Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals fiscal 2016 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 will now hand the conference call over to Patrick O'Brien, General Counsel for Arrowhead. Please go ahead, Patrick.
Thanks, Tamara. Good afternoon, everyone. Thank you for joining us to discuss Arrowhead's results for its fiscal 2016 third quarter ended June 30, 2016. With us today from management, are President and CEO, Dr. Christopher Anzalone, who will provide an overview of the quarter, Dr. Bruce Given, our Chief Operating Officer and Head of R&D, who will discuss our clinical programs, and Ken Myszkowski, our Chief Financial Officer, who will give a review of the financials. We will then open 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-521, ARC-AAT, ARC-F12, ARC-LPA, ARC-HIF2, and our other programs, as well as anticipated timing for study enrollment and completion and the potential for regulatory, commercial, and business development 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, Patrick. Good afternoon, everyone, and thank you for joining us today. Patrick is filling in for Vince, whose wife Hillary apparently is making a habit of giving birth on the days of our quarterly conference calls. Welcome to the world, Nicholas Santino Anzalone. I'd like to start with our announcement today that we raised $45 million of equity capital. We did this with a small and targeted syndicate of high-quality biotech-focused institutions. I think these are important considerations, particularly in the current capital markets, and we are proud to have been able to execute the transaction and appreciative of the trust these institutions have in Arrowhead.
With any equity financing, there is a balance we hope to strike between accessing the capital we need to build value by moving our programs forward and limiting dilution in order to maximize shareholder return. We stopped at $45 million because it strikes that balance. We wanted to strengthen our balance sheet now and increase our runway to reach potential inflection points while we work on certain preclinical business development opportunities. Let's take a look at both sides of that equation and start with potential milestones we can reach with the current and new capital. An additional $45 million of capital will get us into the third calendar quarter of 2017. Between now and then, we expect to reach a number of milestones, including but not limited to the following.
Single-dose patient data with ARC-521, multiple-dose patient data with ARC-521, readouts on some of the phase II ARC-520 studies, collaborations with additional therapeutic agents in MONARCH, single-dose healthy volunteer ARC-AAT data, single-dose patient ARC-AAT data, complete enrollment of the first ARC-AAT phase II study, and nomination of an additional clinical candidate. As you can see, we have sufficient runway to hit several potential catalysts. We are comfortable with our capital resources. If the current offering was oversubscribed and priced at market without a discount, why stop at $45 million? Why not further strengthen our balance sheet with additional capital? The answer is that we wanted to limit dilution while we continue to pursue some possible preclinical discovery stage collaborations. Let's take a closer look at that concept.
We have believed for some time that once we build out our discovery and development capabilities and gain clinical validation for our various technology platforms, we will enter a period marked by rapid pipeline expansion. We are in that period now. Because of the versatility of our technologies, there are substantially more opportunities than we can support independently. This is a natural part of the growth process for a platform company. We anticipated that this time would come. Over the last few quarters, we made a strategic shift to seek preclinical discovery stage development partnerships that could expand the reach of our technologies in areas that are outside of our core focus or beyond our current capabilities and financial resources.
In order to attract the highest quality partners, we've also selectively grown our headcount across key departments and will move to a larger research and development facility before year-end that will allow us to grow rapidly. With our robust and versatile drug discovery and development engine, we now see Arrowhead as a partner of choice for companies interested in expanding into RNAi therapeutics. We have said on conference calls this year that we believe we have access to capital through a variety of sources. This continues to be true. In fact, we are in active discussions around preclinical discovery stage collaborations. Of course, we cannot predict or provide guidance on the timing or magnitude of these types of agreements or guarantee that they will come to fruition. They are a focus for us and represent an important part of our ongoing financing strategy.
Now I'd like to turn to a brief review of some of the highlights of the last quarter before I turn the call over to Bruce Given, who will discuss our clinical programs. We continue to execute on multiple fronts and moved our programs forward at best-in-class speed. For ARC-520, our first candidate aimed at providing a functional cure for chronic HBV infection, we continue to enroll and dose patients in our various global phase II studies. Collectively, these studies are designed to give us a comprehensive understanding about how ARC-520 acts at various dose levels in different patient genotypes, in e antigen positive and negative disease, in nuke-experienced and naive patients, and as monotherapy or in double or triple combination with other agents.
Based on data from our single-dose 2001 study and supported by our non-clinical chimpanzee study, ARC-520 appears to be maximally active in patients with higher relative levels of antigen expression from HBV cccDNA versus HBV that has integrated into the host DNA. In e antigen-positive nuke-naive patients, we saw max S antigen knockdown of almost two logs or 99%, with an extremely long duration of effect. These and other data led us to believe that ARC-520 is doing precisely what it was designed to do. It appears to be highly active against cccDNA-derived mRNA transcripts, and thus can reduce the production of HBV proteins and the pregenomic RNA. Remember that this virus only makes six things, and we hit all of them. For those patients with lower relative levels of cccDNA and higher relative levels of integrated DNA, we developed ARC-521. During the quarter, we initiated a phase I/II study.
This is a single ascending dose study in healthy volunteers in parallel with a multiple ascending dose study in patients chronically infected with HBV. Bruce will talk a little more about that study, but it is designed to rapidly get to the following three readouts. One, single-dose safety data in healthy volunteers. Two, single-dose antiviral activity data in patients with chronic HBV and three, multiple dose safety and antiviral activity data in HBV patients. The disclosure of these readouts should happen progressively. We expect to start during the first quarter of 2017. We also made progress on our phase I study of ARC-AAT, our clinical candidate against an orphan liver disease associated with a genetic mutation that causes alpha-1 antitrypsin deficiency, or AATD. We completed dosing in an expanded part A in healthy volunteers and continue to enroll part B in patients with AATD.
We intend to report data from this study and initiate a phase II study before the end of the year. During the quarter, we made presentations at three medical meetings on programs that each use a different version of our platform delivery technology. At EASL, we presented data on ARC-520 that uses an IV-administered two-molecule version of our DPC delivery system. At AACR, we presented data on ARC-HIF2, which uses a one-molecule DPC vehicle that enables delivery to extrahepatic tissues, in this case, tumor tissue. Lastly, at ATVB, we presented data on ARC-LPA, which is the first program to use Arrowhead's new delivery vehicle designed for subcutaneous administration. These presentations and description of the data are available on our website. They represent years of innovation and breakthrough by our R&D staff, and we are extremely excited about the breadth of our technology and capabilities.
We now feel like we can pursue virtually any disease where an RNAi-based intervention that precisely targets and silences the expression of a specific gene is needed. In summary, the fiscal third quarter brought substantial progress in our clinical programs, our preclinical candidates, our underlying technology platforms, our R&D capabilities, and also in business development discussions. These all help to put Arrowhead on a solid foundation for growth in the near term and the long term. 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. Good afternoon, everyone. Being responsible for R&D, it is rewarding to see us continue to execute on our goals across our groups. As Chris mentioned, during the quarter, we initiated a phase I/II study of ARC-521, our second clinical candidate against chronic HBV. Before I give an update on our later-stage programs, I want to talk for a moment about the innovative design for this first-in-man study that we think will get us to multiple dose data in patients very rapidly. It is both a single ascending dose study in healthy volunteers and a multiple ascending dose study in chronic HBV patients. Up to 36 normal healthy volunteers will enroll sequentially into a total of six escalating dose levels randomized to receive a single dose of ARC-521 or placebo.
Once the day eight safety assessment is completed in the third dose cohort in healthy volunteers, the patient portion of the study begins in parallel with continued uptitration in healthy volunteers. Up to 24 hepatitis B e antigen negative chronic HBV patients will enroll sequentially into a planned total of three dose levels, each to receive three monthly doses of open label ARC-521. The primary outcome measures are safety and tolerability, pharmacokinetics, and change in viral antigens and HBV DNA. Based on our experience with ARC-520 from all of our studies, we are comfortable that we can dose escalate rapidly. Remember that ARC-521 is built in the same underlying DPC delivery technology as ARC-520. We think we have a good idea about what to expect from the standpoint of tolerability, dosing, and activity.
I am pleased to report that we have already completed dosing in the first two volunteer cohorts with ARC-521, and everything is going smoothly so far. We expect to begin cohort three in healthy volunteers this week. Assuming no safety surprises, the first patient cohort will then begin. As you can see, this study is moving at a good pace, and as Chris mentioned, should give us the opportunity to potentially give three valuable readouts. First would be single-dose safety and tolerability in healthy volunteers, then single-dose activity in chronic HBV patients, followed by multiple-dose activity in HBV. These readouts could start in early 2017, depending on the pace of accrual. This is the timeline that we laid out when we announced the 521 program last year, and it is fulfilling to see the execution match our promises to our investors.
Turning to ARC-520, we've had a lot of screening and enrollment activity during the quarter. In fact, we have now enrolled a total of around 250 across all the ARC-520 studies to date. We estimate that around 200 of these have received ARC-520, with around 50 receiving placebo, and it continues overall to be well-tolerated. We are frequently asked about timing for data release relative to the ARC-520 phase IIb program. We feel that we are in a position to give reasonable guidance today in this regard. The 2002 and 2003 studies in nuke-experienced patients are moving forward nicely. We continue to anticipate that enrollment will complete this year. That would give us results in the trials reporting out as expected around mid-2017. Patients with a half a log or greater reduction in hepatitis B surface antigen have been rolling into the 2007 long-term extension.
There are also additional patients from the single-dose 2001 study that have been rolling over to the 2001 open label extension study. Both the 2001 and 2007 extension studies allow for patients to be dosed with ARC-520 in combination with entecavir or tenofovir for up to a year. For MONARCH, some of you may know that as the 2008 study, we continue to enroll patients across various cohorts. None of the cohorts are fully enrolled at this time, but we have over 25 patients that are currently in the screening process. We added additional investigators and sites last quarter and also added a cohort that looks at HBV and hepatitis delta virus co-infection. As designed, the MONARCH program continues to expand and give us the opportunity to generate a comprehensive picture of ARC-520 activity in combination with various agents and in different patient populations.
We would anticipate that cohorts from MONARCH will become eligible for a presentation upon their completion, and likewise for the 2001 and 2007 extension studies. This would indicate that data should start to appear during the second half of calendar year 2017, though because these are open label studies, as we have noted before, we have some flexibility on timing. We also continue to anticipate adding new cohorts to MONARCH as other novel agents mature to the point where they can be brought into exploratory combinations. Assuming that these new cohorts would also involve a year of ARC-520 treatment, rich data reporting will continue during calendar 2018. Moving on to ARC-AAT, we completed enrollment Part A of our phase I study in healthy volunteers. We are still enrolling and dosing in Part B in patients with alpha-1 antitrypsin deficiency.
We continue to plan on sharing data from the program later in the year at an appropriate medical meeting, assuming abstract acceptance. Importantly, we have selected the two dose levels for our exploratory phase II study and are well on our way to getting that study initiated. We submitted clinical trial applications, or CTAs, in four countries and have already received approval from regulatory authorities in Canada, Ireland, and Sweden. The 2001 study will be an open label, multi-dose, phase II study that will most critically determine the effect of ARC-AAT on intrahepatic alpha-1 antitrypsin levels, as evidenced by changes in liver biopsy in patients with alpha-1 antitrypsin deficiency. Patients who enroll will have a pretreatment biopsy, then receive seven monthly doses of ARC-AAT, and then have a post-treatment biopsy after the last dose. We will also be measuring circulating levels of AAT throughout the study.
The liver disease associated with AATD is increasingly being recognized by patients and physicians as a serious problem. Patients are living longer with AATD because the pulmonary manifestations of the disease are being addressed with enzyme replacement, smoking cessation, and overall improvement in drug treatments for pulmonary disease. However, there remains no medical treatment for the liver disease. We are eager to see if ARC-AAT can stop the progression of the liver disease and possibly even allow the liver to recover and heal existing damage. Our 2001 study should give us and the AATD community in general the first insights into this, and these study results will be eagerly awaited by us and those active in the field.
Let me say that our preclinical discovery programs continue to make progress, especially, notably, our subcutaneous triggers are showing increasing potency, depth, and duration of knockdown, and our extrahepatic program is also making steady progress. For those of you that attend the American Heart Association annual meeting, we will have oral presentations on both our Factor XII and Lp programs.
With all the news flow from our clinical programs, it's easy to miss how quickly our platform has evolved. With that brief review of our R&D efforts, I'd like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?
Thank you, Bruce, good afternoon, everyone. As we reported today, our net loss for the three months ended June 30, 2016, was $19.4 million, or $0.32 per share, based on 60 million weighted average shares outstanding. This compares with a net loss of $15.9 million, or $0.27 per share, based on 59.5 million weighted average shares outstanding for the three months ended June 30, 2015. Total operating expenses for the three months ended June 30, 2016, were $19.4 million, compared to $16.1 million for the three months ended June 30, 2015. The increase in operating expenses compared to the year-ago period is primarily due to higher research and development costs, much of which is related to our new clinical candidate, ARC-521, as we prepare to enter clinical trials.
Net cash used in operating activities for the nine months ended June 30, 2016, was $54.2 million, as compared to $53.7 million during the nine months ended June 30, 2015, a change of half a million dollars. Turning to our balance sheet. At June 30, 2016, including $1 million in investments, our cash and investments balance was $44.6 million, a decrease of $16.8 million as compared to March 31, 2016. As we announced this morning, we raised $45 million in additional equity capital, further strengthening our balance sheet. Our common shares outstanding at June 30, 2016, were $60.4 million, which increased from $60 million at March 31, 2016, due to the issuance of shares from the exercise of warrants. Also, at June 30, 2016, 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 $63.1 million. With that brief overview, I'll turn the call back to Chris.
Thanks, Ken. We feel good about where we are as a company. Our clinical programs are advancing quickly, and all three have the potential for groundbreaking readouts over the next 12 to 18 months. Beyond our clinical programs, we have three extremely interesting publicly announced preclinical candidates in ARC-LPA, ARC-HIF2, and ARC-F12 that represent large opportunities on their own, but also an expansion of our broad RNAi technology platforms. We now have systems capable of potent gene knockdown after IV administration and subcutaneous administration, as well as prototypical extrahepatic system that has been shown to elicit high levels of target knockdown in tumor models. We continue to carefully build out our discovery and development capabilities in such a way that we may create additional internal clinical programs and work with partners to develop programs they may take forward for commercialization.
We believe that creating a mix of partnered and internal programs enables us to operate with balanced capital needs and with a greater diversification of risk. Ultimately, this is a way to more fully monetize our platforms and maximize shareholder return. We are building a great company that develops innovative medicines for intractable diseases using industry-leading technology. We think all of this positions us very well for growth in the short term as well as the long term. I would now like to turn the call over to the operator. Operator?
Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star and then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes to the line of Carmen Augustine with Jefferies. Your line is now open.
Hi. Thanks for taking the question. I was wondering if you could give us any more color on what kind of qualities you would be looking for in a preclinical partner and if discussions continue to be ongoing for a clinical collaboration in HBV.
Thanks very much, Carmen. For a preclinical discovery stage collaboration, we're really looking for a strong partner with a target that looks interesting to us. If the targets come from them if we are talking about one of our targets, we are certainly interested in speaking with people about some of our earlier-stage discovery activities. We really view those on a case-by-case basis. Regarding clinical collaborations, that's a much higher bar for us, and I'll tell you why. We think that we're building an awful lot of value with our clinical programs, and while we are certainly happy to talk to companies about partnering these either geographically or worldwide, we take that very seriously, and we view that as potentially strategically dilutive. Should those partnerships happen, we take a very close view at what the upside is for our shareholders.
Really right now, we are more interested in discovery stage collaborations.
Okay, great. Thanks. One more, if I could. Could you talk a little bit about the rationale for adding HDV coinfection patients to the MONARCH trial?
Well, yeah, sure.
HDV coinfection is a major public health issue in certain parts of the world. It would be an orphan drug in the U.S. I guess technically it's an orphan drug in Europe even, it's a big problem, for instance, in Germany and some of the Eastern European countries. The thing about HDV is it requires the presence of an HBV coinfection, because it uses the surface antigen to encapsulate the delta virus. You have to have coinfection for delta to exist. It's important because it's much more aggressive than HBV. These patients rapidly develop cirrhosis and liver failure, it's a very nasty coinfection. One of the interesting questions is can you do anything for delta? Nucs actually are not helpful at all in delta. The only current treatment is interferon, and it doesn't do a very good job.
There's a lot of interest in the hepatitis B world for can you do something about delta? We thought it was worth putting in a cohort and seeing if we could help. These cohorts in MONARCH are small, 10-12 patients. We have a fairly low activation energy from our perspective to ask questions like the delta question, because it's a fairly straightforward thing for us to do.
Okay, great. Thanks.
You're welcome.
Thank you. Our next question comes from the line of Michael Yee with RBC Capital Markets. Your line is now open.
Hey, guys. Thanks. Good afternoon and congratulations on progress in the financing. On hepatitis B with ARC-520, can you just clarify a couple things? One is, do you expect that there is any sort of near-term announcements on actually 520 or 521? Or just to clarify, you're pretty much in execution block and tackling mode and just sort of enrolling, and it's really all about 2017. On AAT, I know that you suggested there was some data coming up at a medical conference. Can you clarify what we'd be looking for there? This is just safety and knockdown in healthies, correct? What are we looking for there? Following that, in the phase II that you're starting up, what is exactly the primary endpoint on the biopsies? Are there specific markers you're looking for? What's the exact primary endpoint? Thanks so much.
Okay. Why don't I start with AAT first, Michael. Thank you, by the way. We're pretty proud of the offering as well. That's been a pretty difficult market. That was really nice. As far as AAT goes, what we will have in this year will be certainly, of course, safety and tolerability. We'll have a very good understanding of the knockdown, dose-related knockdown, depth, and duration by dose in volunteers and in patients, which we obviously already know a lot of that, which is why we were able to select our doses for the biopsy study with a pretty high degree of confidence. That data, I think, will just be a really nice picture of exactly what our compound does from a profile perspective.
It'll also probably answer a question that's out there in the community of just how much AAT is made in the liver relative to what's made outside the liver. I think we'll have pretty good confidence since we have endosomal escape that whatever we produce is probably multi-log knockdown in the liver. At least, that would be our hypothesis going into the biopsy study. In the biopsy study, this is seven months of dosing. Given that, the primary things we are looking at in the biopsies are the things that we know we should expect to change. We will look at monomer content. Basically, really how much AAT is being produced from expression of the AAT gene by looking at the monomer content. That we would expect to see really suppressed to an extremely high degree.
That's kind of the first and most important thing. We want to know we shut down the gene basically completely. We'll look at polymer content. That's going to be really interesting, because no one knows if you shut down monomer how long it takes for the liver to clear polymer. Understanding if we shut down monomer and seeing how much polymer change we get over seven months is going to help us, I think, get a pretty good idea at, for instance, what's the feasibility of getting rid of globules. If you're going to get rid of globules, what kind of time might that take? This is going to be really important data for the field. There are other things that you see in AAT livers, inflammation, fibrosis, et cetera.
Seven months feels a little short to show changes in some of those things. We'll certainly look for them. We have a large number of things we want to look at, Michael. The most sensitive marker, we think, is going to be monomer content followed by polymer content. I hope that's helpful.
Okay, thanks on that front.
Michael, also regarding your questions on data readouts for 521 and 520. First, as a former lineman, I can't overestimate the importance of blocking and tackling. I think that the rest of 2016 is a lot of blocking and tackling. We are enrolling, I think, reasonably quickly in both those. I think 521 is designed to get two readouts quite quickly. We expect, as we mentioned, to start to read out 521, single and multiple dose in the beginning of 2017. For 520, it's harder, as we've said, as we've talked about in the past. It's harder to know when we'll have data there. We talked about some time points on this call where we expect some of these studies to be over. Definitely we expect data in 2017. Prior to that, we just sort of have to wait and see.
As you know, we have some open label studies, and so we have some possibility of data there, but that's just hard to predict at this point.
Okay, thanks.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question at this time, please press star and then one. Our next question comes from the line of Elemer Piros with Cantor Fitzgerald. Your line is now open.
Yes, good afternoon. Hello, Chris and Bruce. Just a couple of details on the AATD trial. I think previously you disclosed that in part A and B, you have 50 individuals, both healthy and diseased patients. In part B, how many patients have you enrolled?
Yeah. Hello, Elemer. It's good to hear your voice, let me go ahead and give you a little bit of detail there. We will biopsy all the patients at baseline. What we're learning from the studies that are being done in the U.S. where there's cross-sectional biopsying going on in AAT patients. A small percentage, maybe about 10% or so, might not have any globules.
Sure.
If we're going to biopsy patients, we're going to treat everybody because for sure they have monomer, even if they don't have globules, and they probably have polymer as well. The way we wrote the protocol is that we will have at least four patients in each of those two cohorts that have globules at baseline. That means at a minimum, we'll have eight patients, four at the lower dose, four at the higher dose. If we wind up picking up a patient or two that don't have globules, those would go on top. You might wind up with nine or 10 patients in that setting.
Mm-hmm. Okay. Some different question. What % of eligible patients continue on the expansion studies with [52 0]?
It's a good question. I learned many years ago never to give any sort of enrollment blow-by-blow detail. I'm afraid you're going to have to wait for that data for when we report 2007.
What I meant is in aggregate, in the multiple extension studies, just roughly what % elect to continue.
Yeah. I just don't feel like I should divulge that data at this point, Elemer. I understood your question. I'm just demurring from giving you an answer.
Okay. Thank you very much for taking my questions.
Sure.
Thank you.
Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to management for any final remarks.
Okay. Thanks, everyone, for listening to the call today, and we look forward to talking to you soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.