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

Great. All right. Well, thanks, everybody, for joining us. I'm Terence Flynn, the pharma and one of the biotech analysts here at Morgan Stanley, and we're very pleased to have Arcus here with us today. Before we get for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Today from the company, we have Terry Rosen, the company's CEO; and Jennifer Jarrett, the company's COO. But thank you both so much for taking time out of your day to join us today. I really appreciate it. Maybe, Terry, I thought you could just start and give a high-level overview of kind of the company's pipeline, especially the breadth of the pipeline because it is somewhat different from some of the other development stage biotech companies and then we can go from there.

Sure. Thanks a lot. So, I'll start actually because of that, we do have a lot of molecules and a lot of trials. And so we've tried to bucket the value drivers into 4 groups. And clearly, the first and the one that's been garnering this proportionate amount of attention is our anti-PD-1 anti-TIGIT combination. And so we'll -- by the end of this year, have 4 ongoing registrational trials with that. So a company coming from essentially a blank piece of paper 7 years ago, we will have those 4 trials. And we do feel that's a best-of-class anti-TIGIT, anti-PD-1 combination. Later this year, we'll be disclosing data from ARC-7, which is a trial looking at that anti-TIGIT domvanalimab -- and that's really those data that support our conviction in that study. The next group really is that rest of the portfolio that perhaps is sometimes overshadowed by the anti-TIGIT clearly, the anti-TIGIT that's looking at billions of dollars of market opportunities and big patient population, so somewhat understandable. But in looking at the rest of the portfolio, the next molecule that I would highlight is our HIF-2 inhibitor. We recently completed a healthy volunteer study. It's now going into patients. We think that the Merck-Peloton molecule validates that as a target. We recognize there's pharmacal kinetic limitations of that Merck molecule. We've demonstrated a profile that is superior. And so, we think that's a great opportunity. We have a group of molecules that relate to the ATP adenosine access. I think both of our small molecules in that arena are CD73 inhibitor or quemli, and our A2 receptor antagonist, both have profiles that clearly and again, clinically would translate into best-of-class profile. Those molecules are in a number of Phase II studies, maybe we'll get into those. I'll mention that since we do have a very robust discovery organization, the portfolio continues to grow. We just selected an XL inhibitor development candidate that will go into the clinic next year. We'll be talking about later this year our first non-oncology target. We will select the molecule in the immunology arena. And in fact, on coming back to that CD73ATP/adenosine axis, we’ll we also have a CD39 antibody. One thing I'll just mention in the context since we are talking about such a large portfolio program for a relatively small company in early stage, probably one of the features that is most unique about ARCUS, and certainly as a module put together with that portfolio is the fact that we have $1.3 billion in cash. But maybe more importantly than that, the collaboration that we have with Gilead funds essentially 50% of all of those programs to which they’ve opted in. So when you think about their cash burn, with all that we're doing in those -- ramping up those 4 registrational trials, we'll actually spend and burn less in 2022 than we did in 2021. So that gives you a sense of the overall portfolio and where those programs stand. We think we're super well positioned. We think that anti-TIGIT anti-PD-1 is a best-in-class combination. We can go to your questions.

Maybe just one follow-up there on the Gilead side. Just remind us what they've opted in on. And then what do they have rights to on the foreword...

Firstly, they've opted into everything in our clinical stage portfolio, so that's now 5 molecules. So the 2 Tigit antibodies, the PD-1 antibody, Etruma, and Quemli, which are the 2 adenosine targeting molecules. So pretty much everything, the one thing that they have not opted into yet, which is really a reflection of the stage of development of the asset is AB521,the HIF-2 -alpha inhibitor. And the way the opt-ins work is they can opt-in at any point in time up until a certain data event, which starts a clock and then they have a very limited period of time where they need to exercise their opt-in or they lose the opt-in right. And it seems like they're interested in HIF-2. It's really we also highlight that on the HIF-2, Phase I study in patients just posted today on clinical trials so people can now see that up there today.

Great. Would you say that's your most underappreciated pipeline asset, if you had to think...

I think it's all underappreciated...

I mean in terms of questions again like HIF-2 alpha again, it sounds like.

I think we're getting more and more questions on it. I mean people will shortly pay attention. I think given that Merck had their first combination data on [ Beloit ] over the weekend at ESMO, I think like the interest has probably ticked up a bit, but we're super excited about it. It's a validated target. We're pretty confident based on what we know today that we could have a superior molecule, and we've got a really exciting development strategy and people will start to hear more about that over the next few months.

Okay. Great. Maybe moving on to kind of the mid-stage pipeline, ARC-7, Terry, you mentioned that's ongoing right now. You've had a number of interim analysis, this is first-line non-small cell lung cancer. Maybe just remind us what you saw in the most recent interim analysis? And then how you think about the competitive bar out there for this data set?

Sure. So let's talk about where that does actually stand. So at this point, we just completed enrollment in the study, so it's 150 patients. And up until this point, we -- the last time we looked at data, we call that interim analysis 3. And those data were looking quite good. And obviously, those -- that's what informed all of this investment in these registrational studies. So, with that 150 patients in, we will be doing another cut of data and we will be sharing those data later this year. And let me describe what those data will include and then we can talk about what we've seen to date. So we will have ORR. We'll have DCR, where we have DOR. -- we'll have a 6-month landmark PFS. We hope, and when I say hope, it's a rational and informed hope that we'll have mature PFS, so at the last interim analysis, the median duration on therapy was around 8 months. We think now to be on the order of 10 or 11 months. So that's right on the cusp of what should give us meaningful PFS. But with that said, until we see the data, we don't know if the PFS will be mature or not. What I would say is the one other caveat in terms of exactly what we'll disclose is that we are in discussions when we're working together even as we sit and speak with Gilead on both what the venue for that disclosure will be and exactly which of those endpoints we'll be able to share. I'll also say that next year, we'll share a full data set for the 150 patients. But what we have commented already at the interim analysis 3 is -- and I think this can get to the benchmark, we were seeing very much differentiation between both the doublet and the triplet from the monotherapy, both in terms of response rate and measures such as duration of response. So all those endpoints that we looked at very clearly, both the doublet and the triplet we're separating from the monotherapy. We're most focused at this point on the doublet because clearly, that's been a foot race. Strategically, that's why we've gotten those 4 trials up and going rapidly as we have. And when we get asked about the triplet, what I would say at the last interim analysis, the Triplet and the doublet look very similar, except that the triplet had what we would describe as more patients with greater depth of response. And so the piece that we're looking for there is with time, and we'll know this sometime next year, does that translate into a clinically meaningful difference in -- on a survival endpoint.

Okay. One follow-up is just in terms of -- so you'll have the ORR, DCR, duration of response, 6-month PFS, hope to have mature PFS, will you disclose all of that data initially? Or did you mean that you'll have that, you'll disclose some of it and then all of it will be at the conference because I know it's like parsing words, but just from a disclosure standpoint, what will we see initially versus what we get when we get the full conference...

So our intent -- we want to be as transparent as possible. Our intent would be to share as much of that that we can, and we'll have to discuss that with Gilead. And again, for disclosure purposes, I would say that's something that we'll be talking with Gilead on an ongoing basis, and we'll probably be finally decided once we have data in hand. But we're very motivated to get that out there, not only from a standpoint of just the investor community, but not in the field but investigators as well. And in fact, we've shared to date with AstraZeneca, we shared it with Taiho, who's our partner in Japan, who shared it with Gilead and actually a number of investigators under CDA who are executing on these trials. So we're very motivated to get it out of there, but we have to discuss that further with Gilead.

Okay. Understood. And then in terms of the competitive landscape, so just as we think about the bar, like what -- especially, I think most of the focus is probably on the PFS side. But again, what -- how are you thinking about what you’d like to see from that PFS side.

Why don't you comment on that?

Yes. So on ORRs, I mean, I know you asked about PFS, I think there was semi guidance that was given last year or early this year, kind of focusing in on this greater than 50% ORR for the doublet and some sort of separation from the doublet versus the single it. So kind of 10% plus. So we think that's still important. PFS, keep in mind, PD-1 alone typically does about 7 months or so if you look at KEYNOTE-042 in similar studies. So obviously, we want to be north of that. So you could probably take a stat of what we would think would be a meaningful improvement over 7 months.

Okay. The 20% fair... Okay. What -- I mean the other question that we get a lot is just that Roche's data and how to interpret it from the skyscraper 1 and 2 studies. And so from where you guys sit, we got some of it at ASCO. I'm guessing we'll get more bit at some point in a publication maybe. But what was your perspective on kind of that data set and any implications for your data and design of the Phase III program in particular?

Yes, it did not affect our Phase III program at all. We have our own data set -- we have been using our own data set as we think about the statistical analysis and powering for AR-10, -- so Sky-1 really didn't impact how we think about things. We'll continue to watch it closely for sure. And if there's things that we could do to fine-tune our study design, we will definitely do that. So we add a few more patients just to get the power up a little bit. Another thing that we could consider doing is looking at the intent rate and maybe we push out like the first interim analysis a bit so that you get more events. So those are the types of things that we have an advantage on that we're not first, and we can learn from them. So that is definitely the good news. You know Sky-1, I think everyone probably has the same interpretation at this point. I think when the news first hit the press, I think people were all over the place in terms of what it meant. But I think for the most part, everyone's kind of trying [ to get on the view ] that they missed the PFS endpoint. It was not statistically significant, but they've been very clear that they showed a numerical difference, and they're now waiting for OS. And I think some of the exact words have been, we showed an improvement on every biological endpoint, We looked at their body language seems to be positive at ASCO. I think as everyone remembers, when they did the Sky-2 presentation, they posted the statistical design and hiring assumptions for Sky-2, which is the only reason I think they would have done that is to show what they probably had used for Sky-1. So it feels like in a way, it's maybe like the best possible scenario for us where they didn't like hit the ball out of the park on Sky-1. And so we're not enough scenario people are like, God, like now, you really have to improve on TeraGo when you're behind. And so I think we have a chance to do better than them and to show that we can hit our endpoints in our study.

Okay. Understood. What -- and then, Terry, you mentioned this, the 4 combination registration trials that you're going to be starting. So maybe just walk through each of those. And then again, how they compare to the patient population that Merck sorry, that Roche enrolled in a population that Merck is enrolling. And any key kind of differences between how you guys are approaching...

Why don't you want to comment on the 4 trials?

Yes. So there are 4 Phase III studies. So 3 are now technically up and running, one will be initiated by year-end. What's interesting about these 4 Phase III studies from our perspective is that we're only operationalizing 2 of those studies. So that helps us tremendously from a resource and capital perspective. So the 2 studies that we will be operationalizing is 1 AR-10, -- so that's a study that looks very similar to Sky-1. So that is in the first line in PD-L1 high patient population. It also looks just like ARC-7, -- so that study has been up and running now for about a year. The second study that we'll be operationalizing is our first Phase III study in the GI malignancy. We haven't disclosed the exact setting yet, but probably we’ll over the coming months. And like I said, we expect that study to be up and running by the end of the year. This is a setting where we think we can be first to market is. There's no other Phase III studies going on today with the TIGIT antibody in this setting. The other 2 studies that we are now operationalizing is first STAR 121 - so this is a study that's essentially building on KEYNOTE-189 and Gilead is operationalizing. So it is looking at TIGIT plus PD-1 plus chemo versus PD-1 plus chemo. Interesting here, the active comparator will be pembro plus chemo. So we're using the actual standard of care. So that will help from a comparison standpoint. And then there'll also be a third arm, which will be a small arm, but will [ Zim plus chemo ]. So that will help address any contribution of component questions and all is another data point that we'll have in addition to Arc-7 that shows that our map looks just like pembro or other PD-1 antibodies. Right now, that feels like a race between us and Merck, Roche did just convert their Phase II study in that same patient population, so first-line lung all-comers to a Phase III, a lot of people, I think, picked up on last week. So they're probably a little bit ahead of us. But given that they're using atezo is their backbone or we're using PD-1, which we think is an advantage, we'll probably focus a little bit more on Merck as our primary competitor in that market. And they started their study about 2 to 3 months ahead of ours, so they're not connect with us. The other difference between us and Roche is that Roche is just looking at the non-squamous cell patient population, Us and Merck are looking at both the squamous cell and the non-squamous cell patient population, so a bigger patient population. And then the other thing that I would point out there, I'm covering a lot here, but that's different about us versus Merck is that Merck is using their co-formulation in their Phase III, which could end up being brilliant, but -- they've now locked themselves into a dose. So hopefully, for them, they've picked the right dose. So we think the fact that we're using individual agents, we think that we pick the right dose, but there's obviously a little bit more flexibility to change this thing over time. It could end up being an advantage for us over the longer term. And then the fourth study is one that's been operationalized by AstraZeneca. So that's looking at the Stage III non- squamous cell line patient population. Here, we're looking at patients with PD-1 greater than 1%. So we feel like we're enriching for the patient population that's most likely to derive a benefit versus Roche has a study in that same patient population they're looking at all-corners. Again, they're on top of atezo in that study. Our study is on top of durva and then we're going up against durva monotherapy. So right there, we're going right on top of the standard of care, and we're having the company that currently basically owns a state freight lung market that will be operationalizing that study. So we think that that's an advantage as well.

One comment I would build on. So if you look at that STAR 121, which is 100,000 patient population, and we think we're going right at KEYTRUDA, the heart of its market there. But it does point to different competitive advantages that we think we have when we think about Merck and we think about Genentech. So the key thing here is that in these doublets, you are a doublet, and we're the only company that in this stage of development, has the FC silent anti-TIGIT combined with robust anti-PD-1. And so I think when you compare it to what Atezo does in terms of ADAs and getting to infusion site reactions. We think that's something that we're already seeing an advantage on. Then when you think about T-Reg depletion, which has been demonstrated for the IgG1 wild-type antibodies, we think that leads to immune-associated AEs, things like rash, pruritus, perhaps even more with time. And that may even affect when you think about how -- what Merck decides to put in its bag, do they go a little lower to not get into that roam. So one of the things that we recognize as Gilead Arcus versus the number of companies that are protecting franchises with anti-PDX we're really just going after what's the best way to optimize the anti-TIGIT, and we feel really well positioned.

You mentioned the co-formulation side. Obviously, there's some -- if they don't pick the right dose, then that's an issue. But if they do pick the right dose, how do you think about kind of commercial implications of that? I mean, again, Merck's doing it likely because KEYTRUDA goes off patent and try to predict the tail. But as you think about kind of pricing dynamics, what are some of the considerations from a co-formulation?

Yes. So we think having individual agents gives us more flexibility as far as pricing impacted us. So plan is right now to co-package and then also co-administer, -- so the individual vials, you mix it into one bag. And so you had those convenience advantages that you would have with the co-form. -- but it is individual agent, so we can also package DOM separately. And so if someone wanted to use Dom with pembro or CESA because that's what they have at their center or whatever it is, they'd be able to do that. And obviously, that gives us some creativity and flexibility on the pricing side as well. Stepping back, the reason we got to the tow packaging and tow admin is we actually did a lot of market research and talked to clinicians and payers. What we heard a lot and clear from clinicians as they prefer individual agents. They like whether they need it or not. I think they like feeling like they have the flexibility and control of individual agents a patient has an AE, you're only having to withdraw one drug, not both drugs. So they definitely liked it. And then payers, they kind of see what co-formulations can really mean from a pricing strategy perspective. And so I think they like the fact that it's individual agents. And like I said, we probably have more flexibility because we can sell DOM separately and people can use it with a generic PD-1 once PD-1 start going off patent.

Yes. Do you think there would be an impetus to be able to use DOM separately on top of it, even if...

Yes, I mean we think... Our base case planning is definitely DOM plus , and that's what we're hearing from investigators sell just over the last year, I think the view on Zama probably changed. I think a year ago, we go out and talk to people, and we even saw this early days on our X7, like we're so comfortable with pembro now, like the thought of using another PD-1. It feels like that has shifted a lot. And I don't know if it's because we now have more data on them that we can share or people just are starting to appreciate more and more PD-1s a PD-1 or PD-1 but people seem very, very comfortable with them. So definitely, our base case assumption is that people would just use Dom plus together. And we would market them, much like Bristol markets, nivo and enter LAG-3 almost as one product.

Okay. Understood. -- a before we go to the adenosine programs, just on the HIF side, you touched on some of the differentiation versus Merck's program. Anything you can do on a clinical trial design side to maybe differentiate or maybe is there still a faster path to market here? How are you thinking about that side of it? And then when will we see your -- some of the data from the patient study that just started. I'm assuming probably second half can...

Yes. a lot of good questions in there... So first of all, stepping back on Bell at the HIF-2alpha inhibitor approved today that Merck cells. It is only approved today for VHL. I think people forget that. I think people, for some reason, assume it's already approved for clear cell RCC. It is only MHL associated cancers. And the big opportunity for HIF-2 inhibitors is clear cell RCC. They are expected to have their first Phase III data in 2024 time frame. So we're obviously still going to be behind them. But I don't think the amount of time that we're behind them is as much as people might think on the surface. As far as our development plan, the first thing I want to point out is we're just starting to Phase I, but what's interesting and different about our Phase I is because we did the healthy volunteer work, we'll be able to start at a relatively high dose in our Phase I in patients. So we'll be starting at 25 mg -- we will then dose escalate to 50 mg to 100 mg. So it could be a relatively quick dose escalation. And that 25 mg, we believe, is going to be a pharmacologically active dose. It's probably not that different than where belzutifan is today from a drug level perspective. We are enrolling all-comers in that study, although we're going to try to enrich for clear cell RCC. My guess is given the mechanism, we should get a lot of clear cell RCC patients in the study. And so we could get somewhat of an early read and early signal on HIF-2 alpha activity in that setting. But going forward, our focus is really going to be on evaluating the molecule in combination with other agents. So the first thing we'll probably do is combine your HIF 2 alpha inhibitor with a TKI. So there'll be more on that later in the year. And then we'll also combine -- I'm sorry, and then on top of PD-1. So it would be a [ 3 agent cabo mix ] like Merck is doing. And then we're also looking at possibilities to do like HIF 2 alpha TKI, plus zim plus dom, plus zim plus etruma, -- so there's some more novel combinations that we're thinking about as well. And then we're also starting to think about tumor types outside of RCC. So HCC is one tumor type our company has presented some interesting preclinical data on. We agreed that there could be an opportunity there. lungs, another area where there's some interest of exploring HIF-2 alpha in relapsed/refractory small cell lung. So there'll be a lot to do there.

The one comment I would make for those who are less familiar with this field, the dose that Merck uses 120 milligrams isn't really selected based on some sort of biological rationale. They have a PK saturation issue such that if they go to higher doses, they don't get higher exposures. And so what we've already been able to show in our healthy volunteer study is if you were to kind of categorize that 120-milligram dose is a unit of activity and think about the horsepower that we're getting our 100-milligram dose, we basically will be delivering to and probably closer to 3x that activity. And from the data that they've already shown in RCC, you see very promising results, but you see most patients are seeing some sort of tumor reduction and maybe a 26% response rate, but there's very clearly room for upside [indiscernible].

And what’s given you're starting at an active dose, is it possible we could see some data first half of next year? Or is that the stretch...

That's probably a little bit of stretch yes, we probably wouldn't want to guide... First...

Okay. Makes sense. And then I guess how -- so this program though Gilead would have an opt-in as well. It sounded like based on your initial comments. Okay.

They’ll have an opt-in to everything we do for the next we're 2 years in the collaboration for the year.

And then is it -- is the window -- is it based on proof-of-concept data. So it's triggered by the Phase Ib study or is it a healthy volunteer study?

For every molecule, it's a little bit different. It's definitely not a healthy volunteer study -- so it's kind of loosely defined as 25 to 30 patients worth of data, and that is the end date at which they can exercise their option. So they can exercise it today if they wanted, but that is what triggers the clock ticking on the end of their option, right? And then after that, I'll write [indiscernible].

Yes. Okay. Makes sense. Maybe just in the last couple of minutes here on the adenosine side. You have ARC-6, which is in prostate and then Arc-9 in CRC. And so maybe just remind us the next cuts of data. Like when are we going to see updates from those 2 programs?

Sure for Arc-6 and ARC-9 we've said that we'll have data in-house before year-end, pretty close to your end, and then we will be presenting data first half of next year.

And then how much more data for ARC-6 specifically versus what you guys said at ASCO 2021 I mean is this much more... Much more.

Much more. Yes. So ARC-6 was just basically the run-in almost to the randomized portion, which is the data we'll have in-house by the end of the year. So that was on about 20 patients, this next data set that we're waiting for. We have not seen it is randomized study. So it's looking at etruma plus Zim plus docetaxel versus docetaxel alone. I think it's something like 70 patients total for getting the exact but it's a big number as well. And we'll have PFS data, so not just our data. And then ARC-9 is very similar. So it's randomized data. That one is even bigger. So there's 2 different cohorts. There's a second line cohort in a third-line cohort. It's the third line cohort data that we would have before year-end, and that would be about 100 patient data set.

Okay. Okay. Great. Well, I think we're up against time. But thank you so much. Really appreciate it. Terry and Jen. Thanks again, and Best of Luck.

Thank you. Thanks, everybody. Appreciate it.