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

Good morning, everyone. Thank you so much for joining us for the presentation with Arcus. We're really pleased to have Terry Rosen, CEO; and Jennifer Jarrett, COO. With that, Terry, I'm going to turn it over to you. Just given you've got a ton of data reads this year, maybe you could just put it in context and then we can jump in.

Sure. Thanks, Salveen. So Arcus has been around since 2015. And I think big difference between how we ended 2021 and how we'll end 2022 and maybe I'll level set where we are in that context. So as we ended 2021, we had one registrational trial. And as everybody knows, we have 6 molecules in the clinic: 2 in the ATP adenosine pathway, 2 anti-TIGIT, our anti-PD-1 and our most recent, our HIF-2 inhibitor, AB521. With the data that we generated in ARC-7 in our third interim analysis, that totally reinforced our plans for registrational studies around the anti-TIGIT/zimberelimab doublet. And so by the end of this year, we'll have 4 registrational trials in areas with huge opportunities. So I'm actually going to ask Jen to say a little bit about those trials, just to talk about that since it's a big change for the company. But when you think about what we're focused on right now, that's really #1 brass ring. The highest priority is to have those up and going in a rigorous way and enable those to be going full steam ahead. In addition to that, we have a number of things going on with etruma and quemli that we can talk about. Some very recent data with AB521, the HIF inhibitor, where we feel that molecule can be a best of class. So Merck's HIF-2 inhibitor certainly validates the target and we think we address limitations of their molecule that could give us more activity. And that will be in patients by the middle of this year. There's been a healthy volunteer study, and we'll be going into clear cell RCC. We have the robust discovery group. So we'll have, in the next 6 to 18 months, 4 potential IND candidates. Now I'll just finish saying a little bit about the Gilead collaboration because that's hugely enabling in terms of everything we're doing. So we sit here now with $1.35 billion in cash. And I think more importantly than that, Gilead is funding essentially 50% of all those programs to which they've opted in, so all the clinical programs with the exception of HIF-2. And that's what really enables us to push off assets, the middle part of the portfolio, these big deal registrational studies and still push the discovery organization so enabling to build that independent company. Maybe Jen can just say a few words about those registrational trials since that's really new that that's full steam ahead.

Yes. So as Terry mentioned, we have 4 registrational studies that are either ongoing or expected to be ongoing by the end of the year. What's particularly exciting to us about these 4 registrational studies is we only have to operationalize 2 of those studies. So as you might imagine, 4 large registrational studies would be a lot for a smaller biotech company. So we're very fortunate to be able to leverage the resources, both operationally and financially, of our partners. So the 2 that we will be operationalizing, one is in lung, that's ARC-10. That has been ongoing since last year. That study is building on ARC-7, so the exact same patient population that we're evaluating an ARC-7, which is the PD-L1-high first-line non-small cell lung cancer patient population. There, we are looking at a TIGIT antibody plus our PD-1 antibody versus our PD-1 antibody versus chemo. And what this study is designed to do is to support the approval of both zim monotherapy as well as the dom plus zim doublet in that first-line PD-L1-high lung cancer patient population. This is a huge market opportunity. It's about 35,000 patients just in the U.S. Outside the U.S., it's about 3 to 4x that size. So when we do the math, market opportunity in the U.S. can be $1.5 billion or higher. The second study that we are operationalizing is a study that's in first-line esophageal and gastric cancers. We haven't given the exact setting yet, but this is a study we're really excited about. The reason that we decided to go into this setting next is based on both data that we've seen in our Phase I study with dom. So this is some data that we haven't released publicly yet, but we've seen some really interesting responses in certain esophageal and gastric cancers as well as data that's been presented by competitors. Notably, Roche presented some data last year at ESMO GI, which was very interesting to us. The other reason that we decided to go to these cancers was based on a very expensive prioritization exercise that we went through with Gilead. And we feel like this is a setting that we've chosen where we can be first to market in the TIGIT space. The 2 other studies that will be up and running by the end of the year, the first is PAC-8. The study has already been initiated. It is being operationalized by AstraZeneca. This study is looking at dom plus durva in Stage III non-small cell lung cancer. AZ is the very clear leader in that market today. They have about 97% of the market. So we think it's a huge advantage to us that we are partnered with the current market leader in that setting. That is a setting that's $2 billion plus in size. Durva today is generating about $2.5 billion and growing in that setting alone. So again, it's a huge opportunity for us. And that just builds on the data that we've seen in ARC-7 in lung. The fourth study that will be operationalized by Gilead is one that maybe we're most excited about right now. This study will be looking at dom plus zim plus chemo in first-line non-small cell lung cancer. Unlike ARC-10, this will be an all-comer study, so looking at patients of all PD-L1 levels. This is a 120,000-or-so patient population in the U.S. alone, so $5 million in upmarket opportunity. So we're really excited to have Gilead getting that study up and running by the end of the year.

Let's start with a theoretical question. So you've been involved in IO drug development for a long time, and you have this very large portfolio. When you look at the fact that in drug development in the past, it sometimes more often than not takes the Phase III here in an IO study to really tell us if it works, even though there have been signals along the way. How do you think about derisking it earlier, just so you running those trials, you really do have that translatability? Is there anything that you can do with your portfolio?

Yes, absolutely. So I think a lot of the things where you might have seen these things fall flat are less, in our view, due to the mechanisms about how the studies might have been run. So I think what you've seen a lot in the last 5 to 10 years across therapeutic areas is a lot of people jumping from like Phase I, Phase Ib into Phase III, so the fact that they haven't run randomized control studies. So if you look at ARC-7, it's a really well-done rigorous study. We were talking with a group of external investigators, and they were commenting how rare that is. Similarly, we're actually embarking on -- we didn't talk about this in the overview, but this is one of the other enabling things with the Gilead collaboration. We have 3 platform studies that are -- will be going on this year, 2 in lung, one in GI, that get just at what you're talking about, looking at quemli, etruma, Trodelvy, in various combinations with zim/dom, but in a more rigorous Phase II type setting that might inform a Phase III study. So we feel the way to derisk is just recognizing that you have to do more rigorous early trials, make sure they're well controlled.

So as you noted, we're going to see data from ARC-7 in the second half year in first-line PD-L1 greater than 50% in non-small cell lung cancer. Can you help us understand what you want to see here? What's clinically meaningful, especially in the context of what just played out with Roche?

Jen, why don't you come on and then...

Yes. I think there's been -- I wouldn't call it guidance. I think some commentary that's been made in the past about what we think a good outcome would be, at least from a response rate perspective there, which would be for the doublet to show a response rate greater than 50% and then a 15% differential response rate over a PD-1 monotherapy. And we still think those are important benchmarks. In addition to ORR, obviously, we very focus on PFS, probably even more focused on PFS. So we'll certainly be looking for something that we would consider to be clinically meaningful. We do have an internal benchmark that we've set as far as what we think is clinically meaningful. That's been supported by a lot of conversations we've had with lung KOLs as far as like what they would consider to be clinically meaningful. So that would be our goal on PFS. And the other thing, and this is something that we saw at our last interim analysis, and we obviously want this to continue, which is for the doublet versus mono, on every endpoint that we looked at, and that's PFS, duration of response, ORRs, DCRs, 6-month PFS, everything showed an improvement for that doublet arm. And we want that to continue playing out to give us more confidence as we execute on our Phase III setting.

And what do you think the additional benefit will be by adding etruma?

Yes. So that's another -- obviously, we're following that triplet arm closely. And what we observed, so if you think about where the study was, basically in that third interim analysis, the doublet really matured well and came closer to the triplet. The biggest difference that we saw between the triplet and the doublet in that analysis was greater depth of response, greater tumor reduction. And so the next thing we're looking at, when you think about where we were, we saw clear differentiation between both the doublet and the triplet from the monotherapy. And now what we're seeing play out is how did those 2 do relative to each other. On does that depth of response translate into durability, that's measured by things such as PFS. If you think about where we were in the study, the median time on study at the last analysis, it was about 8 months. So clearly, we had these 2 distance themselves from the monotherapy. Now we'll see how that plays out as we go through another 6 to 9 months comparing those 2.

Perhaps, we could talk just about the Roche data for a second here and how you think about the read-through to yourselves. But at ASCO, on one hand, there was commentary that small cell lung cancer study was powered for OS. And so that could be how non-small cell lung was powered. That said, that the curves went against TIGIT in favor of placebo. So how do you think about that with regard to the target and then your trial?

Sure. So let me talk about both the SKY-2 and SKY-1 separately. So we think there are 2 different situations. SKY-2, we simply think it was a shot Roche took. They have the standard of care there. I think they wanted to ensure that they at least give a shot at protecting that franchise. But when you think about small cell in the rest of the world, if you don't have that franchise in general, that would have been a very low priority target. It's not very PD-1 responsive. As we sit here today and look at anti-PD-1, anti-TIGIT, the best way based upon both biology and clinical data is that anti-TIGIT turns anti-PD-1 into super anti-PD-1. So you really want to go into settings where you have already seen a response in this anti-PD-1. So I think Roche took that shot. I think they were very clear on their data set that they were folding up their tent on that one and moving along. SKY-1, we think, is very different. We think that is -- we felt this as soon as we saw the data based upon looking at other, not only what they've talked about since. But even if you go back and look at things like IMpower133, how they've done studies in the past, where the statistical question that's obviously been discussed a lot, both by analysts, the community, and now Roche themselves has gotten out there and explained that they're certainly putting the vast weight of their alpha on OS. People should keep in mind, the brass ring, the approvable endpoint there is OS. The thing that PFS, what it might do, is if they really knock the ball out of the park, if it was both statistically significant and clinically meaningful, that could drive to a more accelerated approval. Perhaps, it will cut 8, 9 months off of their time line. So we read the tea leaves from everything they've said. We take it face value that they do, in fact, believe they're on track to show something on OS. The readthrough to us is awesome because if anything, it took a little wind out of the sails on those opportunity for an earlier approval. The other thing that I would just mention, when we look at our anti-TIGIT, anti-PD-1 doublet now, which is essentially what you're going to always be looking at in your anti-TIGIT plus your anti-PDX, we unequivocally feel we have opportunity for best-in-class doublet in this space. So we're the only company with the Fc-silent anti-TIGIT combined with a robust anti-PDX. So we're seeing the efficacy that we've observed through IA3. What we're also seeing is when we look at what's out in the literature, what other companies reported, certainly compared to the CITYSCAPE data, we're seeing dramatically less ADAs -- or I'm sorry, not -- we don't really see any ADAs. We're seeing dramatically less injection site reactions, which could be due to ADAs perhaps from atezo. But we're also seeing reduced levels of immune-associated AEs, things like rash and pruritus, which might come from Treg depletion, which we know the IgG1 wild-type antibodies to generate. So we're really feeling very good. Readthrough to us is that we think the target remains very attractive, and we feel like we're super well positioned to be big players in the space.

Do you feel that the choice of your checkpoint inhibitor could drive a differential response when used in combination with an anti-TIGIT?

I think that answer is probably yes. I think you're going to build upon whatever your -- if we're talking about anti-PD-1, anti-PD-L1, whatever that intrinsic activity is will probably manifest itself. It may be different in different settings. But definitely, it's a 2-component opportunity. And I do think it's those 2 components that are going to essentially turn into one component, and it's going to be dependent on the intrinsic properties of both of those agents.

I think an important point to keep in mind, and Terry was alluding to this, is if you think about what PD-1 antibody does on its own in that setting, somewhere between 35% and 40%, PD-L1 is probably lower on that based on all of the data that we've seen. And so for a PD-L1 plus TIGIT antibody, you have to also overcome whatever that difference is versus we're just building on exactly what we've seen pembro do on its own in that setting.

There's been a lot of discussion on this in the past, and you've commented on it. But do you see a difference in the anti-TIGITs out there?

We definitely -- and in fact, as you know, we're the only company that has both. So we actually have a data set from Phase I on AB308, which is an IgG1 wild-type Fc-enabled [ vertin ]. And we have dom and then we have what's been reported. And so unequivocally, we do not see any populations at all of T cells being depleted by the Fc-silent, and we absolutely see Tregs being depleted by AB308. And at varying levels, other companies have reported that as well. And we do -- it's basic immunology. You talk to any immunologist, you do not want to deplete your peripheral Tregs. And we think that that's most likely to manifest itself in various immune-related endpoints. How dramatic that gets, I don't know. We'll see. But clearly, as I mentioned, we're seeing differences in that rash and pruritus. We did note in the CITYSCAPE data that had been reported, they had also seen higher levels of pancreatitis in their doublet versus atezo. That's certainly another endpoint that could be mediated by Treg depletion.

Etruma. So how should we think about the breadth of data that will be presented this year? What are you most excited about there?

We're excited broadly over the next 6 to 12 months. We'll be reporting data first from ARC-7. And then, of course, you have ARC-6 and ARC-9. We think the opportunities there are big. We're continuing, as we said, to do additional studies in these platforms. Clearly, our highest level of excitement would come from ARC-7 simply because it's the most advanced and we'll see how 6 and 9 play out as well.

For ARC-6, what is the bar for success here for ORR and PFS? I think you've noted PFS of 4 to 6 months in the past, but...

Jennifer can go into that for us here.

Yes. I mean, keep in mind, both for ARC-6 and ARC-9, those are randomized studies or randomized cohorts. So there's an active comparator arm, which is the standard of care. So unlike a lot of companies where you're doing single-arm studies and you have to be really mindful of how sooner you might do in that setting, we will actually have the active comparator that we can make that comparison to. But I think, in general, if you think about what docetaxel does, which is our comparator in that setting, it's probably around 4 to 6 months, maybe closer to 6 months of PFS.

I think it comes back to the first question you asked, that theoretical question, which is very real. We recognize this as being a general issue that these standard of cares tend to move around. I mean just look at studies like CITYSCAPE or COAST. In each case, you had the anti-PDX or anti-PD-L1 in that case underperform compared to the past. And so that idea of running a controlled study earlier rather than later, we think it may add a little bit of time. But in the end, you don't get slaughtered on a $200 million Phase III study.

And then with quemli here, you've had positive data with the CD73 target and you have some combo trials that are -- that we're going to see results from. How are you thinking -- I guess, overall, how optimistic are you for the combination outlook? But also, how are you thinking strategically about where you're going to use it?

So we think quemli is going to be very important. And in addition to our own data, I mentioned COAST, which was AstraZeneca's study in Stage III in lung, a randomized study. For us, that was a very important study. Same importance, we think, to the field that CITYSCAPE represents, a well-controlled, randomized study, not only demonstrate the importance of CD73, but also the importance of adenosine, that adenosine has an important role in tumor genesis and tumor survival. So we continue to be very excited. We think about a number of settings. I talked about these platform studies. We're using those platform studies to also sort out are there opportunities where we think either etruma may be better, quemli may be better. But we feel very strongly about the opportunities there. I'll just mention since you mentioned ARC-8, we continue to follow that. We haven't changed our thinking in terms of what the hurdles are there. We think based upon history that certainly, you would want to see PFS beyond 6 months and a response rate on the order of 40% or greater.

So you've got a lot of stuff in the early-stage pipeline as well, and you mentioned the HIF-2 here. In the Phase I healthy volunteer study, maybe are you expecting better tolerability than what Merck has shown with their drug? And what do you need to see, I guess, on the board to determine whether or not you advance this program?

Yes. So we've already seen enough to know that we're advancing. And the real key issue there is less a tolerability one and more a potential activity one. So what I'll remind people is that the Merck-Peloton molecule is being administered at 120-milligram dose once a day. Now the reason that 120-milligram dose was selected isn't for any particular biological reason. But what it is, is that the PK profile saturates at 120 milligrams. So if they go up in dose, they don't see concomitant increases in activity. It's clear that Merck recognizes this themselves. They're currently doing a study where they're looking at twice a day and 3 times a day dosing at that 120-milligram dose. We got into this area primarily focused on combination. So there's a biological rationale why combining a HIF-2 inhibitor with, let's say, an adenosine modulator makes sense. But since we built our molecule from scratch, and we -- again, we don't cut corners, we generated a molecule that preclinically looks like it would have an outstanding PK profile. We validated that in the healthy volunteer study. Not only do we see a PK looking great, but we also saw PD looking great that's well defined for the field, that's well defined for the Merck molecule. So we definitely believe that we have a molecule that has the opportunity to squeeze more activity out of the HIF-2 stone, if you will, more water out of that stone than the Merck molecule. And we'll be in clear cell RCC patients by the middle of this year.

You have a CD39 antibody that's IND-enabling, another one targeting the adenosine pathway here. How do you intend to incorporate this? And then how do you think about its use versus CD73, just given their similarities?

Sure. So let me remind people of the fundamental biology that we're talking about in the ATP adenosine pathway and where CD39 sits in that space versus, let's say, a CD73. So basically, ATP belongs in cells. And if it -- if you kill a cell, that ATP spills out, it triggers an immune response. So it's basically a danger signal. It tells the immune system to mount a response. So let's say, if a cancer cell died, you would have that pop open, that ATP, which belongs inside of cells that's present in high concentration, says mount an attack. Now what CD73 and CD39 do is they convert -- through 3 steps, they knock off those 3 phosphates in adenosine triphosphate to produce adenosine. CD39 knocks off the first 2. ATP -- I'm sorry, CD73, which is the rate-limiting enzyme, clips off the third, and then you form adenosine. Now adenosine in contrast to ATP is highly immunosuppressive. So basically, what those 3 enzymatic transformations do is convert a highly immunogenic signal into a highly immunosuppressive signal. It's a very common phenomenon in biology. We have something that turns on the immune system, and then we have something that turns it off. So while they're in the same pathway, inhibiting those 2 different targets does very different things. And I think that's a subtlety that those who don't live in this field every day may not recognize. So what you accomplish with CD73 inhibition is you block that last step that's important in adenosine formation. If you don't block it, that adenosine binds to adenosine receptors on immune cells and tells them to stand up. If you block CD39, so that first enzymatic clip, what you do is you maintain the levels of ATP. So on one hand, you're blocking the actions of the immunosuppressive part of the pathway. On the other, you're maintaining the elements of the immune stimulatory part of it. So we actually view these -- you can -- despite the fact that they're in the same biological pathway, they have very different manifestations that ATP is acting in a way to enhance dendritic cell activation, which is a whole different part of the biological cascade. So we do think that CD39 has the opportunity to not only be synergistic or additive, if you will, with things like CD73 inhibition. But it could be combined with other standards of care that have nothing to do with the ATP adenosine pathway and provide another mode of immune stimulation.

You've talked about announcing your first non-oncology inflammatory asset in the first half, I believe, which is almost ending. What areas, I guess, are most attractive to you? And are you still on track for that announcement?

Why don't you talk to Jennifer about that?

Yes. So it is our first inflammatory target. It's actually part of a research collaboration that we signed about a year ago with [ BBF ], so they're actually funding all of the research activities associated with this program, which has been nice. They've been a great partner. We can't say probably a lot. Just for competitive reasons, we want to probably hold our cards a little bit closer to our vest. But this would be, we think, a first-in-class, best-in-class molecule targeting very large market opportunities. So it's something that we're excited about. And our focus today is largely on oncology that I think we will be selective about identifying some opportunities within the immunology space that we think there's a real opportunity for a company like ours, given our expertise in immunology and small molecules.

And we'll still hear about it this month?

Yes, I'd say midyear, third quarter, we'll probably disclose the target. We're very close to identifying the development candidate and can file an IND within the next 12 months.

Last question here. I mean, you obviously have the financial backing of Gilead. But when you look at the markets and -- I guess, help us understand where you stand on a cash basis. And if you're prioritizing, reprioritizing assets, how are you thinking about this?

Yes. I mean we're in a really fortunate position today. We had $1.3 billion, $1.4 billion of cash as of the end of the last quarter. Our burn actually this year will be less than last year, even though we're getting these 4 Phase III studies up and running because of the cost sharing that we have with Gilead. And obviously, that cost sharing continues and it covers a lot. It covers, such as you were saying, clinical development. It covers 50% of CMC. It covers commercial preparation work that we might do for basically all of our clinical programs today with the exception of HIF. It's also, I think, notable like we have not actually had to go to the public capital markets for 2 years now. So since we signed the Gilead deal, we did an equity offering -- a direct-to-equity offering last year, just with Gilead. And then obviously, with the accelerated opt-in towards the end of last year, that brought in an additional $725 million. so I think we've been very careful about how we've used the public capital markets. We continue to want to put ourselves in a position where we don't need to rely on the public capital markets. So we're carefully thinking about our spend and capital allocation as well as all the different other sources of capital, whether it's from Gilead and other opt-ins that might happen as well as clinical collaborations like what we've done with AZ. There's one thing in particular that we're working on today that I think will be interesting that helps subsidize our clinical studies as well as providing operational resources. So we don't need to build out more infrastructure to operationalize a study.

Great. Well, with that, Terry and Jen, thank you so much.

Thank you. It's a pleasure. Thanks.

Thank you.