Arrowhead Pharmaceuticals Inc (ARWR) 2009 Q1 法說會逐字稿

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

Welcome to the Arrowhead Research first quarter fiscal year 2009 financial results conference call.

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

(Operator Instructions).

This conference is being recorded today, Monday, February 9, 2009.

I will now like to turn the conference over to our host, Sanjay Hurry, Investor Relations of Arrowhead Research Corporation.

Thank you, Operator.

Good afternoon, everyone, and thank you for joining us to discuss Arrowhead's financial results for the first -- fiscal first quarter ended December 31, 2008.

With us today from management are President and CEO Dr.

Christopher Anzalone and Chief Financial Officer Paul McDonnel.

Management will provide a brief overview of the quarter and will then open the call up to your questions.

Also on the call for participation in the Q&A session are chief executive officers of Calando and Unidym, Dr.

James Hamilton and Dr.

Mark Tilley.

Comments made during today's call may contain certain forward-looking statements within the meaning of Section 27(A) of the securities act of 1933 and Section 21(E) 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, are intended to identify forward-looking statements.

In addition, any statements that refer 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 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, I'd like to turn the call over to Dr.

Chris Anzalone, President and CEO.

Good afternoon, everyone, and thank you for attending our conference call this quarter.

It has been only two months since our last conference call, so today I would like to focus primarily on our strategy to get through these difficult financial and economic times while serving our mission of bringing potentially game-changing nanotechnologies to the marketplace.

There are five fundamental action items that are currently driving our businesses.

They are, one, optimizing the consolidation of our subsidiaries, such that we operate more efficiently as an enterprise; two, aggressively cutting costs where possible; three, sharpening the focus of our business models; four, continuing to move our technologies and products to market as quickly as possible; and five, securing necessary capital.

I'll discuss what this framework has meant for Arrowhead as an enterprise, as well as each subsidiary over the past quarter.

For Arrowhead, the parent company, our strategy has meant focusing our resources almost entirely on our current subsidiaries.

While we are keeping the future pipeline of opportunities warm so we may act on them when the time is right, Arrowhead professionals are focused on supporting our current subsidiaries, which we believe have great potential.

As those of you familiar with the Company are aware, our business model is predicated upon the centralization of key management responsibilities at the Arrowhead level.

This provides our subsidiaries with seasoned management and enables each subsidiary to accelerate development and manage costs.

We've always believe this to be an efficient model, and particularly in today's capital-constrained environment, we see it as a key competitive advantage for our subsidiaries.

Now to Unidym.

Of all the Arrowhead subsidiaries, it has undergone the greatest progress towards streamlining and increased focus.

As I discussed on the December call, Unidym initiated a reorganization last quarter intended to significantly decrease the Company's cash burn and create a more focused business model.

This shift was significant, and it included an agreement between Unidym and Arrowhead to increase Arrowhead's operational involvement and to tap Arrowhead Vice President of Advanced Materials, Dr.

Mark Tilley, as Unidym CEO.

Unidym's reorganization is resulting in a leaner, more agile company, better able to respond to opportunities in what is already a difficult market.

Once the cost-cutting measures are fully implemented, we estimate that Unidym will achieve more than a 60% reduction in cash burn.

The focus, however, is not just on cost savings.

Before the reorganization, Unidym employed a vertically-integrated model that included manufacturing bulk material for noncore markets, as well as manufacturing -- the manufacturing of transparent conductive films for commercial products.

Unidym is in the process of divesting the bulk materials business and is focusing on an expanded license program and/or possible sale of the business to monetize this opportunity.

Transparent conductive films are, of course, critical to Unidym as we move into touchscreen markets, and it is now focused on establishing partnerships with film companies rather than manufacturing films itself.

We believe that partnering with film companies that have extensive technical expertise and established distribution channels will enable Unidym to address touchscreen markets more rapidly, while decreasing capital needs.

Unidym is now focused solely on its core competencies, such as its extensive patent portfolio and the ability to make conductive inks with electronics-grade carbon nanotubes.

As such, we believe Unidym is well-positioned to move more rapidly into primary -- into its primary target markets of LCDs and touchscreens in a cost-effective manner.

As Unidym sharpens its focus and contains costs, it continues to make solid progress toward the marketplace.

We are confident that Unidym will realize revenue from the sale of materials to touch-panel manufacturers in the near term, a milestone that was originally forecast for December 2008 but missed amid the slowing economy.

We also believe that Unidym's progress toward addressing the LCD markets is accelerating and that significant deals and accomplishments will be announced in coming quarters.

For instance, Samsung electronics demonstrated the world's first carbon nanotube-based color active matrix electrophoretic display last quarter.

The device is the result of an ongoing joint development program between Samsung Electronics Company and Unidym, and uses a carbon nanotube transparent electrode developed by Unidym.

Also last quarter, Tokyo Electron Venture Capital, a long-standing strategic partner and investor, committed additional capital to Unidym and we expect continued collaboration between Unidym and Tokyo Electron in the LCD and solar markets.

We believe that Unidym's continued progress, its near-term potential for market penetration, and lower cost structure position it to attract additional outside capital from strategic and financial investors in coming quarters.

Unidym is currently in the process of raising this financing.

Turning to Calando, like Unidym, it has focused on moving toward -- moving forward toward commercialization, while working hard to contain costs and become increasingly efficient.

Calando continues to have an agreement with Arrowhead, enabling Dr.

James Hamilton, Arrowhead's Vice President of Medical Technologies, to serve as Calando's CEO.

In addition, other Arrowhead professionals are actively engaged in such activities as business development and patent protection, providing Calando with a relatively low-level recurring burn rate.

This lean structure provides Calando with the flexibility to effectively turn down spending or reallocate capital rapidly and as necessary.

Calando's resources are currently solely focused on supporting its clinical programs and enhancing its value for our partnership or ultimate acquisition.

Our expenses last quarter reflect this.

The majority of Calando's costs were related to the Phase I clinical trial for CALAA-01, managing the initiation of the Phase IIa clinical trial for IT-101, and assembling the institutions that will run that, and moving CALAA-02, Calando's second RNAi clinical candidate, toward an IND filing with the FDA.

We believe these are all high-return endeavors that drive significant value back to Calando as a partner, or ultimately as an acquisition target.

The progress Calando demonstrated in 2008 continued into the first fiscal quarter of 2009.

Calando's RONDEL-enabled siRNA-based therapeutic CALAA-01 remains ahead of schedule in Phase I clinical trials in patients with solid tumors, and I'm pleased to report that the trial continues to progress well.

Last quarter, Calando also announced the use of its RONDEL systemic delivery technology for the treatment of sepsis in mice.

This points out the broad utility, we believe, of this system and represents a meaningful extension of its siRNA delivery technology beyond its initial application to oncology.

Moving to our wholly-owned subsidiary Tego BioSciences, we revised Tego's business to a licensing model last quarter.

As the owner of a -- key IP in the area of modified fullerenes for use in therapeutics and diagnostic applications, Tego maintains an expansive patent portfolio.

We believe it to be a better use of our capital to focus on partnering and licensing its technology to companies that will invest in developing end products, rather than building the products ourselves.

As such, we have reduced cash burn here to virtually zero.

As with Calando, we have an active process to establish partnerships and are confident that we will be able to announce deals in coming quarters.

With regard to our wholly-owned subsidiary Agonn, it remains principally focused on acquiring key IP to target niche opportunities within the high-growth energy markets and, in particular, with regard to next-generation ultra capacitors for use in hydroelectric vehicles as well as non-traditional energy production markets.

Now this process continues to make progress, and requires minimal capital at this stage.

Finally, turning to our minority interests, Leonardo BioSystems and Nanotope, these companies have very low burn rates as they develop candidates to bring to the clinic.

Leonardo is leveraging the resources and expertise of the large lab of Dr.

Mauro Ferrari, a nano cancer specialist and Leonardo founder, to develop its multistage drug delivery system.

Dr.

Ferrari's lab at the University of Texas Health Science Center in Houston made significant advances last quarter in delivering new classes of molecules that Leonardo is applying to its proprietary system.

Nanotope continues to optimize the formulation of its spinal cord regeneration candidate and developed what we believed to be breakthrough animal data with the new cartilage regeneration candidate.

I'll now turn to Arrowhead CFO Paul McDonnel to discuss Arrowhead's quarterly financial results.

Thank you, Chris.

As described in the 10-Q filed today, on a consolidated basis, Arrowhead finished the first quarter of fiscal 2009 with a consolidated net loss of $8.030 million, compared to a net loss of $5.234 million for the same period in the prior year.

More importantly, on a consolidated basis, the net cash used in operating activities during the quarter totaled $7.449 million, compared to $5.832 million for the same quarter in the prior year.

Cash and receivables on hand as of the end of the quarter totaled approximately $8.643 million, compared to $10.152 million as of October 1, the beginning of the current fiscal quarter -- current fiscal year, excuse me.

On a consolidated basis, Arrowhead had benefited from the approximately $2.516 million raised or committed through the Calando note offering, all of which has now been collected, and $2 million of mezzanine financing at Unidym, together with $700,000 in cash received from the sale of Unidym's equity interest in Ensysce.

The net decrease in cash and cash equivalents during the quarter was approximately $2.457 million.

Workforce and headcount reductions made since the beginning of the fiscal year are expected to result in annualized cash savings from salaries and benefits well in excess of $4.3 million.

Additionally, the eventual cash savings from closing Unidym's Texas facility and consolidating nanotube production into Unidym's northern California operations will result in additional annualized operational cash savings estimated well over $1 million per year.

But consolidating facilities may first require up to $1 million of cash over the next couple of months.

The impact of the cash-savings actions taken by the various subsidiaries during the first quarter will become more apparent in Arrowhead's consolidated results of operations for the current quarter, which will end on March 31.

For the quarter ended December 31, the savings resulting from the reduction in headcount at Unidym and Calando were largely offset by the increase in expenses resulting from a decision made earlier in the fiscal year to pursue an additional drug candidate for Calando's RONDEL delivery system.

The new drug, CALAA-02, demonstrates the RONDEL system's ability to move quickly into the clinic.

However, moving quickly comes at a cost.

During the quarter, Calando incurred nonrecurring costs for the licensing, outside laboratories, manufacturing, consulting, and other preclinical work for CALAA-02, totaling approximately $1.3 million.

These nonrecurring costs are on top of the costs incurred for completing Phase I of IT-101, conducting Phase I clinical trials for CALAA-01, and initiating the ovarian cancer Phase II clinical trial for IT-101.

The timing and the magnitude of the future clinical trial and patient costs is difficult to predict, which, in turn, makes cash forecasting very imprecise.

However, Arrowhead's consolidated cash consumed by operations will decrease significantly in the current quarter, compared to the prior quarter, and will continue to decrease from quarter to quarter after that.

For an overview of possible strategies to address the operational cash requirements of Arrowhead's various subsidiaries, I will turn the time back to Chris.

The five action areas that I laid out at the beginning of the call are simply a more granular way of describing our basic strategy, which is to strengthen our balance sheet while moving our technologies and companies toward commercialization.

I believe we made good progress initiating programs to contain costs and maximize our efficiency as an enterprise, but of course, potentially more important is our ability to bring in additional capital.

Even in these difficult times, we believe there are many ways we can strengthen our balance sheet and secure necessary capital.

We are moving in parallel down multiple paths for additional financing and they include, one, a single or series of partnerships for Calando; two, direct investments into Calando from strategic and/or financial investors; three, funded JDAs and partnerships for Unidym; four, revenue generated from Unidym sales; five, license fees to Unidym; six, the sale of Unidym's bulk materials business; seven, direct investments into Unidym from strategic and/or financial investors; eight, the sale of Tego; nine, Tego license fees; and 10, continued scheduled payouts from the 2008 [Aonix] sale.

Now let me be clear -- we are moving aggressively down all these roads and we have significant traction in every one of them.

These are 10 achievable targets and they do not represent a complete list of the financial options we are pursuing.

While we believe it is unlikely that all of these strategies will bear fruit in a timely manner, we are confident that enough will succeed to provide us with the financing we need.

To use the parlance of my biology training, we believe we have enough redundancies in this system.

What is conspicuously absent from this list is raising additional equity capital directly into Arrowhead.

Of course, this remains an option, particularly as we hit key near-term milestones.

Finally, I'd like to add some perspective to this analysis and to try to help our shareholders see what I see.

This is a Company that, we believe, has potentially significant near-term opportunities in large, high-growth markets.

For instance, we believe Unidym is extremely well positioned to participate in the transformation of touchscreen and LCD markets.

These are large markets where major players have indicated they are in search of a replacement for ITO and we believe we have such a replacement.

We are highly optimistic that Unidym's technological platform and world-class partners will help address these large markets in the near term.

Similarly, we believe Calando has something that the pharmaceutical industry needs and we believe that Calando's RONDEL system can help overcome the problems associated with systemic delivery of siRNA and contribute to the wider adoption of RNAi therapeutics.

Further, we believe Calando's Cyclosert system can be a valuable tool for delivering certain small molecule drugs as well as other classes of molecules.

Importantly, we believe that all these opportunities have the potential to drive real near-term value via partnerships and market penetration.

We are highly focused on creating a runway that is long enough to enable Arrowhead to begin to realize this value.

Of course, there are two ways to lengthen such a runway -- decreasing costs and increasing capital.

As I have discussed, we are working toward both.

These are indeed difficult times, but I believe that Arrowhead and its subsidiaries are making great strides and fiscal 2009 will be a pivotal year for us.

With that, Operator, I would like to open the call to questions.

(Operator Instructions).

Bill Boutin, Indusino Capital Management.

Real quick, could you guys go over again your plan -- to fund the Company until the end of the year?

Sure.

We have -- we believe we have sufficient capital -- on the books, and opportunities that we can get through the end of the year and into 2010.

We are pursuing a number of avenues.

I mentioned 10 of them.

These are our most pressing.

However, we are -- really walking down multiple paths beyond these 10.

I'll repeat these, however.

One is a single or series of partnerships for Calando.

We believe that that could bring in capital to Calando, and possibly to Arrowhead.

Direct investments into Calando from strategic and/or financial investors.

Again, Calando and Unidym are our two greatest consumers of capital, and so, to the extent that we can source direct investments into those, it will greatly -- enhance our balance sheet.

Number three is funded JDAs and partnerships for Unidym.

Number four is revenue generated from Unidym sales.

Number five is license fees to Unidym.

Number six is the sale of Unidym's bulk materials business.

Number seven is direct investments into Unidym from strategic and/or financial investors.

Again, as I mentioned earlier in the call, we are actively pursuing that as we speak.

Number eight is the sale of Tego.

Nine is Tego license fees, and 10 is continued schedule payouts from the 2008 sale of Aonix.

[Jeff Ram], Stifel, Nicolaus & Company.

Could you talk a little bit about the -- you touched on the cartilage (technical difficulty) what that could mean and is there a potential to partner up with something like that to raise cash?

Thanks very much.

That's a great question.

Yes, so Nanotope has at least two primary areas right now -- of course, the spinal cord regeneration candidates that we've been working on for quite some time, and we are continuing to optimize the formulation, and as you point out, this new candidate for cartilage regeneration.

What we've seen there is we believe truly stunning.

What we've seen in animal models is the ability to regenerate lost cartilage.

And it appears that new cartilage is virtually indistinguishable from native non-injured cartilage.

We are excited about this, to say the least, and we are actively talking to other companies about partnering that.

We believe we can partner that fairly early, far before the clinic, we think.

That will help us to defray the cost of the clinical trials.

Let me also be clear, Jeff, that is not majority-owned subsidiary.

We have a minority interest there, a better than 20%, but that is not a majority-owned subsidiary at this time.

Bill Boutin, Indusino Capital Management.

Just had a follow-up on my previous question, on the plan for the end of the year.

Are we talking fiscal year, or are you talking calendar year when you say 2010?

We're talking fiscal year.

And then, given what you listed off, then you still need to execute on one or more of those things to make the plan viable?

Yes.

So we're not in the business of just staying in business through the end of fiscal 2009.

And so, we are actively pursuing these as well as, again, other avenues to bring in additional capital that will give us a runway far beyond that, into 2010 and beyond.

We think this is a fairly important inflection point for us, in large part because of our two most mature subsidiaries, Calando and Unidym, we believe are really at the cusp of breakthroughs and partnerships.

And so, we are focused like a laser on these next six to nine months to make sure that we can provide the capital that they need.

And again, we are confident that we can do that.

Okay.

And then, just another quick question.

Previously -- or several times with Calando, you've used some sort of near-term events, and I think the first time you used it was October 13 before you put out the series of letters on each of the portfolio companies.

Now, during this call, it's the first time that you've kind of left the near term out, that wording.

We think that there are near-term partnership opportunities.

I did not mean to leave that out.

Okay.

That's it.

It's just that -- as you know, Bill, these things take some time in a good environment, much less a bad economic environment.

So these take a bit of work, and we are actively involved in that process and I think we will get through it.

Thank you.

(Operator Instructions).

Julia [Grace].

Chris, you mentioned that, obviously, the operational involvement with Unidym has increased over the past several quarters.

Does that in any way increase your financial obligation for funding or any kind of collateral situation with Unidym?

No, it does not.

We don't have any ongoing obligations to Unidym, other than the fact that we think it's a winner and we want to do everything we can to make it succeed -- or to help it succeed.

And then, also, you mentioned a couple times that you're in the process of raising some financing for Unidym right now.

What's the likelihood that you guys can get that done in the next quarter?

Timing -- it's difficult to predict timing in this environment, of course, as you know.

We are working very hard at securing that financing this quarter.

It may slip to next quarter.

It may be tranched out over two quarters.

It's just too early to tell.

Thank you.

(Operator Instructions).

Sir, I show no further questions in the queue.

I now turn it back for any closing remarks that you have.

And sir, there are no further questions in the queue.

If there are no further questions, we certainly thank everyone for their time and their interest.

And we will see you on the call next quarter.

Ladies and gentlemen, this concludes Arrowhead Research first quarter fiscal year 2009 financial results conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236.

AT&T would like to thank you for your participation.

You may now disconnect.