Arrowhead Pharmaceuticals, Inc. (ARWR) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen welcome to the Arrowhead Research fiscal 2013 third quarter financial results conference call. Throughout today’s recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity for you to ask questions. I would now like to hand the conference call over to Vincent Anzalone, Director of Finance and Investor Relations for Arrowhead. Please go ahead.

Thank you, operator and good afternoon everyone. Thank you for joining us today to discuss Arrowhead’s results for its fiscal 2013 third quarter ended June 30, 2013. 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 will 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. They represent management’s current expectations and are inherently uncertain. Thus actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today’s call. You should refer to the discussions under Risk Factors in Arrowhead’s annual report on Form 10-K and the company’s quarterly reports on Form 10-Q for additional matters to be considered in this regard. With that said I’d like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company. Chris?

Thanks, Vince. Good afternoon everyone and thank you for joining us today. We have many new shareholders. So I’d like to take a moment and review key events that shaped our capabilities, business model and priorities. In October of 2011 we acquired Roche’s RNAi Therapeutics business, which included the Dynamic PolyConjugate or DPC delivery system that we use in our Hepatitis B drug candidate ARC-520. As many of you know Roche invested over half billion dollars to create this unit. They built it in a manner that only a large pharmaceutical is capable of. They invested a very large amount of capital and systematically acquired technologies, licensed expanse of IP, attracted leading scientists, developed new technologies internally and built state-of-the-art facilities. At a time when markets were questioning whether RNAi could ever become a viable therapeutic modality we saw great promise in the technology broadly and the quality of what Roche built specifically. The acquisition provided us with three primary silos of value. One, brought room to operate within three siRNAs formats. They are canonical, meroduplex and dicer substrate siRNA structures. Two, what we believe to be the best-in-class small RNA delivery system, the targetable DPC platform. And three a state-of-the-art R&D facility in Madison, Wisconsin and a large team of scientists who are experienced in RNAi and siRNA delivery. This was and is a powerful combination indeed. It provided us with the tools we need to build an independent and broad RNAi company. We believe we are the only company with access to all three siRNA structures. And this enables us to optimize the RNAi trigger on a target-by-target basis. Our DPC delivery system enables us to deliver siRNA efficiently to hepatocytes and non-hepatic tissue in a highly specific manner. Our R&D team and facility enabled rapid innovation and…

Thanks, Chris and hello to everyone on the call today. As you know ARC-520 is our clinical candidate against chronic Hepatitis B infection. HBV is world’s most common serious liver infection with an estimated 350 million patients worldwide that are chronically infected. The goal of ARC-520 is to provide a functional cure which is an immune clearance stage characterized by hepatitis B surface antigen negative serum with or without sero-conversion. In March we hosted an event to discuss the hepatitis B treatment landscape and our ARC-520 program in more detail. An archive of the webcast is available on the Arrowhead website. And I would recommend viewing it if you more information about HBV. We recently initiated a Phase I study of ARC-520 following successful competition of the clinical trial notification regulatory process in Australia. The objectives of the study are to characterize the safety profile of ARC-520, determine the maximum tolerated dose and evaluate pharmacokinetics. It is the single centered randomized and double blind placebo controlled single dose escalation first in human study of ARC-520 administered intravenously to healthy adult volunteers that’s being conducted in Melbourne, Australia. Each does cohort includes six subjects randomized at a ratio of one to two to receive a single intravenous injection of either placebo or ARC-520 respectively. We have completed dosing of eight volunteers and expect four additional subjects to be treated today. Therefore by the end of today we expect to complete the dosing in the first two of six planned cohorts. The trial is moving quickly and we are on schedule to meet our stated goal of completing the trial in the fourth quarter. Following competition of the Phase I we plan to apply for ethics and regulatory permissions to initiate a Phase IIa study in chronic HBV patients in Hong Kong.…

Thanks, Bruce and good afternoon everyone. As we reported today our net loss attributable to Arrowhead for the three months ended June 30, 2013 was $6.1 million or $0.23 per share, based on 26.1 million weighted average shares outstanding. This compares with the net loss attributable to Arrowhead of $8 million or $0.71 per share based on 11.2 million weighted average shares outstanding for the three months ended June 30, 2012. Total operating expenses for the three months ended June 30, 2013 were $6.4 million compared to $6.9 million for the three months ended June 30, 2012. Net cash used in operating activities for the first nine months of fiscal 2013 were $13.6 million compared with $10.8 million in the prior year period. Increasing cash used in operating activities reflects final pre-clinical requirements including GMP manufacturing and GLP toxicology to enable our HBV candidate, ARC-520 to enter clinical trials. Turning to our balance sheet, our cash and short-term investments were $33.1 million at June 30, 2013 compared with $3.4 million at September 30, 2012. The increase in our cash balance reflects the $36 million offering closed in May 2013. During the first nine months of fiscal year cash outlays for R&D were $10.1 million and cash used in G&A were $4.4 million. Cash inflows during the first nine months of the fiscal year included $42.5 million from the sale of equity securities, $500,000 in revenue and $1.2 million in proceeds related to the sale of our former subsidiary Unidym. Our shares outstanding at June 30, 2013 were $31.3 million, up $17.7 million from $13.6 million at September 30, 2012. Common shares outstanding include the conversion of our preferred shares which would be $36.7 million. With that brief overview I will turn the call back to Chris.

Thanks, Ken. We have made substantial progress in recent months. As I mentioned we have streamlined our business behind the DPC platform and our first candidate built on it ARC-520 a number of accomplishments speak to that progress and serve to fuel future developments including the following. One, we strengthened our balance sheet with $36 million financing from a syndicate of high quality biotech investors. This provided sufficient capital to fund development into 2015. Two, we presented DPC and ARC-520 data at several scientific and investor conferences. Three, we completed the clinical trial notification regulatory process in Australia for ARC-520. Four, we initiated a Phase 1 trial of ARC-520 and by the end of today we will completed dosing of the first two of six planned cohorts. And five, we have assembled and consulted with an advisory board on additional liver targets. So does it mean for the future? We have several near-term milestones. We anticipate data from the ARC-520 Phase 1 in Q4 establishing a safety profile for the candidate and representing the first human data with the DPC delivery platform. This important derisking event for ARC-520 and also represents a broader derisking of the entire DPC platform. We will present a full data set from our chimpanzee study at the 64th annual meeting of the American Association for the Study of Liver Diseases in November. Dr. Robert Landford who conducted the study at the Texas Biomedical Research Institute will present the data. We are on schedule for regulatory filing in Hong Kong in Q4 for single dose Phase 2A with ARC-520 in chronic HPV patients. This will be a dose escalation study and we believe that we may start at an effective dose level and therefore begin to generate meaningful data immediately. Our goal is to complete the…

(Operator Instructions). And our first question comes from Bob Wasserman with Dawson James. Please go ahead with your question. Bob Wasserman – Dawson James Securities: Hey thanks. Congratulations on the accomplishments in the quarter. Just a couple of questions. You mentioned about ARC-520 in the Phase 1 trial completing in Q4 is that calendar Q4 or our fiscal Q4?

Sorry calendar Q4. Bob Wasserman – Dawson James Securities: Okay good. Fiscal Q4 is coming to a close pretty quickly here. So it sounds like it’s going to be a busy fourth quarter, completed the dosing trial and also filing for the Phase 2a and also publishing this data is that feasible, is that your plan for the year?

Yeah so the short answer is yes. The longer answer is it depends on how you define publish. It is our goal to release the data. I assume that we would like to release a full dataset in conjunction with a conference or some or a meeting or some of the peer review publication but we would certainly – we had certainly discussed the major findings as we are finished in the fourth quarter. And you are right. It will be busy because then we hope to then move directly into filing at Hong Kong. We are as one can imagine we are assembling what we need for that filing now such that when the Phase 1 is over we drop in the data and get that finalized fairly quickly. Bob Wasserman – Dawson James Securities: Okay, great. I didn’t mean to put words in your mouth there. Also little bit changing the subject on to Madison facility. Now that you have increased funding, probably more funding you have in a while, are you going to, any plans to expand the operations there either in terms of staffing or capital equipment?

That’s a great question. Thanks very much. We have no plans to really expand capital equipment. We have what we inherited from Roche was a fully functional well laid out, well designed laboratory. And so we really don’t need any new major equipment. On a personnel side we are well staffed, there are a few positions here and there that we are bringing on, but our core staff, our leaders within that group are the same ones that were there at Roche and they are the same ones with Mirus Bio before Roche acquired them. And so our core staff remains the same. We will have a few positions that we would likely bring in such that we can move quickly but I would not say any – don’t expect any wholesale changes in expenditure there. Bob Wasserman – Dawson James Securities: Okay once again congratulations on the quarter and thanks for answering the questions.

Thanks very much.

Our next question comes from Derek Tang from Cormorant Management. Please go ahead with your question.

Hi thanks for taking my question. Can you tell us what was the dose that’s being used in the healthy volunteer study?

Not sure, Bruce do you want to guess that?

Yeah Dirk you are trying to understand the starting dose or where we will start to ending up kind of what we think the clinical dose range is just so I understand little more specifically what you want.

I mean for the study in Australia which dose are you starting at and when would you end, it’s a single dose study right?

Yeah we started at that 0.01 mg per kg and the current ending point is 2 mgs per kg It’s possible that depending on what we see we may even decide to amend and go a bit higher but the current ending dosage will be 2 mgs per kg.

So each group is six patients right. Four – two…

Four active, two placebo.

Two placebo, so how many groups would it take for you to go from 0.01 to 2 mg?

It’s six.

Six groups, okay. And then I am assuming the Hong Kong study dose will be based on the findings of the Australian study.

Correct and you first-in-man study you always start very low, especially when you are dealing with a new technology. But a part of the advantage of starting with the normal volunteer study rather than going straight into patients is that we will plan to start the Hong Kong study at a dose that we project may actually be efficacious. We don’t know for certain what the efficacious dose will be but we have ideas and we will probably start that Hong Kong study somewhere in the vicinity of a 0.5 mg per kg or 1 mg per kg something like that.

And can you also comment on why you incorporated placebo control in the healthy volunteer SAD study.

Yeah, it’s an interesting question, Derek we have been getting that question occasionally and I started out in Phase I work inside a big pharma, 25 years ago and we always did placebo control and that’s been the tradition for first in man, except in oncology. And maybe it’s just because you have such a high percentage of biotech workers in oncology. I am not sure but apparently quite a few people in the investment community are not used to having placebo controlled Phase I studies. But from big pharma perspective we always placebo control. And the biggest reason for that was just adverse events, for instance you find a normal volunteer trials, a lot of patients will have things like headaches, I mean outside of lot of placebo. Subjects will have things like headaches, nausea, vomiting et cetera, it’s just a weird thing but part of it’s probably caffeine withdrawal because we don’t let them have caffeine and a lot of people get caffeine withdrawal, headaches et cetera. And we just found over the years inside big pharma that having a placebo group really allowed you to interpret any adverse events that occur or any changes in laboratories or anything else. From the perspective of where they are really different from the placebo population. So in my mind it’s traditional but I understand that for the investor community not everybody has actually seen it

Got it. Thanks so much for the clarification.

You are welcome.

Our next question comes from James Gash. Please go ahead with your question.

Yes, congratulations and excellent call so far. I have a quick question on what is the current cap on common shares outstanding?

Ken?

So at June 30th we had 31.3 million shares outstanding. It was our common shares. We also have 9,900 preferred shares outstanding which would convert into 5.4 million shares outstanding.

And is it fair then to assume that the preferred have not converted?

None of the preferred have been converted yet.

And keep in mind the preferred has no coupon. It’s just a non-voting it’s almost like a common share that does not vote.

Yes. On the scientific front, considering the Holy Grail of functional cure for Hep B I wonder if you might discuss the possible distinction between sero conversion versus sero clearing?

That’s a great question. Bruce do you want to address that?

Yeah. I am not sure it’s really much of a distinction. It’s probably a function of whether there is antibody in excess versus a relative equilibrium between antibody and antigen. So even patients that are sero negative many of them do produce antibody and there are immune complexes but the antigen is just wildly in access. And it’s just been found that some patients who have a functional cure will become antigen negative but in reality what that antigen negative usually means is just that there is still are circulating immune complexes but there is not in excess of antigen. That’s a relatively rare event. By far the more common thing for functional cure is patients that have seroconverted and that hepatitis surface antibody positive antigen negative.

Okay. I think I get it. Thank you very much, congratulations again.

Thank you very much.

Our next question comes from Steven Shire. Please go ahead with your question.

Good afternoon gentlemen. Congratulations on a good quarter. My question was first related to the financials. The comparison of last year under a different set of – basically I would like to know if we are comparing apples-to-apples. Was it broken down the number of shares available last year versus this year and that we are actually comparing it year-over-year better performance?

Well when you look at the operating expenses they are comparable. The reason they are increasing because we stepped up our efforts on the cost of the clinical beginning in a pre-clinical requirements for that.

I was talking about the earnings per share differential for those.

So the shares, they would have increased significantly since last year due to the financing that took place. So that’s what driving the change in the shares outstanding and the effect on the EPS.

Okay that’s good to know. And my other question is regarding the using that DPC platforms for the obesity thing. Is that now off the table I didn’t hear anything about that today. I thought they started Phase 1 trial last year.

Right. So the obesity drug is not DPC related. That came from…

Oh, it isn’t.

Right, right. And that’s not RNAi based. That came from MD Anderson. So we view that almost as a free look. We are watching that Phase 1 trial. As I mentioned it doesn’t cost us anything MD Anderson is conducting it and assuming all the direct cost. And so we are going to sit back and watch what those data look like. Once that Phase 1 is done we can make a decision on how to move forward with that. But because it’s not within our focus now it’s not DPC enabled RNAi therapeutic. We are not spending any development cost on it.

The only reason I mentioned that is because given the nature of the world, the U.S. population both therapeutically and financially it seems like a win-win to develop that.

Yeah, and so I think we are in a really good position actually. We have, we own the rights to that. As I mentioned in the prepared statements the pre-clinical data looked quite good in multiple species and so we will see how it goes in humans. Again assuming you are exactly right that’s a huge potential market.

As a scientist myself I’d just let you know the business of doing a placebo is pretty constant. It’s a historical fact. I don’t understand our investors wouldn’t see that, that’s not my understanding. I have one last final question gentlemen. Regarding the basically the nice build-up of the stock, the price of the stock in the last month I haven’t been able to find any catalyst anywhere, whether I do the research on the web or through various search engines that I have access to there was nothing that I saw that was a catalyst. So maybe I am asking something that you can’t answer but I was just curious.

Yeah so the short answer is I can’t answer that because who knows what drives stocks. Here is what I can tell you, we spend a lot of time speaking with institutions. We have for some time now and I believe that we are now at a point in our development where it makes sense for some of these institutions to come in and we are not raising their money right now. And so the only way they can build a position in Arrowhead is to buy in the open market. And I think that’s what we are seeing that it is a culmination of those two events. Our development programs being at a point where in the eyes of institutions they are enough derisked that they want to build the position the markets are large enough. So the upside in their eyes could outstrip the downside potential and the fact that we continue to talk to these people. So we want to keep ourselves or we want to put ourselves in our radar screen and keep ourselves in front of the right investors.

And also would enhance the company’s position on being able to have capital because of the stock price I would assume right?

Well again we are not raising any capital right now so.

I am just saying just from your I guess from your – I guess you have corporate shares and you have individual anyway I think it’s a good thing for the company obviously and it’s obviously a good for investors out there to see almost a radical shift. I mean the slope of the curve is something like 60 to 70 degrees if you look at it depending on certain points. Anyways thanks very much gentlemen and I wish us good luck. I wish you gentlemen good luck. I still this stock has a lot of place to go should you get the ARC-520 and also obesity drug I think will just I suspect that a big company would want to buy us out, buy you guys out at that point but that’s not something to comment on. Thank you very much and congratulations on your quarter.

Thank you very much.

(Operator Instructions). And ladies and gentlemen at this time I am showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Thank you all very much for your attention and your interest in Arrowhead Research and we look forward to talking to you next quarter.

Ladies and gentlemen that concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.