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Arrowhead Research Corporation (NASDAQ:ARWR)

Alvos Acquisition Conference Call

April 11, 2012 4:30 PM ET

Executives

Brooks Rahmer – IR

Christopher Anzalone – CEO

Analysts

Todd Ulrich

Ted Tenthoff – Piper Jaffray

Operator

Good day and welcome to the Arrowhead Alvos Therapeutics Acquisition conference call and webcast. All participants will be in a listen-only mode.

(Operator Instructions)

Please also note that today’s event is being recorded. I would now like to turn the conference call over to Christopher Anzalone. Mr. Anzalone, please go ahead.

Christopher Anzalone

Thanks operator. Good afternoon everyone and thank you for joining us on the call today. With us – Brooks Rahmer?

Brooks Rahmer

Hi, guys. Think I will say a few words. Thanks everybody for joining the call today. On the call with us are President and CEO Dr. Christopher Anzalone, COO Dr. Bruce Given, and CFO Ken Myszkowski.

Management will provide a brief overview of the acquisition 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 27(NYSE:A) of the Securities Act of 1933 and Section 21(NYSE:E) 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. 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 management's current expectations and are inherently uncertain.

You should also 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 all that being said, I'd like to turn over the call to Dr. Christopher Anzalone, President and CEO of the company. Chris?

Christopher Anzalone

Thank you, Brooks. Good afternoon everyone and thank you for joining us on our call today. We are very pleased to announce that Arrowhead has acquired Alvos Therapeutics, Inc., formerly known as Mercator Therapeutics. Alvos is a privately-held company that licensed a large platform of proprietary human-derived Homing Peptides from MD Anderson Cancer Center. This technology is designed to direct therapeutic agents to primary and metastatic tumors and associated vasculature and shuttle the agents into target cells. As such, it holds the promise of: (a) hunting down and destroying tumors that are known as well as hunting down and destroying metastases that are not yet known; and (b) converting therapeutics that interact with most cells in the body to “smart” drugs that accumulate primarily at tumor sites to affect only cancer cells. This would be a large step away from the collateral damage and side effects of traditional cancer drugs and toward therapeutics that are invisible to healthy cells while being deadly to cancer cells.

This platform is powerful in the exquisite specificity of the targeting sequences, the huge number of unique sequences, the fact that they were derived from human screening therefore are immediately applicable to man, and the proprietary nature of the library. As you know, we have always seen great value in targeted therapeutics, and both our RONDEL and DPC siRNA delivery platforms are targetable. What we have now is a proprietary library of literally thousands of unique sequences that we can now use with our own platforms as well as with small molecule drugs.

We feel quite confident in the new library because MD Anderson has achieved clinical proof of concept in targeting metastatic prostate cancer with the first sequence tested in man, and our targeted obesity program grew out of the same methods and in fact, the same lab at MD Anderson. One could say that we saw so much value in the obesity technology that we wanted the entire platform.

Let’s now take a closer look at the technology and how it has been developed. Drs. Renata Pasqualini and Wadih Arap run a large, well funded, and well respected laboratory at MD Anderson. Their focus is discovering novel cell-surface receptors on tumor sites and peptide sequences that will bind those receptors as well as other known receptors. Importantly, their method identifies peptides that are rapidly internalized into cells. The rationale is that if we can identify receptors that are specific to tumor sites and peptides that will bind them, we can use those peptides as chaperones to shuttle payloads directly into tumor sites and nowhere else. These payloads can be drugs or targetable delivery vehicles.

Drs. Pasqualini and Arap refer to the novel receptors and peptides as zip codes. If you can provide a drug with the right zip code, it will only go to tumor cells. From a medical standpoint, this would solve some of the great problems with current cancer therapeutics by limiting side effects and increasing efficacy. Rather than having the majority of a drug interact with non-cancer cells as is the case with current treatments, we would be able to direct the majority of administered drug into our target cancer cells. From a business standpoint, if a company owns the zip codes, it could create highly effective and safe drugs itself and help others make their drugs better. Regarding the latter, the company with the zip codes could provide a substantial portion of the value of the final drug.

In order to discover these receptors and sequences that target them, Drs. Pasqualini and Arap used a technique called phage display. They have been pioneers in this field and its use in cancer. Over the past several years they have worked closely with MD Anderson to apply phage display screening to end-of-life cancer patients with primary and metastatic tumors under extremely rigorous ethical standards. To our knowledge, they are the only group in the world that is generating this type of human-derived data, and this is enormously powerful. As you can imagine, direct screening in human cancer patients can eliminate some of the uncertainty that has plagued traditional discovery methods with animal models.

This strategy has been quite successful and we now have many thousands of highly specific zip codes and have discovered a large number of novel receptors that are expressed only on the cell surface of tumor sites and nowhere else. We now have what we believe to be the world's largest proprietary library of human-derived targeting peptides. We also have the ability to further increase this library by continuing to work with MD Anderson to screen additional patients.

This is clearly great science, but where is the business for us? First, Arrowhead intends to apply this technology for targeting our proprietary siRNA delivery vehicles. As you know, we strongly believe that RNAi will revolutionize medicine if the field is able to solve delivery. Our two primary delivery platforms, DPCs and RONDEL, are highly attractive in part because they are safe, effective, capable of delivering RNAs to multiple organ systems, and they are targetable. We now have a huge proprietary library of targeting peptides for linking to these vehicles. This provides our program with a powerful new source of flexibility and value. We will use the library to create our own targeted RNAi therapeutics and we believe that this is another component that will be quite attractive to potential partners.

The new library is also valuable in creating a new class of therapeutics, Peptide-Drug Conjugates, or PDCs. By linking the homing peptides to traditional small molecule drugs we can potentially transform a therapeutic that interacts with most cells in the body into one that interacts primarily with the cell of choice. We believe that this transition from untargeted drugs to targeted is a paradigm shift for cancer therapeutics and our new library stands to put us at the forefront of this transformation.

We intend to build our own pipeline and work with partners to apply our targeting sequences to their drugs. We believe that this specific targeting will enable us to make generics into super generics and to help partners make their proprietary drugs better. Given the large number of approved APIs for oncology and the thousands of specific targeting sequences that we now have, the combinatorial permutations are endless.

Strategically, this acquisition creates value for us, but what about operational and financial concerns? The new program is highly synergistic with our current development programs. As I mentioned, this came from the same lab as our obesity program so we understand the platform well and have good expertise in peptide chemistry. We plan to integrate development of the Alvos technology into our Madison, Wisconsin facility, where we have a long history of work with targeting ligands. We have strong rapid cycling capabilities allowing us to assess functional characteristics of a large number of ligands. By leveraging our current infrastructure, employees, facilities, and expertise, additional costs assumed as result of the transaction are expected to be low.

To acquire all the outstanding shares of Alvos, we issued an upfront payment of 315,467 shares of restricted Arrowhead common stock. In addition, Alvos shareholders may receive additional issuances of stock valued at up to $23.5 million at the time of issuance based on the achievement of clinical and regulatory milestones. These milestones begin with demonstration of statistically significant clinical efficacy. Alvos shareholders are also eligible to receive additional Arrowhead stock based on sales milestones.

Overall, we believe that we have acquired Alvos, a company with cutting edge technology that is highly synergistic with Arrowhead, on attractive terms for Arrowhead shareholders. We also believe this was an attractive deal for Alvos shareholders. We have substantial infrastructure and expertise that we will bring to the development of this new platform immediately. We believe that Alvos shareholders will realize significant long-term value as Arrowhead shareholders, and that we are well positioned to help move this program forward quickly and cost effectively. I would like to welcome the Alvos shareholders into the Arrowhead family. We are extremely excited about our company and how this powerful new program fits into it. I expect to release a white paper providing more detailed information about this technology in the near term.

So, with that, thank you for your interest and I would like to now open the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Todd Ulrich. Please go ahead with your question.

Todd Ulrich

I had a quick question. To me that cash burn likely to go incrementally up. Seems like a big opportunity long term but there's been many sort of big opportunities through different IP acquisition over a long period of time. So one, I am kind of curious what you think the disconnect could be in terms of shareholder value versus the ultimate opportunity like what is the market missing. And do you think part of that is finally executing on something in terms of a partner shipping it in cash and the door. Just curious if you have any thoughts around that. Thanks.

Christopher Anzalone

This is a big opportunity long term but it's also big opportunity short term and mid-term we believe. This duck tails very, very well with our current programs. As I mentioned, our two primary siRNA delivery vehicles RONDEL and DPCs are targetable. And that's a significant advantage that they have over competitors. We are right now using "off-the shelf" targeting ligands, those which are in the public domain. We now have a proprietary library that is extremely powerful, highly specific that we can couple with our existing platforms and so it augments our existing business very, very well.

Now with respect to cost, we expect those to be quite low. We have substantial infrastructure and expertise in Madison, Wisconsin. We will not have to increase our infrastructure at all to make room for this program. We will leverage a lot of expertise we have right now. We will probably bring in only a small number of new chemists and biologists to help us with this. We're thinking probably in the order of two, maybe three in the mid-term and so our incremental costs there are quite manageable but given that small amount of cost, we think we have tremendously more value in our existing programs. And in addition it also opens us up to an entirely new business almost as a by-product if you will of its value in RNAi and that is these peptide drug conjugates or PDCs. We think that that is a very attractive new class of therapeutic that we can get into relatively cheaply with partnerships as well as on our own. Again, we do not believe we have to bring in substantial development, fire power because we already have that to bring this program into that new line of business. We think that this asset will make our RNAi program even more attractive to partners and we think that this will be attractive on its own to partners to create PDCs with their own drugs.

Todd Ulrich

Chris, would you be kind enough to give us an update on the landscape for RNAi potential partnerships. I do agree that a lot of this IP obviously has very long term potential value but it feels like, unless I am missing something, the last update was Pharma or potential partners really de-risking by putting that risk on smaller potential partners, meaning want to see progress in clinical trials, maybe late P1, may be even at P2. So while all this sounds great, it feels like it could be potentially a year maybe many years away. So it's seems like the furthest thing along stores RONDEL. So I am just curious if you could update this sort of landscape around partnering and to maybe where RONDEL is in terms of finally proving out that delivery given the one beat out was needed and when we could see a potential partnership there, maybe finally some cash in the drawer. Thank you.

Christopher Anzalone

I am not convinced that bringing monetary value with this platform is years away. To the contrary I think that we have much near term value that we can bring in with this platform. Now regarding the landscape in RNAi, it feels like it's looking for data. And has generated some positive data, I think that's a help for the entire field. It feels like there is increasing acceptance of a solution for delivery around the corner. We are still talking to companies and we still feel quite good about what we have to offer partners both in RONDEL and the BPCs and our off-stream RNAi IP. So this is additive, this Alvos transaction is additive to what we have, it's not in place of it. We feel like our partnering activities are still on track. Our value proposition now is as you know, fundamentally different than it was just four months ago. Because we have so much more firepower to offer to the partners and so our posture is a bit different but we feel quite good about it.

Todd Ulrich

Thank you for that. Any idea when the 1B could be completed. It seems like that needs to be done before a potential partnering toss, to possibly consummate. And second part and this will be then in my questions. Do you think RONDEL is still as powerful in terms of scalability and the fact as DPCs?

Christopher Anzalone

We have provided guidance recently that we believe the 1B will be done by the early summer and we are not changing that guidance. We still feel good about that. Regarding RONDEL versus DPCs, so we have the luxury of having multiple systems. Those two, again are the primary one but we have the luxury of when we are developing a new therapeutic either internally or with a partner of putting those head to head against each other. I don't want to pick sides. I think they are both high quality delivery systems. I think one of them maybe better for certain indications or for certain targets of for certain sequences than another and we will just make that decision on a target by target basis, but I'll tell you it is of great value to us and I think to our partners to have the ability to toggle among a variety of delivery systems.

Todd Ulrich

And just last one, if we get the 1B done by early summer, could we see a partnership at least potentially by the end of the year finally on RONDEL.

Christopher Anzalone

We haven't given guidance on partnership for the RNAi program.

Operator

(Operator Instructions). And we do have an additional question; this comes from Ted Tenthoff from Piper Jaffray. Please go ahead with your question.

Ted Tenthoff – Piper Jaffray

Obviously new and probably have some work trends to figure out on things like that, but Chris maybe you can walk us through what it takes to get this prime time, in other words you now have all these tools to apply from a delivery standpoint and they'll compete given on the target or the program or whatever. But what needs to be done to get these things ready to take into the clinic.

Christopher Anzalone

I think that's a great question. So we have a lot of really great data on specific finding of a number of these peptides. Now we have a very large library and we will continue to shift through more of these but right now as we speak, we have a very large number of sequences that we are convinced through multiple studies that were done (inaudible) that they find specifically to either tumors or tumor vasculature. So we feel really good about that right now. What we have less data on is conjugating them to various molecule drugs or conjugating them to the DPCs or through RONDEL we have not been able to start that program vigorously yet because we just acquired the technology but we intend to do that shortly.

We do not think that this is a science question. We think this is an engineering question in that we believe that the conjugation while potentially not trivial is certainly solvable. And so the first job that we'll be doing is to play with those conjugation chemistries. We already have a series of strategies that we have set and we should be able to start that quite shortly. Once we have developed that and once we feel comfortable about the conjugation, of course then we go through the traditional drug development cycle of doing some efficacy trials and once we are convinced that we are seeing effective delivery, then we can go into talks. If we are going to with respect to the PDC program, I think that what we're going to want to do is conduct reasonably simple head-to-head experiments where we have the untargeted and the targeted drug together and confirm to ourselves that this is doing what we think it's going to do and then with the DPCs and RONDEL, I think we will likely be testing a number of different sequences to determine which one seems to be more efficient.

Ted Tenthoff – Piper Jaffray

That makes a lot of sense, and if I may a quick follow up, when it comes to partnering consideration, are you thinking about this as a platform that you would license together? Would you consider delivery deals alone like just around this conjugate technology? I mean obviously small molecules is different from (inaudible) in that standpoint. Or is it just something where you're going to apply it to products and ultimately hopefully partner the products themselves.

Christopher Anzalone

I don't have a complete answer for that yet, because it's still too early for us. Here is what I think. I think that we will create our own pipeline of small molecule drugs conjugated to some of these peptide sequences. Similarly we will have our own pipeline of siRNA therapeutics that utilizes these sequences as they targeting OIDs. For our own internal pipeline, now we may bring those all the way through to the markets or we may partner those along the way. Now regarding the platform integration, here is what I think. I think that we can work with large pharmaceutical partners as well as biotech partners to take a look at, just as an example, take a look at their drugs that maybe coming to an end of their patent life.

So you can imagine that we would have a pretty attractive business to work with them, to reformulate those drugs with well-established safety and efficacy profiles that likely have good champions within those companies. We work with them to open up our library and pick a series of sequences that may be interesting to increase the efficacy of those drugs, decrease the side effects etcetera and then work with them to assess those. Ultimately I think that will be quite attractive to those companies because it will give them a reformulation that is now truly targetable or truly targeted rather. And so it's not just a reformulation to extent patent life but truly a new drug. And we will do those to partnerships really on a drug by drug basis. And so I can imagine doing partnerships with a single sequence a number of times just for various different drugs or various different halos.

Operator

(Operator Instructions). And we have a follow-up question from Todd Ulrich. Please go ahead with your question.

Todd Ulrich

Just one follow-up or two. On the 1B to the extent you can't, I mean is the further data you're potentially seeing somewhat encouraging to the standpoint that versus having a naked, now it's sort of modified certainly and thus that RONDEL still may not be creating some of these toxic or effects that you had seen that obviously had pushed us into 1B. Is that sort of data pass still someone encouraging as much as you can sort of distill to us?

Christopher Anzalone

Yes, I am not going to comment on current data, but here's what I can tell you. We are not testing in a 1B in modified siRNA sequence. We are in fact testing a new dosing regimen. And what we talked about in the past, what we believe is that some of the AEs that we saw at the higher doses in the Phase I were likely related to the unmodified siRNA rather than to the RONDEL. We also saw that some of those effects were transient so it was our theory that if we can pre-treat a patient with a lower dose, we could then increase dose even higher by desensitizing those patients. And so we are testing that right now. I can tell you that we still feel good that we have not seen AE either related to RONDEL, of course you never know but that is our interpretation. What we've seen so far, that is potentially important to us because in follow-on products we will almost assuredly use modified siRNAs because it is well understood now, it wasn’t when we started the trial but it's well understood now that unmodified siRNAs can have an immune response and the modifications required to decrease the immune response are well understood. So going forward, we feel good about what we've seen so far in the tolerability of RONDEL and we still don't know. I don't think how far we can dose RONDEL up without seeing AEs.

Todd Ulrich

Got it and just away from RNAi if I may, how should we think about DOB. Is the opportunity in terms of any other sort of potential tell us whether it’s a data set of potential partnering or just anything that would sort of show prowess in the clinic there.

Christopher Anzalone

Well as we announced, the FDA has given us clearance to start treating patients. That Phase I is being conducted in MD Anderson. The good news there is that the direct cost associated with that Phase I are entirely born by MD Anderson. The challenge there is that because we are not conducting it, we don't have control over how quickly we are dosing patients. We think we'll be dosing patients in the very near term and we have not yet started dosing patients. We are excited about those data. We think it’s a fantastic platform. It's not just a single drug but really is a platform because we have a number of these targeted sequences that came in via these license that we are in it. And so what we see is a suite a products with this that could defer by targeting sequence, could defer by payload, could defer by what we conjugate to that and other words right now, as you know the protocol is to treat patients with a once-a-day subcutaneous injection. One could imagine that there are strategies that we could employ to effect the PK and therefore maybe someday provide a once a week or a once in month injections. And so those are all considerations and those are all I think value points that we are exploring. We are excited to start adjusting patients and I will just stay tuned, we think that that will happen in the very near term.

Operator

And at this time, I am showing no additional questions. I would like to turn the conference call back over to Anzalone for any closing remarks.

Christopher Anzalone

Thanks very much for participating in the call today everyone. We expect to have a whitepaper out in the near term to provide some more information on this exciting new platform. We are thrilled to have it as part of the Arrow family. We think that it is an important part of our existing programs and we think it enables us to get into new businesses as well. So thanks very much and we will see you next month at our quarterly conference call.

Operator

The conference call is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.

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