Ladies and gentlemen, welcome to the Arrowhead Research fiscal 2014 second 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 will now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince.
Thank you, operator. Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2014 second quarter ended March 31st, 2014. With us today for management, our 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 announce that we have scheduled an analyst R&D day for June 19th in New York City. At this event, Arrowhead management and a panel of external disease area experts will discuss our next clinical candidate and provide a corporate update. Space will be limited, so any research analysts and institutional investors interested in attending should RSVP to us at ir@arrowres.com.
A webcast of the event will also be available on our website for those unable to attend. For today's call, I would like to remind you that comments made 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. 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, and thank you for joining us on our call today. The fiscal second quarter and the period since our last conference call have been extremely productive for Arrowhead. Our priorities can be thought of in three camps. We made substantial progress in each of them. They are, one, progress with our lead candidate, ARC-520, against chronic hepatitis B infection. Two, progress on our core DPC platform and the pipeline of new drug candidates it enables. Three, access to capital and talent. Let's take a closer look at each of these and begin with ARC-520. As we have said in the past, ARC-520 remains our highest priority and primary near-term value driver. Over 350 million people, or roughly one in 20 worldwide, are thought to have chronic HBV infections. There is no cure.
This has been a much more difficult virus to treat than hepatitis C, in part because blocking viral replication is not sufficient to clear the virus. High levels of surface antigen or S antigen can immunosuppress a patient with chronic HBV infection even when viral replication is blocked to undetectable levels. Many believe that substantially decreasing S antigen levels could de-repress the immune system and enable it to clear the virus. To date, there has not been a way to do this consistently. Our published nonclinical studies in rodent models, as well as a chimpanzee with chronic HBV infection, suggest that ARC-520 is capable of rapid and deep reductions of S antigen levels in addition to all other HBV gene products. I'm not aware of any published reports that rival our data.
As such, we believe we have a powerful drug candidate and substantial first-mover advantage in this large unmet medical need. We intend to retain and even expand this advantage with well-thought-out clinical studies and good execution. As we've discussed in the past, our phase I clinical study began in July 2013. Planned dosing was completed just three months later. It indicated that ARC-520 was generally safe and well-tolerated at all doses studied. This was followed by a phase IIa study in patients with chronic HBV infection, which started dosing at the end of March 2014. The study is planned to enroll 16 E antigen-negative chronic HBV patients in two dose groups, with patients receiving either ARC-520 or placebo in combination with entecavir. We will follow patients until S antigen levels return to baseline or within 20% of baseline.
In addition to generating more safety and tolerability data, this study will give us depth and duration of S antigen knockdown, which will be used to design the upcoming multi-dose studies. We announced that the first cohort of eight patients had been fully enrolled and dosed in just over a week. We have received DSMB approval to move into our second cohort and expect to begin dosing shortly. Patient accrual has been very fast, which is encouraging and keeps us on pace to have top-line results to report in the third quarter. We expect this to be in the form of a press release. Demonstrating consistent S antigen reduction in humans would be an exciting outcome and a first for the field. Therefore, we hope to report a more complete data set at a scientific conference or a peer-reviewed publication.
People have inquired as to whether we would release any interim data before the phase II-A is complete. We will not. The study is blinded. It would be inappropriate for us to communicate any hard data or even perceived trends while the trial is ongoing. We are happy to provide information about the study design and expected timelines. We thank you for your patience. In addition to the phase II-A, we remain on schedule with long-term GLP toxicology studies, drug manufacturing, protocol development, site and investigator recruitment, and other activities needed to support the phase II-B studies planned to begin in the second half of this year. As we've discussed in the past, these studies will be multinational. We would expect to start seeing functional cures with repeat dosing of ARC-520. As you can see, our progress with ARC-520 has been rapid and consistent.
Thus far, we have met or beaten all of our guidance. We expect this to continue. The positive safety data from the phase I study de-risks ARC-520 because until a candidate is administered in humans, there's no way of knowing if a safety signal will emerge that was not predicted in animal models. The data thus far suggests that we have a safe and well-tolerated drug candidate. Regarding efficacy, we have generated and published data indicating deep and durable knockdown across multiple animal models, including non-human primates. This includes the siRNA sequences in ARC-520, as well as sequences against other liver targets in order to better understand efficiency of the DPC delivery system. Because of the reliability of RNAi as a mechanism and the highly predictive nature of non-human primate data for human knockdown, we expect to see deep and durable S antigen knockdown in the phase II-A.
Should we see that, report next quarter, it will be another risk removed from the program. At that point, it would appear that we have a safe and effective drug candidate. The final hurdle would be to demonstrate that reducing S antigen levels leads to functional cure of HBV. The multi-dose phase II-B studies will get at that question. We expect to be looking for functional cures next year. These are exciting times indeed. Let's now turn to the broader DPC platform and pipeline. In addition to being an exciting candidate, ARC-520 serves as a proof of concept for the DPC delivery technology as it relates to liver targets. If we show that ARC-520 safely and effectively knocks down HBV gene products, it is highly likely that DPCs will be capable of safely and effectively knocking down other hepatocyte targets.
This is important as we expand our pipeline of RNAi therapeutics. It also speaks to the leverage we see across our development programs. The successful phase I went a long way to de-risk the platform from a safety standpoint. The fact that we saw no evidence of any end-organ toxicity at any dose gives us confidence as we prepare multiple new candidates. The phase II-A study top-line readout next quarter will more fully de-risk the platform by demonstrating knockdown efficiency. Once both of these are firmly established, we see enormous opportunities to create value by aggressively expanding our pipeline. This process has begun. We nominated a clinical candidate for an as-yet undisclosed rare liver indication for which we plan to file an IND in the fourth quarter. As Vince mentioned, we will hold an analyst day on June 19th in New York City to discuss this candidate.
During the event, we will provide anticipated timelines for the candidate and present non-clinical data. A panel of key opinion leaders will present additional information about the pathophysiology, patient populations, and current treatments for the disease. This candidate is an exciting next step for us as we build out the pipeline, but it is only one of the targets we're working on. We are making substantial progress with additional undisclosed programs that we hope to provide guidance on in the future. These include liver as well as extrahepatic targets and DPC formulations for both IV and subcutaneous administration. All this work on ARC-520 and expanded pipeline requires resources, both human and financial. We have built up both of these recently. During the quarter, we added staff from the bench scientist level to VP level in various key areas, including manufacturing, toxicology, chemistry, biology, quality assurance, regulatory, and clinical operations.
These additions ensure that we can support rapid clinical development of ARC-520 and our next clinical candidates. They also allow us to continue to develop DPCs. In February, we strengthened our balance sheet through an equity financing with gross proceeds of approximately $120 million. This capital allows us to fully fund ARC-520 into phase III and gives us the resources we need to push additional candidates into the clinic and through proof of concept over the next few years. We now have multiple years of cash to support our pipeline growth and are not dependent upon near-term pharma partnerships that can limit upside potential for our shareholders. It enables us to expand the scope of our upcoming ARC-520 phase II-B studies. We plan to conduct multiple studies that answer key questions about the response of different patient populations to ARC-520.
We will discuss more about the phase II-B study designs later in the year. It gives us great confidence to know that we are properly resourced to design the development program in a way that generates a comprehensive understanding and data package for ARC-520's activity. With that update, I'd now like to turn the call over to our CFO, Ken Myszkowski, to review our financials for the period. Ken?
Thanks, Chris, and good afternoon, everyone. As we reported earlier today, our net loss attributable to Arrowhead for the three months ended March 31st, 2014, was $13.9 million, or $0.31 per share based on 44.3 million weighted average shares outstanding. This compares with a net loss attributable to Arrowhead of $6.8 million, or $0.41 per share based on 16.5 million weighted average shares outstanding for the three months ended March 31st, 2013. Total operating expenses for the three months ended March 31st, 2014, were $11.3 million compared to $5.4 million for the three months ended March 31st, 2013. Research and development related expenses were $5.2 million, while G&A costs were $1.3 million. The increase in operating expenses compared to the year ago period are due to ARC-520 clinical trial, related ongoing toxicology trials, and drug manufacturing costs in preparation for phase II clinical trials.
R&D compensation expense is higher due to increased headcount as compared to the prior year. Net cash used in operating activities for the first six months of fiscal 2014 were $14.7 million, compared with $8.3 million in the prior year period. The change in cash used in operating activities is consistent with the change in operating expenses. Turning to our balance sheet, our cash balance at March 31st, 2014 was $142.8 million. Our cash resources also include excess cash invested in investment-grade bonds maturing in the near future. Bonds maturing in less than 12 months are classified as short-term investments and totaled $17.8 million at March 31st, 2014. Bonds maturing in more than 12 months are classified as long-term investments and totaled $34 million at March 31st, 2014.
Including short and long-term investments in fixed income securities, our cash and investments balance was $194.7 million at March 31st, 2014, compared to $29.8 million at September 30, 2013. The increase reflects the financings completed this past February and October. Additionally, the company received cash inflow of $8 million from the exercise of warrants and stock options. Our common shares outstanding at March 31st, 2014, were $51.9 million. At March 31st, 2014, there were also 21,000 shares of preferred stock outstanding. These preferred shares are convertible into 5.6 million shares of common stock. Common shares outstanding, including the conversion of our preferred shares, would be 57.5 million. With that financial overview, I will now turn the call back to Chris.
Thanks, Ken. We've made good progress in all areas and are quite pleased with our execution over the past quarter. Unfortunately, weakness in the biotech market generally, and RNAi companies in particular over the past several weeks, have meant that this progress toward value creation has not been reflected in our stock price. We are focused on providing growth to our shareholders, but sometimes market moves distort value creation in the short term. We have no control over that. What we can control is the quality of our science, the choices we make to go after high-value unmet medical needs, the quality of our clinical programs, and the extent to which we execute. On all of these fronts, we have excelled, so we have to trust that the market perception will catch up with us, just as it did last year. Our lead program continues to move rapidly.
Our pipeline is filling out. Our core technology is increasingly de-risked, we have a very strong balance sheet. Needless to say, we are positioned exactly where we believe we need to be for durable value creation. Importantly, we will have regular and impactful events throughout the remainder of 2014 to demonstrate our progress. These include the following. Throughout May and June, we will present at major investor and scientific conferences, including the Deutsche Bank Health Care Conference this week, TIDES next week, and Jefferies, Wells Fargo, and Piper Jaffray events in June. On June 19th, we will hold an Analyst Day to discuss our next clinical candidates. In the third quarter, we expect to release top-line results from the phase II-A study of ARC-520. In the fourth quarter, we anticipate that multi-dose phase II-B studies will begin.
In the fourth quarter, we expect to file an IND for our next clinical candidates. Lastly, we will provide updates on undisclosed programs and technological capabilities that we are targeting for 2015. I would now like to open the call up to your questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or wish to remove yourself from the queue, please press the pound key. Our first question comes from Thomas Wei from Jefferies. Your line is now open.
Thanks. Just a couple of questions on the Hong Kong study. Just to clarify, in your press release that you're going to put out in the third quarter, will it actually contain the magnitude of the surface antigen reduction that you see in each arm?
Yes. Thanks, Thomas. Yes, that is our intention. We'll be describing the depth and duration of S-antigen knockdown in that press release. That's correct.
how would you set our expectations on what sort of magnitude is reasonable to expect from a single dose here?
Yeah. We've been very upfront about this, maybe to our detriment, but we expect to see a log of knockdown, and that's our goal. Given the data with interferon, the best we can understand is that somewhere around a log in knockdown may be important to get to eventual S-antigen loss and a functional cure. That's what we expect, about a log in knockdown that will last a month. Now, if we don't get there with two mg per kg, we are prepared to amend the protocol and go up three mg per kg because we'd like the flexibility of having a log of knockdown. I think it's fair to expect that is our goal, at least.
If that were to be the case where it falls slightly short, I guess I'm curious, if you fell slightly short and you thought that a three mg per kg dose was important to pursue, how does that impact the timing of the start of the phase II-B study?
I wouldn't think-
wouldn't you be able to get there by giving multiple doses anyways? I'm just curious how you think about this single-dose data relative to the multi-dose study.
Yeah. you're exactly right. If we did fall slightly short of that, we believe we could get there by dosing more often than once a month or whatever we decide on this. you're right about that. what we want to do is we want to give the phase IIb enough flexibility to get around, to ask a lot of questions. the more knockdown that we can demonstrate with a single dose, the greater flexibility we've got. it's for that reason that we really like to make sure that we can get to a log of knockdown. regarding timeline, we don't believe that if we did have to go three mg per kg, that that will affect the timeline. We still expect that we can release top-line data in the third quarter and that we can start the phase IIb on time.
The limiting factor there really right now is finishing the long-term tox studies, the long-term GLP tox studies that need to support the phase IIb. we are on track to start that in the second half of the year, and whether we stop at two or go to three mg per kg, we think we can still make that.
Great. Thanks. That's very helpful.
Sure. You're welcome.
Thank you. Our next question comes from the line of Michael Yee with Capital Markets. Your line is open.
Hey, thanks. I got knocked off briefly, so I don't know if this was answered, but can you perhaps give some scenarios on the phase IIb to get this data? Obviously, appreciating what you just answered on the last question. I mean, multiple doses, how long in combination with entecavir, maybe you could walk through some of that and when you would actually see data on that. That's like a mid 2015 event if you start all this on time?
For the phase IIb studies?
Yes, correct.
I'd like to give you guidance on that, but we just can't at this point because we just don't know. We will learn a lot over the next several months. We'll learn how long we can keep S knockdown, how deep it goes. My thinking is that it's hard to give guidance on when we might have data for the phase IIb until we have that. My sense is that we'll start at least some of the phase IIbs sometime in the second half of this year, and that we could have some data in the middle of 2015. We can't really commit to that yet until we have a better understanding about what the S knockdown curve looks like.
In terms of the types of arms, like give me your base case, how many different arms and what are we looking at? How long is dosing? Talk a little bit about that when you start later this year.
Sure. Bruce, do you want to address those questions?
Yeah, sure. I mean, our thought process has been that we would probably run a classic sort of highly controlled multi-arm study that would include a NUC-only arm, and that would be either entecavir or tenofovir. We'll just stratify between the two, but we view them as equivalent clinically. A NUC-only arm, and then an arm that was a NUC plus a lowish dose of ARC-520, and then NUC plus the higher dose of ARC-520. We expect that the highly controlled study is to probably have 12 weeks of dosing that may be basically three monthly doses, for instance, or something along those lines. We of course, would follow after the last dose. They probably would be something like 16 weeks duration.
It's our expectation that those patients would then roll right into a long-term follow-up that would allow dosing out to at least a year. That would include probably the NUC-only arm as well, getting to go into that study. We of course, have no idea if we can produce this profound knockdown in surface antigen. We have no idea how long we have to do that before the immune system can respond. Our best guess is it's probably longer than just a few months. We're hopeful that it'll be maybe something like half a year, or it might even be a year of therapy. We just don't know yet.
Right. To clarify that, you said roll right into a long-term follow-up. You said you'd follow them for 16 weeks. You follow them for four months and then just allow them to just get more dosing if they relapse. Is that what you mean?
Well, no. Our expectation is based on what we've seen so far, of course, with interferon, which we have no idea whether that really is fully predictive here. It oftentimes requires some time with the surface antigen levels down for the immune system to come back. We would keep dosing the patients during that long-term extension and of course, watch what was going on with all of their viral parameters and be looking for the occurrence of S clearance and possibly seroconversion as well. At this point, we're kind of on the frontier. We don't know how long it'll take to produce an S clearance state, and we're very interested in finding that out in phase II. We have designed the phase II program to help us answer that question, which I think is very important.
Last clarification, I promise. Therefore, you do not expect to see an ALT flare or antibodies on this one dose phase II-A, correct?
Well, that'd be a real surprise. That would be a very happy surprise, but that's asking an awful lot. That's kind of the lottery ticket result.
Perfect. Thank you.
Thank you. Our next question comes from Ying Huang from Barclays. Your line is open.
Hi, it's actually Catherine for Ying. A couple of quick questions. First, besides ALT and AST and S antigen levels, are you collecting any other data in this phase IIa trial? Can you give us any thought of what we should expect in terms of S antigen reduction after 12 weeks?
Bruce, do you want to address those?
Sure. We are measuring other parameters, in those patients that in the phase IIb that would be E antigen positive, we'll be looking at what's going on with E antigen as well. These patients will, for the most part, be fully suppressed with respect to HBV DNA, we wouldn't expect to really be able to see anything there. In those patients who are low but not fully suppressed, we would expect to see further suppression with the addition of ARC-520, and that's something that we will be measuring. All of that's part of it. I think one of the interesting questions regarding the surface antigen is with multiple doses, will we see it ratchet down even further? I think that's a very real possibility. Thomas Wei asked at the beginning about single dose.
I think with multiple dose, in fact, we may see an additive effect and the surface antigen may fall further than it does with a single dose, and it's one of the things that we'll be looking for very carefully. That, again, may be very helpful to the immune system to have that kind of de-repression. We'll be looking at all of that and the quantitative surface antigen levels over 16 weeks, I think are going to be an important parameter and something that we're particularly interested to see.
That's for the phase IIb?
I'm sorry?
That's for the phase IIb?
Yes, that's for the IIb.
What about the IIa? Are you collecting anything else?
Well, the IIa is an E antigen negative patient.
Yeah
that's fully suppressed with respect to DNA. There's not a whole lot more to measure there, which was kind of the point of doing it in E antigen negative patients. It makes for a pure experiment where only one variable is moving.
Got it.
That's by design.
Okay. On the other question of reduction after 12 weeks?
You're asking after a single dose?
Yeah.
We'll follow the S antigen until it gets back to baseline or at least within 20% of baseline as far out as, say, three months. We don't expect it to stay down that long. We don't know what we're going to see until we see it. Generally, the thought process is that RNA that loads into RISC tends to persist about a month. It seems that it'd be somewhat unlikely for it to go a whole lot further than that. Until we get there, we don't know.
Okay, great. Thank you.
Again, ladies and gentlemen, if you would like to ask a question, please press star then the one key on your touch-tone telephone. Our next question comes from line of James Gash, who is a private investor. Your line is open.
Yes. Regarding the IIa, will there be any different rates of infusion, or will that all be the same?
Those will all be the same. Bruce, you want to talk about the infusion rate there?
Well, yeah, the rates will be the same. We're infusing at a rate of about 10 milligrams per minute. They'll be the same. Of course, the doses are different on a milligram per kilogram basis. The about six minutes or seven minutes to infuse, depending on the weight of the patient. A two mg per kg dose will probably tend to take something more on the order of 10 minutes. The rate of infusion is the same.
Do you hold out the possibility that a two mg per kg at a slower rate of infusion might get the job done before you go to a three mg per kg?
You mean get a deeper knockdown?
Yeah.
I don't think so. I don't think that would really have much of an impact. Unless it was a really slow infusion, maybe you could theoretically wonder, but I don't think at any sort of reasonable rate.
Okay. Thank you. The next question is basically a clarification of outstanding shares, common shares.
Ken?
What's the number on that?
Sure. Our outstanding shares at March 31st were $51.8 million. That does not include the preferred shares that are outstanding, which would add another 5.6 when they are converted to common shares.
Can you comment, has there been any conversion?
Yes. During the year, there have been about 7.6 million of preferred shares that have been converted to common. There are remaining about 21,000 shares of preferred that are out there. As I say, when those are converted, that'll be another 5.6 million shares.
Oh, okay. I understand now. More than half have converted.
That's right.
Okay. Thank you, gentlemen.
Yes, thank you.
Our next question comes from the line of Grant Fang from SAC Investment Research. Your line is now open.
Hi. Guys, congratulations on a strong quarter. Just a quick question about the phase IIb trial. Do you have a rough estimate of the cost associated with the phase IIb trial?
That's a good question. We've not given guidance on that at this point, in part because we have not set on the number of studies we're going to do. As we mentioned in the prepared remarks, one of the important things about raising the money that we did in February is that it gives us flexibility to do a relatively large number of small pilot studies to get at various questions with respect to how ARC-520 works with different patient populations. I suspect that we'll give more guidance on the phase IIb later this year once we get into it or once we're approaching it. At that point, we can give you probably a better understanding about what some of those studies might be and then an overall cost associated with it.
Okay. You have enough cash right now for the phase II, right?
Oh, we have plenty of cash for phase II. In fact, what we've said is we've got enough cash to get us into a phase III for ARC-520, as well as push additional candidates through clinical proof of concept. We are really not cash constrained right now as it relates to the development of ARC-520.
Sounds good. Thank you.
You're welcome.
This concludes the question and answer session. I would like to turn the conference back to Chris Anzalone for any further remarks.
Thank you very much for your interest, and we look forward to telling you more on June 19th at the Analyst Day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect. Everyone have a great day.