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Executives

Vincent Anzalone – Director, Finance and IR

Dr. Christopher Anzalone – President and CEO

Dr. Bruce Given – COO

Ken Myszkowski – CFO

Analysts

Bob Wasserman – Dawson James Securities

Grant Zeng – Zacks Investment Research

Arrowhead Research Corporation (ARWR) F2Q13 Earnings Call May 9, 2013 4:30 PM ET

Operator

Ladies and gentlemen welcome to the Arrowhead Research fiscal 2013 second 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 to ask questions.

I will now hand the conference call over to Vincent Anzalone, Director of Finance and Investor Relations for Arrowhead. Please go ahead Vince.

Vincent Anzalone

Thank you, operator. And good afternoon everyone, thank you for joining us today to discuss Arrowhead’s results for its fiscal 2013 second quarter ended March 31, 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 update 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 today 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 and represent management’s current expectations and are inherently uncertain.

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. 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?

Dr. Christopher Anzalone

Thanks, Vince. Good afternoon everyone, and thank you for joining us today. As you know our mission is to create powerful new therapies that address real health problems. Raw innovation and execution to our commercial development and necessary engines driving us toward this goal and we made substantial progress on both over the past quarter.

Of course these engines require capital to run and we’ve recently announced a $36 million financing from a syndicate of high quality healthcare investors. This gives us the cash runway into 2015 and now we are properly funded to execute on our strategy and accelerate the development of our RNAi-based treatments. We believe our team and technological platform are second to none and now we have the capital to properly fuel that team and technology.

Let’s take a closer look at the financing and what we believe it means. This is the first time in the company’s history that Arrowhead has been able to attract this amount of capital and this high quality of fundamental investors. RA Capital led around with a syndicate that included Special Situations Fund, Camber Capital, Sabby Capital, Aquilo Capital, Sphera Global Healthcare Fund and investor Jim Mellon. These fund conducted extensive due diligence over several months and while bring them in was not an ultimate goal in and of itself. This financing is a strong indication that some very sophisticated investors have confidence in our technology, plan and ability to create value.

The structure of the financing is also important because it is shareholder friendly. They’re offering us price at the market and included no warrant coverage. This is a welcome step forward and we believe it is unique for a company our size. This financing is a turning point for what it represents and what it enables us to achieve. We now have the resources to reach several important near term milestones and critical data points. These include one, filing with Australian authorities this quarter to lunch a Phase 1 study in healthy volunteers with our Hepatitis B candidates ARC-520. Two, data from the ARC-520 Phase 1 establishing the safety profile for the candidates and representing the first human data with the DPC delivery platform. Three, regulatory filing in Hong Kong in calendar Q4e 2013 for a single dose Phase 2A with ARC-520 in chronic HPV patients. Four, data from the Phase 2A study, five completion of long term GLP toxicology studies and initiation of a multi dose Phase 2B study of ARC-520 planned in the second half of 2014 and six, completion of preclinical work to designate at least one new RNAi clinical candidates.

In addition to be in the street calls throughout – I am sorry 2013 and 2014 we plan to release updates on our pipeline and underlying technologies to publications, scientific meetings and investment conferences, Webinars and analyst/investor events. We also anticipate a data being available from the ongoing Phase 1 study of Adipotide or anti obesity candidates being conducted at MD Anderson Cancer Center. However since we do not control or fund the study I have not included that in this list.

These are important near term value drivers because they serve to de-risk the ARC-520 program specifically and the DPC delivery system more broadly. The ARC-520 clinical program which we will discuss in more detail later in the call is designed to provide us with a relatively early efficacy read out. Over the next 12 to 18 months we expect to have a good idea about whether the candidate will have a similar safety and efficacy profile in humans as we have seen in all the models. If these results reflect the results in two established grown models and the HBV infected chimpanzee we expect ARC-520s commercial risk profile and therefore value to change dramatically. Clinical proof of concept could also de-risk the broader DPC platform and drive value into the base technology and follow-up candidates.

I’d like to move on to our view of the steps we’ve taken and the progress we’ve made in the recent months. As we discussed in our last conference call we view 2013 as a demonstration year. We spent 2012 building out the assets and capabilities we acquired with the Roche transaction and much of this was not or could not be publicized. However, now we’re positioned us to generate and actively publicize the type of clinical and non-clinical data to represent valuable proof-of-concept.

For example, we published a paper in journal Molecular Therapy detailing the non-clinical development of ARC-520. We’ve included key data demonstrating a new way of treating chronic Hepatitis B virus infection by silencing the entire HBV genome. With this approach we believe achieving a functional cure is possible. The data showed multi log reduction in Hepatitis B viral DNA and proteins including s-antigen lasting over 30 days after a single injection. We do not believe any group has ever shown reductions as rapid or as deep as this.

The s-antigen reductions were potentially most important as widely believed that s-antigen reduction which no current therapy is capable of consistently inducing is the necessary step in achieving a functional cure. We believe the s-antigen reductions and ARC-520 induced were substantially more pronounced than anything ever demonstrated to-date. More broadly the data demonstrated that the DPC delivery system is capable of extremely efficient gene silencing that should also be applicable to a variety of disease targets. This work was done in two well established grown models that are accepted as appropriate and reasonably predictive.

However we believe that we could de-risk ARC-520 by demonstrating safety and efficacy in a primate before moving into human studies. Chimpanzees are naturally acceptable to same Hepatitis B virus as humans and they respond to infections very similar. Chimpanzees were used in the development of HBV vaccines in our thought to be predictive of human safety and efficacy responses. We became aware of two chimpanzees with chronic HBV infection that could be studied and we are provided access to one of them.

In many ways this animal was a very good model. Of course as a chimpanzee it’s physiology is quite similar to that of humans and it was infected HBV at a young age. However there were two areas that made it a very challenging model first it presented with extremely high viremia and antigenemia. We believe that it’s viral load and HBV protein levels were likely several orders of magnitude higher than we ever expect to see in most human patients. So, the bar for reducing viral and antigen levels was quite high.

Second the animal had a mutant form of HBV that is likely resistant to one of our two siRNA sequences in ARC-520. Therefore we were fighting a very high infection with only half of our dose of ARC-520 being effective. We view this as a worst case scenario. Even so after a low dose of ARC-520 we demonstrated a level and speed of viral and protein reduction never reported. We identified a well tolerated dose of ARC-520 leading to a 95% reduction in circulating viral DNA. More importantly ARC-520 lead to approximately 90% reductions in Hepatitis e-antigen and s-antigen these data support previous findings and road models and aid and predicting a therapeutic dose range to be evaluated in upcoming clinical trials. We do not see, we did not see any toxicity signals that can be attributed to the drug so we believe that ARC-520 will have a comfortable therapeutic index. This study is ongoing and we will release additional data in the future.

Following the release of those initial we hosted a well attended analyst and investor event in New York City to discuss our Hepatitis B program. Panel members for the event included company management and key opinion leaders in HBV. Dr. Robert Gish, noted hepatologist and Arrowhead Clinical Advisory Board Chairman, and Joan Block, Executive Director and Co-founder of Hepatitis B Foundation. The live event was also webcast and if you missed it an archive is available on the Arrowhead website.

Over the past few months we expanded our intellectual property protection through two patent allowances covering the DPC delivery system. The first was a next generation Protease Sensitive Masking technology that enables new DPC constructs that can be engineered for a long circulation times and improved tissue targeting characteristics. DPC with this new masking technology have been shown to be highly potent upon subcutaneous administration MA enabling new therapeutic targets including oncology. The second patent allowance which we announced earlier this week specifically protects the use of Targeted Melittin or Melittin-Like Peptides to facilitate delivery of siRNAs conjugates to the parasites. This new patent protection covers the composition of the DPCs used in ARC-520 and runs until 2031 we look to say we have long lasting IP protection for this candidates.

Lastly we made progress toward completing the final steps required to file regulatory submission for first unmanned studies of ARC-520. We completed GMP manufacturing of clinical supply for Phase 1 and Phase 2A and completed GLP toxicology studies with a final study report expecting shortly. We have recruited the clinical site investigator and we are now in the final stages of preparing the regulatory filing for submission during this quarter.

With that update I would now like to turn the call over to our COO and Head of R&D Dr. Bruce Given to review the ARC-520 clinical program in a little more detail. Bruce?

Dr. Bruce Given

Thanks Chris and hello to everyone on the call today. Before I talk about our clinical trial strategy and timeline I want to first review why we believe HBV is an attractive commercial opportunity and disease that is well suited for an RNAi-based intervention.

HBV is the world’s most common series liver infection. With an estimated 350 million patients worldwide that are chronically infected that are thoughts to be approximately 2 million patients in the U.S. 14 million in Western Europe over 100 million in the Asia Pacific region and another 220 plus million throughout the rest of the world. HBV can lead to cirrhosis to the liver as responsible for 80% of primary liver cancers globally. The annual death tool for HBV is estimated as high as 1 million. So, this is truly a global disease that imposes an enormous health burden and death toll on both the developed and developing world. The goal of ARC-520 is to provide a functional cure at an immune clearance state characterized by Hepatitis B surface antigen negative serum with or without serum conversion. This goal leads to my next point about why we believe RNAi is uniquely suited to address HBV.

Current treatment options include interferon which is difficult to use at a highly disruptive side effects and nucleotide or nucleoside analogs referred to collectively as NUCs. The best NUCs are very good at suppressing viremia and production and release of new viral particles that are not capable of directly suppressing the production and release of viral proteins including s antigen and e antigen. Either interferon nor NUCs provide meaningful rates of functional cure. Many experts in the field believe that addressing both viremia and antigenemia is required to obtain a functional cure.

RNAi in general and the siRNAs in ARC-520 specifically acted a fundamentally different way than NUCs. The intervene upstream at the point of DNA transcription it can deeply knockdown all HBV gene products including proteins and the viral intermediates necessary to produce viral DNA.

No other mechanism and to our knowledge drug currently used or in development has been able to reliably do this. Moving on to our plant clinical program for ARC-520. As Chris mentioned we are making final preparations for our regulatory submission to begin a Phase 1 study. This will be a single S and E dose study at approximately 42 healthy volunteers in Australia. It is designed to provide a standard assessment of safety and tolerability. We are on schedule to meet our stated goal of a submission this quarter and dosing will begin soon after we receive ethics and regulatory approval. We believe the study will be complete and data available in Quarter 4. We are planning to follow this with a second dose I’m sorry, with a single dose Phase 2A study in chronic HBV patients in Hong Kong. The Phase 1 study will establish a safety profile relative rapidly it should enable us to begin this Phase 2A study in patients at a therapeutic dose level thereby accelerating the path to meaningful results. Our plan is to apply for ethics and regulatory permission for the Phase 2A study in the fall of this year.

In addition to assessing safety and tolerability in patients, we will file measures of viral load and antigenemia and also determine depth and duration of effect. Historically, data from chimpanzees were chronic HBV have been very predictive of dosing and response in humans. So we are eager to see the readout from our Phase 2A study. If successful we are planning to conduct a multiple dose Phase 2B study beginning in the second half of 2014. In order to meet that timeline, we will have to among other steps complete a multi-dose GLP toxicology study which is planning to initiate next quarter.

Following the next 12 months of work we will have a well rounded data package for ARC-520 that includes extensive 9 clinical data volunteer and patient safety and tolerability and critically we expect to have an early readout on the extended duration of our ability to knock down production of new virus in key viral proteins. We think these goals are aggressive but achievable.

With that update I would like to turn the call over to our CFO, Ken Myszkowski to review our financials for the period. Ken?

Ken Myszkowski

Thank you, thank you Bruce and good afternoon everyone. As we reported today, our net loss attributable to Arrowhead for the three months ended March 31, 2013 a $6.8 million or $0.41 per share based on 16.5 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead a $5.3 million or $0.50 per share based on 10.7 million weighted average shares outstanding for the three months ended March, 31, 2012.

Total operating expenses for the three months ended March, 31, 2013 were $5.4 million compared to $4.9 million for the three months ended March, 31, 2012. Net cash used in operating activities for the first six months and fiscal 2013 were $8.3 million added with $6.9 million in the prior year period. Increased operating expenses in cash used in operating activities reflect preclinical requirements and final I&D enabling steps including G&P manufacturing and GLP toxicology per HBV program.

Turning to our balance sheet, our cash position was $3.3 million at March 31, 2013 compared to $3.4 million at September 30, 2012. During the first half of the fiscal year cash outlays for R&D were $6.1 million and cash used in G&A were $2.7 million. Cash inflows during the first half of the fiscal year included $7.1 million from the sale of equity securities and public offerings $400,000 in revenue and $1.2 million in proceeds related to the sale of our former subsidiary (UniDAC). Our shares outstanding at March 31, 2013 were $17 million up $3.4 million from $13.6 million at September 30, 2012. Including the $36 million offering closed last week our common share is currently outstanding $31.3 million and would be $36.7 million inclusive of the conversion of the preferred shares issued.

With that brief overview I’ll now turn the call over to Chris for concluding remarks.

Dr. Christopher Anzalone

Thanks Ken. Before we talk about the concept on multiple shots on goal many times over the last few years. This approach design to open opportunities, mitigate shareholder risk and search for value. Once that value is identified is critical for a company to be nimble and move quickly to fully support it. ARC-520 and the flexible platform that enables it together represent that value and our company is fully aligned to bind them. This is where we are today, this is when our work acquiring technologies and building capabilities begins to pay off and this is why it is a very exciting time with Arrowhead.

We believe that ARC-520 is a well thought out candidate from a market and technological standpoint. Approximately one out of every 20 people on the planet is infected with HBV and there is no cure. Our approach is unique and its focused on financing the entire HBV genome and it is the only therapy and development we are aware of that could potentially lead to a functional cure. As I say in billiards there are still a lot of green between the ball and packet but we have first mover advantage. In addition we have substantially de-risked the program. We have a good understanding of the safety profile after many studies in non-human primates and en routes.

The final report from the GLP toxicology studies will be available shortly and we have not seen any surprises to-date. We have a good understanding of the potential efficacy after studies in two road models and most recently a chimpanzee with chronic HBV infection. Finally our time is attractive ad we will file this quarter to begin human studies.

For all its promise ARC-520 is not our only value driver. The underlying DPC siRNA delivery system is extremely versatile and as the ARC-520 progresses to the clinic we believe it will drive value in the platform that enables it. We have a team of dedicated scientist that strive everyday DPC is even safer and more prudent, including the recent advances with contrast capable of subcutaneous administration in tumor targeting. And now after our recent financing we have a capital needed to accelerate our development programs. We’re committed to raising the profile of the company and firmly believe we are well on our way to becoming the leading developer of RNAi therapeutics. As I mentioned we anticipate several important milestone advance over the next 12 months that we believe we’ll further that goal.

Thank you for your interest in Arrowhead Research, and I’d now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) our first question comes from Bob Wasserman with Dawson James Securities. Please go ahead.

Bob Wasserman – Dawson James Securities

Hi guys. Congratulations on getting like accomplished this year. And I know it’s only been a couple of days since you completed your I got your recent funding that could you give a little more background a little more color on the Hong Kong study specifically the 2b, the second study would it be larger in size would you do at all sort of Hong Kong or dislocates or may be elaborate a little bit on that task mark?

Dr. Christopher Anzalone

Well as you might imagine we’re in early Phases of our thought process around that 2b study. Our initial thinking has been that will more likely be a multinational study. Potentially including U.S and European sites not solely Asian sites for instance. But I would have to again advice it’s early days for us. We’re just now actually we’ll be meeting without Clinical Advisory Board in the next few weeks to talk and much greater length about the upcoming Phase 2A study or single dose study in Hon Kong that probably starts around the first quarter of 2014. We will also talk about initial thoughts around the 2B study but I would expect we are still a few months away from having that study more full we planned.

Bob Wasserman – Dawson James Securities

Okay. Could you speak a little bit more about why Hong Kong and how that market compares with the U.S and European in terms of Hepatitis B and the incidence and the severity there?

Dr. Christopher Anzalone

Yeah, that’s a great question. We normally would have thought perhaps about doing our first-in-man study maybe in the U.S or even in Europe and we wanted to go into patients very early on and the issue in the U.S especially is that main of the patients are not pure HBV patients but are also co-infected with other diseases such as HIV or HCV.

Bob Wasserman – Dawson James Securities

HCV. Okay.

Dr. Christopher Anzalone

Yeah. In addition to that those that are solely HBV are sometimes in immigrant communities that have had a tendency not to really readily participate in clinical studies. So the advice that we got from our advisors early on was that a trial that focused on the U.S and even Europe had a high chance of being in the slow and rolling trial. On the other hand in the case of Hong Kong, Hong Kong has about a 30% prevalence Chronic Hepatitis B so it extremely high prevalence it has a wonderful medical system left over from the British that the time of British rule and a very and it has its own regulatory system which is very much a sophisticated western regulatory system.

The Hong Kong seems to be an ideal place to be able to enroll a patient study quite quickly. The reason with Australia then for the normal volunteer study when we decided to do volunteers first is just that it’s in the same theatres Hong Kong it’s a there are the regulatory authorities understand each other well and we felt that Australia we could probably also enroll at least some patients with a Chinese background which would be a helpful for the Hong Kong authorities as well. So when you put all that together we wind up doing Phase the normal volunteer Phase 1 study in Australia and then the first human patient study in Hong Kong.

Bob Wasserman – Dawson James Securities

So that the Hong Kong theatre has their separate regulatory body as composed to Mainland, China?

Dr. Christopher Anzalone

Yes it does.

Bob Wasserman – Dawson James Securities

Okay. And does that the hospitals there also draw Hep C patients from Mainland, China as well or is it there is enough density on Hong Kong to get the Phase 2 study?

Dr. Christopher Anzalone

Well, it’s a 30% prevalence in Hong Kong.

Bob Wasserman – Dawson James Securities

Okay.

Dr. Christopher Anzalone

So we were sure that we should be able to enroll this in Hong Kong.

Bob Wasserman – Dawson James Securities

Okay. Okay, great. Well thanks a lot. Congratulations again.

Dr. Christopher Anzalone

Thank you.

Operator

Our next question comes from (inaudible), a Private Investor. Please go ahead.

Unidentified Analyst

Yes, gentlemen. I just want to return to the issue of Unidym I was I’m a little confused ask on the last conference all about revenues perhaps I should have been more inclusive. Are there any payments do us from that transaction?

Dr. Christopher Anzalone

Yeah. Thanks very much James it’s a great question. So there are we are working with Wise Power right now the acquirer of Unidym to secure those payments. We are owned and about a million dollars extra on this on the second tranche of the acquisition payment. We are working with them to secure that right now.

Unidentified Analyst

Did these payments continue on into the future as far as?

Dr. Christopher Anzalone

They don’t.

Unidentified Analyst

More tranches or whatever?

Dr. Christopher Anzalone

No, no they don’t so this was the second tranche is a second of two guarantee payments. Payment going forward had to do with milestone with revenue milestones and with royalties. So we don’t have any good visibility on that right now but as we do get better visibility we will certainly in part that to you.

Unidentified Analyst

Okay, okay. Well good job on the placement. Congratulations gentlemen.

Dr. Christopher Anzalone

Thank you very much.

Operator

Our next question comes from Grant Zeng with Zacks Investment Research. Please go ahead.

Grant Zeng – Zacks Investment Research

Hi guys. Congratulations on the strong quarter especially for the 36 million financing. I just have a two question about the timing of the opportunities that in the Hong Kong study basically so you are going to run opportunities that will be first in a few months. My question that does the Hong Kong study follow the alternative study or that will be run some attorneys needs?

Dr. Christopher Anzalone

Yeah. And I thought this might not have been a little bit clear because they are fiscal year not a calendar year. So this gives me an opportunity to maybe clarify timing a little bit. But the overall volunteer study in Australia comes first. We will be filing for permission to do that study this quarter we anticipate starting that study in the third quarter. Hopefully early in the third quarter but that will dependent on how long it takes for ethics review and to get the agreement from the Australia and authorities. We are anticipating that study will complete in the calendar fourth quarter. So not in our fiscal fourth quarter but in the calendar fourth quarter. And at the point that we have the data from that study that’s when we will complete our I&D submission to Hong Kong. So the Hong Kong patient study file those after the normal volunteer study it is now simultaneous.

Grant Zeng – Zacks Investment Research

Okay. If I was getting the Hong Kong probably we’ll follow their opportunities that would be right?

Dr. Christopher Anzalone

Yes, sir.

Grant Zeng – Zacks Investment Research

Okay, that’s it. Thank you.

Dr. Christopher Anzalone

You’re welcome.

Operator

(Operator Instructions) I’m showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Chris Anzalone for any closing remarks.

Dr. Christopher Anzalone

Thanks everyone for your interest and we look forward to speaking with you to meet with you later this year.

Operator

The conference is now concluded. Thank you attending today’s presentation. You may now disconnect.

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