Arrowhead Pharmaceuticals Inc (ARWR) 2015 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Arrowhead Research FY15 second quarter financial results conference call.

(Operator Instructions)

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

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Arrowhead's results for the FY15 second quarter ended March 31, 2015. 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 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.

These include, but are not limited to, statements regarding the anticipated safety and/or efficacy of ARC-520, ARC-AAT ARC-F12 and our other programs as well as anticipated timing for study enrollment and completion, and the potential for regulatory and commercial success. They represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially.

Arrowhead undertakes no duty to update 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 would 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 today. In review of the previous quarter and period since our last call, we're very pleased with the progress we made on several fronts. I will cover a few of the highlights now. And then turn the call over to Bruce Given, our Chief Operating Officer and Head of R&D to discuss our clinical programs in more detail.

During the quarter, we acquired Novartis' entire RNAi business. This portfolio of assets represents almost a decade of work by Novartis and gives us some important new capabilities. The portfolio includes multiple new patent families covering RNAi trigger design rules and modifications that we believe fall outside of key patents controlled by competitors.

Combined with the chemistry portfolio constructed by Roche, we feel that we can work on any target an indication. In addition, Novartis discovered novel intercellular targeting ligands that can enhance the activity of some RNAi triggers by targeting the RNAi induced silencing complex, or risk,, more effectively, and improve instability ones risk of loaded. Think of these as sophisticated RNAi activity enhancers.

Also included was an assignment of Novartis' license from Alnylam Pharmaceuticals, granting Arrowhead access to Alnylam intellectual-property, excluding delivery IP, for 30 gene targets, already chosen by Novartis. Lastly, a pipeline of three candidates that were in active development and went through the rigorous Novartis vetting process. We view this acquisition then as the addition of new tools to are already substantial RNAi toolbox. And this feeds into our broad two pronged philosophy.

First, we want to have the freedom to address any target and indication from an IP standpoint. Second, we want to have access to as many RNAi trigger structures and modifications as possible in order to tune each candidate and employee the optimum chemistries on a candidate by candidate, basis.

When these two frameworks are substantially in place, a company ships from developing the candidates it can make, to developing the best possible drug for patients. That is where I believe we are and the Novartis acquisition contributes to this. We have already been working to integrate these assets into our development operation and in fact, we are currently testing the Novartis chemistries to determine if they should be used in our most advanced preclinical programs.

Our research and early development groups have also made some important advancements in DPC technology and in some of our preclinical programs. We published a paper described in our next generation DPC constructs that use proprietary mass in chemistries with increased stability and longer circulation times.

These constructs have the added benefits of allowing conjugation of the RNAi trigger directly to the DPC. All of these changes are designed to enable both subcutaneous administration and extra product delivery which would dramatically expand the universe of diseases that may be addressed by DPC enabled RNAi therapeutics.

Last week, we also present preclinical data at the Tides conference on RF-12, our potential new drug candidate targeting Factor-12 mediated diseases such as hereditary angioedema and thrombosis. The studies we presented demonstrated that ARC-F12 achieved deep dose-dependent and durable knockdown of the target gene in rodent and primate studies.

In multiple dose primate studies with the IP administration once every four weeks, approximately 90% knockdown was achieved after the first dose. And even greater knockdown following subsequent doses.

In a relevant mouse model of thromboembolism, ARC-F12 showed a dramatic increase in inclusion times and appeared to protect against thrombus formation, or clotting. ARC-F12 appeared to be generally regularly well tolerated and no drug related changes in toxicity markers were observed in these animal studies.

We're in the process of conducting studies in additional models for hereditary angioedema, or HAE, to provide further data to decide if we will advance ARC-F12 as a clinical candidate and initiate IND enabling studies. Patients with the rare genetic disorder HAE can experience recurrent and dangerous acute inflammatory attacks in multiple tissues with attacks of laryngeal edema being particularly serious and potentially fatal. Currently approved prophylactic treatments targeted toward HAE involve frequent intravenous dosing of one to three times weekly and many patients do not respond adequately, so we believe there is a great opportunity to develop an improved therapeutic that may only require dosing every four or six weeks.

Turning to our clinical programs, in February of this year, we began dosing ARC-AAT, our clinical candidate for the treatment of liver disease, associated with alpha-1 Antitrypsin deficiency, or AATD. We announced last week that we had completed the healthy volunteer portion, or part A of the study, and that we have been cleared by the data safety committee to transition -- to do a transition study into part B, which will be conducted in patients with AATD.

This transition was triggered when a predefined knockdown target was achieved in cohort 3 of the study. AATD is an endogenous gene, so healthy volunteers without AATD produce functional AAT that can be easily measured with a simple blood draw.

These early results suggest that in humans, we can knock down endogenous genes that are expressed in the liver. We have always been confident that this would be the case. But now we have clinical data to support it.

This is very exciting and I believe another important validation for are underlying technology platform that may have far-reaching implications as we continue to expand our pipeline. The planning and execution of the study by our clinical development team has been outstanding to date, and they are now working to get the patient portion of the study moving forward.

We also made good progress in the clinical program for ARC-520 our candidate against chronic hepatitis B infection. We had productive discussions with the FDA on our plans for a multidose study and received valuable feedback about the program that has been incorporated into our plans for the US, as well as Europe and Asia.

In April, we gained clearance from the FDA to proceed with the HEP-R2004 clinical study with an initial dose of 1mg per kg. We are pleased to be moving forward with that study here in the US and expect that it will generate valuable data about ARC-520's activity in a multidose setting.

Thus our multiple dose Phase 2B studies remain on track, and we expect to begin dosing patients in the US this quarter. We also believe that we may begin receiving approvals to start international studies this quarter with dosing likely beginning in the summer.

As we have said in the past, we are true pioneers in HBV. Everything we learn in clinical and nonclinical studies helped shape our strategy for the indication. And much of what we are doing represents firsts for the field.

Of course it is extremely helpful to us but are also introduces as real questions related to communication strategies in light of competitive considerations. We have been fairly quiet about the program since presenting early data at AASLD which, I might add, was notable because only single initial doses of ARC-520 elicited what we believed to be the first reliable report of significant S-antigen reduction in humans.

This relatively quiet period does not mean that we were idle. To the contrary, we have been very busy and have learned a tremendous amount about ARC-520 and the hepatitis B virus. Here is what we are prepared to disclose at this time.

For the first time, we can report we have been conducting a long-term study of ARC-520 in nine chimpanzees chronically infected with hepatitis B. It has been going on for about a year and is nearing completion. We believe this to be the largest and longest study ever conducted in chronically infected chimpanzees and certainly the most exhaustive study to date with ARC-520.

We have generated a large amount of very exciting data and we are not yet finished. I believe this study will advance the entire field of HBV, and it has been very in advancing our understanding of how ARC-520 may fit into a treatment strategy.

The wealth of data, the chimp study and the single-dose Phase 2A study have provided very important insights into the drug and disease, some of which challenge current dogma. Today, we have not spoken publicly about any of this chimp data.

These studies have led to new hypotheses and we have decided to test some of these new hypotheses on humans by adding three cohorts to the Phase 2A study in Hong Kong which remains blinded. None of these employed doses, greater than 4 mgs per kg, and two are open label while the third is a double-blind placebo-controlled cohort. These are important groups and we're very excited about completing them.

We have said repeatedly in the past, this program would be iterative in nature and that we would follow the data. This is and example of that flexible stance. Unfortunately, because of the new cohorts, because one of the new cohorts is placebo-controlled, this will mean pushing back unblinding of the entire study to next quarter rather than this quarter.

I appreciate that some will be disappointed that we are changing guidance for the release of a 3 and 4 mgs per kg results from second to third quarter. But we did not anticipate expanding the Hong Kong study when we set that guidance.

Our regulatory team and advisors agree that unblinding the study once all the blinded cohorts have run their course is the prudent course of action under these circumstances to maintain the integrity of the studies in the eyes of the scientific community and the international regulatory authorities. It is simply unwise and frankly, uncommon in the pharmaceutical industry, to unblind cohort by cohort, without a compelling reason to do so. Such as our decision to unblind the first two cohorts in preparation of an FDA filing.

I strongly believe that our long-term chimp study will be considered seminal HBV work. And it has enabled us to build a more complete Phase 2A study in humans.

This is all great news for the field and for the Company. So a one quarter delay in data releases a small price to pay when we are focused on creating durable long-term value.

We will have a tremendous amount of data to report between the seven cohorts of patients and a large Phase 2A and a greater than one year study of nine chronically infected chimps. Because of the quantity and importance of these data, we will have an analyst day next quarter to present the findings in detail.

We plan on having not only are scientists participate, but also internationally recognized experts in the field. It will be an important event for us, and I also believe it will be an important event for the entire HBV field.

With that overview, I would now like to turn the call over to our COO and Head of Development, Dr. Bruce Given. Bruce?

Thank you, Chris. And good afternoon, everyone. As you heard from Chris, our clinical development and regulatory teams have been very busy recently and are doing great work designing and managing our clinical studies. Chris touched on this. But I would like to talk for a moment about the HEP-ARC 2001 study of ARC-520.

As you recall, this was originally a single-dose Phase 2A study in E-antigen negative chronic HBV patients at two sides in Hong Kong. We previously reported initial results from a first two dose cohorts at one and two mgs per kg. And as of our last quarterly conference call, we had enrolled in additional two dose cohorts at 3 and 4 mgs per kg.

Observation periods are complete for these, and the cohorts remain blinded. We have since made protocol amendments to add three additional cohorts, two of which have received IRB approval to proceed, and we expect the third to be approved as early as this month.

We have already enrolled in dosed, seven of eight patients, and the first new cohort and hope to dose the last patient shortly. The second additional cohort is recruiting patients now. Similarly, we expect a third new cohort to enroll at a good pace, once IRB approval is achieved.

As you know, we unblinded the one and two mg cohorts last year in order to support an IND another regulatory findings for multiple dose Phase 2B studies. We expect to unblind the entire Phase 2A study which will include the 3 and 4 mgs per kg cohorts, as well as the additional blinded cohort next quarter.

We understand that many of you would like us to disclose data from the 3 and 4 mgs per kg cohorts now, and we would also like to be able to discuss those. However, unblinding cohorts while other blinded cohorts are still running should only be done under limited circumstances, such as for an FDA filing.

This is a marathon, not a sprint. And we need to ensure the long-term integrity of the program and the studies that may ultimately support regulatory approval.

We are committed to following GPC standards in regulatory norms in order to ensure as smooth a regulatory process as possible. As Chris mentioned, we have already generated a great deal of information in the long-term chimp study and the now expanded Phase 2A, that we believe will prove important for the HBV field. Once we are able to unblind the entire Phase 2A next quarter, we will have an in-depth analyst day to discuss these data alongside the long-term chimp data.

We expect to host internationally recognized KOLs as part of this event. Given the scope of the data, we believe that several important presentations and peer-reviewed articles will emerge from these studies in addition, to what is reported at the analyst day. This will be an exciting time for us. So stay tuned.

Turning to the multiple dose Phase 2B studies of ARC-520, we received clearance from FDA to proceed with the HEP-R2004 study in the US. This is a randomized double-blind placebo-controlled multidose study of ARC-520, administered intravenously to patients with chronic immune active HPV infection, maintained on entecavir or tenofovir.

The study is planned to enroll up to eight patients who will be randomized at a ratio of 2 to 1, with eight patients receiving 1 mg per kg of ARC-520 and four receiving placebo. Each patient will receive three total doses, once every four weeks. Patients will be followed through Day 147.

The primary objective of 2004 is to evaluate the depth of hepatitis B surface antigen decline in response to multiple doses of ARC-520 compared to placebo. We intend to open three sites for enrollment.

One site was open for enrollment last week and patient screening has begun. Site initiation for the other two is scheduled for the coming weeks, after which they may begin recruiting and screening patients.

As we have mentioned before, we still intend to proceed with additional core international multidose trials. We have incorporated the FDA recommendations, which are constructed and cost bearing to the program overall, into our international regulatory findings, which have been submitted during the last couple of months. We're working diligently with regulators in select European and Asian countries now, and we intend to provide an update publicly after we have been cleared to proceed.

We have also made great progress in a very short amount of time on our second clinical candidate, ARC-AAT, against liver disease associated with alpha-1A trypsin deficiencies, which we shorthand as AATD. In just over two month, we initiated a Phase 1 study, completed enrollment and dosing of three ascending dose cohorts in healthy volunteers, collected follow-up data, surpassed predefined knockdown targets, and have received data safety committee approval that transition into patients of patients with AATD.

I want to applaud our clinical operations team for great execution and the successful start to this groundbreaking study. We plan to conduct Part B of the study which will recruit patients with PIZZ genotype AATD in Australia and potentially other geographies. The site in Australia is on schedule to gain ethics approval to begin recruiting of alpha-1 patients in the next week or so. And we hope to add three to five additional sites going forward.

The protocol for Part B is essentially the same as Part A. It is a placebo-controlled double-blind, single dose escalation study to evaluate the safety, tolerability and pharmacokinetics of ARC-AAT and the effect on circulating alpha-1A trypsin levels in patients with the disease. The study plans to enroll in dose cohorts of six participants each, with participants randomized in a ratio of 2 to 1, active to placebo, to receive a single intravenous injection of either ARC-ATT or placebo.

Dosing in patients with AATD will begin at 2.0 mgs per kg of UNA and 1.0 mg per kg DPC, which was the highest dose used in Part A. And then dose escalation will proceed according to the protocol.

The study evaluates participants for 28 days following dosing. With additional follow-up if needed every two weeks, until AAT levels return to baseline. We hope to complete the Phase 1 study by the end of 2015.

While I have presented a healthy amount of work for our clinical team, we are also starting to design the Phase 2 multiple dose study of ARC-AAT and some of the Phase 2B combination studies of ARC-520. So stay tuned for more details about our plans later this year.

With that, I would like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?

Thanks, Bruce and good afternoon, everyone. As we reported today, our net loss for the three months ended March 31, 2015, was $28.7 million, or $0.51 per share, based 55.7 million weighted average shares outstanding. This compares with a net loss of $14 million, or $0.31 per share, based on for the 44.3 million weighted average shares outstanding, with the three months ended March 31, 2014.

Net cash used an operating activities during the second fiscal quarter were $16.4 million compared with $7.7 million in the prior year period and $24.2 million in the first fiscal quarter. Cash used in operating activities during the quarter of $16.4 million were primarily composed of research and development costs, mostly program cost for ARC-520 and program cost for ARC-AAT, as well as R&D salary and wages and related discovery of research cost.

Total operating expenses for the three months ended March 31, 2015 were $29.7 million compared with $11.3 million for the three months ended March 31, 2014. The increase in operating expense, compared to the year ago period are heavily influenced by a non-cash charge of $10.1 million for inquired in process research and development costs, a component of the accounting related to the Novartis acquisition.

Additionally, there were higher research and development expenses, primarily drug manufacturing costs, which increased $3.2 million, during the period, mostly related to ARC-520, as well as higher clinical costs, which increased $1.2 million. Clinical costs have increased, as we incur startup cost from the CRO related to the planned ARC-520 Phase 2B studies.

We also incurred cost for second clinical candidate, ARC-AAT, of about $2.9 billion while ARC-AAT clinical trial costs in the comparable period were minimal. The primary drivers of the change in cash used in operating activities as compared to FY14 is consistent with the drivers of the change in operating expenses, aside from the $10.1 million acquired from process R&D cost.

The consideration provided for the acquisition of the Novartis assets was cash and stock. $25 million of stock was issued during the fiscal period and $7 million in cash was paid during the fiscal period. $3 million was paid in April, 2015.

Turning to our balance sheet, at March 31, 2015, including investments in fixed income securities, our cash and investments balance was $128.4 million, a decrease of $16.9 million from December 31, 2014. Our cash and investments at September 30, 2014 were $177.3 million. Our counted shares outstanding March 31, 2015, were 59.4 million, which increased from 54.7 million at September 30, 2014, primarily due to the issuance of 3.3 million shares for the Novartis acquisition.

Also, at March 31, 2015, there were 15,652 shares of preferred stock outstanding. These preferred shares are convertible into 2.7 million shares of common stock. Common shares outstanding including the conversion of our preferred shares would be 62.1 million.

With that brief overview, I will turn the call back over to Chris.

Thanks, Ken. During our last conference call, we set out a list of goals for calendar 2015. We are measuring our execution versus those goals, and our investors should do the same.

We have already achieved three of the goals and are on schedule to reach several more. We still have a lot of work to do, but we believe the achievement of these goals, among others, will help to build long-term value for our shareholders.

There is a lot of exciting work going on at Arrowhead. And the next several months are shaping up to be quite active indeed. We look forward to keeping you up-to-date on our progress and presenting data from the long-term chimp study and the ARC-520 clinical program at a special analyst day next quarter.

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

(Operator Instructions)

Alethia Young, Deutsche Bank.

Hi, guys. Thanks for taking my questions. The first one, I guess, is with your update that you provided on the three new cohorts. Is it possible to give us a little bit more color around what are the hypotheses that you are studying there?

As well like with the chimps, the nine new chimps, just a little more color around what is going on there as well. And then I have some follow-ups.

I think we would like to hold that for when we do the analyst day, Alethia, as we sort of implied in the presentation. There are competitively sensitive items here and while we are going to give -- our plan is to give a lot of information during the analyst day.

We would to like probably hold it for the last quarter. Otherwise, we would have gone ahead and said here, during the presentation, what was included in those cohorts. I don't know, Chris, if you want to elaborate on that.

I think that is exactly right. We are, as we said, really excited about those new cohorts. I think it rounds out that Phase 2A study nicely. And the chimp study has been very exciting.

We look forward to providing a lot of information during that day. It really is frankly far too much information to -- I think to disclose any other way, but having a pretty in-depth analyst day. Stay tuned. That will be sometime next quarter. And I think that it is an important day for us.

So have you guys said if it is single or multiple doses that you're going to be studying in the next cohorts?

We have not said that.

Okay. Okay then moving on to maybe AAT. It seems like you got to your dose maybe a little bit earlier than what my expectations were at least. And then, maybe can you give us what the pre-clinical data suggested around how this correlates with what you are seeing in patients, so we can kind of get a read through maybe where you might see an application to hook in a patient?

Yes, we of course didn't know what the dose would be. This crossover point, I guess was -- internally, there are probably would have been as many people at this dose as for the next dose maybe. So it is somewhere sort of in that range, we thought there was a pretty good chance we would crossover.

But in truth, this is now our second product in the clinic. We are starting to feel may be that we see more of a clearer trend to our animal data. But I think we felt the need to be cautious internally in over-interpreting the animal data.

But this feels like, as we have said before, that there seems to be a lot of similarity between humans and primates and sort of the dose responses that we see. Of course, when it comes to a primate, that is basically a normal gene. And when we come to the patients that we're going to be dealing with disease genes.

I would say this was in the ballpark of where we were hoping to start seeing knockdown, but it was hard to predict that we were going to actually see the knock down to cause us to go ahead and convert to patients here.

Back to ARC-520, your analyst day, are you expecting 3Q or 4Q for that?

Next quarter. Third quarter.

Great, thanks.

Sure.

Eun Yang, Jefferies.

This is Carmen on for Eun, thanks for taking the question. So for the multi-dose study in 520 starting out 1 milligram, are you going to need to see the data there before moving into the 2 milligram cohort?

So what the FDA wants to see, is they want to see the data from this 1 mg per kg US study. They want to see the final study report from the Hong Kong HEPR-2001 study.

Now we can say what the pre-clinical study they are interested in, they saw the interim data from the chimp work. As you might imagine, they found that pretty interesting. They want to see the report from that as well.

They want to see all of that. You know and that is the data package they are looking for, to deal with the partial clinical hold.

And also keep in mind that, that we don't expect that to be a limiting factor for our X-US studies. And we believe that we should be able to move reasonably quickly, in Asia and Europe, with those studies.

Okay, great. Thank you so much.

You're welcome.

Michael Yee, RBC Capital Market.

Thanks. Good afternoon. A couple quick ones. If you wanted to dose with interferon, do you need to start that in Phase 1A or had you already gotten permission for that? Or can you do that? And is that where I think we are going in the three cohorts, I guess, is the first question.

We're certainly not implying that the three cohorts have interferon in them. So that is not anything that we are implying.

But to come back to your question, we, of course, won't know until we get a regulatory read. But our belief is that just as we have really been able to dose with NUCs, we think we ought to be able to dose with interferon, which is also standard care in Hepatitis B.

So it is not out thinking that we would have to go back to Phase 1 to study that combination before we could study it clinically in Phase 2B. But we will have to wait and see whether the regulators agree with us. That is our perspective. We met with a lot of investigators at EASL and that was their perspective as well.

Okay. Just to be clear, it is a standard approved drug. So it's not like you need to go back to ask permission for that to dose together with ARC-520, because I think that is a regiment we would all be interested in looking at from a safety perspective with one dose. But you are not implying at all but you are going that way?

Michael, we have to get regulatory approval, to do any study involving ARC-520. I'm just saying that we believe that the regulatory authorities, at least in certain geographies especially, are going to be likely to allow us to dose on top of interferon just as we believe they are going to be comfortable with us dosing on top of NUCs.

Okay. I guess to follow-up with that, in the attempt to move to Phase 2B with multiple doses, you laid out some of the stuff you are thinking about to do that in the US. In Europe, it does, or I guess O-US, it does seem a little more straightforward as you just commented.

I guess, what do you think the gating factors are to starting that, whether that be in Hong Kong or other regions? How would are we thinking about timing there, to get multiple dose started outside the US?

It is always hard to say. We're still in the regulatory process. So it is easier to answer that question when you've got your regulatory green light like we have with the FDA for the US study.

We certainly have the sense that, assuming that we don't come up with any surprises, chances are pretty good that we will start dosing over the summer. But I don't want you to take that as guidance because guidance would imply more certainty than I can give any time I am dealing with regulatory reviews. But it feels sensibly possible.

And partly, as Bruce said, we are in the regulatory process right now. We are having those discussions. So as we said in the prepared remarks, we believe that this quarter we could start to see approvals to begin in some of those studies.

Okay. Last question, sorry to come back to it, but coming back full circle. In the additional cohorts, this has to all do with the Phase 2A, correct? This is all single dose stuff, correct?

Yes. This is the Hong Kong study. This is the 2001 study we're talking about. We have added three cohorts to that study.

We haven't said if it is one or multiple doses however.

I see. Okay. Thank you.

Thank you.

(Operator Instructions)

Ted Tenthoff, Piper Jaffray.

Thank you very much. Just a little bit more clarity. Should we expect data from both 3 and 4 mgs per kg cohort and also these new three cohorts next quarter and that is what you will be reporting at the R&D day?

Yes. Expect that. And also expect the long-term or at least some of the long-term chimp data. We are going to have an awful lot of data. We need to figure out how we are going to communicate that and when we are going to communicate that. But there will be an awful lot of data that we will be going over from all of those during the analyst day next quarter.

You know how it is, Ted. There is always that tension between what you can do and not lose your ability to present it at big international meetings like AASLD and EASL -- cannot be prevented from publishing while giving investors enough to really understand the basics of what is in the data. So that is a tension that all of us in the industry face.

And we will do our best to give as much information as we can, you know, without giving so much that we are precluded from scientific publication and presentation of the data. There is always that tension. I'm sure you are well aware of that.

Good enough. Thanks, guys. Looking forward to the R&D day.

Okay. Thank you.

I'm showing no further questions. I would now like to turn the call back over to Christopher Anzalone, for closing remarks.

Thanks everyone for your attention. We look forward to seeing you next quarter.