Arrowhead Pharmaceuticals, Inc. (ARWR) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Arrowhead Research Fiscal 2013 First Quarter Results Conference Call. Throughout today’s recorded presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I will now hand the conference over to Vincent Anzalone, Director of Finance and Investor Relations of Arrowhead. Please go ahead, Vince.

Thank you, operator. Good afternoon everyone, and thank you for joining us today to discuss Arrowhead’s results for its fiscal 2013 first quarter ended December 31, 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. 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 Reports 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?

Thanks Vince. Good afternoon everyone and thank you for joining us on our call this afternoon. As we discussed on our last conference call, we view 2012 as a transition period for Arrowhead, where we start to comprehensively rebuild our business around the assets, technology, and R&D capabilities acquired through our transaction with Roche. I cannot overstate how dramatically that improved our ability to rapidly advance our product candidates and partnering efforts. In addition, the acquisition of the Homing Peptides platform provided us with a proprietary library of targeting ligands that we believe will broaden our ability to target our siRNA delivery vehicles to various tissues and potentially allow us to develop a new class of actively targeted drugs in peptide drug conjugates or PDCs. That was 2012 speak of that as a building year and 2013 as a demonstration year. In fiscal and calendar 2013, we are focused on moving our drug candidates forward and publicizing the type of clinical and non-clinical data that represented valuable proof-of-concept. We strived to do this in a capital efficient way while still providing our scientists with the resources they need to continue to innovate. Our long-term goal is to become less dependent and ultimately not dependent on the capital markets by funding our business through partnership, collaboration, and licensing revenues. Generating high-quality clinical data in patients is a critical step toward this and we believe it starts in 2013. We also see additional significant milestones throughout the year that could serve as catalysts. Before we go into the milestones targeted for 2013, I would like to briefly review some of the key accomplishments of the fiscal first quarter and since our last call. First, we signed a collaboration and license agreement with Shire to use our Homing Peptide platform for an undisclosed…

Thanks, Chris and good afternoon everyone. As we reported today, our net loss attributable to Arrowhead for the three months ended December 31, 2012 was $4.6 million or $0.33 per share based on $14.1 million weighted average shares outstanding. This compares with the net loss attributable to Arrowhead of $2.5 million or $0.25 per share based on $10.1 million weighted average shares outstanding the three months ended December 31, 2011. During the three months ended December 31, 2012, net cash used in operating activities was $3.8 million compared with $2.7 million during the prior year quarter. Total operating expenses for the three months ended December 31, 2012 were $5 million compared with $4.1 million for the three months ended December 31, 2011. Operating expenses and cash used in operations were up slightly during the quarter representing a full month – a full three months of activity for our Madison operations as well as higher R&D expenses as we advanced ARC-520 through preclinical toxicology testing and related manufacturing costs. Turning to our balance sheet, our cash position was $2.9 million at December 31, 2012 compared with $3.4 million at September 30, 2012. During the quarter, the cash decrease of $0.5 million was due to operating cash flow of $3.8 million offset by cash flow from financing activities of $3.3 million. During January, an additional financing yield net proceeds of $3.3 million. Our current shares outstanding are 17.3 million and were 15.6 million at December 31, 2012. This compares to 13.6 million shares outstanding at September 30, 2012. The increase in shares outstanding is primarily due to the recent financings we completed in December and January. With that brief overview, I will turn the call over to Chris for concluding remarks.

Thanks, Ken. As I mentioned, fiscal 2012 was a building year required a tremendous set of RNAi assets from Roche – that Roche, excuse me, invested over $500 million to establish. Later we acquired what we believe to be the world’s largest human drive peptide target in library to use with our siRNA delivery system. These are powerful platforms and we are now in a position to rapidly build products on them. This means converting potential value into actual value and we believe 2013 will represent a tangible leap in that direction. As I mentioned earlier, I think of 2013 as a demonstration here. Beginning this quarter, we will have publications, webcasts and website posts, presenting to the world data that demonstrate the power of our platforms and the individual drug candidates. This will be the first time much of these data will have been presented outside the company. We expect to enter the clinic with what we believe to be a potential break through hepatitis B treatment. In addition to treating healthy volunteers, we will treat chronic HBV carriers providing the type of efficacy readout that usually comes with the Phase II trial. We planned to continue clinical studies on our obesity program. We are building new clinical candidates and we’ll provide guidance around them in underlying data. In short, we believe that the hard work of 2012 starts to bear substantial fruit this year and provides sustainable long-term value creation. Thank you for your interest. And I would now like to open the call up for questions. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Ted Tenthoff of Piper Jaffray. Please go ahead.

Great. Thank you very much and thanks for the update. I appreciate you making the comparison to Alnylam, because things there really have started to heat up as a result of our focus on product. And I think when you look at what you guys are working on in particular, the hepatitis B program jumps out something that’s really unique and really exciting. So, Chris, maybe you can walk us through sort of kind of what the steps are and I know you said you are going to have a webcast or a conference call, which I think will be really interesting and exciting. But maybe you can walk us through what kind of some of the steps are remaining to get us to an IND filing and to the clinic?

Great, thanks very much Ted. And I also appreciate your analogy of Alnylam, I think that we are in this very interesting transition of moving towards being a product based company as well. We have established these very powerful I think in broad platforms and we spent a lot of time building them out and making them even more flexible, and now we are able to focus our attention on building on those platforms. HBV is a great example of that. So, now regarding the final few steps to get into IND, Bruce, I’ll pass that over to our Head of R&D, Dr. Bruce Given. Bruce, do you want to discuss that?

Sure, thank you, Ted. I agree with your comments completely. At this point in life phase almost done with the GLP toxicology, and that’s really the critical path for us is completing the in life phase, doing all the histology done on those animals and putting together final toxicology tables if you will. That’s always the critical path for getting an IND done. Now, there is a lot of writing that goes on around that relating to CMC, the chemistry manufacturing controls and relating to our preclinical studies etcetera, but mostly, it’s the assembly task once you setup your project timeline. So, once we have the final toxicology tables, I would think the regulatory submission will go in, in just a matter of few days after that. So, that represents a clinical path, and everything else including manufacturing the clinical supplies should all be done in advance of that final occurrence with the GLP tox. I hope that answers your question Ted, if not can you elaborate?

No, no that’s very helpful. Thank you.

Our next question will come from Robert Wasserman of Dawson James. Please go ahead.

Hi, thanks for taking my call and thanks for having the call today. I kind of wanted to follow up a little bit on the HBV, are you having the conference call, is there any event or conference that surrounding the timing of this or just a good time for you to make it calm?

It’s little bit of both actually, it is – it’s a good time you have to call because it’s close in that through the time that we are in the clinic that it makes sense to provide a broad informational update to our shareholders and potential shareholders. And so, in doing that too far advance of the clinic doesn’t make much sense. And so a lot of this is driven by that timing, but second we have been working on some other data that we believe will be already by then. And so it’s also a good time to present some new data that we think are exciting.

Okay. And more question just about the market, may be you could give a little bit color on where the standard of care of HBV is right now, what else do you see in the clinic that may be is ahead of your with other competitor – potential competitors.

Right, that’s a great question. So, the real standard of care right now is a regimen of nucleotide and nucleoside inhibitors. These are pretty good these days. They do a very good job of blocking the export of new variants, so somebody with HBV can be on this -- can beyond a very, one of the nukes and not give it to his or her spouse. However, that the downside of these things are a, they have to be generally speaking, they have to be -- the patients have to be on these for life, and second which is a cool area of the first. It doesn’t provide any kind of cure. So, in other words, these patients still have HBV now, they won’t be spreading it necessarily, but they will still have it and so they still run the risk of hepatic cancer, they still run the risk of cirrhosis, in fact HBV is leading cause of primary liver cancer. So, it doesn’t solve the problem, but it makes the problem a little bit better. Our big opportunity here is that we think that by knocking out the entire HBV gene by knocking out the viral proteins as well as the export of new virus that we can get to that functional cure. If we can do that, that not only will we take we think substantial market share away from the nukes because we should be able to do everything that they can do plus, but we also think that we can expand the market. Because keep in mind that the number of infected individuals in the world is thought to be around 350 million people. It’s a very large number, but the majority of those are not treated in part we think, because there is no functional…

Okay, well thanks. Thanks.

Our next question will come from James Gash of (indiscernible). Please go ahead. Mr. Gash, your line is open. Our next question will come from Donald Hutchinson of Safe Harbor Financial Management. Please go ahead.

Hi, good afternoon. I have been a – clients of our firm have been rather long-term holders of the stock and I understand the work to being done and it sounds pretty exciting, but all you have to do is look at a stock chart to figure out what’s happened to the shareholder value here. And if I recall on a recent conference call you mentioned some concern about the continual dilution of the stock. And then it seems like no sooner did we turnaround and we got re-diluted the umpteenth time. Quite frankly any reasonable shareholder who has been holding this thing for a numbers of years has been absolutely diluted to debt and it’s almost a near debt better than 80% at least what are you going to do about raising money that stops this continual dilution of the equities?

Yeah, thanks very much. I appreciate that question. This is something that have been of course is a focus of ours. Biotech companies by nature require a capital and very often substantial amounts of capital and so this is something that we are not alone in dealing with. Having said that it’s something again that we take very seriously. We have – it feels to us like we are at a significant inflection point. And the reason for that is that we did spend as I mentioned in my prepared remarks all of last year, all of fiscal 2012 you’re building out this these sets of platforms. It was a lot of work we acquired the Roche assets it was a competitor process and we were lucky to get that. They have spend over $0.5 billion developing these assets and we now have those and included in that is a state-of-the-art I think second to none research facility in Madison, Wisconsin with some of the best scientists I think in the world. And we also acquired what we think is the world’s largest peptide targeting library and have begun to apply that to our siRNA delivery systems. So, this is an off a lot of work that cause money and cause time that we have now gotten behind us. Unfortunately, it’s difficult to show the market the value of that why you’re putting it together. We think we are at this inflection point because we are now at the point we can now show the market, don’t believe what I say look what we do, we can now show the market the value of this we in hepatitis B program. Now we think that’s a substantial value driver for us for two reasons. One, because we think it is a…

Your next question will come from Lee Alper of Hammock Investors. Please go ahead. Lee Alper – Hammock Investors: Good afternoon. Almost a follow-up on what he says with Cerulean, can you give us some color of when we might be able to expect some payments my understanding they moved from the Phase I to Phase II with one deal and then they are looking to start a second one. When do you start to receive something?

Yeah, that’s a great question, thanks very much. And first let me apologize to you and everybody else, my voice is going up and fighting with a bad cold and my voice is going so, pardon me. Yes, we know we’ve spoken with them and of course we know what they say publicly. They should have data from that most advanced Phase II this year at least that’s what they have said publicly and all the science to-date have been positive, but it’s been a good trial and then the data have been good. They’ve also said publicly that they are now actively looking for partnerships and they are actively discussing I understand its licensing deals or at least with deliveries, that’s their new posture, that’s what they have said publicly in January. So, when I look at potential milestone payments, I think the most significant milestone payment would be our share of their sublicense revenue, we should be eligible for about 10% of sub-licensing revenue on that candidate and again to fall what they said if they are now looking for that kind of license deal and will be on a back of hopefully positive Phase II data in a very difficult market – in a very difficult disease. That could be a very viable asset and so, I don’t have any guidance from them on when that would happen, but it feels like it is now long-term, it feels like we may be eligible for something there in the near to mid term. Regarding other milestones as they move these candidates to the clinic, our next – I believe our next milestone we triggered as they enter a Phase III, which I believe should happen in the near-term as well since they have – since they were just ramping up this one Phase II. We will have also other milestone payments as they bring the other candidate into the clinic I believe.

So when they move from the Phase I to Phase II there were no milestones.

No, Phase I to II is no milestones, they will have other milestone payments that will be triggered when they file an IND again it’s a publicly that they are moving the next candidate based on the platform into an IND short lease. So, I think it will be eligible for them.

Okay, fine, thank you.

You’re welcome.

Your next question will come from (indiscernible) of Family Investments. Please go ahead.

How are you doing guys? Just wanted to share that I feel to think way that the general for spoke about dilution and so on and so forth, I understand perfectly by our technology companies takes a lot of money to develop, a final product in partnerships, but in this case as you advanced that would take around the clinical trails and so on. It reflects in the price of the stock, you really does a list, you are not sending the right message to shareholders or to investment community. This is my opinion because if you put a platform in which 2013 sorry, we’ll be a year of seem some results correlative with the price of the stock that is a different story, but we haven’t seen that, we’ve only have seen dilution, reverse split and is not the same if you take out 3 million shares at seven and you want to do at a $0.50, I mean, another point is your projections in terms of all the achievements that has of course, I know what your budgets are in each program and where these money that had been raised which we want to take you if you want to be another round because they managed too high with all know this things and I suggest very much that each project has a budget that you should looking to the money that you have because if you are going $5 million or $7 million a quarter, we don’t not been getting in, we are going to that with $80 million shares, the pipeline that’s all, nothing else, but continue hold in this backlog idea for the last years and we’ll see what happen, but it’s very uncomfortable to see that there is no correlation between what you are doing in the price of the stock as you are doing well? That’s it.

Yeah, I appreciate that, thanks very much. The challenge we’ve had for the last year is that – is that there isn’t half a lot that was happening that we are doing that was not – there was not something that we could – that we could show in the street, the acquisition of that Roche assets and the targeting assets and then integrating those and developing those, those are things that just that happen and it’s very difficult to really demonstrate that to shareholders and enable them to value those. That’s why again 2013 is important because I think that that we will able to that we can finally provided the street information that we’ve seen how long that will better enable them to value of assets.

Our next question will come from James Gash of (indiscernible). Please go ahead.

Gentlemen, thank you. I like what I am hearing. I have to say I am heartened by this conference call. I just wanted to ask a quick question mainly to clear up my own understanding regarding the Unidym sale from the past that we still expect revenues from that.

Yeah, so, that’s a great question, thank you. The terms of that structure in sale, provided us the ability to bring in milestone payments and as they hit certain revenue points and those are still in place. I got tell you unfortunately don’t have – I don’t have good visibility on how close they are to some of those, we do know that I’ll step back, one of the reason result to them was that was the wise power had good contacts and good business relationship and a history of business relationship with Samsung and Samsung is a clear leader in the field that the Unidym was going after this field of touch screens and next generation touch screens and so that was – that was hard, we are hardened by that. Samsung has recently said publicly and again and I have no other information other than what I read in the newspapers that they are going to come out with a flexible touch panel. I understand that is not using Unidym’s technology, but is using a gold nano wires but we do know that Unidym wise power is still working closely with Samsung and we are hopeful that they are working on a possibly next generation product in that area so, kind of a long maunder and I apologize for that, answer to your question is yes, we still do have the opportunity for revenue from that – from that sale, I just don’t know when it may come in.

Unpredictable.

It is unpredictable, yeah and it’s not holding I think back I just don’t know we are – we do have some information rights but even with those it’s difficult to forecast.

Thank you, I’m going to look forward to the webcast on ARC-520 next month.

Great, thank you very much.

Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Chris Anzalone for his closing comments.

Thanks very much everyone for listening to the conference call and we look forward to talking further in the soon as would be I guess next month. I look forward to that webcast.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.