given who will discuss our clinical programs. We continue to execute on multiple fronts and moved our programs forward at best in class speed. For ARC-520, our first candidate at aimed providing a functional cure for chronic HBV infection, we continue to enroll and dose patients in our various global Phase 2 studies. Collectively these studies are designed to give us a comprehensive understanding about how our ARC-520 acts at various dose levels in different patient genotypes in e-antigen positive and negative disease, in NUC experience and naïve patients. And as model therapy or in double or triple combination with other agents. Based on data from our single dose 2001 study and supported by our non-clinical chimpanzee study, ARC-520 appears to be maximally active in patients with higher relative levels of antigen expression from HBV cccDNA versus HBV that has integrated into the host DNA. In e-antigen positive NUC- naïve patients we saw max s-antigen knockdown of almost two logs or 99% with extremely long duration of effect. These and other data let us to believe that ARC-520 is doing precisely what it was designed to do. It appears to be highly active against cccDNA-derived mRNA transcripts and thus can reduce the production of HBV protein and the pre-genomic RNA. Remember, that this virus only makes six things and we hit all of them. For those patients with lower relative levels of cccDNA and higher relative levels of integrated DNA, we developed ARC-521. During the quarter, we initiated a phase 1/2 study; this is a single ascending dose study in healthy volunteers in parallel with the multiple ascending dose study in patients chronically infected with HBV. Bruce will talk a little more about that study but it is designed to rapidly get to the following three readouts. One, single dose safety data in healthy volunteers. Two, single dose antiviral activity data in patients with chronic HBV. And three, multiple dose safety and antiviral activity data in HBV patients. The disclosure of these readouts should happen progressively and we expect to start during the first quarter of 2017. We also made progress on our Phase 1 study of ARC-AAT, our clinical candidate against an orphan liver disease associated with the genetic mutation that causes alpha-1 antitrypsin deficiency or AATD. We completed dosing in an expanded part A in healthy volunteers and continue to enroll part B in patients with AATD. We intended to report data from this study and initiate a Phase 2 study before the end of the year. During the quarter we made presentations at three medical meetings on programs that each uses a different version of our platform delivery technology. At EASL, we presented data on ARC-520 that uses an IV administered two molecule version of our DPC delivery system. At AACR, we presented data on ARC-HIF2 which uses a one molecule DPC vehicle that enables delivery to extra-hepatic tissues in this case tumor tissue. And lastly at ATVB, we presented data on ARC-LPA which is the first program to use Arrowhead's new delivery vehicle designed for subcutaneous administration. These presentations and description of the data are available on our website. They represent years of innovation and breakthrough by our R&D staff. And we are extremely excited about the breadth of our technology and capabilities. We now feel like we can pursue virtually any disease where an RNAi based intervention that precisely targets and silences the expression of a specific gene is needed. In summary, the fiscal third quarter brought substantial progress in our clinical programs, our preclinical candidates, our underlying technology platforms, our R&D capabilities and also in business development discussions. These all helped to put Arrowhead on a solid foundation for growth in the near term and the long term. With that overview I'd now like to hand the call over to Dr. Bruce Given, our COO and Head of R&D. Bruce?

Thank you, Chris. Good afternoon, everyone. Being responsible for R&D, it is rewarding to see us continue to execute on our goals across our groups. As Chris mentioned, during the quarter we initiated a Phase 1/2 study of ARC-521, our second clinical candidate against chronic HBV. Before I give an update on our later stage programs, I want to talk for a moment about the innovative design for this first-in-man study that we think will get us to multiple dose data in patients very rapidly. It is both the single ascending dose study in healthy volunteers and a multiple ascending dose study in chronic HBV patients. Up to 36 normal healthy volunteers will enroll sequentially into a total of six escalating dose levels randomized to receive a single dose of ARC-521 or placebo. Once the day 8 safety assessments is completed in the third dose cohort in healthy volunteers the patient portion of the study begins in parallel with continued up titration in healthy volunteers. Up to 24 Hepatitis B e-antigen negative chronic HBV patients will enroll sequentially into planned total of three dose levels, each to receive three monthly doses of open label ARC-521. The primary outcome measures are safety and tolerability pharmacokinetics and change in viral antigens and HBV DNA. Based on our experience with ARC-520 from all of our studies, we are comfortable that we can dose escalate rapidly. Remember, that ARC-521 is built in the same underlying DPC delivery technologies ARC-520. So we think we have a good idea of what to expect from the standpoint of tolerability dosing and activity. I am pleased to report that we've already completed dosing in the first two volunteer cohorts with ARC-521. And everything is going smoothly so far. We expect to begin cohort 3 in healthy volunteers this week. Assuming no safety surprises the first patient cohort will then begin. So as you can see this study is moving at a good pace. And as Chris mentioned should give us the opportunity to potentially give three valuable readouts. First would be single dose safety and tolerability in healthy volunteers. Then single dose activity in chronic HBV patients followed by multiple dosing activities in HBV. These readouts could start in early 2017 depending on the pace of accrual. This is the timeline that we laid out when we announced the 521 program last year. And it is fulfilling to see the execution match our promises to our investors. Turning to ARC-520. We've had a lot of screening and enrollment activity during the quarter. In fact, we have now enrolled the total of around 250 across all the ARC-520 studies to date. We estimate that around 200 of these have received ARC-520 with around 50 receiving placebo and it continues to overall to be well tolerated. We are frequently asked about timing for data release relative to the ARC-520 Phase 2b program. We feel that we are in a position to give reasonable guidance today in this regard. The 2002 and 2003 studies in NUC experienced patients are moving forward nicely and we continue to anticipate that enrollment will complete this year. That would give us results in trials reporting now is expected around mid -2017. Patients with a half log or greater reduction in Hepatitis B surface antigen have been enrolling into the 2007 long term extension. There are also additional patients from the single dose 2001 study that have been enrolling over to the 2001 open label extension study. Both the 2001 and 2007 extension studies allow per patient to be dosed with ARC-520 in combination with entecavir or tenofovir for up to a year. For MONARCH, some of you may know that as the 2008 study. We continue to enroll patients across various cohorts. None of the cohorts are fully enrolled at this time but we've over 25 patients that are currently in the screening process. We added additional investigators at sites last quarter and also added a cohort that looks at HBV and Hepatitis delta virus co-infection. So as designed, the MONARCH program continues to expand and give us the opportunity to generate a comprehensive picture of ARC-520 activity in combination with various agents and in different patient populations. We would anticipate that cohort for MONARCH will become eligible for a presentation upon their completion. And likewise for the 2001 and 2007 extension studies. This would indicate that data should start to appear during the second half of calendar year 2017. But because these are open label studies, as we've noted before we have some flexibility on timing. We also continue to anticipate adding new cohorts to MONARCH as other novel agents mature to the point where they can be brought into exploratory combinations. Assuming that these new cohorts would also involve a year of ARC-520 treatment, rich data reporting will continue during calendar 2018. Moving on to ARC-AAT. We completed enrollment part A of our Phase 1 study in healthy volunteers. We are still enrolling and dosing in part B in patients with alpha-1 antitrypsin deficiency. We continue to plan on our sharing data from the program later in the year at an appropriate medical meeting assuming abstract acceptance. Importantly, we've selected the two dose levels for our exploratory Phase 2 study and well on our way to getting that study initiated. We submitted Clinical Trial Applications or CTAs in four countries and have already received approval from regulatory authorities in Canada, Ireland and Sweden. The 2001 study will be an open label, multi dose Phase 2 study that will most critically determine the effect of our ARC-AAT on intrahepatic alpha-1 antitrypsin levels as evidenced by changes in liver biopsy in patients with alpha-1 antitrypsin deficiency. Patients who enrolled will have a pre treatment biopsy then receive seven monthly doses of ARC-AAT and then have a post treatment biopsy after the last dose. We will also be measuring its circulating levels for AAT throughout the study. The liver disease associated with an AATD is increasingly being recognized by patients and physicians as a serious problem .Patients are living longer with AATD because the pulmonary manifestation of the disease are been addressed with enzyme replacement, smoking cessation and overall improvement in drug treatments for pulmonary disease. However, there remains no medical treatment for the liver disease. We are eager to see if ARC-AAT can stop the progression of the liver disease and possibly even allow the liver to recover and heal existing damage. Our 2001 study should give us and the AATD community in general the first insight into this and this study result will be eagerly awaited by us and those active in the field. Finally, let me say there are preclinical discovery programs continue to make progress especially notably our subcutaneous triggers are showing increasing potency, depth and duration of knockdown and our extra hepatic program is also making steady progress. For those of who that attend the American Heart Association Annual Meeting, we'll have oral presentations on both our factor 12 and Lp little a programs. With all the news flow from our clinical programs, it is easy to miss how quickly our platform is evolved. With that brief review of our R&D efforts, I'd like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?

Thank you Bruce, and good afternoon, everyone. As we reported today, our net loss for the three months ended June 30, 2016, was $19.4 million, or $0.32 per share, based on 60 million weighted average shares outstanding. This compares with a net loss of $15.9 million, or $0.27 per share, based on 59.5 million weighted average shares outstanding for the three months ended June 30, 2015. Total operating expenses for the three months ended June 30, 2016 were $19.4 million, compared to $16.1 million for the three months ended June 30, 2015. The increase in operating expenses compared to the year-ago period is primarily due to higher research and development costs much of which is related to our new clinical candidate ARC-521 as we prepare to enter clinical trials. Net cash used in operating activities for the nine months ended June 30, 2016 was $54.2 million as compared to $53.7 million during the nine months ended June 30, 2015, a change of $0.5 million. Turning to our balance sheet, at June 30, 2016, including $1 million in investments, our cash and investments balance was $44.6 million, a decrease of $16.8 million as compared to March 31, 2016. As we announced this morning, we raised $45 million in additional equity capital further strengthening our balance sheet. Our common shares outstanding at June 30, 2016 were 60.4 million, which increased from 60 million at March 31, 2016, due to the issuance of shares from exercise of warrants. Also at June 30, 2016, there were 15,652 shares of preferred stock outstanding. These preferred shares are convertible into 2.7 million shares of common stock. Common shares outstanding including the conversion of our preferred shares would be 63.1 million. With that brief overview, I'll now turn the call back to Chris.

Thanks Ken. We feel good about where we are at the company. Our clinical programs are advancing quickly and all three have the potential for groundbreaking readouts over the next 12 to 18 months. Beyond our clinical programs, we have three extremely interesting publicly announced pre clinical candidates in ARC-LPA, ARC-HIF2 and ARC-F12 that represent large opportunities on their own but also an expansion of our broad RNAi technology platforms. We have now systems capable of potent gene knockdown after IV administration and subcutaneous administration as well as pretty typical extra hepatic system that have been shown to illicit high levels of target knockdown in tumor models. We continue to carefully build out our discovery and development capabilities in such a way that we may create additional internal clinical programs and work with partners to develop programs they may take forward for commercialization. We believe that creating a mix of partnered and internal programs enables us to operate with balanced capital needs and with a greater diversification of risk. Ultimately, this is a way to more fully monetize our platforms and maximize shareholder return. We are building a great company that develops innovative medicines for intractable diseases using industry leading technology. We think all of these positions us very well for growth in the short term as well as the long term. I'd now like to turn the call over to the operator. Operator?

[Operator Instructions] And our first question comes from the line of Carmen Augustine from Jefferies. Your line is now open.

Hi. Thanks for taking the question. I was wondering if you could give us any more color on what kind of quality you would be looking for in a pre clinical partner. And if discussions continue to be ongoing for a clinical collaboration in HBV?

Thanks very much, --. So for preclinical discovery stage collaboration, we are really looking for a strong partner with a target that looks interesting to us. If it's kind of the target coming from them, if we are talking about one of our targets we are certainly interested in speaking with people about some of our earlier stage discovery activities. So we are really doing those on a case by case basis. Regarding clinical collaborations, that are a much -- it's a much higher bar for us. And I'll tell you why. We think that we are building an awful lot of value with our clinical programs. And while we are certainly happy to talk to companies about partnering these either geographically or worldwide. We take that very seriously and we view that as potentially strategically dilutive and so should those partnerships happen we take it very, very close view at what the upside is for our shareholders. And so really right now we are more interested in discovery stage collaborations.

Okay, thanks. And then one more if I could. Could you talk a little bit about the rationale for adding HDV co-infection patients to the MONARCH trial?

Well, yes, sure. So HDV co-infection is a major public health issue in certain parts of the world. It would be an orphan drug in the US. I guess tactically it is an orphan drug in Europe even but it's a big problem for instance in Germany and some of the Eastern European countries. And a thing about HBV is it requires the presence of an HDV co-infection because it uses the surface antigen to encapsulate the delta virus. So you have to have co-infection for delta to exist, it's important because it is much more aggressive than HBV; these patients rapidly develop cirrhosis and liver failure. So it's a very nasty co-infection. So one of the interesting question is can you do anything for delta? NUC actually are not helpful at all in delta. The only currently treatment is interferon and it doesn't do a very good job. So there is a lot of interest in the Hepatitis B world for can you do something about delta. So we thought it was worth putting in a cohort and see if we could help. These cohorts in MONARCH are small, 10 to 12 patients, so it's -- we have fairly low active patient energy from our perspective to ask questions like the delta question because it's fairly straightforward thing for us to do.

Thank you. And our next question comes from the line of Michael Yee with RBC Capital Market. Your line is now open

Hi, guys, thanks. Good afternoon and congratulation on progress in your financing. On Hepatitis B with ARC-520 can you just clarify couple of things? One is do you expect that there is sort of near term announcements on actually 520 or 521 or just to clarify you are pretty much in execution block and tackling mode and just sort of enrolling and it's really all about 2017. And then on AAT I know you that you suggested there are some data coming up in a medical conference. Can you clarify what would be looking for there? This is just safety and knockdown in healthy is correct. What are we looking for there? And following that in the Phase 2 that you are starting up what is exactly the primary end point on the biopsies? Is there specific markers you are looking for? What's exactly primary endpoint? Thanks so much.

Okay. Why don't I start with AAT first, Michael, so and thank you by the way. We are pretty about the offering as well, that was -- it is in a pretty difficult market so that was really nice. So as far as AAT goes what will have in this year will be certainly the core safety and tolerability, we will have a very good understanding of the knockdown, a dose related knockdown, depth and duration by dose in volunteers and in patients which we obviously already know a lot of that which is why we are able to select our doses for the biopsy study with a pretty high degree of confidence. So that data I think would just be a really nice picture of exactly what our compound does from a profile perspective. It will also probably answer a question that's out there in the community of just how much AAT is made and deliver relative to what's made outside deliver. Because I think we'll have pretty good confidence since we have [end as almost escape] that whatever we produce is probably multi log knockdown in the liver at least that would be our hypothesis going into the biopsy study. Now in the biopsy study, so this is seven months of dosing, so given that the primary things we are looking at in the biopsies or the things that we know we should expect to change. So we will look at monomer content so basically really how much AAT is being produced from expression of the AAT gene by looking at the monomer content. And that we would expect to see really suppressed to an extremely high degree and that's kind of the first and most important thing. We wanted to know we shutdown the gene basically completely. Then we will look at polymer content and that could be really interesting because we -- no one knows if you shut down monomer how long it takes for the liver to clear polymer. And so understanding if we shut down monomer and seeing how much polymer change we get over seven months is going to help us I think get a pretty good idea at for instance what's the feasibility of getting rid of globules and if you are going to get rid of globules what kind of time might that take. So this is could be really important data for the field. And then there are other things that you see in AAT livers inflammation, fibrosis et cetera, seven months fields are little short to show changes in some of those things. But that will certainly look for them. So we have a large number of things we want to look at Michael but the most sensitive marker we think is going to be monomer content followed by polymer content. I hope that's helpful.

Okay. Thanks and now I am happy.

Sure. And Michael also regarding your questions on data readouts for 521 and 520. First as a formal alignment I can't over estimate the importance of blocking and tackling. So I think that the rest of 2016 is a lot of blocking and tackling. We are enrolling I think reasonably quickly in both those. I think 521 is designed to get two readouts quite quickly. We expect as I mentioned to start to readout 521 single and multiple dose in the beginning of 2017. For 520 it's harder as we've said -- as we've talked about in the past, it's harder to know when we will have data there. We talked about some time points on this call where we expect some of these studies to be over. And so definitely we expect data in 2017. And prior to that we just have sort of have to wait and see. As you know, we've some open label studies and so we have some possibility of data there but that just hard to predict at this point.

[Operator Instructions] And our next question comes from the line of Elemer Piros with Cantor Fitzgerald. Your line is now open.

Yes, good afternoon. Hello, Chris and Bruce. Just a couple of details on the AATD trial. I think previously you disclosed that in part A and B you have 50 individuals both healthy and diseased patients. In part B how many patients have you enrolled?

Yes, so - hello, Elemer, it is good to hear your voice and let me go ahead and give you a little bit of detail there. So we will biopsy all the patients at baseline. What we are learning from the studies that are been done in the US where there is a cross sectional biopsy going on in AATD patients, a small percentage maybe about 10% or so might not have any globules. And if we are going to biopsy patients we are going to treat everybody because for sure they have monomer even if they don't have globules and they probably have polymer as well. So the way we wrote the protocol is that we will have at least four patients in each of those two cohorts that have globules at baseline. So that mean that a minimum will have eight patients for at the lower dose for the higher dose, but if we wind up picking up a patient or two that don't have globules, those would go on top. So you might wind up 9 or 10 patients in that setting.

Okay. And somewhat different question. What percent of eligible patients continue on the expansion studies with 520?

It's a good question but I've learned many years ago never to give any sort of enrollment blow by blow detail. So I am afraid you are going to have wait for that data so when we report 2007.

What I meant is in aggregate in the multiple expansion study just roughly how many -- what percent you like to continue?

Yes. I just don't feel like I should divulge that data at this point, Elemer. I understood your question I am just demurring from giving you an answer.

Thank you. And I am showing now further questions at this time. I'd like to the turn the conference back over to management for any final remarks.

Okay. Thanks everyone for listening to the call today. And we look forward to talking to you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.