Arrowhead Pharmaceuticals - Earnings Call - Q4 2016

Transcript

Speaker 0

Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. Throughout today's recorded presentation, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. I will now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince.

Speaker 1

Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal twenty sixteen fourth quarter and year ended September 3036. With us today from management are President and CEO, Christopher Anzalone, who will provide an overview and Ken Myszkowski, our Chief Financial Officer, who will give a review of the financials. Bruce Given, our Chief Operating Officer and Head of R and D will also be available when we open up the call to your questions. Before we begin, I would like to remind you that comments made during today's call 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. These include statements regarding our expectations around the development, safety and efficacy of our drug candidates, projected cash runway and expected future development activities. These statements represent management's current expectations and are inherently uncertain. Thus, results may differ materially. Arrowhead disclaims any intent and 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 ks and the company's subsequent quarterly reports on Form 10 Q for additional matters to be considered in this regard, including risks and other considerations that could cause actual results to vary from presently expected results expressed in today's call. With that said, I'd like to turn the call over to Doctor. Chris Franzalone, President and CEO of the company. Chris?

Speaker 2

Thanks, Vince. Good afternoon, everyone, and thank you for joining us today. We would normally review highlights of the progress we've made during the previous year, and clearly, there were many notable accomplishments. However, this is not a typical year end earnings call, so I'd like to review the recent events and give an update about what we're focused on right now. As you know, on November 29, we announced that we made the decision to halt development of all drug candidates that employ a liver targeted IV administered DPC delivery vehicle.

That specific structure of DPC is also known as EX1. This included all three of our clinical candidates, ARK-five twenty and ARK-five twenty one for chronic hepatitis B infection and ARK AAT for alpha-one liver disease. This was not a decision that we took lightly and obviously not what we expected for the EX1 platform. It was however necessary as the regulatory path for products containing EX1 has become increasingly uncertain. On November 8, the FDA notified us that the HepARC2004 study of ARK-five twenty was being placed on clinical hold in The United States.

This was prompted by deaths at the highest dose of an ongoing nonhuman primate toxicology study using EX1 that was being conducted to support long term dosing. In subsequent discussions and review by regulators, investigators and ethics committees in 17 countries in which we had clinical sites for ARK-five twenty, ARK-five twenty one and ARK AAT, it became apparent that the regulatory concerns expressed by the FDA would delay our studies globally. We believe that resolving those regulatory concerns would at minimum require additional long term nonclinical toxicology studies and would likely cause a delay of eighteen months or more in our clinical programs. Also at the end of those toxicology studies, if we decided to undertake them, it is possible that regulatory concerns would remain and the studies would stay on hold. This was the opinion of our internal staff and, crucially, an external expert toxicologist that we consulted for additional review and guidance.

It is unfortunate that we will not be able to continue to treat patients in clinical trials with ARK-five twenty, ARK-five twenty one, and ARK AAT because we were seeing some very interesting data. Our plan was to progress the IV versions of these through clinical trials and if successful to seek market authorization. But we also had a long term goal of following up with subcutaneous or subcu products in HBV and AAT. Our subcu system has been in development for multiple years, and we have some rather advanced data on a few different products. So it is important to note that we are not starting over.

We have also learned a great deal during prior HBV and AAT studies that we expect will help drive our subcu programs efficiently. I want to talk for a moment about our subcu system and how it differs from the DPC system that included the EX1 vehicle. We We have included a schematic of the subcu system in presentations at a few medical conferences in the recent past, but for competitive and IP reasons we have not disclosed the exact structure. What we can say is that it is a family of proprietary single molecule structures where clusters of liver tropic N acetyl galactosamine or Nag ligands with various linker chemistries are conjugated directly to RNAi triggers. The triggers we are using are of various lengths and designs and are stabilized through a variety of chemical modifications.

Importantly, there is no polymer or peptide based active enzomal escape component. So in this way think of it as more similar to GalNAc than to DPCs as you know them. In preclinical studies with the subcu platform we have obtained depth and duration of target gene knockdown approaching that of intravenously administered EX1 containing candidates, but at lower doses. We haven't yet conducted GLP toxicology studies, but our internal tox work has led us to believe that good safety margins are likely. This transition is happening earlier than we intended, but we now focus our internal development resources exclusively on our subcu and extrahepatic RNAi delivery platforms and on our current and potential future partnered programs.

We think these platforms give us a strong foundation, and we intend to push them into the clinic rapidly. At the same time, we anticipate our partner candidates will be heading into the clinic quickly as well. Our current disclosed pipeline includes ARO HBV, ARO AAT, ARO F12, ARO HIF2, ARO LPA, and ARO AMG1, the last two of which are partnered with Amgen. Note that we have a new prefix of ARO or ARO for our drug candidates. Prior candidates that utilize the EX1 delivery vehicle had the ARC prefix, which we will no longer use.

Because of the discontinuation of our existing clinical programs, we made the difficult decision to reduce our workforce by approximately 30%. These reductions were done in a manner that allowed us to maintain full resources to continue to rapidly advance our own pipeline and support our current collaborative work with Amgen. We are also in a position to accommodate future partner based programs. The reductions in planned clinical trial related expenses and the smaller R and D workforce give us a streamlined cost structure that extends our cash runway into 2019. So what are we focused on for the immediate future?

First, we are in the process of shutting down our clinical studies, which is quite an undertaking. Our clinical operations and regulatory staff are working with CROs, sites, investigators, and regulators to ensure a smooth and responsible transition of study closure and patient medical care. Since there were three products, several studies, and 17 different countries involved, this process will likely take a few months. Once complete, we can look at all the available study data and determine what can be communicated. Second, we are actively advancing our pipeline.

While we are not prepared today to give guidance on timelines, we feel confident that we are progressing toward selecting candidates for multiple programs. The data being generated using our subcu platform are looking quite good and the speed at which our R and D organization is advancing these new products is impressive. We look forward to providing a roadmap for our pipeline in the future. Third, we are moving forward with the two products partnered with Amgen. We see enormous potential for that partnership.

Both products use our subcu technology and we see that platform having the potential to attract additional deals in the future. But for now, we want to ensure that we give Amgen the best candidates possible against LPA and the additional target. Amgen will be responsible for clinical development, so we cannot give guidance on timing, but the collaborative work we are performing is progressing well. With that overview, I would now like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?

Speaker 3

Thank you, Chris, and good afternoon, everyone. As we reported today, our net loss for the year ended September 3036 was $81,700,000 or $1.34 per share based on 61,100,000 weighted average shares outstanding. This compares with a net loss of $91,900,000 or $1.6 per share based on 57,400,000.0 weighted average shares outstanding for the year ended September 3035. Total operating expenses for the year ended September 3036 were $81,900,000 compared to $96,400,000 for the year ended September 3035. Net cash used in operating activities in fiscal twenty sixteen was $64,400,000 compared to $65,700,000 in fiscal twenty fifteen.

Our R and D expenses declined from $47,300,000 to $41,400,000 primarily due to the completion of our Phase II manufacturing campaign in previous periods and our conscious decision to employ thoughtful spending controls over our preclinical programs. This reduction was somewhat offset by higher salary and payroll related expenses on higher headcount figures during fiscal twenty sixteen and higher G and A costs increased as a result of higher outside professional service costs. The change in operating expenses were additionally influenced by a change of $10,100,000 which was a non cash expense in the prior year related to acquired in process research and development costs, a component of the accounting related to the Novartis acquisition. Turning to our balance sheet. Our cash balance was $85,400,000 at September 3036 compared to our cash and investments of cash of $98,700,000 at September 3035.

The decrease in our cash and investments balance reflects the $64,400,000 cash used in operating activities, offset by cash received from our equity financing in August of $43,200,000 and $14,000,000 in upfront cash payments as part of our recent collaboration and licensing deals with Amgen. In November 2016, we also received an additional $42,500,000 in cash from Amgen consisting of a $30,000,000 upfront payment for ARC LPA and $12,500,000 in additional equity investment. We anticipate our cash balance at the end of the year will be more than $100,000,000 Our common shares outstanding at September 3036 were 69,700,000.0 and would be 72,400,000.0 assuming conversion of the preferred shares outstanding September 3036. With this brief overview, I'll turn the call back to Chris.

Speaker 2

Thanks Ken. We are in the process of determining priorities and timelines for our development programs, so we are not giving granular guidance on milestones for the upcoming year. Once that process is complete, we will communicate it to investors. Overall, Arrowhead is in execution mode now. We are all disappointed about discontinuing the EX1 based clinical programs and we hate to say goodbye to the great folks that are leaving the company because of the workforce reduction.

However, we have the technology, the talent, the experience and the capital to bring the company to the next stage of development. Our subcu platform is likely a more commercially viable long term solution than our IV based DPC system, So there's a great deal of optimism about the future. I would now like to open the call to questions. Operator?

Speaker 0

Our first question comes from the line of Ted Tenthoff with Piper Jaffray. Your line is now open.

Speaker 4

Great. Thank you very much for taking the question. I actually have quite a few just sort of housekeeping things. First and foremost, how you know, I think John you said in your prepared remarks that you received $42,500,000 from Amgen including $30,000,000 in cash and $12,500,000 in equity. That equity component is smaller than I think what we had anticipated with respect to a 21,500,000.0 So is there more upfront in the form of equity due from Amgen?

Speaker 3

No, we've collected everything that was due from Amgen as far as upfront payments go. The total in equity was $14,000,000 and the total of upfront payments outside of that is 42.5. The total is $56,500,000 that we received. Part of that was in the fourth fiscal quarter and the balance was in the first fiscal quarter of this year. Got you.

Speaker 4

So that means that there's still the $12,500,000 that you mentioned was received subsequent to the $14,000,000 was in the fourth quarter?

Speaker 3

Yes. So the $12,500,000 was in the quarter that's ending December 31, yes.

Speaker 4

December, okay. So 1Q, the 12,500,000.0 And the $30,000,000 was that received

Speaker 3

That was also received in That this was upfront payment. The 12,500,000.0 was the equity component.

Speaker 4

Got you. Perfect. Very helpful. So that includes part of why the share count was higher on the front of the 10 Q at 74,000,000, right?

Speaker 3

Right, so two things happened from ninethirty until we filed. So those shares came in from or those shares went out for Amgen, was 1,700,000 Also, preferred stock that we had outstanding at ninethirty was converted to common stock. So that increased by about 2,700,000.0 shares.

Speaker 4

Okay, so that full preferred was converted. Okay, that's helpful. How will we recognize this Amgen upfront in terms of cash and equity in terms of amortization?

Speaker 3

Right, so the equity component is recorded through equity. So you'll see that in the quarter it was received. The upfront payments are recorded as revenue. However, they're not recorded in the period received. They're deferred and recorded over a period for which we will provide services related to that revenue.

So for example, the $5,000,000 upfront for Target X will be recorded over the period that we estimate it'll take to deliver the clinical candidate related to that. So we estimate that and record the revenue straight line. And to the extent we deliver the candidate sooner, we would catch up the revenue at that point. That's the smaller piece of it. And then related to LPA, was a $30,000,000 upfront payment.

The only deliverable we really have is some coordination with Amgen related to the manufacturing process. And so we would expect that to be amortized into revenue. The majority of it will occur through our fiscal twenty seventeen year.

Speaker 4

Okay, great. That's very helpful. So just one last follow-up question on that. The equity component of the upfront that was recognized in the fourth quarter fiscal 'sixteen, that was the contingent consideration or was that due to the conversion of the preferred shares?

Speaker 3

The equity component from Amgen related to LPA was $12,500,000 That's what was recorded in the first fiscal quarter of twenty seventeen. Is that your question?

Speaker 4

No. So the component, equity component of $14,000,000 in equity that was recognized in fiscal fourth quarter, was that recognized as the contingent consideration or was the contingent consideration due to the conversion of the preferred shares?

Speaker 3

There was $14,000,000 that was received in fiscal 'sixteen, the fourth quarter. Dollars 5,000,000 of that was cash that will be deferred and recognized to revenue as we described earlier. $9,000,000 of that $14,000,000 is relating to an equity purchase.

Speaker 4

Gotcha.

Speaker 3

The existing consideration is just an accounting entry. There is no cash impact related to that. Okay,

Speaker 4

helpful. Thank you.

Speaker 3

Thanks, Ed.

Speaker 0

Our next question comes from the line of Michael Yee with RBC Capital Markets. Your line is now open.

Speaker 5

Hi, this is Andrew Tsai on for Michael Yee. Thanks for the questions. First, have you spoken with FDA at all since your decision to discontinue the programs? And second, I I guess you're not providing guidance but just thought I'd ask, are there any events in 2017 we can look forward to specifically? Thanks.

Speaker 2

Yes, we're not providing guidance at this point on 2017. We're still kind of finalizing our priorities and our timelines. And so we'll give that guidance later. Regarding the FDA, we have received the letter. We mentioned earlier that when we were put on a clinical hold for the 2004 study, we were told verbally on a call with the FDA that we were put on clinical hold and we're awaiting a letter.

That letter has since arrived and it did not affect our decision to discontinue the studies. It confirmed our belief that it's best to discontinue those studies at this point.

Speaker 5

Thanks. Very good. Thank you. Welcome.

Speaker 0

Our next question comes from the line of Catherine Zi with William Blair. Your line is now

Speaker 6

I'm just wondering, with the sort of the truncated data that you collected from ARK-five '20 and ARK-five '21, do you plan to present them, in 2017?

Speaker 2

Thanks very much. The answer is I guess we don't know. We will, we do intend to present some data from those studies because as we have mentioned some of what we were seeing was actually quite interesting. We have to close those studies out and then determine what that data set looks like and then what we want to talk about. But we do expect to disclose and discuss at least some of those data.

The venue and the timing of that of course we don't know at this point. So we will let you know as soon as we know that. But at this point we do intend to discuss that data and we'll have to see when the right time and what the right venue is.

Speaker 6

And, if you look at R520 and R521 they seem to be pretty potent in terms in their respective backgrounds, let's say, you know, the nuke experience or not, or E plus or minus, in the appropriate situations, and they appear to be quite potent. And it looks like from the little bit of data that you released, they appear to be pretty potent in humans, as well, at least in the initial data. And then with regard to your subcu product, you said the potency is approaching those candidates. In what sense do you mean? Do you mean that those were, let's say, in some animal models like the hydrodynamic mouse?

Or what kind of assays did you see? Is that 50%? Is that 7080%? At what level do you think that it's good enough for you to push it into the clinic?

Speaker 2

Yeah, I'll let Bruce expand on this if he wants to. But I think we're not fair to talk numbers right now. The ARO HBV is still in development. We've not pushed that into GLP tox yet. And so we're still optimizing what that construct is going to look like.

I think we know a heck of a lot now that we did not know a year ago and certainly two years ago. And so my hope is that what we learned with ARK520 and ARK521 is going to help us move ARROW HBV quickly and effectively in the clinic. You know, we're not fair now to talk about what kind of data we're seeing. Bruce, do you want to expand on that?

Speaker 7

Yeah, I would just say, Katherine, you know, that that comment is a general comment that goes across multiple products not just, you know, ARO HBV. And I think the reason I say that is because, you know, the target knockdown really depends on the indication and, you know, how much knockdown you need is not always the same from indication to indication. So HBV is a situation where I think you want as much knockdown as you can get. And you know, reporting as we did that we've seen really, you know, very close to three logs of knockdown in surface antigen is really quite remarkable and is setting a very high bar for anybody else you know, in the RNAi field. I mean that's just really that's setting quite a high bar.

But when you talk about some of the other indications, you know, we don't need that level of knockdown, we don't think. And, you know, so we were talking sort of more generally. And, you know, those indications all use their own different animal models and some are tail veins, some are transgenic, some are other things, primates. So it's a real mixed bag. But we're just basically saying that in general, we're finding that we're able to produce the kind of knockdown subQ that we think we're going to need in those various indications.

But it is going to vary from indication to indication.

Speaker 6

Yeah, I think

Speaker 2

I'm sorry, go ahead, Katherine.

Speaker 6

Yeah, I'm just saying that I understand. You know, for HBV you want as much as possible. For AAT you can knock out pretty much at maximum 80%, 90% because you always had some extra hepatic stuff going on. What I'm trying to say is that in the same system, same indication, ARO HBV versus five twenty five twenty one, ARO AAT versus ARC AAT in the same situation just sort of basically it's more like evaluating the efficacy or effectiveness of platform versus platform. What have you seen?

Speaker 7

Yeah, don't think we're ready to give specifics at this point. You know, that will come out in time.

Speaker 2

That's right. We will have data that will be releasing it, you know, at some point and then you can make your own determination. But I think the take home message is this, that to get the type of deep and durable knockdown that we were getting with the DPCs, our IV format DPC, we needed that endosomal escape component, the active endosomal escape component. But as we continued to develop our subcu we were finding that we could do it without it. And so the take home message is that we are now at a point where what we can do with subQ is really quite similar to what we can do with the DPCs.

So as we mentioned in the prepared remarks, our plan for HBV and for AAT was to get into the market hopefully with those IV formulations and then to follow them with a sub q. And so now we're just doing the second step rather than the first step. And we think we have constructs that are quite potent.

Speaker 6

Sure, and then for ARO HBV, so you're gonna, from a trigger design perspective, go straight to the triggers where you would inhibit both the integrated as well as the cccDNA?

Speaker 2

Yeah, so we're not prepared to talk right now about sequences and structures for ARO HBV. But again suffice it to say we learned so much in our chimp studies and in our human studies that I think that we've got an awful lot of data to help us to design a good candidate. So we'll be disclosing more of those structures as we approach the clinic.

Speaker 6

Thank you.

Speaker 2

You're welcome.

Speaker 0

And that concludes today's question and answer session. I'd like to turn the call back to Chris Anzalone for closing remarks.

Speaker 2

Thanks everyone for joining the call today and I wish you all a happy holidays.

Speaker 0

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect.