Arrowhead Pharmaceuticals, Inc. (ARWR) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Arrowhead Research fiscal 2012 fourth quarter and year-end financial results conference call. [Operator instructions.] I will now hand the conference over to Vincent Anzalone, director of finance and investor relations for Arrowhead. Please go ahead, Vince.

Thank you, operator, and good afternoon everyone. Thank you for joining us today to discuss Arrowhead’s results for its fiscal 2012 fourth quarter and year ended September 30, 2012. With us today from management are 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 we’ll then open the call up 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. Without limiting the generality of the foregoing, words such as may, will, expect, believe, anticipate, intend, could, estimate, or continue, or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of Arrowhead’s future financial performance, trends in its businesses, 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 Risk Factors in Arrowhead’s annual report on Form 10-K and the company’s quarterly reports on Form 10-Q for additional matters to be considered in this regard. Thus, actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today’s call. With that said, I’d like to turn the call over to Dr. Christopher Anzalone, president and CEO of the company. Chris? Christopher Anzalone Thanks, Vince. Good afternoon everyone, and thank…

Thanks, Chris, and good afternoon everyone. Our net loss attributable to Arrowhead for the year ended September 30, 2012 was $21.1 million, or $1.90 per share, based on 11.1 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead of $3.1 million, or $0.44 per share, based on 7.2 million weighted average shares outstanding for the year ended September 30, 2011. For the quarter, our net loss attributable to Arrowhead was $5.3 million, or $0.43 per share, based on 12.5 million weighted average shares outstanding. This compares with a net loss of $2.8 million, or $0.39 per share, based on 7.2 million weighted average shares outstanding for the quarter ended September 30, 2011. On a consolidated basis, for the year ended September 30, 2012, net cash used in operating activities of continuing operations was $15.3 million, compared with $7.7 million in the prior year period. Our total operating expenses for the year ended September 30, 2012 was $21.2 million, of which approximately $3 million was noncash expenses. Operating expenses in fiscal 2011 were approximately $10.1 million. The increase in operating expenses was primarily related to the acquisition of our Madison R&D facility and related operating costs including personnel and research and development activities. Our total operating expenses for the quarter ended September 30, 2012 were $5.4 million, an increase of $2.5 million from $2.9 million during the quarter ended September 30, 2011. The increase in operating expenses for the quarter was also due to the Madison R&D facility. Turning to our balance sheet, our cash position was $3.4 million at September 30, 2012. This compared to $7.5 million at September 30, 2011. The change in cash was primarily due to our cash used in operating activities of $15.3 million, somewhat offset by the cash inflow from…

[Operator instructions.] And our first question will come from Ted Tenthoff of Piper Jaffray.

I’m most interested in the HBV program, and I’m wondering, when it comes to the DPC technology, what data do you have with respect to uptake in disease hepatocytes? [unintelligible] that would be similar to those that might be most reminiscent of hepatitis C infection or even cirrhosis. What kind of data have you seen with respect to uptake in disease liver cells. Christopher Anzalone That’s a great question. As you know, there are not a lot of established models for hepatitis B. For instance, I believe that there are maybe two chimpanzees in the world that have hepatitis B. Otherwise, we rely on murine models, a transgenic model as well as non-transgenic model. Bruce, do you want to walk through some of the work that we’ve done in those models?

I think the short answer is there’s not really a good cirrhosis model or even an active hepatitis disease model other than chimpanzees. And as Chris said, I think there are two chimpanzees in captivity right now that have chronic hepatitis B. And at this point, I don’t even think that either of those are cirrhotic. So we haven’t directly answered that question. That said, the good news here is that DPCs are targeted to be a [sealed] glycoprotein receptor, which is expressed in huge abundance on hepatocytes. And it’s my understanding that the receptor is still present in patients that have hepatitis or even in the presence of cirrhosis. So as long as you have viable cells, you should have cells that have the receptor present. So we would expect that DPCs should be effective in that circumstance.

And our next question is from Andrew Fellows of Edison.

I was just wondering, and you probably can’t say too much, but if you’d give a bit of flavor or color on the Shire in terms of the speed of progress, and also the kind of magnitude of the research funding that you’re going to be getting from them. Is there any extra color you can give on that? Christopher Anzalone Unfortunately we can’t give too much color on the extent of research funding. Here’s what I can tell you. The first phase of this is going to involve interrogating our database. We’ve got these 42,000-plus sequences in the database that we can interrogate on a tissue-by-tissue basis. And that should spit out some fairly large number of sequences that we believe will specifically target their tissue of choice. In the past, what we have said is that we’ve seen somewhere between 300 and 1,000 sequences that can specifically target a tissue type. And so we’ll start with a very large number like that. Once we have that, we will then start to winnow that down into a smaller, more manageable number, and do in vitro as well as in vivo screens to bring that down to a very small number of a primary candidate and then a few backups. We’ll be doing that. The first part of that, the screen, will be done by us, and then the forward screens will be done in collaboration with Shire. Once one is picked, they’ll move it into the clinic and they will control that entirely. There’s no strict timeframe on any of these phases, and so we’ll just see how fast we can move on this. We believe that they’re motivated to move quickly, and certainly we are, so this first real partnership is going to be a test case for us. We’re going to learn an awful lot about the platform. We’re going to learn an awful lot about targeting that tissue type, as well as other tissue types, and we’ll learn an awful lot about how long it takes to get to a small number of preferred sequences.

On the CALAA-01, I got the impression that perhaps you’re talking about modifying the RONDEL delivery system or looking at other mechanisms. Is that correct? And what does that mean for the overall timing of development there? Christopher Anzalone We have been doing a lot of work on RONDEL, since we’ve had the facility in Madison, to potentially optimize it. And we’ve also been testing it against DPCs to determine some indications of where it may be superior and some indications where the DPCs may be superior. And so that’s still in progress. Another thing we’ve mentioned in the past is that CALAA-01 is using unmodified siRNAs. We know that going forward all of the RNAi candidates that we’re going to have are going to use modified siRNAs, and so we are trying to determine, right now, A) is RONDEL the right system to move into a Phase II with that? And B) are we happy with taking a therapeutic without modified siRNAs into a Phase II. And we’re still in that process right now.

[Operator instructions.] And our next question is from Lee Alper of [Lee Alper]: The concern I have is how are you going to fund to get from here to where we’re going to do something. Christopher Anzalone As we’ve stated in the past, what we have here is a bit of a hybrid model. We are a platform company, and we’re also a product company. We’ve got these very broad platforms that we can use to create multiple internal products. We have examples of those in ARC-520, Adipotide, and the like, to push into the clinic and drive value. But it is our hope that these platforms will enable us to bring in non-dilutive capital to help out with our operations. That’s in large part why we assembled these, the RNAi platforms and the targeting platforms. And it’s taken us a little while to get these really up and running. We’ve only owned the RNAi assets for a year now from Roche, and we’ve only owned the targeting assets since April. So it’s taken us a little while to get them going, but we feel like we are at a good position now, where we can start to really speak with partners and talk about partnerships that may bring in non-dilutive capital. I think the Shire deal was a good step in that direction. It’s certainly not there yet. We certainly hope to ink deals that will bring in substantial capital, that will cover our operating expenses so we don’t have to rely entirely on the capital markets. But again, I think it shows an evolution of the deals from what we do with Merck first, and then a few months later with Shire. We hope that the next deal, then, will be even larger, and provide more capital for us. On the RNAi side, as I said, we’ve only had the Roche assets for a year now, but we’ve been speaking with companies and we are certainly hopeful that given the broad assets we’ve got there, particularly with the new data on subcutaneous administration, with the proof of concept of the DPCs in the ARC-520, we’re hoping that those will help to drive partnerships that can bring in some non-dilutive capital. So the long answer is that we would really like to finance this company as a mixture of equity capital as well as non-dilutive capital. We have, of course, relied exclusively on equity capital in the past, and we are hopeful that we are nearing that transition point where we can start to bring in substantial amounts of non-dilutive capital to make it easier on our own shareholders.

And this will conclude our question and answer session. I’d like to turn the conference back over to Chris Anzalone for any closing remarks. Christopher Anzalone I thank you all for your interest in the company, and participation in the call today, and I wish you all a happy holiday season. I will see you in 2013.