Arrowhead Pharmaceuticals, Inc.
Q4 2012 Earnings Call Transcript

Published: 21 Dec 2012

[Operator:]

Ladies and gentlemen, welcome to the Arrowhead Research fiscal 2012 fourth quarter and year-end financial results conference call. [Operator instructions.] I will now hand the conference 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 2012 fourth quarter and year ended September 30, 2012. With us today from management are President and CEO Dr. Christopher Anzalone, Chief Operating Officer and Head of R&D Dr. Bruce Given, and Chief Financial Officer Ken Myszkowski. Management will provide a brief overview of the quarter and we’ll then open the call up to your questions. Before we begin, I would like to remind you that comments made during today's call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including without limitation those with respect to Arrowhead’s goals, plans, and strategies, are forward-looking statements. 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 that said, I’d like to turn the call over to Dr. Christopher Anzalone, president and CEO of the company. Chris? Christopher Anzalone Thanks, Vince. Good afternoon everyone, and thank you for joining us on our call today. Let me start by discussing the recent announcement that we signed a collaboration and license agreement with Shire to use our homing peptide platform. This is the second targeting agreement that we’ve made a pharmaceutical company, the first one being with Merck in August, since we acquired the platform in April of this year. The agreement with Shire includes research funding for Arrowhead to screen our library of human-derived homing peptides and identify targeting agents that can preferentially deliver a therapeutic payload to a specific, undisclosed tissue type. Shire will then be responsible for clinical development and commercialization of a peptide drug conjugate, or PDC, using our targeting peptide and one of their therapeutic agents. We are eligible to receive up to $32.8 million in milestone payments, plus additional milestones if Shire seeks regulatory approval for a second indication. We will also receive royalties on the sale of these products. We are encouraged by the interest from companies of this caliber, and see this as an important value driver in four primary areas. First, it provides validation for the technology. Working with Merck and Shire in two very different fields so soon after we acquired the platform speaks to the breadth of the technology and suggests that established pharmaceutical companies see value in the platform. Second, there’s a direct economic value in the partnership, because Shire will provide research funding, milestone payments, and royalties as the program moves forward. Third, Shire funding will help to pay for development of targeting that we may use outside the partnership. This is truly leveraging a specific collaboration to build value for the entire platform. And fourth, this deal demonstrates an evolution of partnership structure and economics. Our first collaboration, with Merck, left negotiation of further development and commercialization economics until after evaluations are complete. The Shire partnership contains more concrete development plans and economics, and we believe it is a positive step towards larger deals. Moving on, we’re making progress with our product pipeline. This currently includes an oncology RNAi therapeutic, CALAA-01; an anti-obesity PDC, Adipotide; and our newest drug candidate, ARC-520, for the treatment of chronic hepatitis B virus, or HBV, infection. During the fiscal fourth quarter of 2012, and since our last conference call, we have seen a number of accomplishments, including 1) as mentioned, we executed the collaboration and license agreement with Shire for peptide-targeted therapeutics, 2) entered into an evaluation agreement with Merck for a monoclonal antibody candidate, 3) began dosing patients with anti-obesity treatment Adipotide in a Phase I clinical trial, 4) completed patient dosing in a Phase IB trial of CALAA-01, 5) enrollment of a randomized Phase II clinical study of partnered candidate CRLX-101, formerly IT-101, in a non-small cell lung cancer was completed by licensee Cerulean Pharma, with overall survival data expected in early 2013, 6) received additional patents on the DPC siRNA delivery system, 7) presented data on new DPC subcutaneous formulations showing 99% knockdown in nonhuman primates without observed toxicity, 8) published studies in the Journal of Nucleic Acid Therapeutics demonstrating high levels of knockdown in nonhuman primates using cholesterol-conjugated siRNA DPCs in a novel co-injection strategy, 9) established a clinical advisory board for hepatitis B candidate ARC-520 and named prominent hepatologist Dr. Robert G. Gish as chairman, 10) submitted a pre-IND package and completed a pre-IND meeting with the FDA on ARC-520, 11) advanced ARC-520 into final IND-enabling steps with IND filing expected in Q2 2013, and 12) strengthened the balance sheet through equity financings with gross proceeds of $10.5 million. I’d like to highlight a few items in more detail. With the Shire deal fresh in our minds, this is a good time to provide some guidance on our strategy for the homing peptide platform and how we plan to utilize it. Our acquisition of Alvos Therapeutics in April was in large part intended to drive value for our targeted RNAi therapeutics programs. Acquisition of the Roche RNAi business gave us extremely broad and powerful capabilities in targeted RNAi therapeutics. We believe that our capabilities could expand exponentially if we had access to a variety of targeting ligands capable of guiding RNAi therapeutics to multiple tissue types in a highly specific manner. For this primary reason, we acquired the homing peptide library, which contains over 42,000 targeting sequences and has the potential to allow preferential delivery to more than 30 tissue types. The combinatorial derivations of the huge number of gene targets and this variety of homing peptides is staggering. It provides us with a virtually limitless set of potential therapeutics. Of course, we could never create even a fraction of these potential drugs, but it gives us options, which is critical in the difficult world of drug development. It also drives value by enabling partners to build therapeutics that we do not intend to develop internally. Almost as a byproduct of developing targeted RNAi therapeutics with the homing peptide library, we are developing the ability to attach more traditional drugs directly to these peptides and enable peptide drug conjugates. This is strategically well timed, we believe, in light of the recent success of antibody drug conjugates. During the last two quarters, our internal work with this platform has followed these ideas. We continue to explore the use of various targeting peptides for RNAi therapeutics and small molecule drugs. We’ll now move on to a discussion of ARC-520, our candidate for the treatment of chronic hepatitis B infection. This is our first RNAi therapeutic utilizing the DPC delivery system. This program was initiated by Roche, and was at an early stage of development at the time of our acquisition. I’m extremely pleased with the speed of development over the past 12 months, and we are on track to file an IND in the second calendar quarter of 2013. This has served as a compelling proof of concept for the DPC platform. It is an example of how quickly our team in Madison is able to innovate and drive to the clinic, and it is an exciting candidate addressing a large, underserved world market. We released a white paper, which is available on our website, about the HBV landscape, and an introduction to our HBV development programs, but we have not discussed many details about ARC-520 to this point. Data from several of the supporting studies are the subject of scientific manuscripts that have been submitted for publication in peer-reviewed journals. We see this candidate as a potentially significant value-driver for Arrowhead, with several short term and medium term milestones that may serve as catalysts. Although we will not discuss in detail the data that are pending publication, we would like to talk more about the ARC-520 candidate and the rationale for using the RNAi mechanism to target HBV. According to the World Health Organization, 360 million people globally are chronically infected with HBV, of which between 500,000 and 1 million people die each year as a result of hepatocellular carcinoma, or HCC; cirrhosis of the liver; or liver failure caused by HBV. Progress on effective treatments has lagged behind those for hepatitis C, in part because of HBV biology is complex and not entirely understood. Infective hepatocytes release new copies of the virus, as well as viral proteins. It is thought that viral proteins can immunosuppress infected individuals and keep them from clearing the virus. Therefore, it is theorized that knocking out the release of viral proteins could enable the patient’s immune system to come back up and clear the infection. Unfortunately, there’s not currently a reliable way to do that. The current standard of care for treatment of chronic HBV is a daily oral dose of nucleotide and nucleoside analogs, or nukes, or a regimen of interferon injections two to seven times weekly for approximately one year. Nukes are generally well-tolerated, and they are effective at blocking the release of new variants so infected patients are no longer contagious. However, they do virtually nothing against viral proteins, so patients are generally on the drug for life and still at risk for HCC, cirrhosis, and other conditions associated with chronic HBV infection. Interferon therapeutics can result in a functional cure in around 10% of patients, but are often associated with significant side effects including severe flu-like symptoms, immunosuppression, and autoimmune disorders. This is the opportunity we step into

[Ken Myszkowski:]

Thanks, Chris, and good afternoon everyone. Our net loss attributable to Arrowhead for the year ended September 30, 2012 was $21.1 million, or $1.90 per share, based on 11.1 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead of $3.1 million, or $0.44 per share, based on 7.2 million weighted average shares outstanding for the year ended September 30, 2011. For the quarter, our net loss attributable to Arrowhead was $5.3 million, or $0.43 per share, based on 12.5 million weighted average shares outstanding. This compares with a net loss of $2.8 million, or $0.39 per share, based on 7.2 million weighted average shares outstanding for the quarter ended September 30, 2011. On a consolidated basis, for the year ended September 30, 2012, net cash used in operating activities of continuing operations was $15.3 million, compared with $7.7 million in the prior year period. Our total operating expenses for the year ended September 30, 2012 was $21.2 million, of which approximately $3 million was noncash expenses. Operating expenses in fiscal 2011 were approximately $10.1 million. The increase in operating expenses was primarily related to the acquisition of our Madison R&D facility and related operating costs including personnel and research and development activities. Our total operating expenses for the quarter ended September 30, 2012 were $5.4 million, an increase of $2.5 million from $2.9 million during the quarter ended September 30, 2011. The increase in operating expenses for the quarter was also due to the Madison R&D facility. Turning to our balance sheet, our cash position was $3.4 million at September 30, 2012. This compared to $7.5 million at September 30, 2011. The change in cash was primarily due to our cash used in operating activities of $15.3 million, somewhat offset by the cash inflow from our financing activities during the year of $10.8 million. Our shares outstanding at September 30, 2012 were 13.6 million, up 4.9 million from 8.6 million at September 30, 2011. The increase in shares outstanding is primarily due to the financings during fiscal 2012. With that brief overview, I will turn the call back to Chris for concluding remarks. Christopher Anzalone Thank you, Ken. The last 12 months have brought dramatic changes to Arrowhead. We have executed on our long term strategy to transition from being a nanotechnology holding company with independent subsidiaries in multiple industries to a focused and unified biotech company. This transition was not a rebranding effort. Rather, it was a comprehensive rebuilding of our business, including our technology platforms, R&D capabilities, and operating, scientific, and business development management. Arrowhead has a solid foundation to create drugs and partnerships that will drive long term value for our shareholders. We are more confident than ever about our ability to do this. I’d like to review some of the key steps that we’ve taken to make Arrowhead a fundamentally different company than it was just a year ago. One, we acquired Roche’s RNAi business, which included a best-in-class delivery system in the DPCs, broad siRNA chemistry licenses, a state-of-the-art 24,000 square foot R&D facility built by Big Pharma, and R&D staff of approximately 40 scientists. Two, we broadened out our management team by adding accomplished biopharma executives Dr. Bruce Given as chief operating officer and head of R&D, and Dr. Brendan Rae as chief business officer. Three, we acquired Alvos Therapeutics, providing Arrowhead with a library of peptide targeting sequences used to create peptide drug conjugates and to serve as targeting agents for Arrowhead’s siRNA delivery vehicles. Four, we created a centralized infrastructure for management of clinical trials, and five, we dramatically improved our ability to support pharma partnerships and collaborations in RNAi and active targeting. These steps, along with other accomplishments, have created an integrated and streamlined development operation that allows Arrowhead to advance multiple programs in a short amount of time. We believe our success at taking ARC-520 from an early preclinical stage program to an IND-ready asset in just over a year demonstrates this point and positions us as a leader in RNAi drug development. We are proud of the progress we made as a company during the last year, and we believe we are well-positioned to rapidly advance our product candidates and partnering efforts over the next year as well. Thank you for your interest, and I would now like to open the call to questions. Operator?

[Operator:]

[Operator instructions.] And our first question will come from Ted Tenthoff of Piper Jaffray.

[Ted Tenthoff:]

I’m most interested in the HBV program, and I’m wondering, when it comes to the DPC technology, what data do you have with respect to uptake in disease hepatocytes? [unintelligible] that would be similar to those that might be most reminiscent of hepatitis C infection or even cirrhosis. What kind of data have you seen with respect to uptake in disease liver cells. Christopher Anzalone That’s a great question. As you know, there are not a lot of established models for hepatitis B. For instance, I believe that there are maybe two chimpanzees in the world that have hepatitis B. Otherwise, we rely on murine models, a transgenic model as well as non-transgenic model. Bruce, do you want to walk through some of the work that we’ve done in those models?

[Bruce Given:]

I think the short answer is there’s not really a good cirrhosis model or even an active hepatitis disease model other than chimpanzees. And as Chris said, I think there are two chimpanzees in captivity right now that have chronic hepatitis B. And at this point, I don’t even think that either of those are cirrhotic. So we haven’t directly answered that question. That said, the good news here is that DPCs are targeted to be a [sealed] glycoprotein receptor, which is expressed in huge abundance on hepatocytes. And it’s my understanding that the receptor is still present in patients that have hepatitis or even in the presence of cirrhosis. So as long as you have viable cells, you should have cells that have the receptor present. So we would expect that DPCs should be effective in that circumstance.

[Operator:]

And our next question is from Andrew Fellows of Edison.

[Andrew Fellows:]

I was just wondering, and you probably can’t say too much, but if you’d give a bit of flavor or color on the Shire in terms of the speed of progress, and also the kind of magnitude of the research funding that you’re going to be getting from them. Is there any extra color you can give on that? Christopher Anzalone Unfortunately we can’t give too much color on the extent of research funding. Here’s what I can tell you. The first phase of this is going to involve interrogating our database. We’ve got these 42,000-plus sequences in the database that we can interrogate on a tissue-by-tissue basis. And that should spit out some fairly large number of sequences that we believe will specifically target their tissue of choice. In the past, what we have said is that we’ve seen somewhere between 300 and 1,000 sequences that can specifically target a tissue type. And so we’ll start with a very large number like that. Once we have that, we will then start to winnow that down into a smaller, more manageable number, and do in vitro as well as in vivo screens to bring that down to a very small number of a primary candidate and then a few backups. We’ll be doing that. The first part of that, the screen, will be done by us, and then the forward screens will be done in collaboration with Shire. Once one is picked, they’ll move it into the clinic and they will control that entirely. There’s no strict timeframe on any of these phases, and so we’ll just see how fast we can move on this. We believe that they’re motivated to move quickly, and certainly we are, so this first real partnership is going to be a test case for us. We’re going to learn an awful lot about the platform. We’re going to learn an awful lot about targeting that tissue type, as well as other tissue types, and we’ll learn an awful lot about how long it takes to get to a small number of preferred sequences.

[Andrew Fellows:]

On the CALAA-01, I got the impression that perhaps you’re talking about modifying the RONDEL delivery system or looking at other mechanisms. Is that correct? And what does that mean for the overall timing of development there? Christopher Anzalone We have been doing a lot of work on RONDEL, since we’ve had the facility in Madison, to potentially optimize it. And we’ve also been testing it against DPCs to determine some indications of where it may be superior and some indications where the DPCs may be superior. And so that’s still in progress. Another thing we’ve mentioned in the past is that CALAA-01 is using unmodified siRNAs. We know that going forward all of the RNAi candidates that we’re going to have are going to use modified siRNAs, and so we are trying to determine, right now, A) is RONDEL the right system to move into a Phase II with that? And B) are we happy with taking a therapeutic without modified siRNAs into a Phase II. And we’re still in that process right now.

[Operator:]

[Operator instructions.] And our next question is from Lee Alper of

[[Lee Alper]:]

The concern I have is how are you going to fund to get from here to where we’re going to do something. Christopher Anzalone As we’ve stated in the past, what we have here is a bit of a hybrid model. We are a platform company, and we’re also a product company. We’ve got these very broad platforms that we can use to create multiple internal products. We have examples of those in ARC-520, Adipotide, and the like, to push into the clinic and drive value. But it is our hope that these platforms will enable us to bring in non-dilutive capital to help out with our operations. That’s in large part why we assembled these, the RNAi platforms and the targeting platforms. And it’s taken us a little while to get these really up and running. We’ve only owned the RNAi assets for a year now from Roche, and we’ve only owned the targeting assets since April. So it’s taken us a little while to get them going, but we feel like we are at a good position now, where we can start to really speak with partners and talk about partnerships that may bring in non-dilutive capital. I think the Shire deal was a good step in that direction. It’s certainly not there yet. We certainly hope to ink deals that will bring in substantial capital, that will cover our operating expenses so we don’t have to rely entirely on the capital markets. But again, I think it shows an evolution of the deals from what we do with Merck first, and then a few months later with Shire. We hope that the next deal, then, will be even larger, and provide more capital for us. On the RNAi side, as I said, we’ve only had the Roche assets for a year now, but we’ve been speaking with companies and we are certainly hopeful that given the broad assets we’ve got there, particularly with the new data on subcutaneous administration, with the proof of concept of the DPCs in the ARC-520, we’re hoping that those will help to drive partnerships that can bring in some non-dilutive capital. So the long answer is that we would really like to finance this company as a mixture of equity capital as well as non-dilutive capital. We have, of course, relied exclusively on equity capital in the past, and we are hopeful that we are nearing that transition point where we can start to bring in substantial amounts of non-dilutive capital to make it easier on our own shareholders.

[Operator:]

And this will conclude our question and answer session. I’d like to turn the conference back over to Chris Anzalone for any closing remarks. Christopher Anzalone I thank you all for your interest in the company, and participation in the call today, and I wish you all a happy holiday season. I will see you in 2013.