Ladies and gentlemen, welcome to the Arrowhead Research fiscal 2014 first quarter financial results conference call. Throughout today's recorded presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. I would now like to hand the conference over to Vincent Anzalone, Director of Finance and 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 first quarter ended December 31st, 2013. With us today from management are President and CEO, Dr. Christopher Anzalone, Chief Operating Officer and Head of R&D, Dr. Bruce Given, and Chief Financial Officer, Ken Myszkowski. Management will give a brief overview of the quarter 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. 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 our last conference call in December, we discussed key 2013 milestones and how they de-risked our programs and helped shape our current value proposition. That was less than seven weeks ago, today we will be more forward-looking and focus on our plans for this calendar year. 2013 was indeed a great year for us, we see even more opportunities for value creation in 2014. We are entering a period of growth marked not only by progress of ARC-520, our candidate against chronic hepatitis B infection, also by expansion of our clinical pipeline. This is the natural progression for Arrowhead as a maturing company and sets forth a fundamentally different risk profile than we had just a year ago. Let's start with capital.
Today, we filed a shelf registration statement for up to $200 million in Arrowhead equity securities. Our existing shelf expires this year, we felt it prudent financial management to maintain an effective shelf registration statement. It also reflects our confidence in ARC-520 and the broader DPC platform. We have a tremendous amount of value yet to unlock, we believe the best way to maximize that value is to drive clinical development ourselves and not be dependent upon early partners. For instance, we are prepared to push ARC-520 all the way through registration. Does that mean we are raising $200 million right now? No. We have a very strong balance sheet that gives us runway into 2016 and enables us to fully fund ARC-520 through phase IIb while pushing two additional candidates through clinical proof of concept.
The new shelf gives us added flexibility to further strengthen our balance sheet at some point in the future and continue independent development beyond that. The ARC-520 clinical program has provided us increased confidence to drive development internally. In October, we completed planned enrollment in a phase I study of ARC-520 in 36 healthy volunteers. The study indicated that ARC-520 was generally safe and well-tolerated at all 6 dose levels studied. All subjects received their full assigned dose, there were no discontinuations for adverse events or otherwise. No serious or severe adverse events were reported, laboratory results have not indicated any end organ toxicity in any subject. We later presented unblinded phase I data at the HepDART 2013 conference, demonstrating that adverse event frequency and severity were the same between placebo and ARC-520.
In November, we applied for regulatory approval in Hong Kong to conduct a single-dose phase IIa study in patients with chronic hepatitis B. The two sites and PIs are well-known international KOLs that have conducted many HBV trials. Ethics committees from both sites have approved our protocol, all necessary preparations are complete. We are waiting for final approval from the Hong Kong Department of Health to begin the study. Communications have been positive, we believe that we will receive approval and begin treating patients this quarter. We are currently planning two dose groups of eight patients each, we expect it to enroll quickly. We believe both cohorts will be at effective dose levels, our primary endpoints are safety and tolerability, as well as depth and duration of s- antigen knockdown.
We believe the dosing portion will be complete in the second quarter, we will follow patients until s- antigen levels return to baseline. While we cannot predict how long the duration of effect will be, we believe that top-line data should be available sometime during the summer. Our plan is to provide these data via press release then present a full data set at a scientific meeting. We have a high degree of confidence that the phase IIa will be successful. The phase I suggested that we have a safe and well-tolerated drug at all doses studied. We saw no dose-limiting toxicities, we do not expect any safety concerns in the phase IIa. We have generated a substantial amount of data in multiple animal models indicating highly potent knockdown.
For instance, we published data in the journal Molecular Therapy describing ARC-520 administration in rodent HBV models that led to three to four logs or greater than 99.9% knockdown of HBV gene products. We have generated data in non-human primates using other siRNA sequences demonstrating similar results. Most recently, we reported deep and durable knockdown in a chimpanzee with chronic HBV. Should the phase IIa work out as we hope, it will represent a great leap forward in HBV research and potential treatment. We believe it will be the first time anyone will have demonstrated a consistent s- antigen reduction, which is thought to be a critical step in reaching a functional cure. Based on the phase IIa data, we plan to move into a multi-dose phase IIb in the second half of this year.
Preparations for this much longer study are underway. They include completion of our second external GMP manufacturing run, chronic GLP toxicology studies in multiple species, site and investigator recruitment, protocol development, and applications for regulatory approval. The phase IIb will be a multinational study. Will likely include sites in the U.S., Europe, and Asia. We'll be designing the trial to provide a readout on ARC-520's ability to achieve functional cures, among other outcome measures. As you can see, 2014 is an important year for ARC-520, and we expect substantial value to be created around this program. 2014 is also about leveraging ARC-520 to de-risk the DPC delivery platform and broadening out our pipeline. Think of ARC-520 as a candidate that drives value directly and as a proxy for other liver-based candidates.
Our friends at Alnylam did the same thing with their TTR program over the past year and a half. We have demonstrated that DPCs are safe and well-tolerated in humans. We hope that by the summer we will have demonstrated that they are capable of inducing efficient, deep, and durable gene product knockdown in humans. This type of clinical validation will enable shareholders and potential shareholders to ascribe value to new candidates relatively early in development. RNAi is a reliable mechanism, and many accept the idea that if you can get a potent siRNA sequence to the right tissue type and the right intracellular space, then you can reasonably expect target gene product knockdown. Once we show that DPCs can do this safely and efficiently in humans, we will have a machine capable of pushing new candidates into the clinic quickly.
These candidates may have a higher probability of success and lower risk profile relative to early clinical candidates using other therapeutic modalities. This is the point where our upside potential expands substantially, and we begin to maximize the value we may extract from our broad platforms. Toward those ends, we expect to have an analyst and investor day at the end of the second quarter to discuss pipeline capabilities and the next candidate. The target and disease area for this next candidate have not been disclosed publicly, but we have said that it is an orphan liver indication. Our current plan is to hold an analyst and investor day to announce the candidate, provide information about the disease area, present preclinical data, and give more guidance about the timing for the clinical program.
This should be very similar to the event we held last year on ARC-520, and we hope to include key opinion leaders in the disease area. We expect to file an IND for the new candidate in the fourth quarter of this year. Underneath ARC-520 and the next candidate, we have programs against other targets. We also have large efforts to develop DPC formulations for subcutaneous administration, as well as programs in extrahepatic delivery. We believe these are significant mid and long-term value drivers, and we hope to provide additional information around them later in 2014. With that update, I would now like to turn the call over to our CFO, Ken Myszkowski, to review our financials for the period. Ken?
Thank you, Chris, and good afternoon, everyone. As we reported today, our net loss attributable to Arrowhead for the three months ended December 31st, 2013, was $10.6 million, or $0.28 per share based on 37.7 million weighted average shares outstanding. This compares with the net loss attributable to Arrowhead of $4.6 million, or $0.33 per share, based on 14.1 million weighted average shares outstanding for the three months ended December 31st, 2012. Total operating expenses for the three months ended December 31st, 2013, were $7.1 million compared with $5 million for the three months ended December 31st, 2012. Research and development-related expenses were $4.5 million during the quarter, and general and administrative expenses were $1.7 million.
The increase in operating expenses compared to the year-ago period are due to higher drug manufacturing costs related to ARC-520 in preparation for phase II clinical trials, higher clinical trial expense related to phase I clinical trial for ARC-520, and higher compensation expense primarily due to increased headcount as compared to the prior year. Net cash used in operating activities for the first three months of fiscal 2014 were $7 million compared with $3.8 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 was $59.7 million at December 31st, 2013. Including investments in fixed income securities, our cash and investments balance was $85.5 million at December 31st, 2013, compared to $29.8 million at September 30th, 2013. The increase reflects the $60 million offering closed in October.
Additionally, the company received cash inflow of $2.8 million from the exercise of warrants and stock options. Our common shares outstanding at December 31st, 2013, were 39 million, up 6.5 million from 32.5 million at September 30th, 2013. Also at December 31st, 2013, there were 51,291 shares of preferred stock outstanding.
These preferred shares are convertible into 10.7 million shares of common stock. Common shares outstanding, including the conversion of our preferred shares, will be 49.7 million. With that overview, I'll turn the call back to Chris.
Thanks, Ken. As I mentioned, 2013 was a big year for us, we believe that 2014 offers even more opportunities for real and durable value creation. They include the following. This quarter, we expect to begin a phase II-A study of ARC-520 in patients with chronic HBV in Hong Kong. Next quarter, we expect to complete dosing in the phase II-A. At the end of the second quarter, we expect to have an analyst and investor day to disclose our next candidate. We will discuss the disease, target, preclinical data, and clinical plan. In the third quarter, we expect to release top-line results from the phase II-A. In the fourth quarter, we expect to begin a multi-dose phase II-B study for ARC-520. Also in the fourth quarter, we expect to file an IND for our next candidate.
ARC-520 remains our top priority and primary value driver, as it moves through the phase II-A, it will also serve as a powerful proof of concept for our broader platforms. I believe that this will represent an important inflection point as shareholder value may then be built simultaneously through the success of ARC-520 as a candidate and via new candidates that enter the clinic relatively de-risked. This becomes a story of leverage and speed. We have developed a machine capable of pushing new candidates into the clinic rapidly that are all built on a validated delivery system. We have all the tools we need to build substantial shareholder value and create new therapies that could positively impact patients worldwide. I would now like to open the call to questions. Operator?
At this time, we will begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ted Tenthoff of Piper Jaffray.
Great. Thank you very much for taking the question. Just a question on the upcoming phase IIa. What still has to be done? What are we waiting for dosing? How quickly do you expect to be enrolling that? Are we going to do one cohort and then subsequently the second cohort? How do we expect that to roll out?
Thanks, Ted. Bruce, do you want to handle that question?
Yeah, sure. Good afternoon, Ted.
Hey, Bruce.
All we're waiting for now is the final approval from the Hong Kong authorities. We expect that fairly soon after completion of the Chinese New Year, we of course don't control that. We're hopeful that that will come soon, we will be ready to go. We will complete enrollment in the first cohort, of course, before we would start the second cohort.
Okay.
We're not required by protocol to wait until the first cohort have all completed their follow-up. Once everybody has been enrolled and have had at least a relatively short, brief period of follow-up for the last patients in, we'll be able to start the second cohort. We're hoping that that'll go fairly quickly.
Excellent. You will be measuring viral load reductions as well, obviously the focus is on s- antigen, correct?
Well, we're going to be on a background of entecavir, viral load should already be fairly fully suppressed or maybe even undetectable.
Yeah.
If there is a virus present, we will be measuring the further decline. Many of these patients will not have a detectable DNA.
That's what we all thought. Yeah.
The main focus here is on s- antigen.
Awesome. Thank you very much, and looking forward to hearing what the next program is too.
Thank you, Ted.
The next question will come from Thomas Wei of Jefferies.
Thanks. I just wanted to understand, in the chimp study, the chimp did receive two doses of drug, but you talk about it as being given so close together in time that it's actually more like a single dose of drug at just twice the dose exposure. Can you remind me how that dose compares to the doses that are being used in the Hong Kong study? I'm sorry, I can't remember that. Then also a comparison of what surface antigen levels were in the chimp relative to what it might be in an HBeAg-antigen negative population in Asia.
Sure. Thanks very much, Thomas. The doses in the chimp were 2 mgs per kg and 3 mgs per kg. As you point out, it was a really short exposure. Those two doses were separated only by 2 weeks. That was not meant to imply that we believe the dosing schedule in humans is going to be every 2 weeks. Rather, we think it's going to be closer to a month. We were just trying to find what an effective dose might be in the chimp in that study. In the phase II-A, we're looking at 1 mg per kg and 2 mgs per kg. We believe that those are both effective doses.
Keep in mind that that chimp was extremely viremic and antigenemic, much more so than we expect to see in humans. It was a much higher bar in that animal than we will see in humans. Second, that animal had a mutant form of HBV that was a mismatch for one of our two sequences. Now, it's not clear what the effect of that is. It could've been that one of the was less effective than the other. For those reasons, we believe that one and two mgs per kg will be effective in people. Now, regarding the s- antigen levels, Bruce, do you want to comment on those levels in the chimp?
Right. They were very high. Our expectation, Thomas, would be that they will probably be on the orders of two to three logs lower in the patients, and maybe some even lower than that. It's a little bit hard to predict. We'll see a considerable amount of variability in s- antigen levels in this patient population. We would expect them to be quite a bit lower than they were in the chimp.
Just to follow up, when you include all of these various factors, the difference in the doses and the difference between chimps and humans and the mismatch and the surface antigen baselines, what do you think is a reasonable expectation for what we could see out of the single dose study in terms of surface antigen effects?
What we are looking to get is about a log of knockdown that would last around a month. We believe we can get that in the one to two mg per kg range. If we can't, we believe that we could amend the protocol in Hong Kong and go higher. The phase I was quite clean and we expect that should those data be reproduced in the phase IIa, that we could probably go higher should we need to. That's sort of our bogey. Now, it's not clear that we need to be that good. For instance, you probably recall in the chimp with s-a ntigen, we got somewhere in the 85% or so knockdown, so less than a log. That was sufficient to initiate this process that we believe was immune activation or immune reactivation.
Even though we would like to see a log in humans, that 85% or so, at least in this one individual, seemed to be enough to start that cascade of events that under chronic dosing could lead to a functional cure.
Okay, great. Thanks.
You're welcome.
Again, if you would like to ask a question, please press star then one at this time. We have a follow-up. I apologize. We do have a question from Wei Li.
Yes. I have a quick question about the missed target of the RNAi. I have two questions. The first is I saw that Arrowhead did some research on the chimpanzee just for the genotype B. I know there is a lot of people, patients with genotype C, and those are closely related with the liver cancer and more probability with the liver cancer. I just wonder, is there any data to support the genotype C? This is the first question. A follow-up is for the genotype C and genotype B, there are two kind of mutations. Is a precore or the basal core promoter. Is there any difference per your comments for those patients with basal core promoter mutations? Thank you.
Thank you very much. That's a very astute question. As you may know, ARC-520 consists of two siRNA sequences. The reason we have two is to give us, or the primary reason to have two, is to give us broader coverage across genotypes, because we know there are multiple major genotypes in hepatitis B. As you mentioned, B and C are two of them. The chimpanzee we studied happened to be a genotype B. We tested our two sequences, or we screened our two sequences with GenBank, which has something on the order of 2,500 or so sequences in it of HBV. Among the two sequences together, we cover 99.6% or 99.9% of all those sequences. We believe we cover all the primary genotypes with at least one of the two sequences.
Regarding mutations in B or C, again, we've got these two sequences, they're both generated in highly conserved regions, presumably we should cover the vast majority of individuals. That's not to say that we will be equally efficacious in all genotypes. This is a very difficult virus, as you know, and it is certainly possible that this therapy could be more or less efficacious in certain genotypes. There's no theoretical reason for that right now, it's certainly a possibility given that we don't know very much about the virus.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Well, thank you very much for your attention and for participating in the call today, I look forward to talking to you soon.
The conference is now concluded. Thank you for attending.