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Arrowhead Research Corp. (NASDAQ:ARWR)

F1Q 2014 Results Earnings Call

February 4, 2014 4:30 PM ET

Executives

Vincent Anzalone - Director, Finance and Investor Relations

Dr. Christopher Anzalone - President and CEO

Dr. Bruce Given - Chief Operating Officer and Head, R&D

Ken Myszkowski - Chief Financial Officer

Analysts

Ted Tenthoff - Piper Jaffray

Thomas Wei - Jefferies

Wei Li - Autodesk Research

Operator

Ladies and gentlemen, welcome to the Arrowhead Research Fiscal 2014 First Quarter Financial 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. I would now like to hand the conference over to Vincent Anzalone, Director of Finance and Investor Relations for Arrowhead. Please go ahead, Vince.

Vincent Anzalone

Thank you, Operator. Good afternoon, everyone. And thank you for joining us today to discuss Arrowhead’s results for its fiscal 2014 first quarter ended December 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 give a brief overview of the quarter and we’ll then open up the call 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 facts, 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?

Dr. Christopher Anzalone

Thanks, Vince. Good afternoon, everyone and thank you for joining us today. During our last conference call in December, we discussed key 2013 milestones and how they de-risk our programs and help shape our current value proposition. That was less than seven weeks ago, so today we will be more forward-looking and focus on our plans for this calendar year.

2013 was indeed a great year for us. But we see even opportunities for value creation in 2014. We are entering a period of growth, marking out only by progress of ARC-520, our candidate against chronic hepatitis B infection, but also expansion of our clinical pipeline. This is the national progression for Arrowhead as a maturing company and set forward the fundamentally different risk profile then we had just a year ago.

Let start with capital, today we filed a shelf registration statement for up to $200 million in Arrowhead equity securities, our existing shelf expires this year and we felt that prudent financial management to maintain an effective shelf registration statement. It also reflects our confidence in ARC-520 in the broader DPC platform.

We have a tremendous amount of value yet to unlock and we believe the best way to maximize that value is to drive clinical development ourselves and not be dependant upon early partners.

For instance, we are prepared to push ARC-520 all the way through registration. So that mean we are raising $200 million right now, no. We have a very strong balance sheet that gives us runway into 2016 and enables us to fully fund ARC-520 through Phase 2b, while pushing two additional candidates through clinical proof-of-concept. The new shelf gives us added flexibility to further strengthen our balance sheet at some point in the future and continue independent development beyond that.

The ARC-520 clinical program has provided us increase confidence to drive development internally. In October we completed plan enrollment in a Phase 1 study of ARC-520 in 36 healthy volunteers.

The study indicated that ARC-520 was generally safe and well-tolerated at all six dose level study. All subject received their full assigned dose and there were no discontinuations for adverse events or otherwise, no serious or severe adverse events were reported and laboratory results have indicated, have not indicated any end-organ toxicity in any subject. We later presented unblinded Phase 1 data at the HepDART 2013 conference demonstrating that adverse event frequency and severity were the same between placebo and ARC-520.

In November, we applied for regulatory approval in Hong Kong to conduct a single-dose Phase 2a study in patients with chronic hepatitis B. The two sites NPIs are well-known international KOL that have conducted many HBV trials. Ethics committees from both sites have approved our protocol and all necessary preparation -- preparations are completed.

We are waiting for final approval from the Hong Kong Department of Health to begin the study. Communications have been positive and we believe that we will receive approval and begin treating patients this quarter.

We're currently planning two dose groups of eight patients each and we expected to enroll quickly. We believe both cohorts will be at effective dose levels in our primary endpoint, our safety and tolerability as well as depth and duration of s-antigen knockdown.

We believe that dosing portion will be complete in the second quarter and we will follow patients until s-antigen levels return to baseline. While we cannot predict how long the duration of effect will be, we believe that topline data should be available sometime during the summer.

Our plan is to provide these data via press release and then present a full data set at a scientific meeting. We have a high degree of confidence that the Phase 2a will be successful. The Phase 1 suggested that we have a safe and well-tolerated drug at all dose study.

We saw no dose limiting toxicities. So we do not expect any safety concerns in the Phase 2a. We have generated a substantial amount of data in multiple animal models indicating highly protein knockdown. For instance, we publish data from electrotherapy describing ARC-520 administration in rodent HBV models that lead to three to four logs of greater than 99.9% knockdown of HBV gene products.

We have generated data in non-human primates using other siRNAs sequences demonstrating similar results. Most recently, we reported deep and durable knockdown in a chimpanzee with chronic HBV. Should the 2a -- should the 2a work out as we hope, it will represent a great leap forward in HBV research and potential treatment.

We believe it will be the first time anyone will have demonstrated consistent s-antigen reduction, which is thought to be a critical step in reaching a functional cure. Based on a Phase 2a data, we plan to move into a multi-dose base 2b in the second half of this year.

Preparations for this much longer study are underway and they include completion of our second external GMP manufacturing run, chronic GLP toxicology studies in multiple species, site and investigator recruitment, protocol development and applications for regulatory approval.

The Phase 2b will be a multinational study and will likely include sites in the U.S., Europe and Asia. We will be designing the trial to provide readout on ARC-520’s ability to achieve functional cures among other outcome measures.

As you can see, 2014 is an important year for ARC-520 and we expect substantial value to be created around this program. 2014 is also about leveraging ARC-520 to de-risk the DPC delivery platform and broadening out our pipeline.

So think of ARC-520 as the candidate drives value directly and as a proxy for other liver-based candidates. Our friends at Alnylam did the same thing with their TTR program over the past year and a half. We've demonstrated that DPCs are safe and well tolerated in humans and we hope that by this summer, we will have demonstrated that they are capable of inducing efficient, deep and durable gene products knockdown in humans.

This type of clinical validation will enable shareholders and potential shareholders to ascribe value to new candidates relatively early in development. RNAi is a reliable mechanism and many accept the idea that if you can get a prudent siRNA sequence to right tissue type and the right intracellular space then you can reasonably expect target gene product knockdown.

Once we show that DPCs can do that safely and efficiently in humans, we will have a machine capable of pushing new candidates into the clinic quickly. These candidates may have a higher probability of success and lower risk profile relative to early clinical candidates using other therapeutic modalities. This is a point where our upside potential expand substantially and we begin to maximize the value we may extract from our broad platforms.

Towards those ends, we expect to have an Analyst and Investor Day at the end of the second quarter to discuss pipeline capabilities in the next candidate. The target and disease area for this next candidate have not been disclosed publicly, but we've said that it is an orphan liver indication.

Our current plans is to hold an Analyst and Investor Day to announced the candidate, provide information about the disease area, present preclinical data and give more guidance about the timing for the clinical program. This should be very similar to the event we held last year on ARC-520, and we hope to include key opinion leaders in the disease area. We expect to file an IND for the new candidate in the fourth quarter of this year.

Underneath ARC-520 and the next candidates we have programs against other targets. We also have large efforts to develop DPC formulations for subcutaneous administration as well as programs with extra-hepatic delivery. We believe these are significant mid-and long-term value drivers and we hope to provide additional information around them later in 2014.

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

Ken Myszkowski

Thank you, Chris and good afternoon everyone. As we reported today, our net loss attributable to Arrowhead for the three months ended December 31, 2013 was $10.6 million, or $0.28 per share based on 37.7 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead of $4.6 million, or $0.33 per share based on 14.1 million weighted average shares outstanding for the three months ended December 31, 2012.

Total operating expenses for the three months ended December 31, 2013 was $7.1 million, compared with $5 million for the three months ended December 31, 2012. Research and development related expenses were $4.5 million during the quarter and general and administrative expenses were $1.7 million.

The increase in operating expenses compared to the year ago period are due to higher drug manufacturing costs related to ARC-520 in preparation for Phase 2 clinical trials. Higher clinical trial expense related to Phase 1 clinical trial, for ARC-520 and higher compensation expense, primarily due to increased headcount as compared to the prior year.

Net cash used in operating activities for the first three months of fiscal 2014 was $7 million compared with $3.8 million in the prior year period. The change in cash used in operating activities is consistent with the change in operating expenses.

Turning to our balance sheet, our cash balance was $59.7 million at December 31, 2013, including investments in fixed income securities, our cash and investments balance was $85.5 million at December 31, 2013, compared to $29.8 million at September 30, 2013. The increase reflects the $60 million offering closed in October.

Additionally, the company received cash inflow of $2.8 million from the exercise of warrants and stock options. Our common shares outstanding at December 31, 2013 were $39 million, up $6.5 million from $32.5 million at September 30, 2013.

Also at December 31, 2013, there were 51,291 shares of preferred stock outstanding. These preferred shares are convertible into 10.7 million shares of common stock. Common shares outstanding including the conversion of our preferred shares will be 49.7 million.

With that overview, I will turn the call back to Chris.

Dr. Christopher Anzalone

Thanks, Ken. As I mentioned, 2013 was a big year for us, but we believe that 2014 offers even more opportunities for real and durable value creation. They include the following. This quarter, we expect to begin a Phase 2a study of ARC-520 in patients with chronic HBV in Hong Kong. Next quarter, we expect to complete dosing in a Phase 2a.

At the end of the second quarter, we expect to have an Analyst Investor Day to disclose our next candidates. We will discuss the disease, target, pre-clinical data and clinical plan.

In the third quarter, we expect to release topline results from the Phase 2a. In the fourth quarter, we expect to begin a multi-dose Phase 2b study for ARC-520. And also in the fourth quarter, we expect to file an IND for our next candidate.

ARC-520 remains our top priority and primary value driver, but as we move through the Phase 2a, it will also serve as a powerful proof-of-concept for our broader platforms. I believe that this will represent an important inflection point as shareholder value may then be built simultaneously through the success of ARC-520 as a candidate and via new candidates that enter the clinic relatively de-risked.

This becomes a story of leverage and speed. We have developed the machine capable of pushing new candidates into the clinic rapidly, that are all built on a validated delivery system. We have all the tools we need to build substantial shareholder value and create new therapies that could positively impact patients worldwide.

I would now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Ted Tenthoff of Piper Jaffray.

Ted Tenthoff - Piper Jaffray

Great. Thank you very much for taking the question. Just a question on the upcoming Phase 2a, what still has to be done, what are we waiting for dosing and how quickly do you expect to be enrolling data? Are we going to do one cohort and then subsequently the second cohort, how do we expect that to roll out?

Dr. Christopher Anzalone

Thanks, Ted. Bruce, do you want to have that call? Back to your question.

Dr. Bruce Given

Yeah. Sure. Good afternoon, Ted.

Ted Tenthoff - Piper Jaffray

Hi, Bruce.

Dr. Bruce Given

So, the -- all we are waiting for now is the approval, final approval from the Hong Kong authorities and we expect that fairly soon after completion of the Chinese New Year, but we of course don’t control that. But we are hopeful that that will come soon and then we will be ready to go. We will complete enrollment in the first cohort, of course, before we would start the second cohort.

Ted Tenthoff - Piper Jaffray

Okay.

Dr. Bruce Given

But we are not required by protocol to wait until the first cohort have all completed their follow-up. So once everybody has been enrolled and have had at least a relatively short brief period of follow-up for the last patients in, we'll be able to start the second cohort. And we are hoping that that will go fairly quickly.

Ted Tenthoff - Piper Jaffray

Thanks. And it will be measuring viral load reductions as well but obviously the focus is on s-antigen, correct?

Dr. Bruce Given

Well, we are going to be on the background of entecavir, so viral load should already be fairly fully suppressed or may be even undetectable. If there is virus present, we will be measuring the further decline, but many of these patients will not have a detectable DNA…

Ted Tenthoff - Piper Jaffray

So the main…

Dr. Bruce Given

If he was on s-antigen.

Ted Tenthoff - Piper Jaffray

Awesome. Thank you very much and looking forward to hearing what the next program is to.

Dr. Christopher Anzalone

Thank you, Ted.

Operator

And the next question will come from Thomas Wei of Jefferies.

Thomas Wei - Jefferies

Thanks. I just wanted to understand in the chimp study, the chimp did received two doses of drug, but you talk about it as being given to so close together in time that is actually more like a single dose of drug as just like twice the dose exposure? Can you remind me how that dose compares to the doses that are being used in the Hong Kong study, I am sorry, I can’t remember that? And then also comparison of what surface antigen levels were in the chimp relative to what it might be in the s-antigen negative population in Asia?

Dr. Christopher Anzalone

Sure. Thanks very much, Thomas. The doses in the chimp were 2 mcg per kg and 3 mcg per kg. As you point out those were -- was really short exposure, those two doses were separated only by two weeks and that was not meant to imply that we believe the dosing schedule in humans in every two weeks rather we think its going to be closer to a month. We were just trying to find what an effective dose might be in the chimp in that study.

So we are in the Phase 2a we are looking at 1 mcg per kg and 2 mcg per kg. We believe that those are both effective doses. Keep in mind that that chimp was extremely viremic and antigenemic, much more so than we expect to see in humans and so there is a much higher bar in that animal then we will see in human.

And second that animal had an uniform of HBV there was a mismatch for one of our two sequences. Now it’s not clear what effective that is. It could have been that one of that -- part of our drug was less effective than the other. But for those reasons we believe that the 1 and 2 mcg per kg mix will be effective in people. Now regarding the s-antigen levels, Bruce do you want to comment on dose levels in the chimp?

Dr. Bruce Given

Right. They were very high and our expectation, Thomas, would be that they will probably be in the orders of two to three logs levels in the patient and maybe some even lower than that. But it is a little bit hard to predict. We will see a considerable amount of variability in s-antigen levels in this patient population but we would expect and it would be quite a bit lower than they were in the chimp.

Thomas Wei - Jefferies

And just a follow up, when you include all of these various factors, the difference in the doses and the difference between the chimps and humans and the mismatch and as surface antigen baseline? What do you think is the reasonable expectation for what we could see out of the single dose study in terms of surface antigen effects?

Dr. Christopher Anzalone

What we are looking to get is about a log of knockdown that would last around a month. We believe we can get that in the 1 to 2 mcg per kg range, but if we can’t we believe that we could amend the protocol in the Hong Kong and go higher. The Phase 1 was quite clean and when we expected that should those data be reproduced in the Phase 2a that we could probably go higher, should we need to, but that sort of our bogie. Now it’s not clear that we need to be that good.

For instance, you probably recall in the chimp. With s-antigen we got somewhere in the 85 or so percent knockdown, so less than a log. But that was sufficient to initiate this process that we believe was immune activation or immune reactivation. So that was -- even though we're going we would like to do a log in human that 85 or so percent at least in this one individual seem to be enough to start that cascade of events that under chronic dosing could lead to a functional cure.

Thomas Wei - Jefferies

Okay. Great. Thanks.

Dr. Christopher Anzalone

You are welcome.

Operator

(Operator Instructions) I apologize. We do have a question from Wei Li.

Wei Li - Autodesk Research

Yeah. Actually, I have a quick question about the mix target of the RNAi. I have two questions but first is I saw the Arrowhead did some research on Chimpanzee just for the genotype B and I know there is a lot of people or patients, with that genotype C and those are closely related with the liver cancer and more compatibility with the liver cancer. So I just wonder is there any data to support that genotype type C. This is the first question.

A follow-up is for the genotype C and genotype B, there are two kind of mutations, is the precore, also basal core promoters. So is there any difference -- I mean, per your comments for those patients with basal core promoter mutation. Thank you.

Dr. Christopher Anzalone

Thank you very much, that’s a very astute question. We designed as you may know ARC-520 consists of two siRNA sequences. The reason we have two is to give us or the primary reason that to is the broader coverage across genotypes because we know the multiple major genotypes and hepatitis B as you mentioned B and C are two of them. The chimpanzee we studied happened to be a genotype B.

We tested our two sequences or we screen our two sequences with gene bank which has something on the order of 25 or so hundred sequences in a depth of HBV. And among the two genotypes, among the two sequences, together we cover 99.6% or 99.9% of all those sequences. So we should cover, we believe, we cover all the primary genotypes with at least one of the two sequences.

Now regarding mutations in B or C, again we got these two sequences and they are both designed and -- or they are both generated in a highly conserved regions so presumably we should cover the vast majority of individuals.

Now that’s not to say that we will be equally efficacious in all genotypes. This is a very difficult virus as you know and it is certainly possible that this therapy could be more or less efficacious in certain genotypes. There is no theoretical reason for that right now but is certainly a possibility given that we don't know very much about the virus.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Dr. Christopher Anzalone

Well, thank you very much for your attention and for participating in the call today and I look forward to talking to you soon.

Operator

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

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