Arcus Biosciences, Inc. (RCUS) Earnings Call Transcript & Summary

Hello, everyone. This is Zeeshan Merchant from Morgan Stanley. This is the fireside chat for Arcus. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm pleased to be joined today by Arcus. We have both the CEO, Terry Rosen; and President, Juan Jaen.

And I'll start by beginning questions. Terry, can you please give an overview of Arcus for those that may be new to your story? How would you describe the investment thesis for your company?

Sure. So first of all, thank you, Zeeshan, for including us in this. And for those of you on the call, we appreciate the interest and engagement, so thank you all. For those of you who aren't familiar with Arcus, the company has been around roughly 5 years. We have a long-term vision to be an independent company. We're heavily R&D-centric but evolving. We have the beginnings of a commercial organization. So if I was to describe where we're at, a snapshot in time today, we have 4 molecules in the clinic. We're focused in oncology, immuno-oncology. We have a PD-1 antibody. We have a TIGIT antibody, clearly a hot area right now. And then another -- and another field that's one of the hottest in the immuno-oncology area, we have 2 molecules that are important in the ATP adenosine axis. They're both progressing very well. Clinically, if you look at that collective group of molecules, one key aspect of our strategy, since we did have this long-term intent is that we'd be able to develop molecules that we can combine with each other since that's a central part of anything that's going to happen in oncology. Part of that has been recently greatly facilitated by a collaboration that we've done with Gilead. So we could potentially have 3 molecules in registrational trials next year. Our programs have been moving very nicely. There's a number of valuable features. Perhaps we'll talk about them later, associated with that collaboration. It's been very enabling for us, including the fact that we have upwards of $800 million of cash that will fully let us really compete with these molecules, where all of our competitors are pretty major players. So it's a very exciting time. 2020 has been a year where we've generated a huge amount of data. We'll continue to do so, and then 2021, we'll be building on that. The last point I would just make is that the company is built around a very strong discovery engine. And one aspect of this collaboration has not only allowed us to maintain and continue that as we've moved towards later-stage clinical trials, but in fact, we're even able to enhance it. It's a central part of that relationship with Gilead.

Thanks for that summary, Terry. So on that Gilead point, you recently announced a 10-year partnership with the company. Can you briefly describe the rationale for that partnership as well as how it's going? And it may be helpful for you to layer in some context around your partners' recent PD activities in oncology and how they apply to you.

Sure. So as I mentioned in the introduction, it really enables us to grow as an independent company. So when you think about what Gilead has talked about, how -- their strategy, there's a huge alignment. So Gilead, as you know, a great company, great accomplishments in viral -- in the viral field. Dan O'Day recently joined, very visionary. He brought in Merdad Parsey as their Chief Medical Officer. Interestingly, there's a very important human element to our collaboration. Our Chief Medical Officer, Bill Grossman, and Merdad have a long-standing professional and personal relationship, a lot of respect. And that was somewhat the bedrock for this 10-year all-in collaboration. So as you think about Gilead building its portfolio organically, great people externally, with some one-off agreements, we came in and I think fit in as part of a very substantial R&D engine that they're building in. When I was referring to our combinations, I think, actually, this week's transaction with Immunomedics, bringing in Trodelvy, is highly illustrative of one of the components that we felt would be very attractive, and it's mutually beneficial. So as Gilead brings that molecule, which has enormous potential, and they're going to obviously fully exploit it, you can imagine that things in our pipeline, for example, our anti-PD-1 agent or our anti-TIGIT might further be able to expand the benefits that Trodelvy has already shown. In a broader sense, when you think about this also from Arcus's standpoint, it enabled us to keep that portfolio intact. So one major partner as opposed to breaking those programs up amongst partners, that enables us to do all the permutations that make sense. These programs have been designed and selected because in different settings, these combinations do make sense. And so that was an important aspect of this. Another central component is the way that this agreement was structured. The key economic term for Arcus was maintaining 50% of U.S. rights. We also received royalties, double digits, that can even get into the 20s for the rest of the world. But we will commercialize together with Gilead. We'll continue to build our group out in that sense. But the way that it's also structured is that the opt-in payments and various milestones are designed to enable us to pay our 50% of the development cost. So you can imagine us going -- even getting to commercial without having to seek potentially additional funding from the public markets. A lot of expertise at Gilead as well. So I think one way strategically that we look at this from the outset of Arcus, we have this long-term vision, and we always felt that we'd rather own 50% of 100-foot pie than 100% of a 6-inch pie, and the relationship with Gilead just enhances that. And it's -- there's such great alignment. The agreement actually closed in July. I would say that this relationship is one where we interact with them pretty much seamlessly. So even already the planning as we move towards the end of this year, we got past HSR and can do that in earnest. And we think about what will be a very broad and aggressive clinical program, particularly as we move into 2021. The planning for all of that is going super well. Keep in mind, the programs that we work on, I mentioned them briefly, our competitors are Merck, they're Genentech, Roche, they're AstraZeneca. So having a partner with the strengths that Gilead brings really enables us to compete in these aggressive races.

Sure. And you mentioned a couple of times that this partnership facilitates your path to becoming an independent, fully integrated company. Can you describe a little bit more of your long-term vision and any additional steps you need to take to achieve this?

Sure. I think the long-term vision is to create, develop, commercialize. We love doing that as we move towards this side by side with Gilead. And I would just say, in the near term, we're focused on execution. So I think it doesn't take enormous vision to look at the pipeline right now. We've got anti-PD-1, anti-TIGIT. So the key backbone therapy of the day and of the time with zimberelimab, our anti-PD-1 antibody. We got into TIGIT early in the genesis of the company as we felt that might be the next potential backbone therapy based upon everything that's out there. It looks like that's playing out. So we're well positioned from the backbone. We've got 2 incredible agents in the ATP adenosine pathway. That makes sense for combination. So executing there, and then moving the discovery pipeline along. I think you'll still see us do some interesting things, but I think it's that core that as we move into 2021 and its execution, it's driving the early data that we've generated into studies that will deliver the randomized data, and then more importantly, the registrational studies that we see coming up. So while we're broad, we're working on a number of things, we have a lot of trials, we're very focused on taking those programs from promising to randomize data and into registrational studies and looking forward to doing it with a great partner like Gilead.

Great. And a very distinct and attractive feature of the Arcus story, one you just mentioned, is the broad portfolio of molecules and the breadth of clinical programs that you've uncovered within the short time of founding the company 5 years ago or so now. Can you describe what you see as your priorities for the next 5?

Sure. So the real focus, there's a big focus in the world about anti-TIGIT, which we're thrilled. We've been in that for some time. Some groundbreaking studies by Genentech, really, gave the clinical proof of concept. Most recently this week, we've seen some data from Merck that reinforce that. But we look at the backbone therapies like anti-TIGIT, anti-PD-1, somewhat it's table stakes for a long-term company. And we see the real opportunity for home run and differentiation from what I'm going to call -- those are hugely innovative programs, but what I'm going to call is the innovative combinations bringing in other agents outside of, let's say, chemotherapy or just combining those agents themselves. Things like, I'll mention AB928, our unique adenosine receptor blocker, the only one in the clinic that blocks both 2A and 2B receptors, which is a critical component of its profile, along with a great drug profile. So I'm going to list off a fair number of priorities and milestones here, but I think it's important to recognize these. So of greatest focus, I think, to the world, and it's certainly important to us, is our trial that we call ARC-7. That's our first trial with our anti-TIGIT antibody. So that's a study that's ongoing. It's going to have -- it's in non-small cell lung cancer. It's in the high PD-L1 patients. Those were -- Genentech showed clearly where you got the most profound signal. And if you keep in mind, what we're really looking to beat here is chemo plus KEYTRUDA. So that efficacy that when that they became the standard of care in this setting, but without the baggage of the chemo. So we have 3 arms in that study: our anti-PD-1; our anti-PD-1 plus our anti-TIGIT; but then the unique thing that we bring to the table there is we have a third arm that includes AB928. And since adenosine is known to be important in lung cancer, that gives a great opportunity with another very safe agent. The other unique thing about that trial is that patients that progress on anti-PD-1 therapy alone can go to that triplet. And again, that's a leading mechanism as to what could be causing that. So we're very excited about that. We're going to take a look at interim data at the end of this year. And sometime early next year, we'll be disclosing those data at a medical conference. I'll also say, as we get towards the end of the year, we'll be sharing our registration strategy for both that combination of anti-TIGIT plus anti-PD-1 as well as the anti-PD-1 monotherapy. And I think you'll see how that ties together with this ARC-7 trial. And we have 2 studies ongoing in collaboration with Genentech with AB928: one in colorectal cancer, one in pancreatic cancer, specifically in PDAC. Those are Phase II randomized trials. We'll have an early look and interim data there as well towards the end of this year, and we'll be disclosing those data early next year. We just have at this week's ESMO conference, we shared data from what we believe is a very exciting indication and very promising data in EGF receptor TKI-failed patients in non-small cell lung cancer. There's really no good therapy for those patients, and that's another one where we think there's a very special biology with AB928, and we're seeing promising results. We expect now to go, as I was mentioning before, from those -- what we consider very encouraging expansion data into a randomized component. That's enabled by flipping a switch in this trial. Finally, we showed promising activity across multiple lines of therapy in colorectal cancer this year, ranging from front line to third line, third line plus. The most facile pathway towards registration is in the later lines, as you would be aware, in colorectal since the standard of care is so poor, and we'll be talking about a platform study later this year called ARC-8. Finally, I would mention a trial that's very exciting that's been ongoing called ARC-6. There's unique biology in prostate cancer relating to adenosine in the -- and in fact, AstraZeneca has also shown a signal, albeit early, that they've talked about in prostate cancer. This is again a big competitor. They have a lot going on. We have a platform trial going on there across multiple settings and multiple combinations, and we'll be sharing data from that sometime in the middle of next year. I actually referred to that platform study that we'd be doing colorectal cancer incorrectly. I called it ARC-8. It will be ARC-9. ARC-8 is a very exciting trial. It's our first look at our CD73 inhibitor. It's just a molecule that blocks the formation of adenosine. It's the first small molecule clinic -- in the clinic that does that. And ARC-8 is a pancreatic cancer trial. There's a very strong rationale for why adenosine blockers and -- and those that inhibit its formation might work in tumors that are oncogen driven. Keep in mind, pancreatic cancer, particularly pancreatic ductal adenocarcinoma, PDAC, is about 85% KRAS driven. So we'll have a data set from that study late this year, and likely, we'll be disclosing it at ASCO-GI. So a lot happening. We've really -- the cadence of readouts from these, as you can see, is enormous. We expect a continuous data flow throughout the remainder of this year, and then obviously, as we move into 2021.

Great. And spending time on each of these individual programs. On the adenosine side first, you obviously mentioned the ARC-4 data at ESMO as well as the ARC-3 at ASCO. Why do you believe adenosine, overall, is a good target? What gives you confidence in the program? And feel free to hone in on details around each of the data points as well as next steps?

Sure. So first off, and this is part of our strategy, the biology around adenosine has been enormously studied literally for a decade. It's a ubiquitous mechanism. Tumors are loaded with CD73, the enzyme that produces adenosine. And adenosine itself is highly, highly immunosuppressive, and that's very well understood at a mechanistic and molecular level. So the biology is there. And then we, ourselves, as well as companies like AstraZeneca, over the past few years, have shown, in fact, that this is translating clinically. I think the key thing now is getting to randomized data. But for example, we're seeing a consistent pattern. Even as we talk about independent trials, a lot of the concepts within these trials overlap, particularly in terms of the biology. So I'll just highlight some of the things we've seen. In colorectal cancer, we saw in the front line setting, very deep responses. And in the later line settings, we saw very durable long responses. So already looking that we see the potential to do much better than the standard of care. There's a strong rationale for the linkage of CD73 in a number of oncogenes, as I mentioned. For example, KRAS, or we see this in the EGF receptor mutant population. And in fact, we've already seen some nice partial responses in ARC-4 in both the dose escalation and dose expansion stages in this setting. One of the other important aspects, it's not only clinical activity. We love to see the dots connect between biology and activity. It gives us enhanced confidence. And one important aspect of the biology of adenosine that's really very recent is that there's 2 adenosine 2 receptors, A2a and A2b. We're the only ones that have a molecule that hit both. And that 2b component is turning out to be very important. The 2b receptor shows up on tumors in addition to immune cells, and it turns out that activation of that 2b receptor leads to map kinase signaling that leads to facilitation of oncogenic pathways, so blocking that is very important. And we think we've been doing a huge amount of biomarker work across all the patients and all our studies, and we think that may turn out to ultimately even be a place where we see patient selection. So it's clear that the adenosine pathway is important biologically. We're in the midst of showing how important it is clinically. And now we're in the next stage, where we'll have those randomized data that confirm the signal and lead to the registrational study. So it's a broad important pathway that you can think of as facilitating a number of other important mechanisms in cancer.

Sure. And turning to your TIGIT program. Merck presented some data at ESMO. Any thoughts there?

Sure. I'm going to let -- I'm going to turn that over to Bill. Bill Grossman, our Chief Medical Officer. He working in this field for a long time. He knows it inside out, and I'll let him comment both on the Merck data and how we see it. Obviously, very exciting as it validates what Genentech is already seeing.