Arrowhead Pharmaceuticals Inc (ARWR) 2009 Q2 法說會逐字稿

Ladies and gentlemen welcome to the Arrowhead Research second quarter fiscal year 2009 conference call on 15 May 2009.

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.

(Operator Instructions).

I will now hand the conference over to Mr.

Sanjay Hurry.

Please go ahead sir.

Thank you.

Good morning everyone and thank you for joining us to discuss Arrowhead's financial results for its fiscal second quarter ended March 31, 2009.

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 we will then open the call to your questions.

Also on the call for participation in the Q&A session are Dr.

James Hamilton, Vice President of Medical Technologies at Arrowhead and Dr.

Mark Tilley of Unidym.

Before we begin I would 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.

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 business or other characteristics of future events or circumstances are forward-looking statements.

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

You should refer also to the discussions under the 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 following forward-looking statements discussed on today's call.

With that said, I would like to turn the call over to Dr.

Christopher Anzalone, President and CEO of the company.

Thank you Sanjay.

Good morning everyone and thank you for joining us on our call today.

Our second quarter performance reflects our ongoing steps to tighten our business model, increase efficiency and extend capital resources while also re-focusing our efforts on near-term commercialization opportunities.

I am pleased to report that our restructuring is now nearly complete, recasting Arrowhead as a leaner, more nimble organization intent on leveraging the IP and technology of its subsidiaries to generate revenue opportunities, some of which we believe are near-term.

I would like to spend a few minutes on each front.

The dislocation in the equities market all but eliminated the primary source of funding for Arrowhead and its subsidiaries.

This required us to make some difficult decisions to restructure our costs and go to market strategies in order to extend our financial runway and preserve our opportunities to pursue our target markets.

I'm pleased to report that as a result of the restructuring, we reduced cash burn by 40% compared to the first fiscal quarter of 2009 and by 32% for the same period last year.

Underscoring this point is Unidym's progress reducing its cash burn rate.

Just two quarters ago, as Arrowhead's largest consumer of capital, it was burning more than $1.2 million per month.

It is now operating on approximately one-fourth of that.

And once restructuring is complete its burn rate will be less than $250,000 per month.

Our other units have also made significant progress decreasing our overall cost structure.

Arrowhead the parent has decreased its cash burn by roughly one-half over the past two quarters.

Tego's and Agonn's burn rates have each diminished to virtually zero as we pursue partnering rather than operational strategies.

Calando's burn has also decreased substantially and we intend to take it to virtually zero after planned partnerships are complete.

And our minority positions, Nanotope and Leonardo, do not currently draw any cash from Arrowhead.

It is only through the dedication of our employees and the management team that we have achieved this.

We expect to realize even greater cost savings in the second half of the year as the structural changes we have initiated bear fruit and are expressed in future financial statements.

From our perspective, a restructuring plan that only considers cost reductions and not operational capabilities is a flawed plan.

Therefore we have been very careful to institute cost savings as part of a larger model that retains our ability to continue building value, albeit under a different structure.

This has meant a greater reliance on partners with established capabilities and assets rather than building certain capabilities ourselves.

It also has involved increasing our focus on near-term revenue opportunities, principally via a shift in some businesses to a licensing model.

This allows us to monetize IP and technology via royalties, milestone payments and earnouts while shifting product development costs to our larger partners.

In addition, we have sought to partner out to non-core businesses allowing us to focus exclusively on specific target market opportunities.

During the quarter and subsequent to the close we have focused substantial energy on negotiating and establishing the right partnerships for our businesses.

For instance, we announced a partnership between Unidym and Continental Carbon Company, whereby Continental Carbon will take over Unidym's bulk CNT materials business.

We believe this is a very good move for the following reasons.

First, it cuts Unidym's operating costs.

Second it is a rolling monetization event for Unidym.

It will include a modest upfront fee, royalty payments and an earn out of up to $26.5 million based on meeting certain sales milestones.

Third, it will give Unidym a ready supply of proprietary electronics grade CNTs for its core markets.

A secure high-volume supply of CNTs is essential to our business as we begin penetrating high-growth markets.

Fourth, Continental Carbon's reputation and capabilities as a global leader in carbon materials will help provide comfort to our current and future device manufacturing partners that Unidym will have the ability to meet high-volume demand.

And fifth, Continental Carbon intends to further monetize the bulk materials business by establishing new non-core markets for this business which could create additional licensing and royalty payments to Unidym.

We also announced earlier in the week the establishment of a joint development agreement with LG Display, one of the largest global manufacturers of displays.

With this announcement, Unidym is now pursuing revenue opportunities with two of the largest display manufacturers in the world.

You may recall that Unidym announced a joint development agreement with Samsung Electronics last summer.

This is a significant achievement for Unidym and one that further validates its CNT technology.

Unidym is in active negotiations with other significant potential partners and we are confident that we will soon be able to report additional developments.

As part of this, Unidym's progress toward revenue from the sale of its materials into commercial touchscreens continues.

And we believe we will hit this milestone in 2009.

We believe that entering this market is a big event for Unidym and a significant technical achievement for the broader display industry.

With respect to Calando, we have been working on establishing the right set of partnerships for a few quarters now.

Frankly this process has taken longer than anticipated.

We believe this is related to a number of factors, including the fact that the two platforms around which partnerships will be formed have some intertwining IP, making deals complicated.

In addition, because the disruptions in the biotech capital markets have pushed a large number of companies into looking for partnerships, the business development market is extremely crowded.

That said, we remain confident that we will complete the right partnerships and that these will enable Calando to virtually eliminate its burn rate while retaining outside potential to its platforms and resulting products.

We're now in active negotiations toward these ends, and are optimistic we will be able to report developments in the near-term.

While these negotiations are ongoing, Calando has continued to make progress in its clinical programs.

Calando's siRNA therapeutic candidate CALAA-01 is nearing completion of its Phase I clinical trial and the safety profile continues to look positive.

Results from Calando's Phase I clinical trial for its small molecule direct candidate, IT-101, were made public last month at the April conference of the American Association of Cancer Research.

The full abstract and poster will be uploaded onto the Calando website.

It was an open label, single arm, dose escalation study in solid tumor patients refractory to previous treatments.

A total of 18 patients were enrolled at two different dosing schedules.

The toxicity profile was favorable and IT-101 showed significant activity represented by prolonged, progression-free survival in heavily pre-treated patients, including patients with metastatic pancreatic cancer, non-small cell lung cancer and renal cell carcinoma.

We have also been very pleased with progress at our minority positions, Nanotope and Leonardo BioSystems.

For instance, in collaboration with founder Dr.

Samuel I.

Stupp at Northwestern University, Nanotope as demonstrated the use of its nanofiber platform system to regenerate cartilage in rabbit models.

We're very excited about this breakthrough and Nanotope's initial focus areas now include cartilage regeneration, spinal cord regeneration and wound healing.

Leonardo has made similar progress and recently generated exciting preclinical data, systemically delivering siRNA in collaboration with its founder, Dr.

Mauro Ferrari.

Leonardo is also currently a finalist in its application for $2.5 million of funding from the State of Texas.

Our growth profile is created through innovation and commercialization at our subsidiaries but maintained via our direct ownership positions in these subsidiaries.

Of course, increasing our ownership positions enhances Arrowhead's participation in their future success.

During and subsequent to the quarter, we undertook several transactions to increase our stake in Unidym to 58.1% with our announcement on April 6.

These transactions included direct investments into Unidym as well as non-cash stock exchanges with some Unidym shareholders.

We see the latter as a very attractive way to increase our stake in the company -- in a company that we believe is potentially transformational and we intend to enter into additional such transactions if possible.

Paul McDonnel, Arrowhead's CFO, will now provide details of our financial results for the quarter.

Paul?

Thank you Chris.

As described in the 10-Q filed today, on a consolidated basis Arrowhead finished its second physical quarter ended March 31, 2009 with a consolidated net loss of $5.3 million compared to a net loss of $5.7 million for the same period in the prior-year.

On a consolidated basis, net cash used in operating activities during the quarter totaled $3.9 million compared to $5.7 million for the same quarter in the prior-year.

Cash and receivables on hand as of the end of the quarter totaled approximately $3.7 million compared to $10.2 million as of the end of the last fiscal year, September 30, 2008, over six months ago.

The headcount reductions and cost saving actions taken since the end of last year and throughout the first and second quarters of the current year are manifested in a $1.8 million reduction in the operational cash burn in the current quarter compared to the same quarter in the prior-year.

Phase-down and completion of the clinical activities at Calando contributed to the cash savings but were partially offset by legacy costs for outside laboratories, manufacturing, consulting and other preclinical work for CALAA-02 totaling more than $500,000 for the quarter and approximately $1.8 million year to date.

On a consolidated basis during the first six months of the fiscal year, Arrowhead benefited from approximately $2.5 million raised from outside investors through a note offering by Calando and the sale of $2 million of newly issued Unidym Series C-1 shares to TEL Ventures.

Additionally, Unidym received $700,000 of cash through the sale of its equity interest in Ensysce BioSciences.

In total, Arrowhead has raised approximately $5.2 million of cash from outside investment since the beginning of the current fiscal year.

During the quarter, the company had consolidated operating expenses of $5.5 million compared to $7.5 million in the year ago period.

The 28% decline in operating expenses is attributable to headcount and other cost saving actions mentioned earlier.

Additional cost saving actions taken since the end of the second quarter should result in a further reduction in the company's cash consumption in the third and fourth quarters of 2009.

Calando's cash requirement by operations was approximately $1.8 million during the second quarter compared to $3.3 million of cash required in the first quarter, or a 45% decline from quarter to quarter.

Calando did continue to incur expenses related to the clinical trials for its two clinical candidates IT-101 and CALAA-01 as well as additional preclinical expenses related to its clinical candidate CALAA-02.

As Chris has described, these expenses and resulting cash demand are likely to be significantly reduced as Calando pursues its partnership and licensing initiatives.

Unidym's cash required by operations was approximately $1.4 million in the second quarter compared to $3.1 million during the first quarter of the physical year if you exclude the one-time benefit of the $700,000 of cash received from the Ensysce sale and the $200,000 from licensing of certain intellectual property.

This represents a 55% reduction in cash required by operations at Unidym and is the result of the aggressive steps taken in December 2008 to further reduce Unidym's costs by reorganizing its management and adopting a narrower focus in its strategy due to the commercialization of its products.

These cost saving measures included headcount reductions, salary concessions and the closure of its Texas facility and the progress towards consolidation of operation into its Northern California facility.

Unidym's cash required by operations in the same quarter last year totaled approximately $2.1 million.

The current quarter's cash requirement represents a 33% decline year-over-year compared to the prior year.

Part of Unidym's strategy is to outsource the manufacturing of nanotubes, reflected in the recent announcement of Unidym's intent to enter into an agreement with Consolidated Carbon to become the principal supplier of nanotubes to Unidym.

I will now turn the call over to Chris for concluding remarks.

Thank you Paul.

To be clear, the partnership at Unidym is with Continental Carbon.

As you can see, we have accomplished a lot over the past several quarters, the fruits of which are only now becoming evident.

We believe we are on the right course with key technologies that may have a real place in the 21st-century world economy.

We have accomplished much and we still have much to accomplish.

Of particular note is the need to strengthen our balance sheet.

We feel very good about our progress from a business and technology standpoint and are focused on ensuring that our finances will follow suit.

We're working on multiple fronts and are optimistic that we will make significant tangible progress on strengthening our balance sheet in the current quarter.

Our restructuring program is nearly complete.

Our partnering efforts are in full gear and beginning to show results.

Our go to market strategies are achievable and include near-term opportunities.

The markets we're addressing are generally large and with substantial unmet needs.

Our management team is strong and committed and our technologies have been developed by some of the world's greatest minds.

Thank you for continuing to be interested in Arrowhead and we will speak to you next quarter.

Sanjay?

(Operator Instructions).

Since there are no more questions.

We would like to thank you for your time this morning.

We will speak to you again next quarter.

Thank you.

This does conclude the Arrowhead Research second quarter fiscal year 2009 conference call.

Thank you for participating.

You may now disconnect.