Good afternoon, ladies and gentlemen, and welcome to the Arcturus Therapeutics First Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Neda Safarzadeh, Vice President, Head of Investor Relations, Public Relations and Marketing of Arcturus Therapeutics. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Arcturus Therapeutics' quarterly Financial update and pipeline progress call. Today's call will be led by Joe Payne, our President and CEO; and Andy Sassine, our CFO. Dr. Pad Chivukula , our CSO and COO, will join them for the Q&A session. Before we begin, I would like to remind everyone that the statements made during this call regarding matters that are not historical facts are forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, performance and achievements to differ materially from those expressed or implied by this statement. Please see the forward-looking statement disclaimer on the company's press release issued earlier today as well as the Risk Factors section in our most recent Form 10-K and in subsequent filings with the SEC. In addition, any forward-looking statements represent our views only as of the date such statements are made. Arcturus specifically disclaims any obligation to update such statements. And with that, I will now turn the call over to Joe.

Thank you, Neda. It's good to be with you again, everybody. I will begin my remarks with an update on progress regarding our COVID-19 vaccine program. We are excited to initiate the commercial manufacturing effort for Kostaive to support the upcoming fall and winter vaccination season in Japan. We're pleased to report that we remain on track to deliver the initial 4 million doses to Japan in the third quarter of this year. Our partner, Meiji, intends to then distribute the Kostaive vaccine throughout the upcoming fall and winter season. In March, the company, along with our partner, CSL, and their partner, Meiji Seika Pharma, announced that our bivalent COVID-19 vaccine candidate, ARCT-2301, met the primary endpoint of noninferiority in a Phase III clinical study in Japan with 930 healthy adults who previously received 3 to 5 doses of mRNA COVID-19 vaccines. We were pleased to see yet again a superior immunogenicity and neutralizing antibody response of bivalent ARCT-2301 to a bivalent conventional mRNA comparator and that this was confirmed for both the Omicron BA.4/5 and Wuhan strains. There were no causally associated serious adverse events with ARCT-2301. Arcturus, along with CSL, also initiated a Phase III study with the monovalent ARCT-2303 candidate vaccine containing the Omicron XBB.1.5 variant. The purpose of this study is to generate additional immunogenicity and safety data for our platform in multiple ethnicities to support product licensure in the United States. The study will also assess the co-administration of ARCT-2303 with the age-appropriate seasonal influenza vaccines. Approximately 1,680 young and older adults are planned to be recruited in the study throughout multiple countries in the southern hemisphere. Our ongoing Phase III vaccine studies showcased the consistent superiority, breadth and durability of the Arcturus STARR vaccine platform. We continue to make progress in expanding the global…

Thank you, Joe, and good afternoon, everyone. The press release issued earlier today includes financial statements for the first quarter ended March 31, 2024, and provides a summary and analysis of year-over-year financial results. Please also reference our most recent Form 10-Q for more details on the financial performance. We are very pleased to initiate the commercialization of Kostaive this year. And as Joe mentioned, the initial 4 million doses is planned to be delivered to Japan in the third quarter of this year. As a reminder, Meiji Seika Pharma has an agreement with CSL Seqirus, whereby Meiji will be responsible for the regulatory approval, marketing, distribution and sales of Kostaive in Japan as well as coordinating the manufacturing of COVID vaccine products with CSL and Arcturus for the Japanese market. The delivery and sales of the vaccine in Japan will trigger our first commercial milestone payment under our CSL collaboration. This is a remarkable achievement since we signed the CSL agreement less than 18 months ago. We will provide more color on the projected for milestones and impact from the Kostaive revenue in the fourth quarter of this year. As a reminder, our projected cash runway does not include any revenues from Kostaive or nor commercial milestone from the CSL collaboration. I am pleased to announce the engagement of JPMorgan Investment Banking team to help us monetize our investment in ARCALIS, a 38%-owned JV in Japan with partner Axcelead. At this point in time, Arcturus is strategically focused on working with a global group of established CDMO to support our manufacturing efforts across all of our wholly owned pipeline program. ARCALIS, located in a strategic biomedical research and development hub in Japan, is poised to become a key player in the global mRNA drug manufacturing landscape. The CDMO is…

Thanks, Andy. We've continued to make excellent progress in our pipeline of mRNA vaccines and therapeutics and advanced our proprietary mRNA and LUNAR delivery platform technologies. We're excited indeed about the initiation of our commercialization process for Kostaive. And with that, I'd like to turn the time over to the operator for questions.

[Operator Instructions] Your first question comes from Miles -- I'm sorry, Evan Wang with Guggenheim Partners.

Great, 2 for me. First, with the therapeutics update on July 1, with the data set now, hoping you can help set some expectations for a number of OTC and CF patients that we'll see and whether you're confident that this will be sufficient number of patients and time course to really interpret. And second, can you walk us through the rationale for the Meiji monetization of ARCALIS, just given the strong cash position.

Thanks, Evan, for the questions. With respect to the Meiji monetization or the ARCALIS monetization question, I'll defer that to Andy. But I can address your first question, it's -- you asked for further detail around the July 1st meeting that we've announced. We're going to be providing an interim data readout for Phase Ib for the ARCT-032 cystic fibrosis program. We anticipate this to be -- the enrollment for this to be completed by July 1. And also, we'll be sharing some Phase II data and a progress update for the OTC program, but this will be on a subset of patients, not on a complete set. And this will likely be communicated in the form of a press release. Did I address your question on that one before we go to Andy to address the ARCALIS question?

Yes. Just -- will we have any data from the additional or the higher dose cohort at that point? Or is it still too early to say?

We'll be able to disclose more details on July 1 st. And then Andy, how about if you can address the ARCALIS?

Sure. Thanks, Evan, for the question. Obviously, we, as a management team and the Board, made a strategic decision to work very closely with a group of global established CDMO to help support our manufacturing efforts across our wholly owned pipeline program. So we're kind of in a fortunate position that we were able to attract a lot of very strong investment banks that had expressed an interest in helping us monetize this investment. And we were fortunate to be able to select and work with a prestigious bank like JPMorgan to help us look at strategic options. And of course, you can assume that it's a very well-placed asset for a lot of potential players, especially in Japan with the growth of that market and the approval of the vaccine, and certainly, we're excited about the growth of ARCALIS. And we're certainly going to be there to support them in many different facets but this -- with the strategic decision, on behalf of our company and management team, to become an asset-light and a variable cost operating entity at this point in the stage of our development. Does that help answer your question?

Yes. I'll jump back in the queue.

Your next question comes from Yasmeen Rahimi with Piper Sandler.

This is Liam Hiester on for Yas. Just our first question in relation to like ARCALIS and Kostaive. What are your expectations around Japan's order potentially in 2025? And then what are the current manufacturing capabilities of ARCALIS, of producing both COVID and flu vaccines? And how is that expected to change in the future? Further moving from there, I think, with the OTC and CF programs. Do you have any tidbits on potential regulatory path forward in those 2 programs? And then also with the July 1st data readout, any specific biomarkers that you will be reporting on at that point?

Sure. Andy, do you want to address the outlook for ARCALIS and Kostaive and manufacturing capabilities?

Yes. No, it's -- we're excited about the opportunity for ARCALIS to be producing vaccine for the Japan market soon. They're in the process of getting GMP batches approved for commercialization, and we anticipate that, that should occur sometime in the third quarter. And so assuming that is successful, it'll be then an opportunity for Meiji to order directly from ARCALIS in terms of manufactured doses. With respect to guiding on future orders and potential opportunities, we're going to really have to defer that to our partner, CSL and Meiji. They prefer to lead those discussions and those kind of guidance. And so hopefully, you can respect the request of our partners. And obviously, we're pretty excited about the future opportunity for not only the Japanese market, but for ARCALIS to be a dominant player.

And with respect to your second question, Liam, for both our OTC and CF programs, I think it's safe to assume that we're intending to expand into the U.S. with OTC, not only expand into the U.S. at some point, but get access to younger, more advanced OTC deficiency disease so that we can mature that product and the regulatory advancement of that. On the CF side, the Phase II is -- the Phase II plans are around not only the United States but other countries as well, and we're going to be working closely and have been with the CF Foundation on the design and implementation of that trial.

Your next question comes from Myles Minter with William Blair.

It's Sarah on for Myles. Congrats on another great quarter. So just a couple from us on the 810 program. Can you confirm switching the ARCT-810 dosing format from a -- to a 3-hour 3-step process and then premedicating with acetaminophen and antihistamine in the current Phase II MAD study after observations in the Phase Ib? And just kind of walk us through the rationale for that switch if it was made. And second, how confident are you that we won't see any febrile reactions in the ongoing -- that portion of the study?

Yes. Great question. We had the opportunity to share some of the details around our learnings from Phase I and Phase Ib in OTC at a -- at the recent SIMD conference. We learned a lot. What is very typical and what we've -- I've personally experienced throughout my career and those in the field is you have to understand the rate of these infusion-related reactions early in the trial, and then you ameliorate these or reduce the frequency and address them through adjustments in premedication and the dosing regimen itself. And we've successfully done that. I believe that we've identified a more effective, optimized premedication protocol that involves acetaminophen. It's also -- we're happy to utilize a premedication process that does not have steroids. So it's steroid-sparing, which is important to this population. And so that was a nice learning that we captured from our early trials. And also, we modified the regimen. So it's a 3-step process for the -- it's more conservative and subtle in the infusion process. Now this is something that -- this is very typical. So it's not something we brag about, that we've removed these infusion-related reaction or at least reduced them significantly because this is something that is typical for this type of product. But rest assured, all these learnings that we've learned in the Phase I and Phase Ib trial have been applied to the Phase II trial, and we'll be able to give an update on that on July 1.

Your next question comes from Whitney Ijem with Canaccord Genuity.

This is Joohwan on for Whitney. Maybe just a quick 2-part question. Assuming you're able to show successful delivery of CFTR to lungs, so subject to LNP, how are you thinking about expanding the inhaled side of the pipeline, whether it's continuing rare disease setting or potential vaccine or something else? And then maybe thinking towards the Phase II, are you thinking about targeting null patients? Or are you more open to broader mutations at that point?

With respect to targeting different mutations, I can allow Pad to address that in a moment. But yes, we are -- you can imagine the energy at Arcturus, now that we're coming to closing of the enrollment of Phase Ib and working with the CF Foundation on Phase II. We're excited about what opportunities can we do outside of CF, and so those discussions are dynamic and very fun here at Arcturus. But we haven't disclosed what our next steps are, our next targets in the lung, but there'll be a time and a place to do that. But we are also excited about initiating and getting on to the Phase II trial, of course, assuming Phase Ib is good. And we'll provide an update on that on July 1. But with respect to are we going to be going after other mutations? My initial response is we're going to be initially focusing on nonmodulator-responsive patients. This includes the Class I sub-patient population of the CF community and also those that do not respond to the presently approved modulators. But in terms of other details of the different types of patients, Pad anything to add there?

No. I -- Obviously, I think you've touched the nail on head, Joe. I mean, obviously, our therapeutic using mRNA is mutation-agnostic. So we can go after a larger subset of patients. But those -- some of the other mutations are well served, as you well know. So I think the biggest need currently is in the null patient population, and we'll focus on that initially. But we obviously will look at a broader indication in the future as well. So thank you.

Your next question comes from Yanan Zhu with Wells Fargo.

Great. Congrats on progress. Maybe a -- first question on the Japan order. Is this 4 million order initial order? Or could there be additional order for the season? Also, have Meiji set a price? And what is the out of pocket if we -- if local government subsidy is considered?

All right. That's a good question for Andy.

Yes. No, thanks, Yanan. As I mentioned a little earlier, I think ARCALIS is in the process of getting 3 GMP batches manufactured and getting it approved so that it could become commercial. And so that time frame is probably going to be in the third quarter. So if they're successful, then that certainly opened the door for ARCALIS to deliver additional vaccine, and it'll certainly be up to Meiji to make that decision. So that's, I think, very important kind of catalyst to be looking for, and we're certainly supporting ARCALIS in this endeavor. And hopefully, they'll be successful with the time line. With respect to the pricing, I think there -- a lot of people have asked that question. And if you look at the Ministry of Health website, there have been a few numbers that have been reported at about $100 per dose, and we've also learned that the market price for Pfizer and Moderna is higher than that. So we're pretty comfortable, and I think Meiji is pretty comfortable with the pricing of the vaccine right now and pretty excited to start to commercialize Kostaive in Japan. With respect to your second part of the question, I apologize, but could you repeat what it was again?

Yes. Out-of-pocket costs after the local government subsidy.

Okay. Good, yes. We have learned through numerous sources in Japan that the local government as well as the national government will subsidize about 80% of the vaccine price, so obviously, a very encouraging support from the government. And as you know, this is a strategic investment and position on behalf of the Japanese government for the people to protect them in the future because it is one of the only state-of-the-art mRNA manufacturing facility located in Japan. And so Japan and their people will be protected going forward in the event, hopefully, of any future pandemics or breakout, so certainly, a very important strategic decision on behalf of the government. And we were very fortunate to be selected by the government and Meiji to be their partner.

Great. Great. If I may ask a question about the CF program. I was mainly wondering about -- is there a biomarker that can guide those findings, whether it is in the current Phase Ib or in the next Phase II? How -- what's the plan to identify those? Is it going to be the FEV1, like a functional endpoint? Or is there a biomarker that can help in that regard?

Yes. Thanks, Yanan. Dosing has been guided largely by safety and tolerability measures in our Phase I and Phase Ib trials. With respect to a biomarker, there isn't one that's driving these decisions. We -- anything else to add there, Pad?

No. I think -- yes,-- for this program, specifically, yes, it's not driven through biomarkers. That's correct. And it's more harder endpoints.

Yes. Yes. In terms of lung volume and FEVs and lung clearance indices, that will be -- there'll be opportunities to address those questions.

Your next question comes from Yigal Nochomovitz with Citigroup.

This is Amin on for Yigal. We had a couple. First, I wanted to know about the math of this formula and how we should calculate it. So basically, $100 per dose and then 4 million gets us to $400 million, and you have like 30% -- around 30% economics of it. Is that the right way to think about your share of the revenue here? And when will this revenue be booked? Is that going to be all in third quarter '24? Or is it going to be spread in the next few quarters? And I have a follow-on.

Yes. Go ahead, Andy.

Yes. No, those are very good questions. And as I said on the call earlier, we will provide more substance and color in the fourth quarter, and hopefully, you can be a little patient with respect to those questions and answers. With respect to the breakout between Meiji, CSL and Arcturus, we're really not allowed to comment on that at this point, except to say that we're all very pleased with the economic-sharing opportunity and certainly are grateful to be able to work with 3 distinguished global partners and especially with their commercial distribution capability, not only within Japan, but globally. So our profit share is 60-40 split with CSL globally on a gross profit basis. So obviously, we can't do that with a third partner. So you'll have to some kind of improvise and assume that it'll be split somehow in 3 matters -- 3 ways. And hopefully, that will give you some color that this is a very lucrative opportunity for all 3 players involved.

Okay. Great. And one more on ARCALIS. What can you tell us about the -- how much your stake at ARCALIS is [ more ]? And is there any good comp for what the manufacturing side, that size [ more ]? Or also, what are the time lines you are looking at to monetize this opportunity?

Are you asking, I just want to -- you got the question, Andy, you understood? Okay. Go ahead.

Yes. No, I think you're -- we're kind of fortunate that there's a number of publicly traded comps in the United States. That should give you a perspective on the valuation of CDMOs that are participating in the mRNA space. And you can also take a look at what Aldevron was purchased for from Danaher recently in the last 2 years and certainly Catalent was acquired as well, and there's a few other publicly traded comps that you can evaluate. So it's a market that I think is very attractively valued because of the growth potential for this mRNA therapeutic going forward. And hopefully, the appropriate party that want to be a part of growing this operations will help develop it. And that is our goal to work closely with them.

Your next question comes from Ed Arce with H.C. Wainwright & Company.

Great, and congrats on the progress so far this year. A couple of our questions around Kostaive and ARCALIS and that order coming up later this year have been answered. But I wanted to get back to your therapeutics pipeline and, in particular, the 2 programs with an update on July 1st. I was hoping that you could share some granularity on the data that you expect to present on that Monday as well as what are your data thresholds for success in both of those programs to support further development.

Yes. Good question. Yes, it's an important day for us this July 1st meeting, for sure. So I appreciate the question. The interim data set for the Phase Ib ARCT-032 CF program primarily focused on safety and tolerability of 2 administrations of this therapeutic. We may be able to give additional granularity or guidance on the dosing and the specific regimen that we are utilizing. And it provides another opportunity to give more details or guidance on the subsequent Phase II trial that's getting planned as you can appreciate. But that -- in terms of data, I think the primary objective is to establish safety and tolerability of 2 inhaled administrations of this product and get people -- help people understand the dosing and the regimen that we're pursuing for Phase II. And then with respect to ARCT-810, I mentioned it is on a subset of patients. It won't be the complete enrollment. But we're looking for biomarker changes, primarily from a data perspective, that unlike the patients in Phase I and Phase Ib, these Phase II patients are more advanced. There's also adolescents participating in this trial. So they're younger as well. So more variability in biomarkers from the onset. So what we'd like to see is some biomarker changes there, and so that's -- and there's -- there'll be more information to provide on July 1st. Was that helpful, Ed?

Yes. That's great.

Your next question comes from I-Eh Jen with Laidlaw & Company.

Both are related to the Japan part. The first one is that the Japanese government has, I believe, funded the ARCALIS construction and production. So would that number times your share of the company will be a proxy for the potential value of that asset? And then I have a follow-up.

Andy?

You can assume. Yes -- no, good question. Obviously, the money provided by the Japanese government was all in the form of grant. And of course, our partner Axcelead has worked very closely to construct this factory with our construction partners in Japan. And you can assume that it's a lot more than $165 million to build the state-of-the-art factory that has 3 different facilities located within one premise. So it is a part of the investment that was made, but there are substantially more capital that had gone in through the investment made by Axcelead and with partners who are the co-shareholders and equity partners in this joint venture. So hopefully, that gives you some perspective of the amount of capital. It is pretty substantial.

Okay. Great. That's very helpful to set up some bases to think. And maybe the next question or the last question here is that in terms of 4 million doses that the -- major potential to deliver in the third quarter, what are the targeted COVID strains of that -- the vaccine?

Yes. That's a great question. The WHO came out and announced that the JN.1 variant was going to be the variant of concern or focus for this upcoming fall and winter seasons. The PMDA traditionally listens carefully to that recommendation and aligns with it. So I think it's safe to assume that the JN.1 variant is likely the one that we're referring to with respect to the 4 million doses. But the formality of that announcement will likely come from Meiji.

Okay. Great. And maybe just to squeeze one more for Andy. Starting for the last 2 quarters, you have the grant revenue from BARDA. So should we anticipate this figure, from a modeling purpose, to continue quarter-over-quarter or that's more lumpy?

No. That's a very good question. It is -- we don't provide guidance typically with respect to the quarterly type of milestone that we anticipate because they are dependent on certain variables that need to be achieved and targets that we need to achieve. And sometimes those targets can flip from quarter-to-quarter. It's not a linear progression model, right? So I prefer to avoid quarter-to-quarter type of guidance and prefer to focus on our 3-year projections and the ability to be able to determine, within a reasonable time frame, how much milestone we should earn within a year or 2 or 3. A lot easier to do that versus quarter-to-quarter. I hope you can appreciate that. I'd love to give you more color. And maybe in the fourth quarter when we begin to ship the Kostaive revenues and collect the commercial milestone, hopefully, that will enable us to have a little bit more quarter-to-quarter type of perspective. But I prefer to remain conservative and guide you when I have a better assessment of what's going to happen in the near term. Hopefully, that will help answer your question.

Absolutely. And congrats on the [indiscernible] progress.

There are no further questions at this time. I will now turn the call over to Joe for closing remarks.

We appreciate all the participation on the call. If there are remaining questions, please don't hesitate to reach out to our team, and we'll get back to you, okay? Thanks to everyone. Good night.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.