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

Okay. Welcome back to the 44th Annual J.P. Morgan Healthcare Conference. My name is Matt Bannon. I'm a banker here at JPM. I'm very pleased to be introducing our next presenting company of the day, Arcus Biosciences. And on behalf of Arcus, we have the CEO, Terry Rosen. [Operator Instructions]. So without further ado, Terry?

Thanks. So good afternoon, everybody. Many of you are probably very familiar with Arcus and followed us for a long time. But hopefully, there are some new people. So what we thought we would do is start with a very brief overview of the company. Arcus was founded about 10 years ago with basically a blank piece of paper with a notion of building an extraordinary small molecule group, great chemistry, medicinal chemistry capabilities. And as we sit here today, 10 years in, we have two late-stage oncology programs and an emerging immunology portfolio as well. So what we'll do today is spend it roughly half on each of those two topics. We'll talk about those late-stage Phase III oncology programs and then the emerging immunology programs. One thing that those of you who followed us probably realize, we've had a history of running a lot of clinical trials and in fact, have been able to run a lot of late-stage clinical trials, large ones as well. And in parallel, maintain a very aggressive discovery research group, I think is somewhat unusual in this space. And we've been able to do that by leveraging partnerships. This is a very purposeful well-crafted strategy. Because of that, we are actually very well capitalized. We have $1 billion now. That $1 billion takes us into the second half of 2028, and the reason I emphasize the 2028 is, because that gets us comfortably on the other side of our initial Phase III readouts as well as proof of concept for some of the early immunology programs I'm going to talk about today. This summarizes our current portfolio of molecules and programs. And I think the important thing to take away from here is these are all high-quality molecules. Basically, these are homegrown. We believe generally best-of-class. And I think those of you who've been in the weeds on, for example, our Casdatifan or Quemli program would say that, that discovery group that we put together really does have power and does produce best-in-class molecules, and the reason we emphasize that is because we optimize until we have a molecule that we believe has the profile that we want to have. Our most exciting program, our highest valued program is Casdatifan. So many of you are probably here to hear about that here our latest on that program. So why is that? First of all, the target of Casdatifan, HIF-2 has been extremely well validated. It's basically completely de-risked biologically, clinically and commercially. Validated by what? By Merck's belzutifan. Belzutifan is currently selling at a run rate of about $800 million a year, and that's only in late-line setting. So that's the tip of the iceberg for the opportunity for this mechanism. Secondly, we've got a best-in-class molecule unambiguously. And that characterization comes from 120 patients. The 120 patients, I'll remind you, this is single-agent activity in a very late-line setting. Also, this is just a two-horse race. So for the reason I was talking about before, Arcus tends to play in space where you're looking at targets that are notoriously difficult to drug, not impossible to drug, but difficult. So one of the consequences of this is you tend to have less competition. You don't have as many entrants. So basically, the competition here is going to end up being us and Merck. And probably the most important aspect of the value here is that Casdatifan is wholly owned by Arcus. So why is that important? Between that full ownership, that exclusive ownership and the data we have, it's totally transformed the company and give us enormous strategic optionality going forward. This slide represents the value proposition for Casdatifan. Clearly, as I was talking about, there's huge opportunity here. The key point to take away is there's extraordinary differentiation between Casdatifan and Belzutifan. And this value proposition is based upon data. And so data is probably the bedrock for us of anything where we would like that value to be derived. So let me start on the right-hand side of this slide. HIF-2 is the first innovation in RCC in decades. In fact, it's certain that HIF-2 is going to become the backbone of any therapy in kidney cancer. And in Arcus with what we've done to-date, we're looking to establish Casdatifan as the, and I'll say the in all caps, the Standard of Care in the setting. So let me, before summarize this clearly has a large commercial opportunity and may not be fully appreciated, I say a little bit more about that, but it's a $5 billion opportunity. The left-hand side summarizes those key data that I was discussing. And again, these are from 120 patients mono-therapy, single-agent activity in late-line patient population. So the bottom panel actually looks at the activity in humans against the key biomarker for HIF-2 inhibition, and that's the suppression of erythropoietin production. So just with your eyes, looking the lower curve is Casdatifan and the upper curve is Belzutifan, and you can see there's a huge difference. And what does this say? So first of all, you see the ability of casdatifan it shows a greater deeper suppression of that production, but what's really profound is the durability of that suppression, so somewhat night and day. So that's the scientific smoking gun for the difference between the two molecules. But of course, the most important manifestation of that is illustrated in the upper curve, and that's looking at the median PFS in that late-line setting for those 120 patients, and what you see is that's over 12 months for casdatifan, and that compares to about 5.6 months for the same setting for belzutifan. So very, very clear differentiation. Now what's interesting is not only does casdatifan look much better than belzutifan, but in fact, if you compare casdatifan to TKI and TKI is important because TKI is a current backbone in the treatment of clear cell RCC. Casdatifan is basically as good or better, and I think better is really more of the case, even independent of line of therapy. So if you look at the late-line Casdatifan data, which is really unprecedented in such a heavily pretreated patient population, you can see even if you compare to an early line TKI, the molecule is better. And the reason I'm emphasizing that, when I come back and talk about our development strategy, this is one key element that's important to grasp. So let me turn to the development of Casdatifan. We have a two-pronged strategy. This summarizes our ongoing Phase III program called PEAK-1. PEAK-1 is our fast-to-market strategy. PEAK-1 is combining Casdatifan with the standard of care TKI in this setting, Cabozantinib. This study should enroll quickly. Generally, a study like this will take about 18 months to enroll, which is pretty good. Also, the approvable readout here is PFS. So clearly, that tightens things up as well. But also this program has a lot of tailwinds in terms of that enrollment. So the first is that every single patient is going to get standard of care. Because it's a 2:1 randomization, you've got a higher probability of getting standard of care plus a relatively benign from a safety standpoint, second compound that's been shown to give additional efficacy, and third and probably most importantly, because there's been such a dearth of innovation in this field, basically, your investigators all know about HIF-2 inhibition. They all know about casdatifan. They want to put patients in the study. It's a really good opportunity for patients. So that's the first part of our strategy, fast to market. This one, I'm going to take a little bit more time on because it's really important. This is our strategy for moving into the front line. And this is something where we actually feel we can own the entire frontline. And so that's why I want -- this is an important thing we want to emphasize in 2026 because we're going to show our strategy and also how we're implementing. So the likely Merck regimen that's being developed here is lenva, belzutifan and KEYTRUDA. So it's TKI-containing. At Arcus, we have an opportunity, and I'll get to why because of the properties of the molecule to go after a TKI-sparing regimen. Now why is that important? TKIs bring benefit, but they come with severe side effects and hence, have a major effect on quality of life. In fact, patients, physicians have been begging for TKI-sparing regimen. So this isn't some Arcus narrative, we're feeding to where the field wants to go. So if you look, I want to introduce the concept of primary progression. For those of you who live in this field, you know what that means. But what I want to emphasize what primary progression is, is when a patient is treated with a therapy and they just blow right through that therapy. They progress before they even get to the first scan. And that's devastating for the patient, it's devastating for the physician. So the reason TKIs are used is they actually minimize the rate of primary progression. So with that baggage, that's the benefit they bring. And a way to think about a TKI, if you're not very familiar with them, it's sort of like chemo. It brings a benefit, but it's not something you really want to be taking if there's an alternative. And HIF-2 inhibition offers the possibility to actually drive the TKI to a much later line of therapy. And given the durability that we've been seeing with HIF-2 inhibition, you can imagine spending years before you ever have to take that TKI. So now looking at that left-hand panel, what we've done is we've summarized the rate of primary progression for every cohort where we've investigated casdatifan, including those that are ongoing. You're actually seeing real-time data, in some cases, even Spotfire data. And what you can see is that, that rate of primary progression is quite low. And what I would even highlight, especially because it's the most important combination in this arm -- in this panel is that Casdatifan plus Zim, that's Casdatifan plus anti-PD-1. And even that shows a low rate of primary progression. So the idea, and this comes back to where I was showing you that Casdatifan looks better than TKI is that you can replace TKI in the front line with Casdatifan and control that rate of primary progression. The issue for Belzutifan in its monotherapy approval study late line, it had a 34% rate of primary progression. So what we have here is an opportunity to transform the field that doesn't bring any additional riskiness. It's simply inherent in the profile of the molecule. So a huge differentiation. What I show on the right-hand side is now the execution plan for this. So we have a number of cohorts that are running, a number that we will be starting. That's basically a bake-off as to what that frontline combination will be. The most commonly used regimen in the frontline right now is ipi/nivo. The thing with ipi/nivo is, it has a relatively high rate of primary progression. So it's a perfect match for Casdatifan. So out of these regimens, it is a bake-off. But if I had to pick today, which one would be of focus, it's anti-PD-1, anti-CTLA-4 plus casdatifan. So the other piece about ARC-20 that I would emphasize is that it's extremely efficient platform study. From -- I will give you an example, when we generate data here, we can go very quickly from data, to registrational study. And in the case of PEAK-1, the first registrational study, it took us about a year to go from starting the Cas plus Cabo cohort here to the Cas plus cabo registrational trial. So let me summarize the Casdatifan program before I move on to say we've got our front -- our first fast-to-market strategy, PEAK-1 is enrolling gangbusters already. Our intent is to enroll it by the end of this year. We've got our strategy to get to the frontline Phase III. Our plan is to execute that such that we can start that study by the end of 2026. This gets to our other Phase III oncology study. This is looking at our small molecule CD73 inhibitor in frontline all-comer pancreatic cancer. We showed in early data, that we had a median OS in this setting, looking at quemli on top of the standard of care, which is gem-Abraxane of just about 16 months. If you compare to gem-Abraxane alone, which is the standard of care, that ranges anywhere from about 9 to 11 months historically. But in addition to that, we did an analysis using a synthetic control arm that was conducted in a blinded, very rigorous fashion and showed about 6 months improvement for the combination versus the standard of care alone. So this actually, as you might have expected, generated enormous enthusiasm in the investigator community and the corresponding registrational trial, PRISM-1 enrolled fully in 9 months. So that was enrolled as of September. We expect to readout from that in the first half of 2027. Obviously, this represents the first transformative opportunity in this all-comer frontline patient population in decades. So this could be a $4 billion-plus commercial opportunity. What I want to turn now is transition to our immunology programs. So our strategy here is pretty simple. What we focused on, is settings where the target has been validated clinically and generally -- commercially as well by huge markets through biologicals. Nonetheless, with those biologicals, they may have limitations and they've been difficult to approach for the reasons I talked about with small molecules, but this fits perfectly into our space. So we're going after these highly validated targets, huge commercial opportunities playing to our strength in small molecule drug discovery. What I'm going to focus on today are our first two entrants into the field, an X2 antagonist and a selective TNF receptor 1 inhibitor. So this gets at the X2 antagonist. It's to treat atopic skin diseases. There's one molecule in the clinic, one competitive molecule that showed some interesting proof-of-concept. We actually believe, like oftentimes the case, the first molecule rushed into the clinic may not have optimal properties. We have in hand a molecule that we think has both enhanced potency, but especially PK properties that will enable us to cover the target clinically, at dramatically lower exposures. We plan to introduce this molecule into the clinic this year. And given the proof-of-concept for this type of setting compared to a lot of the oncology settings is so quick. We actually think that we could get to proof-of-concept by the end of 2026, if not that early into 2027. Now TNF antibodies are well known to everybody, huge commercial success, huge therapeutic success. And what's interesting, this fits exactly the type of paradigm that I was describing where you have this incredibly successful drug, but where there are limitations. So what's known intrinsically with the antibodies is they block both TNF receptor 1 and TNF receptor 2. Now the unfortunate thing is that blockade of TNF receptor 2 signaling, can actually lead to -- it's pro-inflammatory. So you can get this paradoxical inflammation, for example, Psoriasis. So the notion had been perhaps you could get a small molecule that selectively inhibited TNF receptor 1. Well, now that's not like a hypothetical, we and others have done that. As a matter of fact, there's one molecule in the clinic. Again, we believe it doesn't have optimal properties. We have a molecule that has enhanced potency and PK. And this is a program that we expect to enter the clinic by the end of 2026 or early 2027. I want to elevate a second and just touch on the commercial opportunity and the huge needs in this area. Casdatifan in frontline, second-line kidney cancer, it's underappreciated, but that's a $5 billion market opportunity, and we'll be talking more about that as the year goes along. But the reason it's underappreciated is because it's not driven only by patient numbers, it's durability of treatment. These patients are going to be in HIF-2 inhibitors for years. Even in our late-line monotherapy study, we have patients that have been on study for over 2 years. Obviously, the pancreatic area, huge opportunity, as I just described. And these immunology programs are all playing in the multibillion-dollar, even double-digit billion dollar opportunities. Also, there they have a nice advantage of early proof-of-concept in terms of tracking progress. So I'm going to finish by looking at the milestones over the coming foreseeable future. We've broken this into 2 slides for a reason that, A, there's a lot of information and, B, they kind of have a little bit different message in each case. So 2026 is going to be a year of continued Casdatifan data. Those data are going to do two things. They're going to further de-risk our PEAK-1 study that's already enrolling gangbusters, and they're going to crystallize the strategy for that frontline Phase III study that we intend to start by the end of this year. Secondarily, we're going to get our MRGPRX2 antagonist into the clinic. So in 2026, we'll have at least three data readouts with the first coming in February, next month, we'll be talking more about casdatifan, and you'll see a flow of information throughout this year as the program continues to advance. As you think about longer term, Arcus, it was transformational for us having the full rights to Casdatifan. It really just changed everything for the company. Having that wholly owned combined with the data, it was -- turned us into a new company. As I mentioned, that's because it just changed everything with respect to our strategic optionality. As we get through the data of this year and execute, next year, once again, I think it's fair to say we'll be a completely different company. When we're talking here next year, it will be yet another new company that you're looking at. So we'll be on the heels of two Phase III readouts in the oncology programs. We have the two immunology programs in the clinic with either proof of concept or approaching proof of concept. What I'd like to emphasize is that we've got this diverse portfolio of programs. We're excited about them. But all that I've just described is based upon execution. We control our own destiny. This isn't nothing that's based upon hope. And the final piece with respect to that is, we're well capitalized. So we control our own destiny, not only in terms of what we have to do, but we have the capital to do it. As I mentioned earlier, we're well on the other side with our cash position to the readouts for all of this. So with that, I'll stop. I'll thank you all for joining today, and appreciate those of you who've been supporting us some as long as the full decade of our existence. So thank you very much.

Okay. Any questions from the audience? I guess to kick things off, Terry. So maybe just higher level, historically, you guys have been focused on oncology. Can you talk a bit more about the pivot to I&I? Would you call it the pivot? Or is it more just expansion of focus?

Yes. So I would actually not call it a pivot, I'd call it a very natural evolution for us. So from the very first days of Arcus, we invested heavily in immunology, biology because a lot of our focus was on immuno-oncology. So as you know, that involves immunology biology, even though it's a clinical endpoint. So it's very natural for us. We have a very strong immunology group that goes along with our chemistry group. And so we've been working for some time. And one of the things I didn't mention this portfolio that we have is very substantial. I argue that it's as good as many larger companies, but we tend not to talk about things when they're glint in our eye, but we like to have tangible matter. So now as these programs are starting to enter the clinic, we are talking about them, but it was a perfect match of having that immunology-biology and having the small molecule expertise and be able to use these biologicals, which are just huge markets, huge opportunities, but still represent need and be able to approach those with oral small molecule drugs.

Got it. Another historical feature has been the Gilead collaboration, very involved with them. So going forward, now that the focus is on your wholly owned programs, how do you view partnerships going forward?

Yes. So as I mentioned in the early days of Arcus, our strategy was to leverage partnerships that always kind of gave us capital and shared risk. As we've become more independent, have more strategic optionality, what I would say, our focus from a collaboration standpoint, and you can expect to see us do more of this now, are more on things that look like the clinical collaborations that can actually continue to add value to what we're working on. So for example, when you think about casdatifan, we really have pretty much a monopoly on that HIF-2 inhibition. Other than Merck, we're the only major HIF-2 inhibitor out there. So you can imagine other mechanisms, for example, that would make sense to combine with casdatifan. And those are the types of collaborations that we're more likely to engage in. So things that will continue to synergize from a value creation around the programs that we have internally.

Got it. Question right here.

So the question is more about your TNF, the small molecule TNFR1. And how does it kind of differentiate from the current other antibody in oral peptide? Especially the potency of small molecule normally plays kind of less effective as other modality.

Yes. So we're very confident -- and this is something that Arcus has, I think, very powerful history. You can -- if you went right down the list of our -- all the small molecules we've developed that when -- if we feel like we need to cover a target 90% at trough, we optimize until we have a potency and PK profile that will do that. So we have strong confidence already that we have molecules that we will be able to do that.

Terry, you talked a bit about the strategy in frontline for Casdatifan in RCC. You talked about the concept of primary progression. Is that a view that's shared by the field? And you had some data, so it's not just a view, but is that something that's shared and understood by the field? Or is there going to need to be some education there?

The field knows that. So I think it's -- we're educating investors as we try to explain more of the strategy and the plan, but that's a very key element. And if you look at the -- this particular field, that's why you see TKI usage in the frontline because, again, to have a patient progress before they even get to first scan is a devastating situation. It's just -- it's the last thing that anybody wants to happen. And so that's why that's such a profound opportunity. You've had TKIs living in that front line for so long, and interestingly enough, ipi/nivo has a relatively high rate of primary progression. So ipi/nivo is the most commonly used regimen in the frontline. And that's because it gives the most cures. Ipi/nivo has the best OS, interestingly enough, has a relatively short PFS. So, on the other hand, has a rate of primary progression that's probably 20% to 25%. And so in patients that have a very rapidly progressing tumor, for example, that's where it doesn't get used. So the idea is when you can bring in a HIF-2 inhibitor, to combine a TKI with ipi/nivo would just be far too toxic. So you bring in something with a benign safety profile that addresses the primary progression, that would be a huge deal. And one of the reasons I highlighted the Zim-Cas data is that foreshadows very well that even just with anti-PD-1 alone, we have a very low rate of primary progression. So the -- it's a very obvious situation to bring in something that has orthogonal biology, orthogonal AEs and combine it with a regimen that's CTLA-4, anti-PD-1, that could be a huge, huge opportunity for the field. But the frontline has TKIs so frequently because of that. And everybody, the investigators, if you talk to investigators, there are some who would tell you, you shouldn't even be developing a TKI in the front line, knowing that you have the opportunity with a HIF-2 inhibitor and the idea is drive that TKI later. Patients do not want to go on TKIs other than the fact that they -- like just like it's almost like the same thought if someone told you're going to chemotherapy. They tend to think of a HIF-2 inhibitor almost as like a walk in the park because the only AEs that you really see from HIF-2 inhibition are on target. And the most common one is anemia, and it's very well managed. In this field, it's very well understood, especially since it's kidney cancer. So even a lot of patients presenting have some anemia. So it's really a great mechanism with minimal effect on quality of life.

Got it. Is there any potential for Casdatifan outside of RCC? So you've got it well covered there, but anything beyond kidney cancer?

Yes. So strategically, we're going to make sure to blanket clear cell RCC. So for those of you who may not be aware of the biology, probably 85% to 90-plus percent of clear cell RCC has HIF-2 as a driver. So that's why when you look at a waterfall plot from one of our studies, you see like basically just the vast majority of patients getting tumor reduction. With that said, there are other settings where there's evidence that would make sense for a HIF-2 inhibitor. The most obvious one is HCC, liver cancer. So that's a place we may go. But what I want to emphasize, our focus right now is making sure that every single patient in their journey in clear cell RCC does get a HIF-2 inhibitor. But we do believe that Casdatifan is a drug. And so we will broaden with time. But in the near term, we're very focused on covering the clear cell RCC.

Got it. Questions? So I have to ask, I know there was the big Phase III trial, your TIGIT program. There's an update recently. Can you just summarize that for us? And how does that change -- how does the outcome change, your cash needs going forward?

Yes. So what you're referring to, is our readout for STAR-221, which was a Phase III study in GI cancer, our anti-TIGIT plus our anti-PD-1. Basically, we saw no benefit versus anti-PD-1, and this is with chemo alone. So I never like to pretend that I don't want to make lemonade out of a lemon, so very disappointing and somewhat inexplicable based upon earlier data. Nonetheless, the consequence of that is that it was a very clean study. So the data were clean, the arms was well balanced. All the patient data were captured. So we were able to say, stop the study. So instead of -- we were fortunate that we didn't have to go to a final analysis. This was an interim analysis. And so actually, our cash needs ironically, are extended. So that's why we're currently -- our cash extends into the second half of 2028. On top of that, we have another study running in lung. We will be doing an analysis of that in this quarter. And if we can stop that, we're not good money after bad. We're data-driven, and we'll stop that and may further extend our cash runway. What I'd like to emphasize, our portfolio -- we're a portfolio company. We have an internal discovery group. HIF-2 wasn't even around when we started that program. And so because of that, I think as a company, we didn't suffer much from that happening, disappointing for us, disappointing for patients. But operationally, if anything, it just extended our runway, enabled us to make sure that we have even more buffer in terms of our readouts and investment in Casdatifan and know that we have comfort zone in covering these immunology programs, which have huge opportunity. So while unfortunate, it's actually in principles to our benefit. It wasn't like we were dependent upon that to go out and raise money after you got halfway here stopping at the next gas station. So we feel pretty good about the overall circumstances and our cash situation is great.

Got one final question. Any from the audience? So just to close on a higher level, what do you think differentiates Arcus from other biotechs? And what, if anything, do you think The Street doesn't fully understand or appreciate about your company?

Great. So I'll answer the second one first because I'll be succinct, which isn't my strength. The market for Casdatifan is still something that it's not as recognized, how large that is. And the reason is because of that durability that I was talking about that really, you're talking about many years. You could imagine a frontline patient on study 3, 4, 5 years. So when we talk about that $5 billion market, I think that will become more recognized and it's very compelling and very -- it's not -- it's even fairly conservative. In terms of the differentiation, what I would say is if you look in the era of 2026, it comes back to what I was discussing at the beginning, maybe a little bit more implicity. The fact that we've run all these late-stage trials, we're able -- we're in huge markets. We're competing with the Mercks of the world, the Genentechs of the world, AstraZeneca of the world. But at the same time, we have a very aggressive discovery portfolio. So casdatifan wasn't a glint in anybody's eyes when we were already moving towards late-stage programs, but now it's the core of what's going to enable us to become a long-term company. So having that discovery group, particularly with the small molecule expertise that is able to continuously replenish itself and have a portfolio that when we're successful, has new molecules coming behind it, I think in the current era is a highly, highly differentiated aspect. And I think it's probably the most important from an operational standpoint in terms of building a company and having a portfolio of molecules and having one thing after another so that you're not in this binary card flip situation, is probably our biggest differentiator.

If no further questions, thanks so much, Terry.

Thank you, everybody. Appreciate it.