Arrowhead Pharmaceuticals Inc (ARWR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Arrowhead Research fourth quarter and fiscal year '08 earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Monday, December 15, 2008.

I would now like to turn the conference over to Sanjay Hurry, Investor Relations Counsel.

Please go ahead, sir.

Thank you, Mitch.

Good afternoon, everyone, and thank you for joining us to discuss Arrowhead's financial results for the fiscal year ended September 30, 2008.

With us today from management are President and Chief Executive Officer, Chris Anzalone, Dr.

James Hamilton, Vice President of Medical Technologies at Arrowhead and CEO of its Calando subsidiary, Paul McDonald, Arrowhead's CFO, and Sean Olson, Vice President of business development at the Unidym subsidiary.

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.

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, I intend it to identify forward-looking statements.

In addition, any statements are referred to projections of Arrowhead's future financial performance, trends in its businesses or other characterizations of future events or circumstances are forward-looking statements.

Forward-looking statements represent management's current expectations and are inherently uncertain.

You should also refer to the discussions under Risk Factors in Arrowhead's annual report on Form 10-K and the company's quarterly report on 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, I would like to turn over the call to Chris Anzalone, President and CEO.

Chris?

Thanks very much, Sanjay.

Good afternoon, everyone, and thank you for attending our inaugural earnings conference call.

I will begin today's call with a brief overview of Arrowhead followed by a review of our performance for the fiscal year.

I will then turn to fiscal 2009 and provide you with a look ahead as to our expectations for the new fiscal year.

For those of who are you new to the Arrowhead story, we are a nano technology holding company that seeks to commercialize potentially disruptive technologies thorough our majority owned subsidiaries.

We create these subsidiaries around university drive technologies as well as to rolling up existing companies.

Our model is extremely operational.

We are not passive investors.

Rather, we actively control our subsidiaries by centralizing key management responsibilities at the Arrowhead level.

We believe this provides our subsidiaries with seasoned management and enables each to accelerate development and manage costs.

Ultimately, we believe this is a capital efficient model that enables Arrowhead as an enterprise to operating more effectively than a cluster of independent companies.

Our subsidiaries are built around -- I'm sorry, our subsidiaries are built to drive value-backed Arrowhead in three primary ways.

One, as mature operating units with earnings growth consolidated at the parent.

Two, as acquisition targets by other companies with proceeds flowing back to Arrowhead.

And three, as IPO candidates providing tradable stocks in our proceeds from the sale of such stock back to Arrowhead.

We currently have four subsidiaries and two minority interests in the energy, healthcare and electronics industries.

Calando Pharmaceuticals, Unidym, Agon Systems and Tego Biosciences are all majority owned subsidiaries.

We currently own less than a majority of Nanatope Incorporated and Leonardo Biosystems, however, it is our intention to gain controlling interest in those companies over time as we have additional capital deployed.

Calando and Unidym are our most mature subsidiaries, and of these, we believe Calando may be the closest to a liquidity event.

So our goal for 2008, fiscal 2008, was twofold.

First, it was to move existing subsidiaries closer to commercialization while also establishing new subsidiaries around potentially transformational technologies.

Second, we made a big push to increase our efficiency as an enterprise by expanding our capabilities at the Arrowhead level and consolidating more of our subsidiaries' responsibility at the parent.

We started this initiative a year ago, and its importance has grown as equity markets have degraded and capital preservation became paramount.

Now the CEOs of all of our subsidiaries and minority interests are senior managers within Arrowhead.

We believe we are now better able to control costs and maximize the efficiency of our operations than at any time since we had operational subsidiaries.

Fiscal 2008 also saw the monetization of a subsidiary.

We achieved a liquidity event with the sale of Aonex technologies to AmberWave Systems for an earn out of up to $7.95 million plus back-end royalty payments.

Partnering out Aonex was a more cost-effective way of getting that technology to market while simultaneously generating returns for Arrowhead.

2008 also saw measured expansion into a new subsidiary and the acquisition of equity interest in two companies.

We formed Agon Systems Corporation to develop and commercialize nano technology based energy storage and acquired equity stakes in Nanotope and Leonardo Biosystems.

The management team was expanded as part of our strategy to further consolidate management functions at the Arrowhead level and to provide our subsidiaries with a more complete base of operations.

I joined Arrowhead in 2007 -- in December 2007 as President and CEO of the company.

Dr.

James Hamilton was appointed Vice President of Medical Technologies.

Shortly after his hire, he assumed the role of CEO of Calando.

Dr.

Mark Chili was appointed Vice President of Advanced Materials and was just appointed CEO of Unidym.

Dr.

Thomas Hog was brought in to be Chief Patent Officer.

Each brings unique skill sets that enable the more effective and efficient management of our subsidiaries.

To help guide our scientific strategy, we established a high level advisory team of world-class nanoscientists.

This team is led by Dr.

Mauro Ferrari, one of the world's most renound nano cancer scientists, Dr.

Chad Merkin, one of the most accomplished nano chemists in the world, and nobel laureate Dr.

Lee Hartwell.

We believe this team gives us unique access and insights into next generation technologies.

So now, I would like to take you through an update of each of our subsidiaries.

First, Calando.

Calando is our most mature biopharmaceutical subsidiary, and we believe that the progress it demonstrated through 2008 positions it well for a potential and near-term liquidity event.

Early in the year, we significantly streamlined operations by merging Insert Therapeutics and Calando Pharmaceuticals.

We focused resources almost exclusively on its clinical programs, cut its non-clinical burn rate and absorbed management of the company into Arrowhead with the appointment of Dr.

James Hamilton as Calando's CEO.

At our annual shareholders' meeting in March, I set forth a series of targets for each subsidiary.

I will go through the Calando goals right now.

First, we forecast filing an IND to begin clinical trials on our first siRNA therapeutic CALAA-01 in March.

We achieved this and dosed our first patient in June.

We believe that this was the first use of siRNA for oncology in humans.

We are now well into dose escalation and is trial is progressing quickly and without complications.

Second, we forecast filing with the FDA to move into Phase II clinical trials with IT-101, our lead small molecule candidate in April.

We met this goal and currently have nine sites up and running for this trial.

Third, we forecast executing a partnership for an investigator led Phase II trial with IT-101 in May.

We missed the goal by about a week and entered into a partnership with City of Hope cancer center in June.

We also announced our goal of entering into a partnership for a second investigator-led trial with IT-101, and have since decided not to pursue this in order to preserve focus.

The final two goals we expressed were to enter into an industry partnership in November and to file a new IND in December.

With respect to the former, we have not entered into any definitive agreements but have begun a process that could lead to a partnership or a sale.

With respect to the new IND filing, we have decided not to move forward on any new clinical programs until we execute some type of liquidity event.

Underscoring the prospects of Calando's technology is the fact that we recently raised $2.7 million into it.

This is intended to help provide a runway to a possible liquidity event.

We believe that the maturity of Calando's technology, the intense interest in solving the problem of systemically delivering RNAi therapeutics and our compelling clinical results make now the right time the explore the sale of Calando.

We will, of course, update you as this process progresses.

Turning to Unidym, we believe that its broad roll-up strategy which included a 2008 acquisition of Nanoconduction Incorporated has created a very powerful player indeed in high value carbon nanotubes with a deep patent portfolio.

We have stocked and monetized this position in electronics industry not by simply selling bulk materials, but rather by reaching down the value chain and selling higher margin products.

Our nearest term focus has been on carbon nanotube enabled conductive films to replace indiam tin oxide and touch screens and LCDs.

We made great strides in these markets in 2008 from both technology and business development standpoints.

Multiple companies have made dozens of prototype devices with our materials, and we demonstrated the first CNT enabled active matrix LCD and the first active matrix electrophoretic display or e-paper in collaboration with Silicon Display Technology and Samsung Electronics, respectively.

Given the potential advantages of our material and the rapid technological advances we saw in 2008, we had expected to book revenue from the sale of our materials to touch screen manufacturers by the end of the calendar year.

Unfortunately, it appears that we will not achieve this because the sharp economic downturn is causing companies with whom we have been in discussions to slow down their procurement process and scaling up to production volumes has taken longer than we have expected.

This procurement slow down, the capital constrained environment and the effective closing of the IPO window have led to us retool Unidym.

To conserve capital, we are focusing on solely on core functions from a product development perspective and our leveraging partnerships to reduce cash burn.

For instance, we are looking to partner out the bulk materials production part of our business, and we are in discussions with large film coating companies to help with large scale manufacturing and distribution of our film products.

Unidym is emerging as leaner company and in fact, is in the process of decreasing burn rate by greater than 60%.

We believe we can do this without sacrificing speed to market by leveraging partnerships we have been cultivating for some time.

This refocused strategy is also intended to move us toward different exit opportunities.

The IPO window is closed, and we expect once it opens again, there will be a significant number of companies competing to get out.

Therefore, we have focused our attention away from preparing Unidym to go public and toward establishing the the types of partnerships and business lines that will encourage Unidym's acquisition.

This type of exit strategy enables us to further scale back management and back office costs, because Unidym would not require its own independent management and finance team.

Therefore, Arrowhead has absorbed Unidym's management.

We have appointed Dr.

Mark Tilly, Arrowhead's Vice President of Advanced Materials as Unidym's CEO.

We would like to thank Art Swift for his service at Unidym.

Allow me to go over the 2008 targets that I laid out for Unidym at Arrowhead's annual shareholder meeting.

First, we forecast a Life Scientists spin out from Unidym in March, and we achieved that with a creation of Encise Incorporated.

We targeted JDA for thin film solar cells in March and reached that with a deal with Nippon Kayaku.

We forecast sampling near production quality materials for touch panel customers by April, and accomplished that with multiple companies.

We targeted a JDA for Oleds in July -- in the July to September time frame, but decided to push that back to remain focused on our near term markets.

Similarly, we targeted a license deal for CNT enhanced or carbon nanotube enhanced carbon fibers in the September/October time frame and a printed electronics JDA in the October/November time frame, but we have pushed this back to focus on nearer term priorities.

Finally, we targeted a new JDA with LCD supplier in the September/October time frame and in August, we announced a renewed JDA with Samsung electronics.

We continue to move forward on LCD and touch screen opportunities while establishing partnership deals in production and ultimately distribution.

We have brought in over $9 million of outside capital in Unidym during fiscal 2008, much of which was from strong strategic investors such as Tokyo Electron Ventures and Integris Incorporated.

Since September 30, the end of our fiscal year, we brought in an additional $2.7 million of capital to help fund operations and decrease Unidym's dependence on Arrowhead for meeting its cash requirements.

Turning now to Tego, with this subsidiary, we believe we have a very strong IP position in modified fuller rings which have a number of applications including for use in therapeutics and as MRI contrast agents.

As a potential gatekeeper to the use of key fuller ring patents, we believe it to be a better use of our capital to focus on partnering with companies that will invest in developing end products out of the space technology than building product ourselves.

We have therefore revised Tego's business model to that of a licensing company and believe that we are in an excellent position to extract a lot of value from this asset for a small amount of capital.

As a result of the revision, we have decreased our cash burn to virtually zero in this company.

Finally, with regard to Agon, our newest subsidiary, we are leveraging to nanotechnology core competency to target niche opportunities within the high-growth energy markets.

Specifically, we are targeting next-generation ultra capacitors, which we believe will be carbon nanotube based.

Ultra capacitors may play a critical role in the hybrid electric vehicle market and the market for non-traditional energy production.

Agon is currently focused on rolling up the key intellectual property in a bid to control the carbon nanotube based ultra capacitor space.

As you can see, we have been focused on more fully consolidating management of our subsidiaries at the Arrowhead level, squeezing greater efficiencies out of our model and conserving cash while continuing commercialization progress.

As I mentioned, all the CEOs of our subsidiaries and minority interests are now senior managers at the Arrowhead level.

In addition to raising capital directly into the subsidiaries, we have also raised new funds for Arrowhead.

We believe this to be evidence of the promise of nano technology and Arrowhead's leading position in the field.

Turning to financial performance for the year ending September 30, 2008, Arrowhead was reporting revenues of $1.3 million compared to $1.2 million in fiscal 2007.

GAAP consolidated net loss declined to $25.8 million or $0.66 per share for fiscal 2008 compared with loss of $29 9 million or $0.83 per share in fiscal 2007.

Cash burn for fiscal 2008 was $27.6 million.

Cash and cash equivalents totaled $10.1 million as of September 30, 2008 compared with $24.1 million for fiscal year ending September 30, 2007.

On November 21, 2008, we announced we had had redirected $1.7 million from wholly owned subsidiary Tego back into Arrowhead.

Furthermore, as I mentioned earlier, the company raised a total of $2.7 million directly into majority owned subsidiary Unidym from existing strategic investor, Tokyo Electron Ventures and from the sale of certain non-core assets.

We also raised $2.7 million into majority owned Calando.

Turning now to fiscal 2009, we don't anticipate any major changes to the strategy employed in 2008.

In brief, we are going to take what we did in 2008 and continue it into 2009.

Further emphasis will be placed on our capital efficient model.

We intend to continue to make our operations more efficient by spending money slowly and extracting more value from our existing assets.

We also believe the Calando may experience some type of liquidity event in 2009 given our clinical results and the interest in sIRNA delivery.

Such an event could take many forms including broad license agreements, partnerships or a complete sale.

The right structure will be one that is intended to return capital to Arrowhead, which in turn may be deployed to enable us to further fund existing commercialization programs at our other subsidiaries and establish new ones.

With Unidym, our streamlining efforts should be evident through 2009 in the form of significantly lower cash burn.

We still anticipate the LCD and touch screen opportunities to be near term ones.

Turning to Agon, we anticipate transitioning it from a virtual company to an operating entity in fiscal 2009.

As part of this, we will likely raise outside capital to start producing prototype ultra capacitors for the hybrid electric vehicle and non-traditional or alternative energy markets.

Tego, as I mentioned before, will seek to generate revenues by licensing its patents to companies for modified fuller ring therapeutics and MRI contrast agents, enabling them to build end products.

Finally, with regard to Nanotope and Leonardo, to remind you, we own a minority ownership in each We intend to increase our equity positions over time if they continue to perform and as additional capital is available.

We believe both are potentially revolutionary applications of nanotechnology.

Leonardo could great improve the efficacy of cancer therapies by increasing targeting efficiency.

Nanotope is focused on regenitarive medicine.

That is to say, the ability to regenerate tissues issues rather than simply replacing them.

.

Nanotope is focused on several exciting areas including spinal cord regeneration.

In conclusion, we believe Arrowhead' two most mature subsidiaries, Calando and Unidym, provide real near-term value to our shareholders and that our developing subsidiaries and minority interests provide significant long term up side potential.

The steps taken to better consolidate management of our subsidiaries at the Arrowhead level are intended to create a leaner, more efficient enterprise that is capable of addressing large market opportunities while accepting the boundaries of these capital constrained times.

We believe this model, coupled with the team we have assembled and the financing avenues available to us as publicly traded entity, afford us the opportunity to take a leadership role in the field and in the minds of investors.

Once again, I would like to thank you all for joining us on our inaugural earnings call.

Before opening the call to questions, I have with me Dr.

James Hamilton, Vice President of Medical Technologies at Arrowhead and CEO of Calando, Paul McDonald, Arrowhead's CFO, and Sean Olson, Vice President of Business Development at Unidym.

We're all available to take calls as well -- take questions as well, I'm sorry.

I apologize that Dr.

Mark Tilley, Arrowhead's Vice President of Advanced Materials and Unidym's new CEO, is not available.

He is currently traveling on Unidym business.

Operator, I'd like to open the call

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions) One moment, please, for our first question.

One moment, please.

(Operator Instructions)

As a former teacher of mine once said, there are no dumb questions.

And we do have a question from [Bill Booden] with Endicino Capital Management.

Go ahead, please.

Couple quick questions.

The first one is on the balance sheet.

Given that you raised money in the subs and in Arrowhead itself and you have been cutting back and streamlining the subs, where does the run rate go from here now per quarter, and how long do you think you can last with the $10.1 million that you have on the balance sheet at the end of September as well as what's in the subs?

Hey, Bill.

How are you?

Good.

That's a good question.

There are actually a number of options on the table for us for bringing in additional capital.

As you mentioned, we could -- we have brought in capital directly into Calando and Unidym, our two most mature subsidiaries, and therefore, our biggest consumers of capital.

That will allow us to, as we continue to do that, that will allow us to decrease the pressure on Arrowhead's balance sheet.

We could enter into funded JDAs.

For instance, with Unidym, we could enter into partnerships with Calando.

We could see a liquidity event with Calando.

We could see a liquidity event with Tego.

Anyway, there's a whole host of options to bring in additional capital, and we are pursuing most of those right now.

We think it is reasonable to expect that a number of those will bear fruit and provide us with additional capital.

However, we do have a plan to continue operations through fiscal 2009 and even into fiscal 2010 with the capital that we have on the books.

So in the worst-case scenario, if none of those options pan out, we're still able to continue operations and to continue the subsidiaries running.

Okay.

And then, too, I noticed when you raised money into Calando, according to the 8-K filing, it was actually done as a loan.

What percent of the company will Arrowhead own, assuming a sale, if that's converted to stock?

We have approximately 65% ownership in Calando right now.

The exact number -- would is it, Paul?

67.

67% ownership in Calando right now.

The reason that we structured that as debt is that we believe that we are near a liquidity event, and we thought that it was the cleanest way to bring in that additional capital that will provide that runway to a liquidity event.

So roughly two-thirds -- we own roughly two-thirds of the company.

Then regarding a liquidity event of Calando, what's the big determining factor for a sale?

There are a number of ways that that can happen, and we are open to discussing most of those.

It can be structured as an all-out sale, where an acquirer will take the Cyclosert as well as RONDEL platforms.

Cyclosert, of course, is our platform that we use for delivering small molecule drugs.

RONDEL is our platform that we use for delivering RNAi Therapeutics, so it could be a straight sale.

It could also be structured potentially as as licence agreement.

It may be there are some companies that value the siRNA piece of the company, the RONDEL piece of the company more highly than the Cyclosert piece of the company, so we are certainly open to discussing a large license agreement to cover either of the platforms.

So it just goes down to the negotiations with potential acquirers.

We think that we have brought this technology to a point where it is time to start having those discussions.

We are in Phase II clinical trials now on the small molecule side, and we are fairly far along in the Phase I clinical trial for the siRNA piece.

On the small molecule piece, you said that the IT-101 Phase I was complete and that data will be available in 2009.

So that would be sometime first time first half?

Q1?

I'll hand that over to James Hamilton to address that question.

That data will likely be presented in abstract form and then as a publication in the second quarter of 2009.

Okay.

And then I have been speaking with various analysts who cover stocks, such as (inaudible) and RX I, and there are handful of guys that are negative on this space thinking it's only going to good for the lab and drug discovery and at least when I speak to them, they talk about systemic delivery and how it doesn't work.

Could you guys talk about what's unique about yours, if there's a simple way to do that, and how you differentiate from traditional lipasomes or whatever other people are doing?

I will hand it over to Dr.

Hamilton.

I will say one thing briefly.

There is a lot of talk about RNAi and siRNA as having only value in the lab and only limited therapeutic value because of this problem with systemic delivery.

We think that we are extraordinarily well positioned because we believe we're the only company that is now actively delivering siRNA systemically.

We are the only company, we believe, that is using siRNA for oncology.

So to the extent that we see positive results in this clinical trial, we think that we are in a fairly powerful position to enable these other companies to extract value from this potentially revolutionary new field of RNAi.

So I will hand it over to Dr.

Hamilton to talk about the specifics.

Sure.

As you probably know, lipasomes have been used, or attempts have been made using lipasomes for quite some time to deliver (inaudible) nucleotides DNA, plasmids or antisense therapeutics, and traditionally, these attempts have not worked.

Where we see the advantage of the RONDEL system over lipasomes is several fold.

A lot of the lipasomes that folks are trying to use may have some issues with hepatotoxicity.

They intend to accumulate in the liver, almost -- if not the entire dose, virtually the entire dose may accumulate in the liver versus accumulate in tumor tissues.

This is not the case with the RONDEL system.

There are issues with loading efficiency.

By loading efficiency, I mean how much siRNA one can get into a liposome versus into our system.

There are well document issues with aminogicity of lipasomal drugs, problems with multiple dosing and effects of clearing antibodies on lipasomal drugs, and there are also issues that are questionable with regards to internalization of lipasomes, getting lipasomes into the cell and getting the payload inside of the liposomes into the cell.

These are all -- of the four issues that I mentioned, are all things that we think that we have made a lot of progress towards overcoming.

Okay.

That was helpful.

I have no further questions.

Thank you, Bill.

Thank you.

(Operator Instructions) One moment, please.

(Operator Instructions) One more moment, please.

Gentlemen, we have no further audio questions at this time.

I would like to turn the conference back over to management for any closing statements.

We have none?

Thank you very much for listening in on our inaugural call, and we look forward to speaking with you again in a quarter.

Ladies and gentlemen, this does conclude the Arrowhead Research fourth quarter and fiscal year '08 earnings conference call.

If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with the passcode # 11123372.

ACT would like to thank you for your participation, and you may now disconnect.