Arrowhead Pharmaceuticals Inc (ARWR) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Arrowhead Research Third Quarter Fiscal Year 2009 Conference Call.

(OPERATOR INSTRUCTIONS)

I'll now turn the conference over to Ms. Brandi Floberg with The Piacente Group.

Please go ahead.

Thank you, Operator.

Good afternoon, everyone, and thank you for joining us today to discuss Arrowhead Financial Results of fiscal third quarter, ended June 30, 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 will then open the call up to your questions. Also on the call for participation in the Q&A session are Mark Tilley from Unidym And Thomas Schluep, Chief Scientific Officer from Calando.

Before we begin, I would like to (inaudible) 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 facts, 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 like, "may", "will", "expect", "believe", "anticipate", "intend", "could", "estimate", or "continue", or "the negative", or other variations thereof are comparable terminology, and tends to identify forward-looking statements. (Inaudible) any statements that refer to projections of Arrowhead's future financial performance, trends in business, 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 (inaudible) in Arrowhead's annual report on Form 10-K, and the Company's quarter reports on Form 10-Q for additional matters to be considered in this regard. (Inaudible) may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today's call.

With that said, I'd like to turn the call over to Dr. Chris Anzalone, President and CEO of the Company.

Thank you, Brandi.

Good afternoon, everyone, and thank you for joining our call today.

Over the past year, one of our key initiatives (inaudible) and to take a more active role (inaudible) operations of our subsidiaries to more effectively manage the businesses. (Inaudible) have been more defensive and offensive in nature, in that they are a (inaudible) deterioration of the capital markets, but also intended to enable our Companies to move more quickly and efficiently to market.

Over the past quarters, in particular, (inaudible) tremendous headway (inaudible) in accomplishing this transformation to streamline our business.

During the fiscal third quarter and subsequent two quarters, we believe we have made significant progress (inaudible), including the following. One, Unidym (inaudible) new development partnership with LG Electronics, command agreements with two of the three largest LCD manufacturers in the world.

Two, (inaudible) began the process of (inaudible) with Continental Carbon Company, a large manufacturer of carbon materials to (inaudible) bulk carbon nanotube production, and help ensure a high quantity and high quality supply capability.

Three, Unidym continued aggressive cost-cutting measures to increase flexibility. Four, Unidym consolidated its operations in California by closing its (inaudible) facilities. Five, Unidym continued to sample prototypes with multiple manufacturers in its core markets within in the industry.

Six, Arrowhead increased ownership position in Unidym to approximately 67% (inaudible) process of closing agreements to bring its ownership to 70%. Seven, Arrowhead closed significantly oversubscribed financing round to (inaudible) balance sheets.

Eight, Calando entered into an agreement with Cerulean Pharmaceuticals to license its non-RNAi business, providing it with modest upfront cash, a potential significant revenue (inaudible) as products move to market, and the ability to cut a large portion of its burn.

Nine, Calando has focused its (inaudible) entirely on (inaudible) activities within longer-tern R&D. 10, Calando's RNAi Phase I clinical trial continues to progress well, and CALAA-01 seems to be well-tolerated, with no drug-related serious (inaudible) reported.

11, we believe Calando's CALAA-01 trial is now entering the therapeutic (inaudible) means an exciting preliminary data. 12, Nanotope's cartilage-regeneration candidate has shown very exciting data in rabbit models, suggesting that it may be (inaudible) for early partnership.

The quarter was not without its challenges, however. For instance, we had some one-time costs associated with consolidating Unidym's operations, completing the Cerulean transaction, and (inaudible) non-RNAi operations.

In addition, we received notification (inaudible) had fallen below the $2.5 million minimum shareholder equity requirements of the NASDAQ capital market. We took decisive action to address this, and with the Cerulean transaction, conversion of approximately $2 million of Calando debt into Calando equity, and permanently (inaudible) million of the Unidym Put Option Liability, we ended the quarter with greater than (inaudible) million of shareholder equity.

In addition, subsequent to the quarter's end, we completed a financing of greater than $2.7 million and permanently removed the remaining (inaudible) of Unidym Put Option Liability. Just prior to this call, we filed an 8-K, per NASDAQ rules, detailing these enhancements to (inaudible) equity. We believe we have now fulfilled the NASDAW requirements for compliance.

Our primary year-term focus is (inaudible) development efforts with our most advanced subsidiary, Unidym, where we see the nearest-term value creation for our shareholders. A key component (inaudible) bringing our products to market as quickly as possible is our increased focus on partnerships. This is a consistent move (inaudible) of our subsidiaries. Where we have shifted away from capital and time-intensive reliance on internal development, to a structure that incorporates more partnerships, (inaudible), to conserve cash while retaining (inaudible), and we made tangible progress (inaudible) we've achieved (inaudible) dollar, we're confident that this is the right strategy for our Company.

In the third fiscal quarter, we effectively reduced our operating expenses by 51% year-over-year. We also (inaudible) decreased our cash burn and (inaudible) June, we're operating at a run rate of about $750,000 per month, which is a decrease of 28% compared with our March burn rate. This will continue to decrease in July and beyond. The June numbers includes significant costs that ended in July. With our cost-control measures nearly completed, (inaudible) is our nearest-term opportunities.

During the quarter, we successfully restructured Unidym's business model from a vertically integrated Company to one that focuses on its core competencies (inaudible) partnerships with well-positioned and well-capitalized companies to (inaudible) technology.

As we discussed on our previous call, as part of our partnership strategy, Unidym (inaudible) portion of its assets for CNT productions to come, or CCNI. We are in the process of negotiating the license and supply agreement for CCNI to provide the majority of Unidym's bulk CNT supply needs. We expect this agreement to consist of upfront payments (inaudible). Subject to completion of the second closing, Unidym has the potential to (inaudible) out payments of up to $26.5 million from CCNI, based on achieving certain sales models done.

We have considerably scaled back Unidym's cost structure, and aggressively reduced its cash burn by an impressive 50% from July to June of this year. Unidym is now running more efficiently and effectively, and is on track to commercialize its (inaudible) products for touch screens later in 2009.

We're extremely excited about Unidym's market opportunities (inaudible). Prior to Unidym's rollup of key foundational technology, an acquisition of three companies, we CNT as the highly fragmented (inaudible) with no clear leader. Unidym's near-term products offer an attractive replacement for a critical, and believe, optimal material currently used in touch panels, LCD displays, and thin film solar cells.

We believe that Unidym could have the first commercial replacement for incumbent ITO, or indium tin oxide (inaudible) devices. This creates a significant opportunity for Unidym, with a total addressable market (inaudible) to exceed $2.5 billion in 2009, and expected to grow to over $3.5 billion by 2012.

On August 7, 2009, we closed a significantly oversubscribed private placement of common stock and warrants for total proceeds of $2.76 million. Given the commercialization of Unidym's products is a key focus. Funds from (inaudible) will be largely allocated to assisting Unidym in bringing its transparent, conductive materials into (inaudible) commercial touch-panel markets. And we believe we could see some modest revenue contributions from Unidym products by the end of calendar 2009.

Our next step will be focused on entry into the LCD market, and even larger market opportunity, which we expect to accomplish in 2011, and have more (inaudible) on timing in 2010.

Unidym has already established partnerships with industry-leading OENs, including Samsung Electronics, LG Electronics, and Tokyo Electron. And they have been working with these companies for some (inaudible) break into our (inaudible). They have conducted extensive sampling of literally dozens of working prototypes in both touch-screen (inaudible) that use our material. We believe that once we gain (inaudible) touch-screen (inaudible) our target markets, penetration could be fairly (inaudible) and our margins will be attractive.

We see big opportunities to create a value relatively quickly if we can break into these markets, show a fairly steep adoption curve, and demonstrate with the large margins that we expect. As Unidym's technologies can be used across (inaudible), we see longer-term market opportunities for Unidym products in thin film transistors, or printable electronics, (inaudible) a replacement for metal oxide films and solar energy applications.

During the third quarter, we strategically increased our stake in Unidym to capture additional value from the subsidiary, and now own (inaudible) of the subsidiary, with agreements in place to reach 70%. With what we see as best-in-class technology, a strong patent portfolio, and a set of solutions to established market opportunities, we are optimistic that Unidym may emerge as a key player in next-generation electronic materials.

We have also made good progress with our majority-owned subsidiary Calando. In the third fiscal quarter, (inaudible) successfully brought to a close license (inaudible) drug delivery of platforms, like (inaudible) and the associated clinical stage anti (inaudible) IT-101. We have been working on partnering this program for some time, and are delighted to have completed the (inaudible) which we received a modest upfront payment of $2.4 million.

Calando (inaudible) receive over $30 million in development and sales milestone payments, plus royalties, should IT-101 be approved for sale and successfully marketed. Additionally, there is upside for (inaudible) drug candidates that Cerulean is able to bring to market with the linear cyclodextrin drug delivery platform in the form of (inaudible) and sales milestone payments, plus royalties.

We strongly believe in IT-101, and the flexible cyclocort platform. We also have confidence in Cerulean's ability to bring multiple compounds to the market using the license technology. Therefore, we believe this deal will bring significant value to Arrowhead over the long run. Importantly, this deal (inaudible) to retain upside potential, while eliminating a large portion of our burn and reduce Calando's liabilities. This is an expensive clinical program, and its elimination enables Calando to focus its resources solely on its clinical stage RNAi program.

Calando is now running on a lean and efficient model (inaudible) reduce burn rate. We have virtually eliminated long-term R&D spending and have become a highly focused, clinical-stage Company that allocates all of its resources to moving its siRNA delivery program through the (inaudible).

We have retained the key rights and knowhow (inaudible). As you know, this is a fairly new field within the pharmaceuticals industry that has garnered (inaudible) full and potentially powerful way to treat a variety of diseases, including cancer. (inaudible) limiting the widespread use of RNAi for therapeutic purposes is systemic delivery. For a number of reasons, this has a been a difficult problem for the industry to overcome, and we (inaudible) the first Company to demonstrate effective systemic delivery, we'll be in a position to create a lot of value.

To our knowledge, no company has ever demonstrated conclusive evidence of our RNAi into humans. It has been our goal, all along, to be that company through our RONDEL delivery system. As you know, (inaudible) we initiated a Phase I clinical trial with RONDEL, via our first RNAi therapeutic CALAA-01. We believe we are the first ones to use a delivery (inaudible) siRNA systemically in humans, and the first to use siRNA against cancer in humans. So, we truly believe that Calando has been at the forefront of this new and potentially revolutionary field.

We have been clear about our desire to partner CALAA-01 and the RONDEL platform with a company capable of (inaudible) multiple therapeutics through the clinic into the market. (inaudible) it does not make sense for us to assume the cost associated with completing clinical trials and establishing sales, marketing, and distribution channels, particularly, at this point, in our development cycle entering these capital-constrained times.

This remains our model, and some have inquired as to why we have established that partnership. We believe that because this platform was not partnered early in its development, companies would rather wait to see clinical data, rather than making a deal based on preclinical animal data that they were not involved in (inaudible). Given where we are in the clinical trial, we are cautiously optimistic that we may be entering a period where multiple companies would have heightened interest.

We're currently nearing the end of the Phase I Ascending Dose trial with CALAA-01. We're very happy to report that the drug has been well-tolerated by patients, and to-date have seen no drug-related serious adverse events, or SAEs, (inaudible) what the drug safety profile is determined. (Inaudible) we believe we may now be entering the drug's therapeutic dose range, and are seeing some interesting preliminary data. As we verify results, (inaudible) conclude the trial, I look forward to sharing additional findings with you.

In addition to our near-term Unidym and Calando prospects, we also (inaudible) Nanotope Incorporated could be a considerable value-driver without requiring significant additional capital from Arrowhead. Nanotope technology enables us to employ a single platform that is customizable for different indications, (inaudible) generate tissues.

In preclinical studies, with multiple animal models, Nanotope's compounds demonstrated the ability to reverse paralysis associated with spinal (inaudible), regenerate (inaudible), increase human (inaudible) and chronic wounds, and regenerate bone. Early (inaudible), all these (inaudible) for large market opportunities with unmet medical needs. We've developed over 100 different compounds that are focused on different tissues, and we think it's a very healthy platform that could present an attractive set of partnering opportunities.

Specifically, our recent work in cartilage regeneration has garnered notable interest, and we are cautious optimistic we will be able to establish a high-quality partnership in this area in the near term. As our later stage Companies and Programs, such as Unidym, mature, we'll be looking to opportunities like Nanotope where we can monetize the assets of early stage platform (inaudible), with multiple applications, and partner these programs with established companies to absorb the cost of later-stage development.

As we work with our (inaudible) innovative, new products to market, we are very proud of the efficiencies we have (inaudible), and will continue to implement prudent cost controls, while maximizing partnering opportunities.

With that, I would like to turn the call over to Paul McDonnel (inaudible) details of our (inaudible) third quarter. Paul?

Thank you, Chris.

As we reported earlier today, on a consolidated basis, Arrowhead's third fiscal quarter ended June 30, 2009 (inaudible) consolidated net loss of (inaudible) million (inaudible) a consolidated net loss of $7.5 million (inaudible) period in the prior year. On a consolidated basis, net cash used in operating activities, during the quarter totaled $1.5 million, compared to $7.7 million for the same quarter (inaudible).

(inaudible) during the quarter, bringing the total consolidated stockholders' equity balance to $3.7 million as of June 30th. During the quarter, the Company had consolidated operating expenses of $4.96 million, compared to $10.1 million in the year-ago period. The 51% decline in operating expense is attributable to the headcount and other cost-saving actions mentioned earlier.

Calando's cash required for its research and development activities was approximately $1.6 million during the third quarter, compared to $1.8 million of cash required during the second quarter, or an 11% decline quarter-to-quarter. Of the $1.6 million in cash required by Calando's operations during the quarter, over $600,000 was used to satisfy payables and accrued expenses from the prior quarter. As Chris has highlighted, Calando's expenses and its resulting cash demands are expected to continue to decrease as Calando utilizes the benefits of its partnership and licensing initiatives, and the closure of its Pasadena facility.

Consolidated operating expenses also included a $1.7 million non-cash charge to record purchased in-process research and development. This charge is a result of Arrowhead issuing Arrowhead stock to acquire additional shares in Unidym, from Unidym minority stockholders.

Unidym's cash required by operations was approximately $830,000 in the third quarter, compared to $1.7 million during the second quarter, and $2.4 million in the financial quarter of the fiscal year.

If we exclude the one-time benefit of the $700,000 of cash received from the sale of [Incise] and the $200,000 from licensing of certain intellectual property during the first quarter, Unidym has reduced its quarterly cash consumption by nearly $2.4 million since the beginning of the fiscal year. This represents a greater-than-70% decrease in cash required by operations at Unidym. The decrease in cash required by operations is due to the elimination and the closure of the two Texas facilities, reductions in headcount, reductions in salaries, and other cost-contained measures. And we anticipate Unidym's cash burn to continue to decline.

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

Thanks, Paul.

Before opening the call to questions, I'd like to thank Paul for his exceptional work with the Company. Last month we announced the he will be leaving Arrowhead to assume an operational role in a company out of state. While we certainly will miss Paul, it is a fantastic opportunity, and one in which he will excel thoroughly.

I'd like to take a moment to thank him for his contributions to the Company, and his assistance through our quarterly reporting cycles. It has been a true pleasure working with Paul, and we are pleased that we'll continue to have access to him as a consultant as needed, as we look for a replacement CFO.

In the interim, we welcome back Joseph. T. Kingsley to the Company, who has joined our team as Vice President of Finance and Accounting. As you may recall, Ted is Arrowhead's former President and CFO, and we expect him to be our interim CFO while we look for a permanent replacement.

We are extremely excited about the near-term opportunities of our subsidiaries. As we look to the next stage of Arrowhead's evolution, we are optimistic that our more mature subsidiaries, Unidym and Calando, will serve as near-term value drivers for our shareholders while we develop follow-on value engines, such as Nanotope.

I believe that these three companies are highly representative of our model. One, we look to develop platform technologies that may be monetized across multiple markets or product offerings to effectively give us multiple shots on goal.

Two, we look to address large and current market opportunities. Three, we are maximizing the efficiency of our structure to create lean businesses capable of growing with limited capital. And four, we are increasingly leveraging established partners to limit our capital requirements and speed time to market.

We remain highly optimistic about the transformative nature of nanotechnology in general, and about the growth prospects of our subsidiaries, in particular. We believe that our model and current assets are well-positioned to create significant shareholder value in the short, as well as long-term.

With that, I'd like to open the call to questions. Operator?

All right, thank you, sir.

Ladies and gentlemen, at this time, we will begin our question-and-answer session.

(OPERATOR INSTRUCTIONS)

There are no questions registered at this time.

(OPERATOR INSTRUCTIONS)

And there do not appear to be any questions at this time. With that, this will conclude today's conference. We do thank you very much for your participation. If you would like to listen to a replay of today's conference, you could do so by dialing 1-800-406-7325 or 303-590-3030 and put the access code 4134570.

We thank you very much for your participation. Have a very pleasant rest of your day.