Ladies and gentlemen, welcome to the Arrowhead Research Corporation fiscal 2015 third quarter financial results 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 would now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince.
Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Arrowhead's results for its fiscal 2015 third quarter ended June 30, 2015. With us today for 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 will then open up the call to your questions. Before we begin, I would like to remind you that comments made during today's call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including, without limitation, those with respect to Arrowhead's goals, plans, and strategies, are forward-looking statements.
These include, but are not limited to, statements regarding the anticipated safety and/or efficacy of ARC-520, ARC-AAT, ARC-F12, and our other programs, as well as anticipated timing for study enrollment and completion and the potential for regulatory and commercial success. They represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today's call. You should refer to the discussions under Risk Factors in Arrowhead's annual report on Form 10-K and the company's quarterly reports on Form 10-Q for additional matters to be considered in this regard. With that said, I'd like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company. Chris?
Thanks, Vince. Good afternoon, everyone. Thank you for joining us today. During the recent period, we made important progress on our clinical candidates, ARC-520 for chronic hepatitis B infection and ARC-AAT for liver disease associated with alpha-1 antitrypsin deficiency. We also made good progress on our preclinical pipeline and the underlying DPC delivery platform. I will discuss a few of these highlights and then hand the call over to Bruce Given, our Chief Operating Officer and Head of R&D, who will provide an overview of our clinical programs, followed by Ken Myszkowski, our Chief Financial Officer, who will give a review of the financials for the fiscal 2015 third quarter.
Before I talk about highlights from the quarter, I want to announce our plan to hold an Analyst and Investor Day on September 24th, 2015, to discuss ARC-520 in detail and provide data from the clinical program and from a non-clinical study in chronically infected chimpanzees. We have learned a great deal about ARC-520 and the biology of hepatitis B during the course of our chimpanzee study that spanned over a year as well as from our phase IIa clinical study. As we discussed in our last conference call, the phase IIa included four cohorts at doses 1, 2, 3, and 4 milligrams per kilogram and was expanded to include three additional cohorts. These additional cohorts were designed to test some of the hypotheses that emerged from our research program, including the chimp study.
We think the format of an Analyst Day will allow us to provide a more comprehensive overview of what we are learning than if we simply provided top-line results in a press release. Some of what we have learned was rather surprising to us and our advisors. We believe that our work represents a real advance for the HBV field and has helped us move our program forward. We have lined up a panel of international experts to talk about the HBV field and how our new data may challenge some widely accepted theories. These panelists include Dr. Robert Gish, Dr. Stephen Locarnini, and Dr. Robert Lanford. The live event for institutional investors and analysts will be held in New York City. In addition, it will be webcast live and available on the Arrowhead website. We will provide more information about the event as the date approaches.
We are also happy to announce that reports from the chimp study will be presented at AASLD in November. Turning to a review of the quarter and the period since our last conference call, we continue to execute on our development programs and made good progress with ARC-520, ARC-AAT, and our underlying technology platform. Starting with ARC-520, we completed dosing of more than a year-long study in chronically infected chimpanzees. As I mentioned, this yielded some very interesting findings, some of which have helped to guide the clinical development of ARC-520. In addition to completing dosing of four cohorts that received single ARC-520 doses of 1 through 4 mgs per kg in a phase IIa study, we also initiated dosing in three new cohorts. We plan on discussing all seven cohorts at the Analyst Day.
Data from the chimpanzee study has also contributed to the design of our multi-dose studies and upcoming combination studies. During the quarter, we achieved regulatory clearances for studies titled Heparc-2002, Heparc-2003, and Heparc-2004, which are three separate multi-dose phase IIb studies in Germany, Hong Kong, and the U.S. Bruce will talk more about these in a moment, but we are very pleased that the studies are moving forward. ARC-520 was never intended to be a single-dose therapy, and we are eager to assess its activity after multiple doses and compare those results to results from our long-term chimpanzee study. We also made good progress on ARC-AAT, our clinical candidate for the treatment of liver disease associated with alpha-1 antitrypsin deficiency. We are excited that ARC-AAT was granted orphan drug designation by the FDA, which provides important incentives for sponsors to develop drugs that treat rare diseases.
These incentives include increased engagement with the FDA, exemption from license application fees, and potentially future product-specific regulatory fees during development, the opportunity to apply for R&D funding, tax credits, an increased chance of priority review, and seven years of orphan exclusivity at the time of new drug application or NDA approval. We see the development path for ARC-AAT as relatively straightforward, and receiving orphan designation makes us more confident that, provided we can demonstrate that ARC-AAT is safe and effective, we can move the candidate through the clinical and regulatory process quickly. The first step in this process is establishing a safety profile and assessing early signs of activity. During the quarter, we completed dosing of Part A of ARC-AAT phase I study in healthy volunteers and transitioned the study into Part B, which is designed to enroll patients with PiZZ genotype AATD.
This transition was triggered when a predetermined knockdown target was achieved. We subsequently began dosing Part B at a single site in Australia and have also received regulatory clearance to expand Part B at additional sites in the U.K. and New Zealand. We hope to bring on additional sites in other countries shortly. We have also made important progress on our platforms over the past quarter. We view ARC-520 and ARC-AAT as significant direct value drivers, but we also see them creating value as proofs of concept for other targets. We believe the demonstration of good safety profiles and activity in humans will help to de-risk future programs built on the same platforms. We see potential rapid value creation in our pipeline, and we are focused on broadening that out.
We have several active preclinical programs against various disease targets, we presented data from one of them, ARC-F12, at the TIDES conference during the quarter. ARC-F12 is designed to reduce the production of factor XII to potentially treat both thrombosis and angioedema. We are pleased to announce today that ARC-F12 has been nominated as our next clinical candidate. We see hereditary angioedema, or HAE, as an attractive target for RNAi in a disease that is not adequately addressed with current treatment options. In our development program, we have seen knockdown as deep as 98% in non-human primates with good durability. Our current planning estimates monthly or perhaps even less frequent dosing, although ultimately this will be determined by our findings in clinical human testing. We have other promising preclinical programs that we are currently assessing as potential clinical candidates.
We intend to present data on some of these targets at scientific conferences later in the year. I'd like to touch on progress we have made expanding our underlying platforms over the past quarter. This includes the DPC delivery system and an extensive array of RNAi trigger structures, chemistries, and modifications. We published data on advancements made to the DPC delivery system designed to enable subcutaneous and extrahepatic delivery. This is an important step forward. These new formulations open up a wide range of disease targets that Arrowhead expects to be able to address in the future. We have made great strides with the RNAi technology we acquired from Novartis earlier this year. Teams at Novartis generated impressive data with novel proprietary structures we believe fall outside current fundamental RNAi IP, as well as novel intracellular targeting ligands that increase RNAi efficiency.
We are happy to report that these technologies are working well in our hands, and these new tools are now part of our development process. These give us more flexibility and capabilities, both from a therapeutic and patent standpoint. In fact, we have been exploring several new trigger options in ARC-F12 and other development programs and have found very good potency and reliable manufacturability. Based on this work, we expect to file an IND or equivalent for ARC-F12 in 2016. In addition to being highly active, the economics of the new trigger are substantially better than one relying on a license for traditional canonical siRNA. With that overview, I would now like to turn the call over to Dr. Bruce Given, our COO and Head of R&D. Bruce?
Thank you, Chris, and good afternoon, everyone. We typically talk about the ARC-520 clinical studies in terms like phase IIa, phase IIb, and Heparc- 2002, but I don't think we have ever explained at one time what all these studies are. There are now multiple ongoing and initiating studies of ARC-520. I think that a helpful thing to do for our investors is to briefly describe each study and identify them by description and study number to help ensure everybody has a clear picture about what we are talking about when we refer to a specific study. A copy of the prepared remarks for this call will be available on the Events page of our website if you want this description for future reference. Heparc-1001 was our initial phase I single-dose escalation study of ARC-520 administered intravenously to healthy adult males and females.
This was conducted in Australia and is complete. The purpose was to assess safety tolerability and pharmacokinetics. Heparc-2001 is a multicenter single-dose escalation study of ARC-520 administered to patients with chronic immune-active HBV infection maintained on entecavir therapy. This is the ongoing study that we typically refer to as our phase IIa study and is being conducted in Hong Kong. There were four initial cohorts that received ARC-520 doses of one, two, three, or four mg/kg, and then an additional three cohorts were subsequently added. We plan to discuss what these three new cohorts are and overall results from all seven cohorts at our Analyst Day in September. This study is designed to give us an indication of early activity and determine tolerability in a patient population.
HEPARC 2002 is a phase IIb multi-center, multi-dose study to determine the depth of hepatitis B surface antigen reduction following ARC-520 in combination with entecavir or tenofovir in patients with HBe antigen negative chronic HBV. It is a parallel design study with patients receiving four doses once every four weeks of either one mg per kg of ARC-520, two mg per kg of ARC-520, or placebo. This study has received regulatory approval to begin in Germany and Hong Kong, and we intend to also open additional sites for enrollment in South Korea, pending approval from regulatory authorities and institutional review boards. The goal is to assess multi-dose activity as measured by reduction in circulating surface antigen in addition to other measures. Heparc-2003 is similar to 2002 but will enroll patients with HBe antigen-positive chronic HBV, so they're sister studies.
It has also received regulatory approval in Germany and Hong Kong and is also pending approval in South Korea. Heparc-2004 is a multi-center repeated dose study to determine the depth of surface antigen reduction following ARC-520 in combination with entecavir or tenofovir in patients with chronic HBV, which is being conducted in the U.S. This study is planned to enroll up to 12 patients receiving either 1 mg per kg of ARC-520 or placebo. Each patient will receive 3 total doses once every 4 weeks. The goal is to assess multi-dose activity as determined by reduction in surface antigen, in addition to other measures such as assessing for any effects on entecavir or tenofovir pharmacokinetics with administration of ARC-520. Heparc-2005 was designed as a study in HBe antigen-positive patients in combination with entecavir or tenofovir. This study was planned to enroll at a single site in Australia.
It was closed before enrolling any patients to make way for a new study, Heparc-2008, which I will discuss in a moment. We also have Heparc-2006 and Heparc-2007, which are multi-dose studies that are in the late planning stages. We'll provide additional details on these studies when their planning has matured. Heparc-2008, which will be known as the MONARCH study, is intended to be a study of various dosing regimens and combinations. It is quite similar to the approach taken by Pharmasset in the HCV field. It will have a flexible, iterative design so we can ask specific questions about ARC-520 in small open label cohorts and quickly initiate additional cohorts based on the answers that we get or the availability of new agents to be tested in combination.
Our goal is to begin MONARCH as soon as possible, and we currently believe that we will be able to initiate the study in the fourth quarter. Stay tuned for more information about this study as we consider it very important. There is also 1 important ARC-520 preclinical development program worth mentioning. We have completed our 6-month rat and 9-month primate GLP toxicology studies for ARC-520 without any perceived change in the safety profile. The availability of these data clears the way for a year or more of treatment with ARC-520 from a toxicology testing perspective. This is all of the ARC-520 completed and ongoing studies. I hope it is helpful to have the descriptions and study numbers. Moving on to ARC-AAT, Chris mentioned the status of the phase I study in his highlights for the quarter, but I want to add a little more detail.
The ongoing phase I trial of ARC-AAT is a multi-center, single-dose escalation, first-in-human study to evaluate the safety, tolerability, and pharmacokinetics of ARC-AAT and the effect on circulating AAT levels. The study has been enrolling in dose cohorts of 6 participants each, with participants randomized at a ratio of 2 active to 1 placebo to receive a single intravenous injection of either ARC-AAT or placebo. The study consists of 2 parts. Part A in healthy volunteers, which dose escalated at a single center until a predetermined level of knockdown was achieved, and Part B to be conducted in patients with PiZZ genotype AATD or alpha-1 antitrypsin deficiency. Part B has begun at the highest dose level used in Part A, and then continued dose escalation may proceed according to the protocol.
The study evaluates participants for 28 days following dosing, with additional follow-up if needed every two weeks until AAT levels return to baseline. The study is enrolling currently in Australia. We've received regulatory approval allowing us to add additional sites in the U.K. and New Zealand, and we are currently awaiting regulatory approval in Germany and the Netherlands. Since alpha-1 antitrypsin deficiency is a rare disease, we want to cast a wide net for patient recruitment. With that, I'd like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?
Thanks, Bruce, and good afternoon, everyone. As we reported earlier today, our net loss for the three months ended June 30, 2015 was $15.9 million or $0.27 per share based on 59.5 million weighted average shares outstanding. This compares with a net loss of $11.6 million or $0.22 per share based on 51.9 million weighted average shares outstanding for the three months ended June 30, 2014. Total operating expenses for the three months ended June 30, 2015, were $16.1 million, compared to $12.7 million for the three months ended June 30, 2014. The increase in operating expenses compared to the year-ago period of $3.4 million were primarily due to higher research and development expenses of $1.1 million and higher salaries and payroll-related expenses, which also increased $1.1 million. Non-cash operating expenses for stock compensation and depreciation and amortization increased $900,000 as compared to the prior year quarter.
Higher R&D costs in the quarter were driven by clinical trial expenses, primarily related to ARC-520. The increase in salary and payroll-related expenses were driven by higher headcount. Total full-time headcount at June 30, 2015, was 97, as compared to a headcount of 75 at June 30, 2014. Net cash used in operating activities during the third fiscal quarter was $13.1 million, compared with $9.8 million in the prior year period. Cash used in operating activities during the quarter were primarily composed of research and development costs, mostly program costs for ARC-520 and program costs for ARC-AAT, as well as R&D salary and wages and related discovery research costs, as well as general and administrative costs, including salary costs.
The primary drivers of the change in cash used in operating activities during the current period as compared to fiscal 2014 is consistent with the drivers for the change in operating expenses aside from non-cash charges. Turning to our balance sheet at June 30, 2015, including our investments in fixed income securities, our cash and investments balance was $111.6 million, a decrease of $16.8 million from March 31st, 2015. Our cash and investments at September 30, 2014, was $177.3 million. During the quarter, the company made the final payment of $3 million to Novartis related to the asset acquisition that closed in March of this year. Excluding this $3 million payment, our net change in cash and investments during the quarter was $13.8 million.
Our common shares outstanding at June 30, 2015, were 59.5 million, which increased from 54.7 million at September 30, 2014, primarily due to the issuance of 3.3 million shares for the Novartis asset acquisition. Also at June 30, 2015, there were 15,652 shares of preferred stock outstanding. These preferred shares are convertible into 2.7 million shares of common stock. Common shares outstanding, including the conversion of our preferred shares, would be 62.2 million. With that brief overview, I will now turn the call back to Chris.
Thanks, Ken. With the Analyst Day presentation, new multiple dose studies of ARC-520, initial healthy volunteer and patient data of ARC-AAT, progress of ARC-F12 toward the clinic, and data from our growing pipeline all on the horizon, it is shaping up to be an exciting second half of the year for us at Arrowhead. We see all of these as substantial near and long-term value drivers for our shareholders. I would now like to turn the call open to questions. Operator? Operator? Operator, are you still on?
Ladies and gentlemen, if you have a question at this time, please press star and one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star and one on your touchtone telephone to ask a question. Our first question comes from the line of Michael Yee from RBC Capital Markets. Please proceed with your question.
Hey, guys. Thanks. Good afternoon. A couple of questions on the Germany and Hong Kong studies. You're dosing there or you're going to start dosing. Can you just describe, I guess, what the trigger points are to disclose the data? How are you thinking about disclosing data over what timing? Maybe walk through a little of that so we can understand when we can expect to hear more on that. Second question is that on the MONARCH study which you disclosed, you said there would be combinations. Should we assume that these are combinations with interferon and you're going to start at below 1 to 2 milligrams? Is that the base assumption? Then last and final question is on AAT, you previously described you could get significant knockdown like 85%-90%.
I'm just trying to understand when we could start to see some of that data now that you've started the Part B part of the trial. Thanks.
Okay. Michael, this is Bruce Given.
Hi.
I guess there are three questions here. Let me take the middle one first, which was the question about MONARCH, Heparc-2008.
Certainly, interferon combinations are an important and obvious place to start, especially since the other agents that, beyond the nukes, of course, the other agents that we'd like to think about in combination are not yet available. They haven't gotten far enough in development to participate in a study like MONARCH yet. At this point, initial cohorts in MONARCH will be interferon-based. I think at this point, until we have information from a multiple dose setting that we need to go higher than one or two mgs per kg, I think we will be starting probably at the two mg per kg dose in MONARCH. We wouldn't hesitate to increase the dose if we thought that would give us more knockdown. One of the important values of MONARCH is that it's a trial that allows us to be quite iterative and quite adaptive in response and intent.
That's certainly possible, at this point, we don't know under multiple dose conditions whether there would be any value from going higher. I'll take the AAT question next. You asked the question of when would we be seeing a knockdown in that range of 85%-90%. That, of course, pre-assumes that humans are going to behave like primates and mice, and that that's where the natural floor is. Keep in mind, unlike some of the places where we work in these hepatic RNAi targets, AAT is produced outside the liver, not only in the liver. For products that are truly liver-targeted, we don't know what the floor is going to be.
If the floor in humans is similar to the floor in non-human primates, and if the floor in the disease is similar to the floor in normal AAT-producing species, I would say that we could expect to see that kind of knockdown. We would probably be seeing that sometime around the end of the year into early next year, potentially, depending on what the doses are that it's going to take. It could even be earlier depending on what the doses are. The doses are similar to what we see in primates. That kind of timeframe seems to make sense for when we would expect to see that happening. Your third question was around 2002 and 2003. We talked about this some in the past. Those trials are designed to provide four doses of drug.
The thought process has also been to have an extension off the back of those, which is the 2007 study, which we're still sort of finalizing our design. If that study winds up also maintaining the same blinded doses that the patients received in 2002 and 2003, that means we won't get the results until there's been a full year of treatment for all of these patients. Which means that we're probably talking about results, I would gather, perhaps in 2017, would be my expectation. We'll have other data, I think, before that. For instance, coming out of the MONARCH study, which is an open label study, for instance. It's not as though there's going to be a very long gap before we start producing data out of the program. Those particular studies will take a while.
Of course, we'll be getting data out in 2004 before then as well.
Okay. Thank you.
Our next question comes from the line of Ted Tenthoff from Piper Jaffray. Please proceed with your question.
Great. Thank you very much for the thorough update. Just two fact-checking questions. The 2002 and the 2003 studies, the one in Germany and HK, and ultimately South Korea, are they four weekly doses, did you say?
No. We said four doses given every four weeks, basically monthly doses, Ted.
Okay, great. Sorry about that. Thanks. Then the Heparc-2004 study, is that the U.S. study that has just been kind of cleared to begin at 1 mg per kg?
That's right. That's the study that we worked out with the FDA.
Yep. How many doses are there in that study? Is that disclosed? I know it's repeat dosing, but I'm not sure how many. Thanks.
Yeah, that'll be three monthly doses.
Three monthly. Okay, awesome. Thank you. Very much looking forward to the Analyst Day in September and learning more about these new discoveries that you guys are making in the field.
Thanks, Ted.
Ladies and gentlemen, if you have a question at this time, please press star and one on your touchtone telephone to ask a question. Our next question comes from the line of Eun Yang from Jefferies. Please proceed.
Hi, this is Carmen Nanfrie, and thanks for taking the questions and congratulations on the quarter. First, in the phase IIa trial of ARC-520, I know we're expecting to see some data in September, but would you be able to give us any kind of directional color on whether you're seeing a dose response in HB surface antigen reduction in the three and four milligram doses as compared to one and two milligrams?
It's actually a hard question to answer because we're still blinded. Those cohorts in cohort 5 are double-blinded cohorts. They're all blinded. They'll be unblinded before the Analyst Day on September 24th, then we'll be able to answer that question. The last two cohorts 6 and 7, are both open label cohorts, so we'll be able to provide current data for those on the Analyst Day. The 3 and 4 mg per kg cohorts in the e negatives are still blinded.
Okay, thanks. Just to clarify, sorry if I missed it, where will the MONARCH trial be run?
Are we disclosing that?
We've not disclosed that.
No.
Okay, no problem. For the phase IIb multiple dose trials, that's Heparc-2004, Heparc-2003, and Heparc-2002, has dosing begun in those?
We are actively screening in Heparc-2004. All of the centers are up and running and screening. Heparc-2002 and Heparc-2003 are at this point, the European centers, as you might imagine, are basically not enrolling in clinical trials because it's the summer vacation season. Even if the investigators are around, then the research pharmacists aren't around or it's just not feasible to start a study in August in Europe. In Hong Kong, we could get started, but we're focusing on completing our enrollment in Heparc-2001 rather than turning those centers on to enroll for Heparc-2002, Heparc-2003. We would expect that they'll start enrolling probably in September.
Okay. On Heparc-2002 and Heparc-2003, you mentioned that those would be testing one and two milligram per kilogram doses. Will Heparc-2004 also be testing a two milligram per kilogram dose?
It's currently designed just to do the one mg per kg dose and then get back to the FDA.
Okay. Lastly, for the Phase 2b combination trials, can you give us any additional details on the dose and for combinations with immune modulators, are you planning to use interferon, anti-PD-1, or something else?
Well, as I had said to Michael, interferon does figure into some of the early cohorts there. So do classic nukes. We've been giving a lot of consideration to other potential combinations. There have even been some discussions with other potential collaborators in that regard. As I said, there actually are very few products out there that are in a position to be able to collaborate. We have our thoughts about what might be the next best combination agents to think about putting cohorts in. We've discussed these with our clinical advisory board. They're pretty excited about some of the ideas as well. At this point, early cohorts, interferon and the nukes are going to be the original starting point, I think is fair to say.
Keep in mind that the goal of MONARCH here is to find a recipe that gets us to functional cures. Once we find that recipe, we'll then blow that out with larger studies, of course. We are taking an open architecture approach to finding that recipe. We are a bit agnostic as to what combinations we'll do. As long as they appear to be safe and they make sense theoretically, we'll try those combinations.
Okay, gotcha. Thank you very much.
You're welcome.
Okay. Pardon me. This concludes today's Q&A session. I'd like to turn the call back over to Mr. Anzalone for any closing remarks.
Thanks very much. Thank you for joining us on the call today, and we look forward to talking to you again on September 24th.
Ladies and gentlemen, thank you for attending today's program. This does conclude today's call. You may now disconnect. Everyone have a great day.