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Arrowhead Research Corp. (NASDAQ:ARWR)

F1Q10 (Qtr End 12/31/09) Earnings Call

February 11, 2010 4:30 pm ET

Executives

Brandi Floberg - IR, The Piacente Group

Christopher Anzalone - President & CEO

Ken Myszkowski - CFO

Analysts

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Arrowhead Research First Quarter Fiscal 2110 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to our host Ms. Brandi Floberg. Please go ahead ma'am.

Brandi Floberg

Thank you, operator. Good afternoon everyone and thank you for joining us today to discuss Arrowhead's financial results for its fiscal 2010 first quarter ended December 31, 2009. With us today from management are President and CEO, Dr. Christopher Anzalone and Chief Financial Officer, Ken Myszkowski.

The management will provide a brief overview of the quarter and we will then open the call up to your questions. Also on the call for participation in the Q&A session is John Miller from Unidym and Dr. Thomas Schluep from Calando.

Before we begin, I would like to remind you that comments made during today's call may contain 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 facts 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 managements' current expectations and are inherently uncertain.

You should also refer to the discussions under Risk Factors at 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 would now like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company. Chris?

Christopher Anzalone

Thanks Brandi. Good afternoon everyone and thank you for joining us on our call today. In the short time period since our last call a month and a half ago, we've had a steady flow of activity both with our subsidiaries and improving our company infrastructure.

We've made continued business traction and technical progress with our lead subsidiary Unidym. Calando continues to represent a promising opportunity given its advanced stage and its Phase I in clinical trial and the data it has generated.

Additionally, we completed the sale of essentially all of Tego Biosciences' assets. To support progress with our businesses, we have enhanced our leadership team through several key appointments including a new CFO and the addition of distinguished experts to both Unidym and Calando's Board of Directors.

These types of business, technical and organizational developments are indicators of our company's evolution as we look to add value through the advancement of our subsidiaries.

During the fiscal 2010 first quarter, we continue to make significant improvements with our operating expenses. Our restructuring is now complete and our initiatives to streamline our businesses have clearly paid off. Out total operating expenses decreased 75% to $2.3 million compared to the same quarter last year. We also decreased our cash using operating activities from $6.7 million in prior year quarter to $1.6 million.

These improvements have had a direct impact on our bottom line and our net loss for the quarter for the period was reduced to $1.5 million or $0.03 per share from $8 million or $0.19 per share in the prior year period.

Our decreased burn rate gives us better flexibility to address unforeseen challenges and opportunities going forward. With our cost-cutting measures larger complete, we expect to continue to operate at about this level going forward with some modest increases to our burn as we enroll additional patients in Calando's Phase I trial.

We made improvements for balance sheet through a private placement in December with gross proceeds of $3.2 million. With this capital infusion, we are operating on more solid ground and have better wherewithal to move forward with our strategic initiatives in fiscal 2010. As you may recall, I personally participated in this offering and this reflects my ongoing confidence in our company's success.

Some of our stockholders have expressed concern that we maybe planning to implement the reverse split to maintain our listing with NASDAQ under the current grace period granted by NASDAQ, we have until March 15th to increase our minimum bid to $1 in order to remain NASDAQ complaint.

We have stated in the past that we believe organic growth rather than a reverse split of our stock will enable us to meet this requirement. March 15th is just around the corner and the timing of achieving and more importantly publicly disclosing milestones has been slower than anticipated.

We're still hopeful that organic growth will enable us to meet the NASDAQ $1 bid price requirement according to NASDAQ rules company that meet all other initial listing requirements or even automatic 180 day extension of the grace period to meet the $1 minimum bid requirement. This gives us another six months to disclose the business technical and organizational milestones that we believe will lead to a higher market value of our stock.

Let me also reiterate and stress that we have no immediate plan or desire to affect a reverse split of our stock.

Turning to our subsidiaries, as I provided a thorough update on each of our businesses on our call in December, today I'd like to highlight some key developments since that time.

Looking at Unidym, we made our initial entry into touch panel market in December. As expected, our sales of our CNTs for the period of quite modest at this stage. We expect as we continue to pursue our reverse and solid relationships with electronics industry leaders and as early doctors begin implementing our technology we'll increase of our attraction in this market.

We are in the process of transitioning from a development stance to one focus on product manufacturing and scale up primarily via partnership and vendor relationships. This is reflective of Unidym's maturation and is a positive step indeed, but it is one that will not happen overnight. We will keep you up-to-date on the progress of this transition.

Based on continued interest in our technology, we have established additional relationships that enable us to work with brand-name players in the display industry. Most recently, we announced earlier this month that Unidym had entered into a joint venture partnership with Wisepower, a publicly traded Korean company. It is market, it co-developed Unidym's film and electronic ink products into the Korean touch panel and display industries.

South Korea is becoming an increasingly important geography for our target markets in touch panel, LCD and other displays as well as solar markets, so we're delighted to have reached this agreement. I think this is an extreme important step in our maturation process. We are now at a point where it is critical to be near customers and have constant interactions with them. South Korea is a key market and Wisepower is the right partner to help us better serve it.

Under the agreement, Unidym will supply its CNT film to the new JV entity, Unidym Korea and Wisepower will contribute operating capital and provide local manufacturing sales and distribution of our product.

By creating Unidym Korea in partnership with Wisepower, we will have the local presence to support our efforts with major Korean display manufacturers and accelerate our business development activities with local partners. We're excited about this opportunity as Wisepower has a successful track record of effectively building new businesses in electronics.

In addition to this agreement, Unidym also recently secured a core licensing agreement for its nanotechnology intellectual property for using applications outside our core focus of electronics, such as aerospace and military products. Each license agreement provides for modest upfront fees and future royalty payments to Unidym. Licensing our IP outside of our core market in principal electronic materials illustrates the breadth of Unidym's patent portfolio and is inline with our strategy to fully monetize our IP.

Last week Dr. Malcolm Gillis, former President of Rice University was appointed to Unidym's Board of Directors. Dr. Gillis played a key role in establishing Rice as leader in nanoscience and was integral in creating the environment that enabled Nobel Laureate Richard Smalley to develop much of the technology on which Unidym is based. We are pleased to welcome Dr. Gillis and look forward to his future contributions to Unidym.

Turning to Calando, we continue to be enthusiastic about our prospects for Calando and it's Phase I trial with its lead RNAi Therapeutic candidate CALAA-01, new license proprietary RONDEL delivery system.

We believe we are well positioned within the broader RNAi Therapeutics landscape. This landscape is still influx, extraordinary interest in the field remains because of its promise revolutionize the way either way we treat disease. However, effective systemic delivery is not yet settled.

It is always been our goal to be the first company to provide viable safe and scalable means of systemically delivering siRNA for oncology. Fiscal remains, we believe we took the first step toward this when we were the first company to initiate a clinical trial using siRNA against cancer. And the first to systematically deliver siRNA with the delivery vehicle. The second step will be to demonstrate via publication in a peer reviewed journal evidenced that we are able to deliver functional siRNA in humans that will initiate RNAi.

As I discussed in our last call, a manuscript has been prepared that describes some of the preliminary data arising from our Phase I clinical trial. While we are eager to have these result published so that we can discuss them with you, we have no control over the timing of the publication. We believe that demonstrating effective clinical data is critical to our ability to fully monetize the Calando platform. Along with our colleagues in the RNAi field, we've seen literally 100s of delivery strategies, initially look interesting based on pre-clinical data only to prove inconsistence or infective in different models.

Therefore going forward, we believe the high value partnerships with large pharmaceutical companies will require clinical data. We feel comfortable that we are well positioned to prove this, it is hope that positive clinical data we will suggest that CALAA-01 could be a valuable drug. And that CALAA-01 is also approved concept that demonstrates to the value of RONDEL for delivering virtually any other oncology related siRNA sequence.

We have recently added two new board members to Calando's Board of Directors. Dr Bruce given has extensive pharma, biotech and clinical experience including 10 years at Johnson & Johnson and most recently as President of a Biotech company that was sold to Pfizer. Dr. Mostafa Analoui, is actively involved in investment management and scientific and business development of Nanotechnology, drug discovery, drug development, diagnostic imaging and global strategies. These gentlemen have already provided meaning insight into Calando's path forward and I'm pleased that Calando will be able to grow on their expertise.

Looking at our earlier stage subsidiaries, as I mentioned earlier, we completed the sale Tego's modified fullerene IP portfolio to Luna Innovations, Incorporated for an upfront payment of $430,000 with additional milestone payments into the future. The sale was essentially all Tego's assets fits in with our strategy to limit our ongoing costs while retaining the upside potential to capture the value of Tego's IP portfolio. We believe that Luna's focus on developing fullerene based products could prove this successful with the addition of Tego's IP.

With this we gave potential future revenue streams through Luna development milestones and royalty payments.

Nanotope, and Leonardo Biosystems are both minority Arrowhead holdings, however, we see compelling opportunities for both companies and expect to enter commercial partnerships in 2010. To the sense, I'd like to highlight our recent success with Nanotope. Earlier this month, data from our preclinical study of Nanotope's lead compound for cartilage regeneration was published in Proceedings of National Academy of Sciences or PNAS.

These data provide another important proof of concept for Nanotope's platform technology for regenerative medicine. With study results published in multiple peer reviewed scientific journals, the platform has demonstrated the ability to regenerate diverse tissues, from spinal cord to cartilage. We continue to expect that we will enter a commercialization corporate partnership with Nanotope over the next coming months.

Given our steady progress with our subsidiaries and our new financial position, we believe that we are in a position to begin evaluating new opportunities as they fit in with our core growth strategy and create additional value for the company. In particular, we are in a unique position to identify later stage technologies for acquisition that we can immediately add value to and capitalize on. As we move through the year, we will continue to look for acquisition opportunities that best position our company for long term success.

Before I turn the call over for a review of our financial performance, I'd like to extend a warm welcome to the newest member of our team, Ken Myszkowski. Ken was appointed as our Chief Financial Offer earlier this month. He brings us decades of finance and accounting experience working with public companies, and we are delighted to have him join our team.

With that, I will turn the call over to our new CFO, Ken Myszkowski for a review of our financial performance for the quarter. Ken.

Ken Myszkowski

Thanks, Chris. I'm pleased to be here with all of you today and to have joined Arrowhead team. As we reported earlier today, our net loss for fiscal 2010 first quarter was $1.5 million or $0.3 per share based on $58.6 million weighted average shares outstanding. This compares with a net loss of $8 million or $0.19 per share based on 42.9 million weighted average shares outstanding for quarter ended December 31,2008.

On a consolidated basis, net cash used in operating activities for the fiscal 2010 first quarter totaled $1.6 million, compared with $6.7 million in the prior year period. At quarter ended December 31, 2009, revenues were $149, and consistent primarily of Unidym sales of CNT (inaudible). This compares with $702,000 in revenue for the quarter ended December 31, 2008, which included $535,000 in revenue from the license fees and grants. The sale of carbon nanotubes by Unidym comprised comparable revenue in both periods.

Total operating expenses for the quarter ended December 31st, 2009 were $2.3 million, a decrease of $7 million or 75% from $9.3 million during the quarter ended December 31st, 2008. This considerable reduction in operating expenses was realized across each of our line items as a result of measures undertaken during 2009 to streamline our businesses and better align our cost structure with our capital resources.

Turning to our balance sheet as of December 31st, 2009, we had cash and cash equivalents of $3.8 million compared to $2 million as of September 30, 2009. This increase in our cash balance was the result of $3.2 million in gross proceeds from a private placement of approximately $5 million units, which we completed in December

With that brief overview, I will now turn the call over to Chris for concluding remarks. Chris?

Christopher Anzalone

Thanks, Ken. As we look ahead, we will continue to focus on generating value from our portfolio of subsidiaries. We will focus on advancing Unidym's CNTs in the large touch panel and LCD markets through existing and new partnerships that we believe will drive our product in future orders.

With Calando, we expect to continue to enroll new patients in our clinical trials and continue escalating the dose in search of a maximum tolerated dose. We're also optimistic that a peer reviewed journal articles will soon be published presenting some of our early data generated from the Phase I.

As I mentioned earlier, we plan to begin to evaluate additional later stage opportunities that will enhance our portfolio of companies in extent with our capital structure and long term goals. We will also begin to more aggressively turn our attention to our early stage companies Nanotope and Leonardo, where we believe we can create additional value and secure partnerships for these programs. All of us at Arrowhead feel good about our progress and believe that fiscal 2010 will be a productive year.

Thank you for your attention and for your continued support. I'll now open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from the line of Milton (inaudible) Wells Fargo.

Unidentified Analyst

Chris, Unidym there is some talk that Samsung is getting ready to rollout some touch tone screens. Can you comment on that and does this involve Unidym?

Christopher Anzalone

I can tell you this. We probably could say that we have a partnership with Samsung and we are continuing to work with them. I think our progress with them will only increase now that we have this joint venture in South Korea, and so we can interact with them on a more regular basis. So I think that you will see at some point Samsung products with our materials in them. However, I need to caution I do not expect that to be in the near term. We are still in the development stage of developing these products. And so I think any product that will come out in the next couple of quarters will not include other material.

Operator

Your next question comes from [Julia Griese] Private investor.

Unidentified Analyst

You guys gave quite a bit of information on the quarter and the different minority interest you have majority interest. Can you give us kind of a general review of the nearest term capitals you see for the company maybe some points or milestones we should be looking for?

Christopher Anzalone

Near term it's difficult to define the quarter. So, let me just throw out some catalyst that we are looking at right now and we will see when we get to [converse] these. I can go through these by company, moving so with Calando, the nearest term catalyst I think will be publication of the paper that we have mentioned, that manuscript has been prepared, it is in the process of being submitted publication and we have little control over when that comes out, but I think when that comes out that could be a potential catalyst for our stock price. We assume that it will show some credibility that will show that our material does what we have thought it should do.

Unidentified Analyst

Is this from the Phase I?

Christopher Anzalone

From the phase I, you got it right. Second, it would be to dose more patients within Calando. We have been very fortunate in that we have dosed a number of patients so far and we have seen no significant adverse events that are drug related thus far and so we are really encouraged that we can continue to dose patients and increase our dose levels. We are still search of that maximum tolerated dose and I think every patient that we dose will increase the power of the platform assuming that the data stays positive.

Of course the big catalyst relating to Calando would be some form of partnership with Big Pharma. As I mentioned in my remarks, I think that given the landscape of RNAi these days, given that there have been so many potential delivery vehicles that have been tested by other companies and that have been consistent or effective in various models. I think because of all that Big Pharma really needs to see clinical data. We think, we are really well position there because we are in this clinical trial, we are generating data we are added dose level right now what we think we can expect to see effects going forward. So, once we get to a partnership I think that's a big catalyst event.

Unidentified Analyst

Third question along those lines, the Phase I results, is it fair to assume that no one is going to see them until they get publish or can you share them with Big Pharma now if you wanted to?

Christopher Anzalone

No, we don't believe in science via press release. It's important to us that the results will be published in a peer reviewed journal in fact we hope a high quality peer reviewed journal. So, no, we aren't in discussions with Big Pharma right now and will not be until we can freely talk about some of this data.

Unidentified Analyst

Okay.

Christopher Anzalone

If we move on to other catalysts within companies, we can look at Unidym; I think new joint ventures in other countries. This is bit of a transition or evolution I think for a model and as we are evolving from a more development based company into a manufacturing based company and product based company.

We feel that we need to be closer to our customers and our partners and so we are looking to have local presence in our key markets and so I think those are points of validation; therefore potentially catalysts for our stock. We look for more market traction for Unidym, you have to get into touch panels, to get closer to get into LCDs to start to ramp up revenue and touch panel markets.

We look for new GDAs and we are speaking with new companies on a regular basis from Unidym to establish new partnerships. I think a key area there is in the equipment side and therefore going to be LCDs for instance. We need to have good partnerships with the right company to build equipment to deposit our material onto LCD devices. I think those are good catalyst events, because again that's validation and it's providing us with broader shoulders, broader partners to push our products into our market.

When we look at our minority of all these in Nanatope, I think our commercial partnerships with Nanatope is a good catalyst, again shows some validation for the technology, gives us a clear path in the market on the Leonardo side, as we I think, like I mentioned in the call in December that we are hopeful, that we will secure some state funding to help support Leonardo's efforts, I think that could represent the catalyst.

And then finally, as we look around for new opportunities, we find relatively speaking a late stage opportunity that is synergistic with our current companies and that we think we can add value to and also get financed, I think that also could be a catalyst for us.

So, within that list and the list could be broader, within that list, there are some small steps and large steps I think together from all those suggest or indicate a fairly steady march forward.

Operator

Your next question is a follow-up question from [Julia Griese] Private Investor.

Unidentified Analyst

Just to kind of touch on the last point you are talking about on the late stage opportunities, obviously one of the things is the continually an issue with Arrowhead in the last year or two is cash burn and cash on hand. Can you talk a little bit to the timing or the capital needs you would look to for this kind of opportunities?

Christopher Anzalone

I think Julia that is an excellent point. The fact that we are looking out towards new opportunities albeit fairly conservatively is representative of our stance. We have been quite defensive over the last year and a half or two years and we are feeling increasingly confident about where we are going and so we feel increasingly comfortable with looking out for new opportunities. That said, we are still quite cash constraint, we have decreases our cost significantly, we are a lot more flexible company right now than we were before, but we are still cash constraint.

So, the type of deals that we would be looking into would require very little cash upfront and that could be financed separately and we have done that in the past for both Unidym and Calando whereby we would be majority owners of the subsidiary, but would take an outside capital. I think that would likely be our strategy if we were to get into a new subsidiary in the mid-term to build the company, but look for co-investors to help to provide operating capital for those companies. I want to be clear that just because we feel more confident about our balance sheet and about where we stand in the world, it doesn't mean that we are ready to take on significant new liabilities and we are going to go about this in a very measured fashion I think.

Unidentified Analyst

One last question, and if anyone else has questions they can jump in. When you're talking about Unidym and obviously some of the JVs that you got going on in another partnerships, would you expect that those would produce near-term sales like so if we were looking at 2010. Can you give us any idea as to what you might be looking for there?

Christopher Anzalone

Yeah, we have been provided any specific guidance on revenue targets. And I think we will still stay quiet on that until we got better visibility on how quickly we can get into touch panels how quickly we can penetrate those markets. We do believe that we will recognize revenue from sale of our materials in touch panels this year. But we have not provided guidance and what that number might be.

Unidentified Analyst

We should see something this year, as far as progress on the top line with Unidym?

Christopher Anzalone

Yes.

Operator

Ladies and gentlemen this concludes the Arrowhead Research First Quarter Fiscal 2010 Conference Call. If you would like to listen to a replay of today's conference please dial 1800-406-7325 and for international participants 1303-590-3030 and entering the access code 422019 followed by the # key. The replay will be available until February 18th, 2010. Thank you for your participation you may now disconnect.

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Source: Arrowhead Research Corp. F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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