Arrowhead Pharmaceuticals Inc (ARWR) 2014 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Arrowhead Research Fiscal 2014 Second Quarter Financial Results Conference Call.

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.

I will now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2014 second quarter ended March 31st, 2014.

With us today from management our President and CEO, Dr. Christopher Anzalone; Chief Operating Officer and Head of R&D, Dr. Bruce Given, and Chief Financial Officer, Ken Myszkowski.

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

Before we begin I would like to announce that we have scheduled an Analyst R&D day for June 19th in New York City. At this event Arrowhead Management and a panel of external disease area experts will discuss our next clinical candidate and provide a corporate update.

Space will be limited so any research analysts and institutional investors interested in attending should RSVP to us at ir@arrowres.com. A webcast of the event will also be available on our website for those unable to attend.

For today's call I would like to remind you that comments 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. They represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially.

Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today's call. You should refer to the discussions under risk factors in Arrowhead's annual report on Form 10-K and the Company's quarterly reports on Form 10-Q for additional matters to be considered in this regard.

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

Thanks, Vince. Good afternoon, everyone, and thank you for joining us on our call today. The fiscal second quarter and the period since our last conference call have been extremely productive for Arrowhead.

Our priorities can be thought of in three camps and we made substantial progress in each of them. They are one, progress with our lead candidate, ARC-520, against chronic Hepatitis B infection; two, progress on our core DPC platform and a pipeline of a new drug candidates and enables and three, access to capital and talent.

Let's take a closer look at each of these and begin with ARC-520. As we've said in the past, ARC-520 remains our highest priority and primary near-term value driver. Over 350 million people, or roughly one in twenty worldwide, are thought to have chronic HBV infections and there is no cure.

This has been a much more difficult virus to treat than Hepatitis C in part because blocking viral application is not sufficient to clear the virus. High levels of surface antigen or s-antigen can immune suppress a patient with chronic HBV infection even with viral application is blocked to undetectable levels.

Many believe that substantially decreasing s-antigen levels could de-repress the immune system, and enable it to clear the virus but to date there has not been a way to do this consistently.

Our published non-clinical studies and rodent models as well as a chimpanzee with chronic HBV infection suggest that ARC-520 is capable of rapid and de-productions of s-antigen levels in addition to all other HBVG products.

I'm not aware of any published reports that rival our data. As such, we believe we have a powerful drug candidate and substantial first mover advantage in this large unmet medical need. We intend to retain and even expand this advantage with well thought out clinical studies and good execution.

As we have discussed in the past our phasal and clinical study began in July 2013 and planned dosing was completed just three months later. It indicated that ARC-520 was generally safe and well tolerated at all doses studied. This was followed by a phase 2a study in patients with chronic HBV infection, which started dosing at the end of March 2014.

The study is planned to enroll 16 e-antigen negative chronic HBV patients in two dose groups with patients receiving either ARC-520 or placebo in combination with Entecavir. We will follow patients until s-antigen levels return to baseline or within 20% of baseline.

In addition to generating more safety and tolerability data, this study will give us depth and duration of s-antigen knockdown, which will be used to design the upcoming multi-dose studies.

We announced that the first cohort of eight patients have been fully enrolled and dosed in just over a week. We have received DSMV approval to move into our second covert and expect to begin dosing shortly. Patient accrual has been very fast, which is encouraging and keeps us on pace to have top-line results to report in the third quarter.

We expect this to be in a form of a press release. Demonstrating consistent s-antigen reduction in humans will be an exciting outcome and a first for the field. And therefore, we hope to report a more complete data set at a scientific conference or peer reviewed publication.

People have inquired as to whether we would release any interim data before the phase 2a is complete and we will not. The study is blinded and it would be inappropriate for us to communicate any hard data or even perceive trends while the trial is ongoing. We're happy to provide information about the study design and expected timelines and we thank you for your patience.

In addition to the phase 2a, we remain on schedule with long-term GLP toxicology studies, drug manufacturing, protocol development, site and investigator recruitment and other activities needed to support the phase 2b studies planned to begin in the second half of this year.

As we've discussed in the past, these studies will be multi-national and we would expect to start seeing functional cures with repeat dosing of ARC-520.

As you can see, our progress with ARC-520 has been rapid and consistent. Thus far we have met or beaten all of our guidance and we expect this to continue.

The positive safety data from the phase 1 study de-risks ARC-520 because until a candidate is administered in humans there's no way of knowing if a safety signal will emerge that was not predicted in animal models. The data thus far suggests that we have a safe and well tolerated drug candidate.

Regarding efficacy, we have generated and published data indicating deep and durable knockdown across multiple animal models including non-human primates. This includes the SiRNA sequences in ARC-520 as well as sequences against other liver targets in order to better understand efficiency of the DPC delivery system.

Because of the reliability of RNAi as a mechanism and the highly predictive nature of non-human primate data for human knockdown, we expect to see deep and durable sNRG knockdown in the phase 2a. Should we see that and report it next quarter, it will be another risk removed from the program. At that point it would appear that we have a safe and effective drug candidate and the final hurdle would be to demonstrate that reducing s-antigen levels -- I'm sorry, and the final hurdle would be to demonstrate that reducing s-antigen levels leads to functional cure of HBV.

The multi-dose phase 2b studies will get at that question, so we expect to be looking for functional cures next year. These are exciting times indeed.

Let's now turn to the broader DPC platform and pipeline. In addition to being an exciting candidate, ARC-520 serves as a proof of concept for the DPC delivery technology as it relates to liver targets. If we show the ARC-520 safely and effectively knocks down HPVG products it's highly likely that the DPCs will be capable of safely and effectively knocking down other hepatized targets.

This is important as we expand our pipeline of RNAi therapeutics and also speaks to the leverage we see across our development programs. The successful phase 1 went a long way to de-risk the platform from a safety standpoint. The fact that we saw no evidence of any end-organ toxicity at any dose gives us confidence that as we prepare multiple new candidates.

Phase 2a study topline readout next quarter will more fully de-risk the platform by demonstrating knockdown efficiency. Once both of these are firmly established we see enormous opportunities to create value by aggressively expanding our pipeline.

This process has begun and we nominated a clinical candidate for an as yet undisclosed rare liver indication for which we plan to file an IND in the fourth quarter.

As Vince mentioned, we'll hold an Analyst Day on June 19th in New York City to discuss this candidate. During the event we will provide anticipated timelines for the candidates and present non-clinical data. A panel of key opinion leaders will present additional information about the path of physiology, patient populations and current treatments for the disease.

This candidate is an exciting next step for us as we build out the pipeline but is only one of the targets that we're working on. We are making substantial progress with additional undisclosed programs that we hope to provide guidance on in the future. These include liver as well as extra hepatic targets and DPC formulations for both IV and subcutaneous administration.

All this work on ARC-520 and expanded pipeline requires resources, both human and financial. We have built up both of these recently. During the quarter we added staff from the bench scientist level to VP level in various key areas including manufacturing, toxicology, chemistry, biology, quality assurance, regulatory and clinical operations. These additions ensure that we can support rapid clinical developments in ARC-520 and our next clinical candidates.

In addition, they also allow us to continue develop DPCs.

In February we strengthened our balance sheet through an equity financing with gross proceeds of approximately $120 million. This capital allows us to fully fund ARC-520 into phase 3 and gives us the resources we need to push additional candidates into the clinic and through proof of concept over the next few years.

We now have multiple years of cash to support our pipeline growth and are not dependent upon near-term (inaudible) partnerships that can limit upside potential for our shareholders. It also enables us to expand the scope of our upcoming ARC-520 phase 2b studies. We plan to conduct multiple studies to answer key questions about the response of different patient populations of ARC-520.

We'll discuss more about the phase 2b studies' designs later in the year but it gives us great confidence to know that we are properly resourced to design the development program in a way that generates a comprehensive understanding and data package for ARC-520's activity.

With that update, I'd now like to turn the call over to our CFO, Ken Myszkowski, to review our financials for the period. Ken.

Thanks, Chris, and good afternoon, everyone. As we reported earlier today, our net loss attributable to Arrowhead for the three months ended March 31st, 2014 was $13.9 million or $0.31 per share based on 44.3 million weighted average shares outstanding.

This compares with a net loss attributable to Arrowhead of $6.8 million or $0.41 per share based on 16.5 million weighted average shares outstanding for the three months ended March 31st, 2013.

Total operating expenses for the three months ended March 31st, 2014 were $11.3 million compared to $5.4 million for the three months ended March 31st, 2013.

Research and development related expenses were $5.2 million while G&A costs were $1.3 million. The increase in operating expenses compared to the year ago period are due to ARC-520 clinical trial, related ongoing toxicology trials and drug manufacturing costs in preparation for phase 2 clinical trials.

R&D compensation expense is higher due to increased headcount as compared to the prior year.

Net cash used in operating activities for the first six months of fiscal 2014 were $14.7 million compared with $8.3 million in the prior year period. The change in cash used in operating activities is consistent with the change in operating expenses.

Turning to our balance sheet, our cash balance at March 31st, 2014 was $142.8 million. Our cash resources also include excess cash invested in investment grade bonds maturing in the near future. Bonds maturing in less than 12 months are classified as short-term investments and totaled $17.8 million at March 31st, 2014. Bonds maturing in more than 12 months are classified as long-term investments and totaled $34 million at March 31st, 2014.

Including short and long-term investments in fixed income securities our cash and investments balance was $194.7 million at March 31st, 2014 compared ti $29.8 million at September 30, 2013. The increase reflects the financings completed this past February and October.

Additionally, the Company received cash inflow of $8 million from exercise of warrants and stock options.

Our common shares outstanding at March 31st, 2014 were 51.9 million. At March 31st, 2014 there were also 21,000 shares of preferred stock outstanding. These preferred shares are convertible into 5.6 million shares of common stock. Common shares outstanding, including the conversion of our preferred shares, would be 57.5 million.

With that financial overview, I will now turn the call back to Chris.

Thanks, Ken. We made good progress in all areas and are quite pleased with our execution of the past quarter.

Unfortunately weakness in the biotech market generally and RNAi companies in particular over the past several weeks have meant that this progress toward value creation has not been reflected in our stock price.

We are focused on providing growth to our shareholders but sometimes market moves distort value creation in the short term. We have no control over that. What we can control is the quality of our science, the choices we make to go after high value unmet medical needs, the quality of our clinical programs and the extent to which we execute.

On all of these fronts we have excelled so we have to trust that the market perception will catch up with us, just as it did last year.

Our lead program continues to move rapidly. Our pipeline is filling out. Our core technology is increasingly de-risked and we have a very strong balance sheet. Needless to say, we are positioned exactly where we believe we need to be for durable value creation.

Importantly, we will have regular impactful events throughout the remainder of 2014 to demonstrate our progress. These include the following. Throughout May and June we will present a major investor and scientific conferences including the Deutsche Bank Healthcare Conference this week, [Tides] next week and Jefferies Wells Fargo and Piper Jaffrey events in June.

On June 19th we will hold an LFA to discuss our next clinical candidates. In the third quarter we expect to release topline results from phase 2a study of ARC-520. In the fourth quarter we anticipate that multi-dose phase 2b studies will begin. Also in the fourth quarter we expect to file an IND for our next clinical candidates.

And lastly, we will provide updates on undisclosed programs in technological capabilities that we are targeting for 2015.

I would now like to open up the call to your questions. Operator?

Thank you. (Operator Instructions). And our first question comes from Thomas Wei from Jefferies.

Just a couple of questions on the Hong Kong study; just to clarify, in your press release that you're going to put out in the third quarter will it actually contain the magnitude of the surface antigen reduction that you see in each arm?

Yes, in fact yes that is our intention. We will be describing the depth and duration of s-antigen knockdown in the press release. That's correct.

And how would you set our expectations on what sort of magnitude is reasonable to expect from a single dose here?

So we've been very up front about this, maybe to our detriment but we expect to see a log of knockdown and that's our goal. Given the data with interferon, the best we can understand is that somewhere around a log and knockdown may be important enough to get to eventual s-antigen loss and a functional QR so that's what we expect, about a log and knockdown that will last a month.

Now, if we don't get there with two [mgs per kg] we are prepared to amend the protocol and go up to three mgs per kg because we'd like the flexibility of having a log of knockdowns, so I think it's fair to expect that is our goal at least.

And if that were to be the case where it falls slightly short, I guess I'm curious if you were -- if you fell slightly short and you thought that a 3-mg per kg dose was important to pursue, how does that impact the timing of the start of the phase 2b study? I mean ultimately wouldn't you be able to get there by giving multiple doses anyways? I'm just curious how you think about this single-dose data relative to the multi-dose study?

Yes so you're exactly right. If we did fall slightly short of that, we believe we could get there by dosing more often than once a month or whatever we decide on this. And so you're right about that but what we want to do is we want to give the phase 2b enough flexibility to get around, to ask a lot of questions so the more knockdown that we can demonstrate with a single dose, the greater flexibility we've got. So it's for that reason that we really like to make sure that we can get to a log of knockdown.

Now regarding time line, we don't believe that if we did have to go 3-mgs per kg that that will affect the time line. We still expect that we can release top-line data in third quarter and that we can start the phase 2b on time. The limiting factor there really right now is finishing the long-term tox studies, the long-term GLP tox studies that need to support the phase 2b and so we are on track to start that in the second half of the year and whether we stop at two or go to 3-mgs per kg, we think we can still make that.

Great thanks. That's very helpful.

Michael Yee, Capital Markets.

Thanks. I got knocked off briefly so I don't know if this was answered but can you perhaps give some scenarios on the phase 2b? Do you still get this data obviously appreciating what you just answered on the last question, I mean multiple doses, how long in combination with Entecavir? Maybe you could walk through some of that and when you would actually see data on that. That's like a mid-2015 event if you start all this on time?

For the phase 2b studies?

Yes correct.

You know, it's I'd like to give you guidance on that but we just can't at this point because we just don't know. There's -- we will learn a lot over the next several months. We'll learn how long we can keep s-knockdown, how deep it goes and so my thinking is that if it's hard to give guidance on when we might have data for the phase 2b until we have that. My sense is that it start, we'll start at least some of the phase 2b's sometime in the second half of this year and that we could have some data in the middle of 2015 but just it's we can't really commit to that yet until we have a better understanding about what we are -- until what the s-knockdown curve looks like.

But in terms of the types of arms like given your base case, how many different arms and what are we looking at? How long is dosing? Talk a little bit about that when you start later this year.

Sure, Bruce, do you want to address those questions?

Yes sure. Our thought process has been that we would probably run a classic sort of highly controlled multi-arm study that would include a nuke only arm and that would be in Tecovir or tenofovir. We'll just stratify between the two but we view them as equivalent clinically, so a nuke only arm and then an arm that was a nuke plus a lowish dose of ARC-520 and then nuke plus the higher dose of ARC-520.

And we expect that the controlled, the highly controlled studies, to probably have 12 weeks of dosing that maybe basically three monthly doses for instance or something along those lines. And we, of course, would follow after the last dose so they probably would be something like 16 weeks duration.

But it's our expectation that those patients would then roll right into a long-term follow-up that would allow dosing out to at least a year and that would include probably the nuke only arm as well getting to go into that study. And we, of course, have no idea that if we could produce this profound knockdown in surface antigen, we have no idea how long we have to do that before the immune system can respond. Our best guess is it's probably longer than just a few months but we're hopeful that it will be maybe something half a year or it might even be a year of therapy. We just don't know yet so, you know.

Right, so to clarify that, you said roll that into a long-term follow-up. You said you'd follow them for 16 weeks. So you follow them for four months and then just allow them to just get more dosing if they relapse? Is that what you mean?

Well, no our expectation is based on what we've seen so far, of course with interferon, which we have no idea whether that really is fully predictive here. It oftentimes requires some time with the surface antigen levels down for the immune system to come back so we would keep dosing the patients during that long-term extension and of course watch what was going on with all of their viral parameters and be looking for the occurrence of s-clearance and possibly [sera] conversion as well.

But at this point we're kind of on the frontier so we don't know how long it will take to produce an s-cleared state and we're very interested in finding that out in phase 2 so we have designed the phase 2 program to help us answer that question, which I think is very important.

Last clarification I promise, you should -- therefore you do not expect to see an ALT flare antibodies on this one-dose phase 2a, correct?

Well, they'd be a real surprise. I mean that would be a very happy surprise but that's asking an awful lot. That's kind of the lottery ticket result.

Perfect, thank you.

Ying Huang, Barclays.

It's actually [Katherine Hu] for Ying. A couple of quick questions; first, besides ALT and AST and s-antigen levels, are you collecting any other data in this phase 2a trial? And then can you give us any thought of what we should expect in terms of s-antigen reduction after 12 weeks?

Bruce, do you want to grab those?

Sure. So we are measuring other parameters. In those patients that in the 2b that would be e-antigen positive we'll be looking at what's going on with e-antigen as well. These patients will, for the most part, be fully suppressed with respect to HBV DNA so we wouldn't expect to really be able to see anything there but in those patients who are low but not fully suppressed we would expect to see further suppression with the addition of ARC-520 and that's something that we will be measuring so all of that's part of it.

I think one of the interesting questions regarding the surface antigen is with multiple doses will we see a ratchet down even further? And I think that's a very real possibility. You know, Thomas We asked at the beginning about single dose but I think with multiple dose in fact we may see an additive effect and the surface antigen may fall further than it does with a single dose and it's one of the things that we'll be looking for very carefully.

And that, again, may be very helpful to the immune system to have that kind of de-repression. So we'll be looking at all of that and that the quantitative surface antigen levels over 16 weeks I think are going to be an important parameter and something that we're particularly interested to see.

And that's for the study 2b?

Don't know if that quite answered your question? I'm sorry?

Is that for the phase 2b?

Yes that's for the 2b.

What about the 2a? Are you collecting anything else?

Well, you know, the 2a is in e-antigen negative patients and full press with respect to DNA so there's not a whole lot more to measure there, which was kind of the point of doing it in e-antigen negative patients. It makes for a pure experiment where only one variable is moving.

Got it.

So that's by design.

Okay. And then on the other question of reduction after 12 weeks?

So you're asking after a single dose?

Yes.

Well, we'll follow the s-antigen until it gets back to baseline or at least within 20% of baseline, as far out as say three months so we don't expect it to stay down that long but we don't know what we're going to see until we see it but generally the thought process is that RNA that loads into risk tends to persist about a month so it seems that it would be somewhat unlikely for it to go a whole lot further than that but until we get there we don't know.

Okay great, thank you.

(Operator Instructions). [James Gash], a private investor.

Yes regarding the 2a, will there be any different rates of infusion or will that all be the same?

Those will all be the same. Bruce, you want to talk about the infusion right there?

Well, yes the rates will be the same. We're infusing at a rate of about 10 million per minute and they'll be the same but of course the doses are different on a milligram per kilogram basis so the (inaudible) about six minutes or seven minutes to infused depending on the weight of the patient and a 2-mg per kg dose will probably tend to take something more on the order of 10 minutes. But the rate of infusion isn't set.

Do you hold out the possibility that a 2-mg per kg at a slower rate of infusion might get the job done before you go to a 3-mg per kg?

Do you mean give a deeper knockdown?

Yes.

I don't think so. I don't think that would really have much of an impact unless it was a really slow infusion. Maybe you could theoretically wonder but I don't think at any sort of reasonable rate.

Okay thank you. The next question is basically a clarification of outstanding shares, common shares?

Ken?

What's the number on that?

Sure. So our outstanding shares at March 31st were 51.8 million so that does not include the preferred shares that are outstanding, which would add another 5.6 million when they are converted to common shares.

Can you comment? Has there been any conversion?

Yes during the year there have been about 7.6 million of preferred shares that have been converted to common, so there are remaining about 21,000 of preferred that are out there. And, as I say, when those are converted that will be another 5.6 million shares.

Okay I understand now so more than half have converted.

That's right.

Okay thank you, gentlemen.

Grant Zeng, Zacks Investment Research.

I've got congratulations on a strong quarter. Just a quick question about the effect 2b trial, do you have a rough estimate of the costs essentially of phase 2b trial?

You know, so that's a good question. We've not given guidance on that at this point, in part because we have set on the number of studies we're going to do. As I mentioned in the prepared remarks, one of the important things about raising the money that we did in February is that it gives us flexibility to do a relatively large number of small pilot studies to get at various questions with respect to how ARC-520 works with different patient populations. So I suspect that we'll give more guidance on the phase 2b later this year once we get into it or once we're approaching it and at that point we can give you probably a better understanding about what some of those studies might be and then an overall cost associated with it.

Do you have enough of cash, enough for the phase 2 trial?

Oh we have plenty of cash for the phase 2. In fact, what we said is we've got enough cash to get us into a phase 3 for ARC-520 as well as push additional candidates through clinical proof of concept and so we are not -- we are really not cash constrained right now as it relates to the development of ARC-520.

Sounds good. Thank you.

This concludes the question and answer session. I would like to turn the conference back to Chris Anzalone for any further remarks.

Thank you very much for your interest and we look forward to telling you more on June 19th at the Analyst Day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect. Everyone, have a great day.