Arrowhead Pharmaceuticals, Inc. (ARWR) Earnings Call Transcript & Summary

All right. So thanks, everyone, for joining us this morning at the Goldman Sachs Global Healthcare Conference. Really pleased to be joined by the team at Arrowhead Pharmaceuticals, giving us an update on where things are, where things are headed for their RNAi platform.

So let's start at the beginning of that level. How should we think about Arrowhead's RNAi approach and how it's differentiated versus peers in the landscape?

Sure. So thanks for having us, Madhu, and thanks to everybody, the Goldman team. So our Arrowhead's RNAi platform, we call it TRiM or targeted RNAi molecules. And the idea behind TRiM is that these are simple conjugates. So they're essentially regardless of if we're going to liver tissue or outside the liver. They're essentially just targeting ligand, linker and then stabilize double-stranded RNA. There are certain areas or certain tissue types where we'll need to get better circulation times, and so we have PK-enhancing features. But the basic idea is the same. We want to keep these structures simple. And so I know that other folks who followed RNAi know GalNAc. And so we and Alnylam and others in the field for liver delivery, we all tend to use basically the same structures. There's differences with respect to linker and certainly differences with respect to sequence and chemical modifications. But we all use the same basic way to get into hepatocytes. Now our differentiator, we feel, is that we have been committed to bringing RNAi outside the liver for a period of more than a decade. It's taken a lot of work and a lot of trial and error, and we have learned a lot over the last handful of years. Now others in the field have felt differently. I would say as recently as just a few years ago, there's other RNAi folks that have said we can build a company just on liver targets. Now we feel like we were more forward-looking on that. And so we recently had a Pulmonary R&D Day in New York a few weeks back to talk about our emerging platform and pipeline of therapeutics that target pulmonary diseases. And that we think potentially could be the second engine of growth for us as a company. Over the last 5 years or so, we've been really aggressive in expanding our pipeline of liver-directed RNAi therapeutics. And over the next 3 to 5 years, we hope to be equally as aggressive in pulmonary and then tissue types 3, 4 and 5. And so that is a big differentiator for us. Second, we always want to be the first and/or the best, ideally both in any target versus RNAi competitors. And if you look down our pipeline, we have been consistently that. We think we're best in class, but we also want to be first-in-class as well. And then last, we want to maintain a really good healthy mix in our pipeline of both wholly-owned versus partnered programs. And that's a moving target, what that healthy mix is. But we think that partnerships help expand the reach of our technology. They bring in capital so that we don't have to consistently go out and raise capital in the equity markets, which obviously with today's biotech market is not a very attractive thing. And we've been good at doing that. The last time we've actually raised equity capital was in December of 2019. And so we feel like we are good stewards of shareholder capital, and we use the lowest cost of capital forms of that. So think that's Arrowhead in a nutshell.

Vince, it's very helpful. So why don't you start with the lead clinical programs. I think we'll begin with ARO-AAT for alpha-1 antitrypsin ZZ liver disease. So can you start with walking through the rationale for targeting AAT by RNAi once liver fibrosis has emerged?

Sure. I'll ask Javier San Martin, our Chief Medical Officer, to take that.

Yes, that's a great question. But we're not only targeting people that have cirrhosis, but of course, for cystic fibrosis. And this is how this works. The drug does one very specific thing, which is knockdown the ZZ of the AAT protein. We don't have the ZZ protein anymore. The liver is able to get rid of whatever was accumulated already there and we demonstrate that with biopsies, looking at the quantification in an assay and histological qualitative assessment, looking at past the globule burden or accumulation, size and so forth. So we saw that within even 6 months as the serum Z protein declined almost immediately within a couple of weeks, the liver is able to clear out that. That triggers an improvement in inflammation that we essentially saw in all patients and that was related or as a consequence, we have 7 and 12 patients on the 200 milligram dose that have a regression in fibrosis. So in this disease, and this is not the only one there is an insult that caused the sequence of event that end up in fibrosis and eventually cirrhosis or end-stage liver disease, and that is the mutant protein accumulation. So this is the liver that has the ability to heal itself to get rid of the protein. And by doing that, the insult that cause inflammation and eventually fibrosis is gone and the liver is able to remodel, recycle, regenerate and become healthy again. And we saw the histology, we saw that in the clinical like LFT measurements, so -- and they are precedent of this. If you look at Wilson's disease, it's the same thing. You get rid of the insult and the liver is able to heal itself, even hep C, maybe it takes longer, but there is good data that shows regression in even cirrhosis in the case of hep C. So I think this is about the liver being an organ and tissue that once you remove the insult has the ability to come back and become healthy again.

So kind of following up on that, to what extent you mentioned this kind of 6-month data where you see an effect on fibrosis. To what extent is that a function of, as you said, the liver healing itself is a function of liver turnover as compared to the liver healing itself as in an actual reversal of the Z globules forming as a kind of like equilibrium reversal. I think that those 2 kind of phenomena is an explanation for what's going on with RNAi against AAT.

Yes. So I will say what I think looking at the data and looking at our -- we have a very good paper and JCI is -- please, yes. Looking at all the preclinical work that we've done and you do see the sequence, you get rid of the protein and then it's the liver who remodel itself. So I think that's the sequence is -- because the treatment of the drug is one and you know it. So whatever happened downstream, I think it's the liver able to remodel and heal itself and that's how we kind of build this story in all regulatory documents, and it was very well received and said, Yes, this is a good example of removing the insult and allow the liver to improve. And it will be a good question to say, whether that also happen in people with cirrhosis or end-stage liver disease. And again, there are examples from other diseases that, that can happen.

Okay. So kind of following from that, can you walk us through a little more detail of the existing clinical data for ARO-AAT so far?

Sure. The full data of the Study 2002, which is the open-label Phase II study will be presented in about a week. We can have in London at EASL meeting and it will be published soon as well. So that's a study where we enrolled 16 patients, all of them had to have some level of fibrosis and less FEV1 at baseline open-label study in 3 different groups. One group received 200 milligrams every 3 months and have a biopsy at month 6. Another group received 200 milligrams and have a biopsy at month 12, so baseline and post baseline at month 12 and then 1 group received 100 milligrams and had a biopsy at 6 months, too, right? So what we saw and I would go to the sequence of it there. First of all, serum Z protein, which gives you an idea of the direct pharmacological effect, all 100% of patients regardless of the dose have 85% to 90% reduction that was achieved after the first dose within 2 or 3 weeks, remained steady throughout the duration of the study. And now we have people down to 2 years. And both doses were roughly similar, I think at least in the nadir and the magnitude of the decrease, perhaps the duration is longer with 200 milligrams. So first thing, we knock down the gene, inhibit the production of the protein that was the goal of therapy. The second component of the outcome is the histology data and the quantification of the Z protein in the liver. We saw 90% or 85% reduction in the Z protein in the liver. The correlation between serum and liver is very tight. So serum Z protein will be a good market for people to follow clinically not invasively. And so second, protein get rid of out of the liver, we measure that histologically with the burden of globules, past the globule. The results are identical to the quantitative. So either way you look at, you see a 70%, 80% reduction in the accumulation of the protein. The third component of the biopsy was inflammation assessment, 3 or 4 different ways: portal inflammation, interface hepatitis and essentially all patients having one or the other or more than one signal of improvement in inflammation. Coincidentally, when you think about inflammation a good number of these patients have elevation of ALT at baseline and almost all of them normalize within the first 4 to 6 months. So we now have all patients with normal ALT and AST and GGT. And finally, fibrosis. And 7 of the 12 patients that received 200 milligrams show an improve of at least 1 degree on the METAVIR fibrosis. And none of the 3 patients on the 100 milligrams, 3 patients that we have paired biopsies show a change in liver fibrosis. So you see the sequence of event, and I think that's what was very compelling when we present this data to the agency asking for breakthrough therapy designation that this is not just the fibrosis and you are seeing a very consistent sequence of the event that really follows the pathophysiology of the disease and reverse it. So that's with regard to efficacy and safety, there was 4 AEs none of them related, all people get back on track and no patient discontinued due to AEs. Pulmonary function test was a very important aspect of that, and we don't see any meaningful changes other than the noise of this specific assessment of spirometries. So safety is, again, this is why the FDA based on 8 patient's only granted breakthrough designation that, of course, enabled the path for accelerated approval and for a lot more interactions with them which we're going to have the next one very soon.

Okay. So given this existing Phase II 2002 data, can you walk us on the upcoming data from the Phase II SEQUOIA study? And really, what are the key clinical endpoints we should be looking at from this trial?

Yes. So SEQUOIA is our first placebo-controlled study. We're testing 3 different doses, 25 milligram, 100 and 200 milligrams, 42 patients were enrolled in this study. We -- all these patients have pair biopsies, and the last biopsy will be conducted this month. So this month will complete the core piece of the SEQUOIA study. Of course, we need to do a beta low. The histology needs to be read. Just to remind you, histology, we had 2 different pathologies, reading. And if there is a discrepancy then there is an adjudicator, so it will take some time plus we do -- plus the globule work in one place and the typical histology in another. So it will take a few couple of months, I would say, but we think in Q4 probably that data will be available.

Yes. And I think that typically, the way that we approach data releases like this is we like to do -- when we have enough data, we like to do a top line release to kind of give the punch line and then do a full data presentation at a medical medium.

Okay. Great. So kind of moving on to the kind of regulatory considerations for AAT. Obviously, all and your partner, Takeda, are interacting soon or have interacted recently with the FDA in the Phase III trial design. So what are the considerations for a Phase III trial potentially for ARO and AAT?

So I would say the key component of the -- in the Phase II discussions will be patient population, but I think that's very clear. It would be patient with baseline fibrosis, discussion about what's the level of pulmonary function that we both be comfortable with, duration of the study. The endpoint will be histology. It would be fibrosis the primary endpoint, but all these other biopsy-related endpoint will be a critical component. The sample size of the study and the careful pulmonary monitoring plan. That would be another key discussion. And then, of course, we're going to have a discussion about what the accelerated approval might look like. And whether that is a component of incorporated interim analysis time point, an agreement with them halfway through an end point. So whenever we get to this decision with the FDA and make public the study design, clinical trial.gov and so forth, hopefully, will have there an interim analysis that could be part of the accelerated approval with the full approval when the study is complete, fibrosis as an end point. And that's, I think, the plan we need to elaborate, discuss with the agency and hopefully agree upon and communicate.

Okay. Obviously, no one would expect you all to read the FDA's mind. But kind of like when you look at the existing data from 2002 in terms of like the time course of fibrosis improvement that you saw, where you saw FX in both 6 months and 12 months. And then in terms of trial side, like with the size of SEQUOIA that whatever it was, like do they create a reasonable balance right to think about kind of the effective duration a year to 2 years and then the effective size like maybe like 50 to 100 patients. It's kind of an effective balance to think about the sizing and duration of a Phase III trial?

Yes. I think I can say about duration and you are within the ballpark. And I think the discussion is how shorter we wanted to make it to get to the market earlier and then how longer it should be to maximize the chances of success in terms of allowing those livers to remodel, regenerate and improving fibrosis. So it will be -- the range that you gave is within what we're working on. And the sample size, I would say it's not going to be in the hundreds. So I might not be too far from what the initial SEQUOIA study was. It was initially 120. So it will be, I would say, from the clinical development perspective, a feasible study in a reasonable period of time in terms of the number of patients and the type of patients that we aim to enroll. So yes, I'm very optimistic about that.

Okay. Great. So then shifting gears over to the cardiometabolic franchise. So I mean like the elephant in the room in that space is kind of the peers who are out there right now, namely like Leqvio from Novartis? And how do you think they frame the opportunity for RNAi agents in the pipeline?

One, very excited about the inclisiran story because I think it will shift peoples mind from antibody therapeutics to RNAi in the cardiometabolic. It would be the first time people will see the benefit of much less frequent dose administration, less volume, less immunogenecity. So I think when I think about how that translates to us directly is ANGPTL3. We have an antibody that is weekly IV, very high doses, cost of good, whatever and then we have an RNAi that will be every 3 months, maybe every 4, maybe every 6. So I think the field of cardiology received the antibody approach a few years ago. And I think now they are shifting to a new technology that, I think, offered some benefit. And so I think it would be great to have the cardiology side to think about a new therapeutic modality that actually has so many benefits for elder population, for example, a lack of interaction with medication. Our drugs are in circulation of 48 hours. Antibodies in order to work has to be in circulation consistently. So I think it is easier it will make -- as this cardiovascular therapeutic field evolve and you have more tools to work with, make it easy, as easier as possible will be a key component, I think.

Okay. So kind of from that, can you walk through kind of the major catalysts coming in the near term from the Angiopoietin-like 3 program, the APOC3 program, means should be looking out for -- from those 2 kind of wholly owned programs?

Sure. So for ARO-ANG3 against ANGPTL3. So the Phase II study there is called ARCHES-2 that was fully enrolled earlier this year. The final study visit will be around the end of the year. So that will be ready to read out in the first half of next year. That's against mixed dyslipidemia. So patients have elevated LDL and persistently elevated triglycerides. For ARO-APOC3, we have 3 studies going on. The first is called SHASTA-2, which is for severe hypertriglyceridemia. So patients with trigs above 500. The second is called MUIR. That's also mixed dyslipidemia, same basic patient population is the ANGPTL3 study. And then the third study for APO is called PALISADE. And that's our first Phase III study against patients or enrolling patients with familial chylomicronemia syndrome or FCS. So the first 2 Phase IIs, we hope to accrue or fully enroll those shortly this year at some point. So those should read out also in 2023 and with FCS, we haven't yet given guidance on when we expect that to be fully enrolled. We're -- it's 72 patients total. So we think that we'll be able to enroll that in a reasonable period. It's a 12-month readout. Is that right?

12 months.

So you make your determination on when you think we'll fully enroll that and then fast forward 12 months from that and then we, hopefully, we'll have a data set to file after that.

A couple of more things. One is the ANG Phase II open-label study in homozygous familial hypercholesterolemia. We already enrolled patients in that study. It's open label. So we think that by the end of this year, we may have the initial take on the proof of concept for that. And if that proof of concept is what we expect, that will trigger another pattern like FCS, okay? It's a rare disease, if the drug approved. It's an antibody once a week, and we have an opportunity to really address that disease in a much more simple way. So that's exciting to that both programs, we have this short-term rare disease approach, long-term, very common population approach. It's a good combination.

So I want to unpack that a little bit. So thinking beyond HoFH for Angiopoietin-like 3 and FCS for APOC3, in these bigger populations, severe hypertriglyceridemia, mixed dyslipidemia. Like where do you think is the ultimate kind of value creation proposition? Does it have to really wait for a cardiovascular outcome study? And how are you thinking about kind of operationally initially performing in multiple cardiovascular outcome studies in that context?

Yes. So let's start with APOC3. There is a sequence of 3 different populations and hopefully indication: FCS, ultra-rare disease, severe hypertriglyceridemia, the goal of therapy is to prevent pancreatitis. That population is in the range of about 3 million to 4 million in the U.S. and similar in Europe. The market needs to be built and understood better because there is a drug approved for that indication. So when you have that situation, you got to work the path forward. But the regulatory path is very straightforward and very clear. The treatment effect in the Phase I study for APOC, we had about 45 patients with severe hypertriglyceridemia. We had 20 -- sorry 4 with FCS, confirmed FCS and the treatment effect is 100% of patients have an 80% to 90% reduction. So it's very consistent regardless of the baseline TG levels. Now from the severe hypertriglyceridemia, then you go to the cardiovascular outcome trial. We're very excited about APOC as a target. This whole concept of our residual risk beyond well-controlled LDL. We think that with APOC profile does, which is decrease triglycerides by about 70%, increased HDL by 50% to 80%. And we're doing a lot of work on the HDL biology because it's not about how much, but it's about how it looks like. How the APOC content of HDL is relevant with regard to the potential antioxidant and anti-inflammatory effects. So we're doing a lot of work on that to really add more evidence to the cardiovascular potential indication. But how many people are believed to have an accessory for cardiovascular disease due to hypertriglyceridemia and is in the range of 20%. So it's a large population. I think the sequence of ultrarare -- rare but not that rare and then common. It's an important and interesting even business commercial challenge to have. And I think we need to work that out.

Okay. And then for Angiopoietin-like 3?

I think it's similar if the HoFH looks good. I think it's important to do it now. In that indication we haven't decided whether we want to go to the intermediate indication, which is the heterozygous. And as you know, inclisiran does have that indication. But it's a couple of thousand patient clinical trials, even though it's not cardiovascular outcomes, they are still large studies. So that's an opportunity that based on the HoFH initial proof of concept, we may want to revisit.

Okay. Great. So maybe shifting outside of the liver because obviously, as you mentioned at the beginning, Vince, the idea of you guys are pursuing pulmonary programs. So can you walk through some of the key takeaways from your recent pulmonary R&D Day looking at both MUC5AC and RAGE as targets in the lung.

Sure. So I'll make a few points and then I'll turn it over to James. So our first-generation compound for pulmonary was ARO-ENaC against target for cystic fibrosis. And just to refresh everybody's memory back about a year ago, we had paused the clinical study because of some preclinical toxicity that we had in a RAP study. We have since done a whole lot of work to understand what was the cause of that and what we can do to mitigate that risk moving forward. And actually, let me turn that over to James because those are some pretty key learnings that have brought the platform to where they are today and what gives us confidence moving forward with RAGE, with MUC5AC and then our third program against MMP7 for IPF.

Sure. I think that's one of the key takeaways is the underlying cause of the findings in the ENaC or at the monkey tox studies that we spent a lot of work on that. And I think we were able to identify the cause and that being the overload of the pulmonary macrophages in both of those species and the tox studies and then also figure out a way around that. But specifically that we were able to reduce the dose level and reduce the dose frequency, but still achieve the same pharmacodynamic effect with both RAGE and MUC5AC. So I think that's a key takeaway from the tox standpoint that we had identified, and we think have a path forward for both RAGE and MUC5AC on the tox front. That was supported by the first-in-man enabling GLP tox studies that we did to get RAGE and MUC5AC up and off the ground, where the top dose in the tox study supporting both of those programs was the no adverse effect level. So we didn't have any adverse effects even at the highest dose. So that's supportive from the toxicology standpoint. And then I think the other 2 takeaways -- actually, the 3 takeaways we're really introducing those 3 programs as novel targets. MUC5AC is a novel target for muco-obstructive disease. There are no other modalities out there specifically targeting mucus expression or mucus secretion. And so this will be a novel approach to treat things like asthma or COPD or primary ciliary dyskinesia as a rare indication. So this should be really a novel new approach. Similarly with RAGE, no other drugs targeting RAGE for pulmonary indications, and this is really a target that sits upstream of many of the other asthma targets, the IL-33, IL-4, IL-5, IL-13 RAGE and sits upstream in the inflammatory cascade to all of those. And so inhibiting RAGE should have broad anti-inflammatory effects for both type 2 high and type 2 low asthmatics. And then a little bit further behind development-wise, but MMP7 is a novel target that looks very interesting for idiopathic pulmonary fibrosis. So in a nutshell, I mean, I think that's the pulmonary day the key takeaways.

Okay. So I think kind of the question we've certainly got from investors since the pulmonary R&D Day is really one of, when do you think you'll get to clinical proof of concept for any of these pulmonary indications? And I would say that, that's about the composite of like your ability to knock down target, like the ability that knockdown translates into clinical impact. So like those trials are, as I understand, underway. So like when do you kind of think you could expect to see kind of assessments of clinical function and clinical impact in kind of the disease pathology setting for either of these for MUC5AC or RAGE as kind of the lead indications on this front?

Yes, sure. So we should have biomarker data in the healthy volunteers end of this year, at least some of the initial biomarker data for both of those programs, MUC5AC and RAGE. And then I don't know if we've guided on that, it would be in the following year when we get into some patient population and be able to at least initially have biomarker data in the asthmatic populations. But I think in terms of approval endpoints, things like FEV1 or exacerbation, that's going to have to wait for later stage clinical studies.

Okay. So I'll stop with 2 final questions. First one is, how are you guys thinking about business development on the forward in terms of like developing future targets both in the liver and outside of the liver with external partners? And then secondly, the question we're asking everybody at this conference is, why should someone buy Arrowhead stock in the next 12 months?

So the first question on business development, I think that we will continue to have the same strategy as we have all along, which is business development is attractive to us for a couple of reasons I mentioned earlier. It allows us to expand the reach of the technology. It allows us to bring in external expertise in specific disease areas that we may or may not want to build out ourselves. And then lastly, it also brings in capital. So we don't need to use the equity capital markets extensively. And as far as cadence goes, this is, again, it's a moving target, and some years will be more, some will be less. But think of business development deals is potentially maybe 1 per year or so. We do like the structure of having either single-target deals or limited numbers of targets. We don't want to become a company that's basically a CRO, where we're creating drugs for other folks to commercialize and move forward. But again, we -- as a platform company with an expanding platform beyond the liver, and again, we talked about pulmonary, but there are multiple other tissue types that we're getting very good at. Each of those potentially can spawn 1 to 2 to 3 to 4 to 5 or more clinical candidates. And so that is -- that's a lot of resources that would be required in order to move those forward. So we'll have a lot of room to do more deals without becoming over partnered. So that's kind of our general strategy. As far as why anybody would buy Arrowhead today?

What's the reason to own in the next 12 months?

Sure. So the I'm talking to an audience of biotech investors. But I think that you guys are the best to make that assessment. But -- and I am certainly biased in this, but I feel like we are substantially undervalued based on external factors rather than internal failures for lack of a better word. Our stock price, and this is perhaps the way to look at it, but our stock price a year ago was about threefold or more where it is today. And we are only further along and further derisked with a larger pipeline and a more expanding platform. And so we feel like we are comparatively, there is no risk-free or low-risk development-stage biotech company. It doesn't exist. But comparatively, we feel like we are on the lower risk side of that. We have a good amount of upside opportunity with our wholly-owned programs as well as our 50-50 profit share with Takeda and AAT. And then we also have the ability to trigger a number of milestone payments from existing partnerships that extend our cash runway. And again, in an environment like today, cash, you want as long of a runway as possible because we don't want to be constrained with development. James and Javier, they want to be able to develop these drugs as quickly as they can for as broad of a patient population as possible. So we need to make sure that we are properly resourced. And in an environment like this today, all of these partnerships and access to additional capital with new business development deals, it makes us feel like we're in a pretty good position. And then, I guess, lastly, we do feel like we strike this good balance of potential for near-term catalysts in the pipeline that can move the stock price and then also an engine for long-term growth with pulmonary and then with additional tissue types in the future.

Excellent. Well, thanks, everyone, for joining us today. Thank you so much, team at Arrowhead Pharmaceuticals, for joining us this morning. Thanks, everybody.

Thank you.