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Edited Transcript of ARWR earnings conference call or presentation 8-May-19 8:30pm GMT

Q2 2019 Arrowhead Pharmaceuticals Inc Earnings Call

PASADENA Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Arrowhead Pharmaceuticals Inc earnings conference call or presentation Wednesday, May 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce D. Given

Arrowhead Pharmaceuticals, Inc. - COO

* Christopher R. Anzalone

Arrowhead Pharmaceuticals, Inc. - CEO, President & Director

* Kenneth A. Myszkowski

Arrowhead Pharmaceuticals, Inc. - CFO

* Vincent Anzalone

Arrowhead Pharmaceuticals, Inc. - Head of IR & VP

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Conference Call Participants

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* Edward Andrew Tenthoff

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Elemer Piros

Cantor Fitzgerald & Co., Research Division - Analyst

* Keay Thomas Nakae

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics

* Maurice Thomas Raycroft

Jefferies LLC, Research Division - Equity Analyst

* Mayank Mamtani

B. Riley FBR, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals conference call. (Operator Instructions)

I would now like to hand the conference over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince.

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Vincent Anzalone, Arrowhead Pharmaceuticals, Inc. - Head of IR & VP [2]

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Thank you, Sarah. Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2019 second quarter ended March 31, 2019. 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 up the call to your questions.

Before we begin, I would like to remind you that comments made during today's call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including, without limitation, those with respect to Arrowhead's goals, plans and strategies, are forward-looking statements. These include statements regarding our expectations around the development, safety and efficacy of our drug candidates, projected cash runway and expected future development activities. These statements represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially.

Arrowhead disclaims any intent and undertakes no duty to update any of the forward-looking statements discussed on today's call. You should refer to the discussions under Risk Factors in Arrowhead's annual report on Form 10-K and the company's subsequent quarterly reports on Form 10-Q for additional matters to be considered in this regard, including risks and other considerations that could cause actual results to vary from the presently expected results expressed in today's call.

With that said, I'd like to turn the call over to Christopher Anzalone, President and CEO of the company. Chris?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [3]

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Thanks, Vince. Good afternoon, everyone, and thank you for joining us today. It's been a productive quarter for Arrowhead characterized by continued innovation toward new potential products and reliable execution in existing programs. We've been on a rapid growth trajectory and believe we are positioned to continue this progress. We have taken some important steps forward in advancing the TRiM platform. We moved multiple product candidates toward value-driving milestones this year, and we embarked on our first pivotal study that provides us with a path to potential commercialization. We also earned a milestone payment for work on JNJ-3989 representing a good reminder of our efficient model to use partner programs to create value by themselves while also providing capital to fund wholly-owned programs toward commercialization.

These accomplishments have contributed to Arrowhead's fundamental maturation as a company, and I believe simultaneously expanded the opportunities in front of us while decreasing our risk profile. This is a potentially potent combination indeed.

Let's now talk about some of these accomplishments and their significance. We began dosing in 2 Phase I clinical studies for our newest clinical candidates, ARO-ANG3 and ARO-APOC3, for the treatment of cardio-metabolic diseases. Consistent with our prior first-in-human studies, we have designed both Phase I studies to provide a readout on safety and tolerability as well as a robust look at the pharmacologic activity and duration of effect. Importantly, we expect this readout to occur in time to report data publicly this year.

Despite all the progress with cardiovascular drugs over the past years and decades, atherosclerotic cardiovascular disease remains a major cause of death. Additionally, orphan indications or -- I'm sorry, orphan populations with cardiovascular manifestations continue to suffer without adequate treatment options. While the current standards of care are effective at lowering LDL cholesterol in the vast majority of patients, large well-run trials continue to show substantial unmet medical need for risk-modifying therapies with novel mechanisms of action.

Hypertriglyceridemia and elevations in triglyceride-rich lipoproteins have been shown to be important causal risks for atherosclerosis independent of LDL cholesterol. Elevated triglycerides can lead to highly dangerous pancreatitis, may participate in hepatic steatosis and are seen in metabolic syndrome. ARO-ANG3 is Arrowhead's subcutaneously administered RNAi therapeutic targeting angiopoietin-like protein 3 or ANGPTL3 being developed as a potential treatment for patients with dyslipidemias and possibly metabolic diseases. ARO-APOC3 is Arrowhead's subcutaneously administered RNAi therapeutic treating angiopoietin -- I'm sorry, apolipoprotein C-III or APOC3 being developed as a potential treatment for patients with hypertriglyceridemia.

These are both attractive targets that could address a number of high-value, unmet medical needs, and we are the first to use RNAi against them in humans. They each provide a degree of optionality with respect to which patient populations and indications to study and pursue. For each target, there may be opportunities to treat well-defined orphan diseases such as familial chylomicronemia syndrome and homozygous familial hypercholesterolemia as well as higher prevalence diseases such as NASH or even primary and secondary prevention of cardiovascular disease. We will follow where the data lead us, and dependent on the patient populations we choose to focus on, we could have a rapid path to pivotal studies. I expect that we will address clear orphan indications immediately, and I think it is even possible that we could be in pivotal studies for both ARO-APOC3 and ARO-ANG3 next year. We could then begin longer-term studies for larger indications concurrently giving us a staged market approach where we move toward orphan markets quickly while we wait for studies of larger indications to mature and eventually go-to-market there as well. Our intention is to discuss our plans for the programs in more detail and describe the potential opportunities and development paths later this year.

Importantly, we believe these targets are well suited for RNAi therapy, and we are the first company to use this modality against them in the clinic. We believe that we can build maximum value for our shareholders by focusing on being pioneers rather than followers, and ARO-APOC3 and ANG3 are good examples of this. More broadly, we intend to be first in our target markets where possible. If instances arise where there is an incumbent, we expect to enter a market only if we believe we have clear technological superiority.

Another important company milestone was achieved in April when we announced that following the filing of an IND, we received FDA clearance to begin an adaptive design Phase II/III trial with the potential to serve as a pivotal registrational study of ARO-AAT. ARO-AAT is Arrowhead's second-generation subcutaneously administered RNAi therapeutic being developed as a treatment for a rare genetic liver disease associated with alpha-1 antitrypsin deficiency. This is the first potentially pivotal study for a compound using Arrowhead's TRiM platform. This is an important event for the company and very gratifying to see. So much hard work over the last decade and countless breakthroughs from the talented folks at Arrowhead have led us to this point. The Phase II/III study will be called SEQUOIA.

We are also initiating a separate open-label study to run in parallel called simply ARO-AAT2002. These studies together accomplish two critical goals. First, we believe SEQUOIA enables us to potentially achieve regulatory approval as rapidly as possible with the highest probability of meeting statistically significant, clinically relevant endpoints. Second, the 2002 open-label study enables us to have a preliminary and ongoing look at patient responses to therapy without jeopardizing the quality of SEQUOIA by unblinding it. Bruce will give more details about the design of both of these studies in a moment, but we think they strike the proper balance between the speed to a potential NDA with the desire to see midterm confirmation that ARO-AAT is doing what it is designed to do. These are our currently planned studies, and we think they are the most important for the overall AAT program.

However, they are by no means the only studies we will run with ARO-AAT. We have discussed a suite of studies with regulators and potential investigators that together are intended to provide information about how we can best help all types of AAT patients who may require therapy at some point. For instance, we will be interested in potential pediatric applications, prophylaxis and patients with severe liver disease. We view this disease holistically and ultimately want to address patients at any point of its progression. Fortunately, we are first in the field and believe we are best positioned to enroll patients quickly and conduct studies that are properly powered. Remember that AAT deficiency is an orphan indication, so the pool of patients is relatively small. The first company to offer potentially helpful therapy in well-designed studies will have the best chance of attracting scarce patients while later MI-2 compounds may have a very difficult time completing any studies. We have been working with potential investigators, patient advocacy groups and regulators in the field for many years now and believe there is substantial pull for ARO-AAT. We expect to move quickly and not only retain but increase our leadership in the field.

Moving on to recent presentations. In April, we presented additional data on both the AAT and hepatitis B programs at the EASL International Liver Conference 2019. The data continue to be highly encouraging. The results presented on the AAT program at EASL were from a long-term preclinical study of our prior generation compound. We believe the results suggest that RNAi and by extension ARO-AAT, holds great promise for the treatment of patients with AATD associated liver disease. Specifically, we are able to prevent further liver damage and reverse existing damage in PiZ mouse models that harbors the human Z-AAT's gene and recapitulates many features of the human AATD liver disease. This gives us added confidence in the potential of ARO-AAT in SEQUOIA in the 2002 open-label study.

We also presented data on JNJ-3989, formerly called ARO-HBV. It is a third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential treatment for patients with chronic hepatitis B viral infection. As you know, Arrowhead entered into a license agreement in October 2018 with Janssen Pharmaceuticals to develop and commercialize ARO-HBV. In an interim analysis of the ARO-HBV1001 study describing results of 40 patients who had 24 or more weeks of follow-up, JNJ-3989 rapidly reduced hepatitis B surface antigen. After only 3 doses, 100% of these patients achieved greater than 1 log of s-antigen reduction with a mean nadir of 1.8 log reduction in e-antigen negative patients and 2.3 log reduction in e-positive patients. Importantly, 88% of all of these patients achieved s-antigen levels less than 100 IU per ml, a threshold possibly associated with improved chances of s-antigen seroclearance. JNJ-3989 also reduced all other measurable viral products. It was well tolerated after 168 total doses administered to 56 patients at doses up to 400 milligrams.

Subsequently, we announced that the ARO-HBV1001 study was expanded to include a new triple combination cohort, now cohort 12, that includes JNJ-3989 and additional undisclosed agents selected by Janssen. In connection with the start of dosing the cohort 12, Arrowhead earned a $25 million milestone payment. This new triple combination cohort has the potential to generate valuable data rapidly and is an important step forward for the program and more broadly for our partnership with Janssen. Arrowhead is eligible to receive an additional $25 million upon the initiation of a Phase II study by Janssen.

As you've heard, we are in the middle of another big year. We have the potential to generate data across multiple pipeline programs that should provide data readouts this year. We just have to continue to execute.

With that overview, I'd now like to turn the call over to Dr. Bruce Given. Bruce?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [4]

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Thank you, Chris. Good afternoon, everyone. I want to provide a quick status update on ARO-ANG3 and ARO-APOC3 and then go into some detail about the design of SEQUOIA and the ARO-AAT2002 open-label study.

The ARO-ANG3 first-in-human study is called ARO-ANG1001. It is a Phase I single- and multiple-dose study to evaluate the safety, tolerability, pharmacokinetic and pharmacodynamic effects by ARO-ANG3 and up to 70 subjects. This includes adult-healthy volunteers with elevated triglycerides as well as patients with various types of dyslipidemia. The single ascending dose portion of the study is designed to include up to 4 cohorts of 10 adult healthy volunteers per cohort. Each SAD subject receives a single dose administration of either placebo or ANG3 at dose levels of 35, 100, 200 or 300 milligrams. The multiple dose portion is designed to include up to 4 patient cohorts who will receive 2 monthly doses of ARO-ANG3. We began dosing in January. We have now completed enrollment and dosing of the SAD cohorts at 35, 100 and 200 milligrams that will be completing dosing of the 300-milligram cohort shortly.

Following selection of a dose at Data Safety Committee, or DSC, and Institutional Review Board clearance, we intend to begin enrollment of the patient multiple dose cohorts, including patients with nonalcoholic fatty liver disease, patients on a stable statin regimen with persistently elevated LDL cholesterol and triglycerides, patients with heterozygous or homozygous familial hypercholesterolemia and patients with severe hypertriglyceridemia. Thus, this trial is designed to give us activity insights in several distinct patient types that would represent potential development pathways for this drug.

The ARO-APOC3 first-in-human study is called ARO-APOC31001. It is a single -- Phase I single- and multiple-dose study to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamic effects of ARO-APOC3 in up to 63 adult healthy volunteers with elevated triglycerides and patients with severe hypertriglyceridemia and familial chylomicronemia syndrome, better known as FCS. The single ascending dose portion of the study is designed to include up to 4 cohorts of 10 adult healthy volunteers per cohort. Each SAD subject will receive a single dose administration of either placebo or ARO-APOC3 at dose levels of 25, 50, 100 or 200 milligrams. The multiple dose portion is designed to include up to 3 cohorts of patients with severe hypertriglyceridemia, and 1 cohort of patients with FCS who will receive 2 monthly doses of ARO-APOC3. We began dosing in healthy volunteers in March and have now completed enrollment and dosing of the 25 and 50 milligrams single dose cohorts. There will be a meeting of the safety committee shortly and pending clearance to proceed, we intend to begin enrollment of the 100 milligrams single dose cohort at that time. Also at that time, we should begin enrolling the first multiple dose cohort at the 50-milligram dose level. These studies are both moving forward on schedule, and we believe that we may potentially complete dosing of all cohorts, including the patient multiple dose cohorts this year.

I would now like to talk a bit about the general design for SEQUOIA and the ARO-AAT2002 open-label studies. SEQUOIA is our multiple dose, multicenter placebo-controlled adaptive Phase II/III study to evaluate the safety, efficacy and tolerability of ARO-AAT administered subcutaneously to patients with alpha-1 antitrypsin deficiency. A multidose placebo-controlled Part A component of the study will feed seamlessly into a 2-arm placebo-controlled Part B component.

The primary objective of Part A is to select a single dose level for use in Part B based on a combined evaluation of safety and pharmacodynamic dose response in each Part A cohort using change from baseline in soluble liver Z-AAT and serum AAT levels as pharmacodynamic metrics. The primary objective for Part B is to evaluate efficacy as assessed by the proportion of ARO-AAT patients relative to placebo achieving a 2-point improvement in a histological grading scale of alpha-1 antitrypsin deficiency associated liver disease and no worsening of liver fibrosis on end of study biopsy.

In total, the study calls for approximately 120 participants. Participants in Part A will require a pre-dose biopsy and those who meet the inclusion criteria will be randomized to receive ARO-AAT or placebo on days 129, 113 and then every 84 days thereafter.

There are 3 cohorts each using a different dose level. All 3 cohorts will be randomized in parallel. Once 36 subjects, 12 in each cohort, have completed a day 113 biopsy, the Part A analysis to select a single dose for Part B will occur. Enrollment will continue into all cohorts until the Part B dose is chosen. Patients enrolled during Part A will continue on study and roll over to the Part B dose level or continue to receive placebo. These patients are intended to receive a minimum of 6 Part B doses and a minimum of 9 doses overall. Remaining patients needed to achieve a total enrollment of 120 will be randomized to the selected Part B dose level or placebo and will receive doses on days 1, 29 and then every 3 months thereafter for a total of 9 doses. All study data from SEQUOIA will be blinded to the patient, the treating physician and to Arrowhead.

We also thought it would be helpful from a planning perspective to assess patient response to therapy at interim time points, but we did not want to have an unblinded interim analysis in SEQUOIA. Therefore, we designed the ARO-AAT2002 open-label study to answer some key questions concurrently. And we are prepared to initiate this study in the second half of 2019. ARO-AAT2002 is an open-label multidose Phase II study to assess changes in a novel histological activity scale in response to ARO-AAT over time in patients with alpha-1 antitrypsin deficiency associated liver disease.

In total, the study is planned for approximately 12 participants in 2 sequential cohorts. Cohort 1 consists of 4 patients and cohort 2 consists of 8 patients. All eligible patients will require a pre-dose biopsy completed as part of the study. Patients that then enroll are expected to receive a minimum of 3 doses of ARO-AAT in cohort 1 and 5 doses in cohort 2 with repeat biopsies approximately 1 month after the third or fifth dose, respectively. Doses will be administered on days 129, 113 and approximately every 84 days thereafter. Patients who complete cohorts 1 or 2 may elect to participate in an extension cohort which would include an additional 4 doses, again, given quarterly, followed by a repeat liver biopsy.

The primary objective to evaluate effective ARO-AAT on a histologic liver disease activity scale will be assessed at 24 weeks for cohort 1 and week 48 for cohort 2. Multiple secondary and exploratory objectives will also be assessed throughout the study. The ARO-AAT2002 open-label study will be conducted at various sites in Europe pending regulatory clearance and is planned to start shortly after SEQUOIA, likely in the third quarter of this year.

Between SEQUOIA and ARO-AAT2002, we will generate a good amount of data on patient response at multiple dose levels using several different measures and after short-, mid- and long-term treatment with ARO-AAT. We see this as another great example of Arrowhead's innovative thinking around trial designs that allow us to accomplish several goals in parallel.

With that brief review of our clinical programs, I'd like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer. Ken?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [5]

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Thank you, Bruce, and good afternoon, everyone. As we reported today, our net income for the quarter ended March 31, 2019, was $23.9 million or $0.24 per share based on $98.1 million fully diluted weighted average shares outstanding. This compares with a net loss of $14.9 million or $0.18 per share based on $84.1 million weighted average shares outstanding for the quarter ended March 31, 2018.

Revenue for the quarter ended March 31, 2019, was $48.1 million compared to $700,000 for the quarter ended March 31, 2018. Revenue in the current period relates to the recognition of a portion of the upfront payments and milestones from our license and collaboration agreements with Janssen. While revenue in the prior period related to a recognition of a portion of the upfront payments from our license and collaboration agreements with Amgen. Revenue from the Janssen agreement will be recognized based on our estimate of the proportion of effort expended toward fulfilling our performance obligations primarily overseeing the completion of the current Phase I/II HBV clinical trial. We expect the majority of the revenue to be recognized in this fiscal year, but we also expect revenue in fiscal 2020 as we continue to perform certain follow-up activities throughout 2020.

Total operating expenses for the quarter ended March 31, 2019, were $26.1 million compared to $15.7 million for the quarter ended March 31, 2018. This increase is primarily due to increased drug manufacturing and clinical trial costs as our pipeline of clinical candidates has increased. Net cash used in operating activities during the quarter ended March 31, 2019, was $19.6 million compared with net cash used in operating activities of $15.4 million during the quarter ended March 31, 2018. The increase in operating cash usage was also due to increased drug manufacturing and clinical trial costs as our pipeline of clinical candidates has increased.

Turning to our balance sheet. Our cash and investments totaled $285.7 million at March 31, 2019, compared to $76.5 million at September 30, 2018. The increase in our cash and investments was primarily due to the cash received from Janssen. We anticipate receiving the $25 million Janssen milestone recently announced during the quarter ended June 30, 2019. Our common shares outstanding at March 31, 2019, were $94.7 million.

With that brief overview, I will now turn the call back to Chris.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [6]

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Thanks, Ken. The year's off to a great start, and we think there are a lot of exciting and value-creating events ahead during the rest of the year. By the end of calendar 2019, we expect to have 7 TRiM-enabled candidates in or approaching clinical studies, 5 of which we expect to wholly own. We'll have a good mix of early, mid and later staged clinical programs, both wholly-owned and partnered, targeting a diverse set of disease areas in multiple cell types. Few companies in the world will have this type of capability, and I expect no other RNAi company to be in this position. Moving forward, this broad and growing pipeline should provide a steady stream of key data readouts at relatively regular intervals.

We expect to also have a clear line of sight to our first or possibly multiple commercial product opportunities. Arrowhead is on a very solid base right now, and we have shown consistently that we can make rapid progress on our long-term goals to file 2 to 3 new CTAs every year, target a new cell type with the TRiM platform every 18 months and have 10 TRiM-enabled candidates in clinical studies by the end of 2020. I will also add that I expect us to be in 3 pivotal studies next year.

Thanks again for joining us today. I would now like to open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Maury Raycroft from Jefferies.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [2]

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Congrats on all the progress. For -- I guess starting off with ANG3 and APOC3, you've made a lot of progress there. Just wondering if some of the meetings that you have on your calendar coming up soon, if we could see any update from those studies in one of those meetings.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [3]

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So the answer is we don't know, but I hope so. And just as last year, we had guided that we intended, we hoped to have data at AASLD for both AAT and HBV. We have guided this year that we expect to have data sometime by the end of the year, hopefully, at the American Heart Association meeting in the fall for APOC3 and ANGPTL3. It is -- just like with AAT and HBV last year, my hope is that we can find some smaller conferences between now and then to give an update on how those programs are going. I don't yet know if the timing is going to work out. I don't yet know, of course, if we would be accepted to present somewhere else. But that is my goal, and so it is my hope that we can do that.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [4]

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Great. Okay. And then for AAT, for ARO-AAT, a lot of details came out in the clinical trial design, [Arrow], which seems like you will be able to answer a lot of questions from that. I'm wondering from Part A, so you're going to enroll those initial 36 subjects. Do you -- give an idea on how long it's going to take to enroll those 36 patients and then how long it takes to get to the end of Part B? Can you provide any estimates on that?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [5]

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Bruce, you want to address that?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [6]

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Yes. So this, of course, is a big question for us. Nobody's been here before in AAT liver disease. So we're paid being the -- all the pathways including sort of putting together the right group of investigators, et cetera. So I can't really give you a time line on that. You know us, if it's possible to go fast, we will be going fast. If it's possible to go faster, we'll go faster. Nobody's as fast as us in the clinic, I don't think at this point. But truthfully, it's hard to put a time on that at this point, you know, Maury, and that is very important.

Now once those 36 have been enrolled, we will continue to enroll into Part A until 36 patients have had their biopsies and the DSMB, and it's going to be the DSMB that selects the dose. They'll be -- have the ability to look at unblinded data while we will not. So they will look at the 3 different doses and look at the combination of safety and activity and choose the best dose for Part B. So at that point, patients that have been enrolled in Part A will convert over that Part B dose and then the remainder of the patients will be recruited into Part B on that dose or placebo. Those patients will basically set the -- the last patient, that 120th patient will set the duration of the active treatment period, and those patients will receive 96 weeks of therapy if they get all the doses they are supposed to get prior to their final biopsy. So that tells you the duration of Part B for that last patient and of course patients will be completing along the way up until that time. Did that get -- did that get your question answered?

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [7]

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Yes, I think so. It's information that we'll have to think about and see how that could play out, I guess. As far as the 3 doses go, can you clarify what you're using initially?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [8]

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Yes. The doses are 25, 100 and 200.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [9]

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And Maury, let me just add one more thing to your prior question. Of course, no one can predict how quickly you can enroll patients, but I will say, as you know, we've been at this for quite some time. We've been talking to, and we've been establishing the relationships with investigators now for several years. It's going to be a multinational study. And so I think that we have cast a large net, and I think it's the right net. And we're thinking now up to 40 sites, and so I think we have a good chance of enrolling this as quickly as possible. And again, as I mentioned in the prepared remarks, we're the first in this field, and so I think that we have a good chance to really go out and bring in the patients that will be willing to do a study like this reasonably quickly.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [10]

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Yes. And as far as starting this study, enrolling throughout the sites, are you on track for starting it this quarter with the initial dosing?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [11]

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Bruce, you want to address this?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [12]

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There is not a lot of time left in this dosing, I think it's not impossible that we would get going in this quarter. But you know, it's hard to guarantee that. You have to get through the IRBs and all the contracting at the sites, et cetera. And then you have to get patients screened and you have to get their initial qualifying biopsies. So there is -- there's a lot of moving parts there to get it started this quarter. I wouldn't bet against it, but it wouldn't shock me if it drips into the early part of next quarter before the -- those first patients get in.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [13]

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Got it. And my last question, and then I'll hop back in the queue. Just with the open-label study, so that's starting later and you've got the 2 cohorts there. So you're going to -- by that time, you're going to eliminate one of the doses from -- I guess how are you going to pick which doses to use in the open-label?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [14]

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Yes. In the 2002 study, we're using the 200-milligram dose. Our rationale there is that it's very possible that a lower dose will be fully active in Part A. But for this study, we wanted to not get too cute. And given that we have a very good tolerability profile from the first work we've done, we feel comfortable going ahead and using that in the 2002 study.

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Operator [15]

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Your next question comes from the line of Ted Tenthoff from Piper Jaffray.

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Edward Andrew Tenthoff, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [16]

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I wanted to just come back to HBV for a second and make sure I understand sort of the changes that take place with the Phase I/II and the Phase II study starts. Can you provide us any more detail around sort of how that plan has changed?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [17]

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Bruce, you want to take that?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [18]

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Yes, sure. I don't know that the plan has necessarily changed. Janssen is still responsible for the major Phase II work that goes on. What did happen is that both Janssen and us saw the opportunity to very rapidly get into a -- some preliminary combination work, taking advantage of the fact that we have the 1001 study open. We have a collection of really the top investigators in Asia-Pacific. So we felt that it was quite likely that we could produce some pretty interesting early data by just going ahead and jumping in and doing that while they do all the heavy lifting to get the large Phase II going and go through all the regulatory check-ins across the world. So it's not so much that anything changed. It was just classic Arrowhead-Janssen opportunism to learn something really important earlier than, otherwise, we'd be able to, if that makes sense.

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Operator [19]

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Your next question comes from the line of Elemer Piros from Cantor.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [20]

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Bruce, if I may just have a clarification on the AAT trial between Part A and Part B. So what would be the treatment period in Part A? And the same question goes to Part B. Or is there some overlap for some patients who continue on the same dose from Part A to Part B, meaning -- yes, if you could clarify this first, please.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [21]

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Right. So the plan is that all patients from Part A, irrespective of what dose they were on, will coalesce into Part B, on the Part B dose. So we're not going to lose any patients, whether they are getting active drug or getting placebo during Part A, they will all be, at least, offered the opportunity to be retained in Part B. That is our plan to keep them. And the length of time somebody spends in Part A really depends on how long enrollment takes. So that first patient in Part A is going to spend more time there than the last patient in Part A. So how much time they spend there is really relative to where they -- when they come in. Any patient from Part A that goes into Part B gets a minimum of 6 doses in Part B. So basically, they'll get a minimum of 1.5 years, if you will, on the Part B dose. A patient that comes straight into Part B will have 2 years of the Part B dose, but a patient that comes in to Part A will get at least 1.5 years of Part B, and they will have had at least 6 months in Part A. But it's possible that some patients will have a longer period in Part A before getting their 1.5 years in Part B.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [22]

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I see what you mean. Okay. Okay. I think it's clear. And the open-label 2002 trial, what could you learn from that, that could influence the Phase II/III itself?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [23]

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Well, it's not designed to influence the Phase II/III. Never say never in this world. So I suppose there's always possibility you saw something there that caused you to want to go talk to the regulators about it. But it's really not so much designed to have any potential influence on the SEQUOIA study. It's really designed just to help us understand sort of what the dynamics are, of changes in the liver. Nobody knows, of course, especially with active therapy. So the way it's designed, we will get a readout at -- basically of pharmaceutical 6 months and 1 year, 24 and 48 months. And then hopefully, those patients will decide to stay on drug and will get a further 1 year of therapy in both of those groups which means that you will have in the end data at 6 months, 1 year, 1.5 years and 2 years. So it really gives us a sense of the dynamics of change which we will not get from SEQUOIA. SEQUOIA will be much more robust and is robust from a regulatory perspective and fully negotiated with FDA. But 2002 will really I think scientifically inform the field of sort of how rapidly things can change in AAT liver disease which, at the moment, there is absolutely 0 known about that. But it's a different thing.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [24]

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And maybe just a couple of questions to Ken to clarify some of the recognition of the Janssen upfront. I -- for some reason, I assumed about $30-some-odd million for the next couple of quarters. Would that be a higher number based on this fiscal second quarter number that you recognized?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [25]

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No. I think those amounts are accurate. The total that we're going to recognize now includes the $25 million that we just earned, the milestone that we just earned. And we recorded $82 million for entering the first half of the year, and we anticipate that we'll recognize about $65 million to $70 million in the second half of the year, and the balance will be recorded then in 2020.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [26]

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And do I understand it correctly, Ken, that the previously disclosed $50 million milestone has been split into 2? You received $25 million now and you anticipate another $25 million next quarter when the Phase II is getting -- is going to get underway?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [27]

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So it was split into 2, yes. We earned the first $25 million, and the second $25 million will come when J&J starts the Phase II clinical trial.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [28]

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And the last one is the share count increase from 92 and 0.6 to 98. Is this due to the Janssen share purchase or some other additional shares? Or has it been included previously?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [29]

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This -- the Janssen shares were recorded not in this quarter, but in last quarter's, a little over 3 million shares. There were a little over 3 million shares -- additional shares outstanding during this quarter added also due to RSU vestings and option exercises.

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Elemer Piros, Cantor Fitzgerald & Co., Research Division - Analyst [30]

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Okay. And sorry, but there was one more. How should we think about R&D ramp, spending ramp in the remainder of this fiscal year? Would it grow?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [31]

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Yes. We've guided a burn of around $20 million a quarter for this year, and we've been -- and we're sticking with that, that this still feels like the right guidance.

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Operator [32]

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Your next question comes from the line of Keay Nakae from Chardan.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [33]

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Bruce, with respect to the triple combo cohort, can you tell us how far out those patients are going to be evaluated and when we might see that data result?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [34]

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Yes. I don't think I'm allowed to give any details on that particular cohort. I do think it's possible that we may get a late breaker in to AHA. And, of course, then whether they'll accept it or not is unknown. Yes, that could well happen. But I'm not really allowed to give details on the cohort.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [35]

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And to be clear, AASLD, not AHA.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [36]

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Oh, sorry. Sorry. Yes. AHA on my mind. AASLD. Thank you.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [37]

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So does that -- waiting for that day, does that impact at all when Janssen may go forward with the Phase II?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [38]

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That was a good question, but I don't think it's going to have any impact on that at all. I don't -- that's -- I don't think that's what it's designed to try to do.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [39]

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This was more of an and not an or. As Bruce said earlier, this looked like a good opportunity for both Janssen and for us to generate some more data while they are preparing for the larger Phase II.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [40]

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Okay. Great. Two more for you. The open-label AATD, can you just clarify, Bruce, how many biopsies might these patients be providing?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [41]

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So in the trial without the extension, so the 2 cohorts, they get a baseline and then a biopsy, either at week 24 or week 48, depending on whether they are in cohort 1 or cohort 2. They are then given the opportunity to get 4 more doses and essentially be biopsied a year after their first biopsy. So if they decide to go into the extension, they will get 3 biopsies. If they only go -- do the original trial without the extension, they'll have 2 biopsies total.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [42]

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Okay. And do you see that being problematic in any way?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [43]

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Look. I mean if I am a patient, I want the treatment, I want all the treatment I can get. But that's me, and I can't speak for those patients. It will not surprise me if a large number or even all of them go into the extension and get that third biopsy. But honestly, it's very hard to predict.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [44]

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Okay. And then just the final question, with respect to the $25 million milestone payment for the triple cohort. Will you recognize all of that in fiscal Q3 as revenue?

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Kenneth A. Myszkowski, Arrowhead Pharmaceuticals, Inc. - CFO [45]

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So the $25 million that we just earned gets added to the upfront. It becomes part of the overall amount that we need to recognize over the performance period which, as I said, was the completion and follow-up of the Phase I study. That's the accounting requirements because the milestone was received during the performance period. When milestones are received after that performance period is completed, they are recognized in full at the time they are earned.

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Operator [46]

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Your next question comes from the line of Mayank Mamtani from B. Riley FBR.

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Mayank Mamtani, B. Riley FBR, Inc., Research Division - Research Analyst [47]

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Congrats on the progress. Just a couple of -- just clarification on the AAT. Did you ever comment like what exactly on the histology, like what specifically is the endpoint that you're measuring, and sort of like what data exists out there that shows some kind of correlation with the clinical outcome? If you can clarify that.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [48]

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you want me to take that, Chris?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [49]

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Sure.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [50]

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So we're in the process of developing a scale. So today, as we sit here, there is no AAT scale. However, over the last few years, there have been several large -- well, relatively large studies, approximately 100 patients collecting biopsies in patients with AAT. So there's actually a nice available set of slides out there with which to put together a scale. So we are actually doing the heavy lifting on that to create that scale. And that's -- so that scale will be completed and in the hands of regulators before Part A ends. So basically there will be the opportunity to decide whether there need to be any changes in the endpoint or not. But the elements of that scale, I think people in the field have a pretty good idea of what the elements of that scale are likely to be and how the scale's likely to look. But it's going through a very intense and regulatory-driven process just the same way they did, for instance, in creating the NASH scale to not only develop but fully validate and fully document the process so that regulatory authorities will be comfortable that the scale was put together the right way.

As to the responsiveness of the scale to treatment, of course, there has never been an effective treatment for this disease. So we don't actually have any data on that, and that's part of what the 2002 study, why it will be such a pathfinding study. This will be the first time ever that people have been able to take a drug that's likely to be very active in reducing the input function that causes the disease, which is the production of the Z mutant AAT, knock it down completely and see what -- how the livers respond and what sort of repair process occurs, et cetera. So that's what makes the 2002 study a really interesting, scientifically important study, even at its size. So maybe more than you asked for, but basically it's all part of an orchestrated program to get to the point that the regulators are hopefully presented with the data package that they're very comfortable with approving the drug on.

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Mayank Mamtani, B. Riley FBR, Inc., Research Division - Research Analyst [51]

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It's very helpful, and I understand it's been not as linear as the F1 through F4 that you see on NASH. It's going to be a composite of multiple things that you just laid out. And then my follow-up was that -- so as I understand when you see the Part A result or some sort of data readout there, you would also have some sort of readout from the scale. So I guess my question is you'd sort of like know what good looks like at the time when you get to that inflection point.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [52]

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Yes. Actually, the scale will not be looked at at that point. So in -- those Part A biopsies will not be assessed histologically. They'll only be assessed for the effectiveness of the various doses at knocking down the production of the monomer which is the soluble AAT. Whether that period of knocking it down has made any difference in the amount of polymer around and they'll also look at the plasma concentrations, even though they're frankly not the important point here. The important point here is the monomer. That's what matters. And that's all they're looking at. They are not looking at any histology.

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Mayank Mamtani, B. Riley FBR, Inc., Research Division - Research Analyst [53]

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Okay. And then any of the follow-on approaches that might be pursued, potentially the [character] or anything else that they will have to probably go down the same sort of pathway that you've laid out. Is that sort of the understanding of the field?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [54]

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Well, you can never speak for regulatory authorities. But I think that it would be highly unlikely that anybody else would be able to somehow take a shortcut. I think this is what's going to be required for everybody.

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Mayank Mamtani, B. Riley FBR, Inc., Research Division - Research Analyst [55]

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Okay. Great. And then back on since AHA is on your mind and I don't know, maybe we'll learn some data on Lp(a) program from Amgen. My question there was really -- are there any learnings from how that has been developed for a particular elevated dyslipidemia indication? Are there any learnings that you're applying to your SAD/MAD sort of programs for APOC3 and ANGPTL3 including potentially having some sort of a disease test that basically allows you to diagnose for some of these patients with elevated risk?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [56]

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Well, fortunately, these -- we're not in a world here with APOC3 and ANGPTL3 of sort of esoteric measurements. It's really triglyceride. It's triglyceride-rich particles. It's LDL cholesterol in the case of the familial hypercholesterolemias for instance. So these are all well-worked pathways. We understand them very well. The risk associated with triglycerides now, I think have really been nicely elucidated not only by GWAS, but also even from the Amarin study. So we're -- I think we're on a little different ground. I believe just as strongly in the Lp(a) by the way, just as strongly. But in that case, they're going to have to get the community to understand the importance of measuring Lp(a) and go through that process to get that test widely used. But in the cases of our drugs, we're talking about measurements that almost every American gets if they're being well managed medically, their LDL cholesterol and their triglycerides are being measured already.

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Operator [57]

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(Operator Instructions) Your next question comes from the line of Maury Raycroft from Jefferies.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [58]

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I just have 2 quick ones. For AAT, just wondering if there are any serum biomarkers that could be assessed over time that may provide a surrogate outside of [A180]?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [59]

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Why don't I go ahead and take that, Chris, if you don't mind?

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [60]

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Sure.

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [61]

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Maury, we're in the same place as the NASH folks and other people that are dealing with fibrotic liver disease. Everybody is trying hard to figure out a way to not have to biopsy patients to know what's going on, both where they are at baseline and are they improving. So in many ways, at the level of sort of what you're treating and what you would follow, if over the next few years, the NASH folks really manage to truly validate something that works in NASH, I'll bet that it will work in AAT as well. But to the extent that they also had not really been able to -- despite a lot of effort and sort of a lot of abstracts and publications, nobody has a validated method, shorter biopsy yet to diagnose the level of fibrosis that's there and to really reliably feel like you know that you are producing change of a meaningful sort. So we're in the same place, and I don't think there's going to be anything special for AAT in that regard. And plasma levels of the hormone aren't going to be the answer because they tell you probably how effective you are at knocking down the AAT production. But they're not really going to tell us no kidding what's going on in the liver.

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Maurice Thomas Raycroft, Jefferies LLC, Research Division - Equity Analyst [62]

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Got it. Okay. And then as far as the baseline liver fibrosis score in the biopsies that you take, is there any goal for inclusion or exclusion that you're going for?

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Bruce D. Given, Arrowhead Pharmaceuticals, Inc. - COO [63]

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Yes. They have to be F2 or F3.

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Operator [64]

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And I'm showing no further questions at this time. I would now like to turn the conference back to Chris Anzalone.

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Christopher R. Anzalone, Arrowhead Pharmaceuticals, Inc. - CEO, President & Director [65]

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Thanks, everyone, for joining us today. And we'll talk to you next quarter.

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Operator [66]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all now disconnect.