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.
Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2016 fourth quarter and year ended September 30th, 2016. With us today for 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&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 actual 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-K 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 Dr. Christopher Anzalone, President and CEO of the company. Chris?
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 29th, 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, ARC-520 and ARC-521 for chronic hepatitis B infection, and ARC-AAT for alpha-1 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 8th, the FDA notified us that the Heparc-2004 study of ARC-520 was being placed on clinical hold in the U.S. This was prompted by deaths at the highest dose of an ongoing non-human 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 ARC-520, ARC-521, and ARC-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 non-clinical toxicology studies and would likely cause a delay of 18 months or more in our clinical programs.
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 ARC-520, ARC-521 and ARC-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. We also had a long-term goal of following up with subcutaneous or subQ products in HBV and AAT.
Our subQ 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 subQ programs efficiently. I want to talk for a moment about our subQ system and how it differs from the DPC system that included the EX1 vehicle. We have included a schematic of the subQ 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-acetylgalactosamine 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 endosomal escape component. In this way, think of it as more similar to GalNAc than to DPCs as you know them. In pre-clinical studies with the subQ 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, we now focus our internal development resources exclusively on our subQ and extrahepatic RNAi delivery platforms and on our current and potential future partnered programs.
We think these platforms give us a strong foundation. 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 utilized 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&D workforce give us a streamlined cost structure that extends our cash runway into 2019. 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 subQ platform are looking quite good, and the speed at which our R&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 subQ technology. We see that platform having the potential to attract additional deals in the future. 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?
Thank you, Chris, and good afternoon, everyone. As we reported today, our net loss for the year ended September 30, 2016, was $81.7 million, or $1.34 per share, based on 61.1 million weighted average shares outstanding. This compares with a net loss of $91.9 million or $1.60 per share based on 57.4 million weighted average shares outstanding for the year ended September 30, 2015. Total operating expenses for the year ended September 30, 2016, were $81.9 million compared to $96.4 million for the year ended September 30, 2015. Net cash used in operating activities in fiscal 2016 was $64.4 million compared to $65.7 million in fiscal 2015. Our R&D expenses declined from $47.3 million to $41.4 million, 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 2016 and higher G&A costs increased as a result of higher outside professional service costs. The change in operating expenses were additionally influenced by a change of $10.1 million, 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 $85.4 million at September 30, 2016, compared to our cash and investments of cash of $98.7 million at September 30, 2015.
The decrease in our cash and investments balance reflects the $64.4 million cash used in operating activities, offset by cash received from our equity financing in August of $43.2 million and $14 million in upfront cash payments as part of our recent collaboration and licensing deals with Amgen. In November 2016, we also received an additional $42.5 million in cash from Amgen, consisting of a $30 million upfront payment for ARC-LPA and $12.5 million in additional equity investment. We anticipate our cash balance at the end of the year will be more than $100 million. Our common shares outstanding at September 30, 2016, were 69.7 million and would be 72.4 million, assuming conversion of the preferred shares outstanding at September 30, 2016. With this brief overview, I'll turn the call back to Chris.
Thanks, Ken. We are in the process of determining priorities and timelines for our development programs, 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, 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 sub-Q platform is likely a more commercially viable long-term solution than our IV-based DPC system. There is a great deal of optimism about the future. I would now like to open the call to questions. Operator?
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number one key on your touch-tone telephone. That's star then one to ask a question at this time. Our first question comes from the line of Ted Tenthoff with Piper Jaffray. Your line is now open.
Great. Thank you very much for taking the question. I actually have quite a few just sort of housekeeping things. First and foremost, I think, John, you said in your prepared remarks that you received $42.5 million from Amgen, including $30 million in cash and $12.5 million in equity. That equity component is smaller than I think what we had anticipated with respect to a 21.5. Is there more upfront in the form of equity due from Amgen?
No, we've collected everything that was due from Amgen as far as upfront payments go. The total in equity was $14 million, and the total of upfront payments outside of that is $42.5. The total is $56.5 million 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. That means that there's still the $12.5 million that you mentioned was received subsequent to the $14 million was in the fourth quarter?
Yeah. The $12.5 million was in the quarter that's ending December 31st. Yes.
December. Okay. 1 Q, the $12.5. The $30 million, was that received?
That was also received in this quarter. That was upfront payment. The $12.5 was the equity component.
Got you. Perfect. Very helpful. That includes part of why the share count was higher on the front of the 10-Q at $74 million, right?
Right. Two things happened from 9/30 until we filed. Those shares went out for Amgen, which was $1.7 million. Also, the preferred stock that we had outstanding at 9/30 was converted to common stock, that increased by about 2.7 million shares.
Okay, 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?
Right. The equity component is recorded through equity, 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. For example, the $5 million upfront for Target X will be recorded over the period that we estimate it'll take to deliver the clinical candidate related to that. 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. Related to LPA, there was a $30 million upfront payment.
The only deliverable we really have is some coordination with Amgen related to the manufacturing process, we would expect that to be amortized into revenue. The majority of it will occur through our fiscal 2017 year.
Okay, great. That's very helpful. Just one last follow-up question on that. The equity component of the upfront that was recognized in the fourth quarter of fiscal 2016, that was the contingent consideration, or was that due to the conversion of the preferred shares?
The equity component from Amgen related to LPA was $12.5 million.
That's what was recorded in the first fiscal quarter of 2017. Is that your question?
No. The equity component of $14 million 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?
There was $14 million that was received in fiscal 2016, the fourth quarter. $5 million of that was cash that will be deferred and recognized to revenue as we described earlier, $9 million of that 14 is relating to an equity purchase.
Got you. Okay, great.
The contingent consideration is just an accounting entry. There's no cash impact related to that.
Okay. Helpful. Thank you.
Thanks, Ted.
Our next question comes from the line of Michael Yee with RBC Capital Markets. Your line is now open.
Hi, this is Andrew Tsai for Michael Yee. Thanks for the questions. First, have you spoken with FDA at all since your decision to discontinue the programs? Second, I know I guess you're not providing any guidance, but just thought I'd ask, are there any events in 2017 we can look forward to specifically? Thanks.
Yeah. We're not providing guidance at this point on 2017. We're still finalizing our priorities and our timelines. 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.
Thanks. Very good. Thank you.
Welcome.
Again, ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number 1 key. Our next question comes from the line of Katherine Xu with William Blair. Your line is now open.
Yeah. Hi, good afternoon. I'm just wondering, with the truncated data that you collected from ARC-520 and ARC-521, do you plan to present them in 2017?
Thanks very much. The answer is, I guess we don't know. We do intend to present some data from those studies, because as we had mentioned, some of what we were seeing was actually quite interesting. We have to close those studies out and then determine what that dataset looks like and then what we want to talk about. 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. We will let you know as soon as we know that. 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.
If you look at ARC-520 and ARC-521, they seem to be pretty potent in chimps in their respective backgrounds, let's say, the nuke experience or not, or E plus or minus, in the appropriate situations, and they appear to be quite potent. 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. With regard to your sub-Q 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 in what kind of assays did you see? Is that 50%? Is that 70%, 80%? At what level you think that it's good enough for you to push it into the clinic?
Yeah. I'll let Bruce expand on this if he wants to, I think we're not prepared to talk numbers right now. The ARO-HBV is still in development. We've not pushed that into GLP Tox yet, 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. My hope is that what we learn with ARC-520, ARC-521 is going to help us move ARO-HBV quickly and effectively in the clinic. We're not prepared now to talk about what kind of data we're seeing. Bruce, do you want to expand on that?
Yeah, I would just say, Katherine, that comment is a general comment that goes across multiple products, not just ARO-HBV. I think the reason I say that is because the target knockdown really depends on the indication, and how much knockdown you need is not always the same from indication to indication. HBV is a situation where I think you want as much knockdown as you can get. The reporting as we did, that we've seen really very close to three logs of knockdown in surface antigen is really quite remarkable and is setting a very high bar for anybody else in the RNAi field. That's setting quite a high bar. When you talk about some of the other indications, we don't need that level of knockdown, we don't think.
We were talking more generally, and those indications all use their own different animal models. Some are tail vein, some are transgenic, some are other things, primates. It's a real mixed bag. We're just basically saying that in general, we're finding that we're able to produce the kind of knockdown sub-Q that we think we're going to need in those various indications. It is going to vary from indication to indication.
Yeah.
Yeah, that I agree.
I'm sorry. Go ahead, Katherine.
Yeah, I'm just saying that I understand. For HBV, you want as much as possible. For AAT, you can knock out pretty much at maximum 80%, 90% because you always have some extrahepatic stuff going on. What I'm trying to say is that, in the same system, same indication, ARO-HBV versus 520, 521, ARO-AAT versus ARC-AAT in the same situation. Sure. Basically, it's more like evaluating the efficacy or effectiveness of platform versus platform. What have you seen?
Yeah, I don't think we're ready to give specifics at this point. That will come out in time.
That's right. We will have data that we'll be releasing at some point, and then you can make your own determination. 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, with our IV format DPC, we needed that endosomal escape component, the active endosomal escape component. As we continued to develop our subQ, we were finding that we could do it without it. 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 could do with the DPCs. 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 subQ.
Now, we're just doing the second step rather than the first step, and we think we have constructs that are quite potent.
Sure. For ARO-HBV, so you're going to, from a trigger design perspective, go straight to the triggers where you would inhibit both the integrated as well as the cccDNA?
Yeah. We're not prepared to talk right now about sequences and structures for ARO-HBV. 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. We'll be disclosing more of those structures as we approach the clinic.
Thank you.
You're welcome.
That concludes today's question and answer session. I'd like to turn the call back to Chris Anzalone for closing remarks.
Thanks, everyone, for joining the call today. I wish you all a happy holidays.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.