Good day, ladies and gentlemen, and welcome to the Arbutus Biopharma 2016 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded. .

I would now like to introduce your host for today's conference, Adam Cutler, Senior Vice President of Corporate Affairs. Please go ahead. .

Good afternoon, and thank you for joining us as we provide a corporate update and report first quarter 2016 financial results for Arbutus Biopharma Corporation. As a reminder, we intend to hold conference calls when we have meaningful updates to discuss, but this won't necessarily always correspond with quarterly financial results. .

Speaking on today's call are Mark Murray, Arbutus' CEO; Mike Sofia, Chief Scientific Officer; and Bruce Cousins, CFO. Mark will provide a corporate update. Mike will review highlights of recently presented data, and Bruce will review the company's first quarter 2016 financials and future outlook.

Following our prepared remarks, there will be a Q&A session. .

I'd like to remind everyone that certain statements made on today's call will be forward-looking and constitute forward-looking statements or forward-looking information under applicable securities laws.

Forward-looking statements and information discussed in this conference call, include, but are not limited to, building an HBV solutions company, realizing the value of our non-HBV assets, 2016 clinical milestones for our HBV pipeline and our current cash balance to fund operations until late 2018.

All of which involve certain assumptions, risks, uncertainties that are beyond our control and can cause our actual results to differ materially from these statements. .

A description of these risks can be found in our latest SEC disclosure documents and recent press releases. In addition, Arbutus does not undertake any obligation to update any forward-looking statements made during this call. .

This call is being webcast live, and the archive will be available on our website at www.arbutusbio.com following today's call. .

Please note that we report in U.S. dollars and in compliance with U.S. GAAP. .

At the end of the prepared comments, we'll open up the call for your questions. So now over to Mark. .

Good afternoon, and thank you for joining us on the call and webcast today. I'd like to focus my remarks today on recent corporate highlights and upcoming events for the year. .

We remain as excited as ever about the prospects for Arbutus based on our full commitment to a therapeutic solution for HBV, our product pipeline as well as opportunities to generate additional capital through transactions related to our LNP delivery technology.

Since the start of this year, we have been pleased to announce several positive developments for the company. .

First, I want to emphasize or remind you that a cure for chronic HBV will require multiple therapeutic agents used in combination to fully suppress viral functions and reengage the patient's immune system.

Arbutus is committed to developing these agents under one roof so that we can rapidly and efficiently identify effective combinations for further development..

Our lead HBV pipeline candidate, the RNAi agent, ARB-1467, is in an ongoing Phase II multi-dosing study in HBV-infected patients. Consistent with our prior guidance, we anticipate single-dose results from this study in Q3 and multi-dose results in Q4.

ARB-1467 will be followed in the clinical development by our next-generation RNAi candidate this year. .

We've also made progress this quarter in developing a proprietary GalNAc conjugate technology to enable subcutaneous delivery of an RNAi therapeutic, targeting hepatitis B surface antigen and/or other HBV targets. .

Of particular interest to us this quarter are the recent presentations of our preclinical HBV data made at scientific conferences. I'd like to turn the call now over to Michael Sofia, our Chief Scientific Officer, to provide the highlights of these results.

Mike?.

Thanks, Mark, and hello, everyone. .

At the recent International Liver Conference, also referred to as EASL, in Barcelona, our team presented preclinical data supporting the combination of our lead core protein/capsid assembly inhibitor, AB-423, with a nucleoside analog entecavir. .

AB-423, in combination with entecavir, has demonstrated synergistic antiviral activity of both drugs. Furthermore, AB-423 alone and in combination with entecavir, has shown potent preclinical activity. .

Following EASL, I presented the results of several of our preclinical HBV drug combination studies at the 29th International Conference on Antiviral Research held April 17 to 21 and at the Cambridge Healthtech Institute's 11th Annual Drug Discovery Chemistry Conference held April 19 to 22, 2016, both in San Diego. .

These data demonstrated additive to synergistic activity in inhibiting a number of different HBV disease markers such as cccDNA synthesis and expression, HBV rcDNA synthesis, S-antigen production and serum HBV DNA. .

These results, which represent the first of a wave of preclinical combination data you will see from Arbutus, demonstrate that when we combine our clinical candidates and models of HBV, our drug candidates can be used in combination with nuke standard of care without any antagonism of drug activity.

Our drug candidates, when in combination with each other or with nuke standard of care, demonstrate at least additive, and in several cases, synergistic activity. And third, our first proprietary drug combination, RNAi plus capsid formation inhibition also demonstrates additive activity..

These drug candidates are direct-acting antiviral agents, and we would expect these mechanisms to act -- to translate to clinical studies as well. .

We expect to be reporting additional preclinical combination data later this year. I want to underscore that we view our ability to do extensive preclinical evaluation of various combinations as a competitive advantage enabled by our broad HBV pipeline under one roof.

These studies will allow us to make important early discoveries about the most promising combinations that will inform the clinical combination studies that we will initiate in 2017. .

I will now turn the call back over to Mark to discuss some additional developments as the company -- as well as our expected upcoming pipeline milestones.

Mark?.

Thanks, Mike. .

Earlier this week, we announced the licensing and research collaboration agreement with Saint Louis University Liver Center to develop ribonuclease H or RNase H inhibitors. This collaboration allows us to further expand our antiviral pipeline and add another program focusing on the HBV viral life cycle. .

RNaseH is a component of the viral polymerase and crucial for HBV replication. We believe that an RNaseH inhibitor could complement other direct-acting antiviral HBV products by further crippling the viral replication process, which we believe is going to be a critical component in achieving a cure for chronic HBV. .

We will continue to identify and evaluate opportunities to augment our R&D pipeline with external technology or compounds. .

Now turning from HBV to another Arbutus asset. Our LNP delivery technology has been central to the enablement of RNAi therapeutics and has an extensive clinical track record. We believe that our LNP technology represents the state-of-the-art for messenger RNA and can enable mRNA therapeutics as well as in vivo gene-editing applications.

We continue to explore opportunities to generate value from our LNP platform technology, which is the most efficient and effective available and is also protected by a robust intellectual property estate..

Now this year, we are working toward the following milestones in our pipeline we plan to accomplish by the end of 2016. As I noted earlier, we expect to present additional preclinical data on multiple pipeline programs, including further results from preclinical combination studies of proprietary pipeline candidates. .

our cccDNA formation inhibitor; our core protein/capsid assembly inhibitor; and ARB-1740, our next-generation RNAi agent..

One non-HBV milestone I want to update is that we expect to present the results of the Phase II study for TKM-PLK1 in HCC, a disease caused primarily by chronic HBV infection, at a medical conference in the second half of 2016..

Finally, business development will continue to be an important contributor to our growth plans. As evidenced by the RNase H transaction, we will continue to expand the portfolio where appropriate.

In addition, we will continue to actively explore partnerships and outlicensing activity of our LNP technology in order to provide meaningful, nondilutive funding for the company. .

Now I would like to ask Bruce to discuss our financial performance.

Bruce?.

Thanks, Mark. .

I'll begin by noting that effective January 1, 2016, we converted our functional currency from Canadian to U.S. dollars. The conversion is based on our analysis of changes in the primary economic environment in which we operate.

Hereafter, no further currency translation adjustments will be recorded in cumulative translation adjustment on our income statement, and the accumulated other comprehensive loss on our balance sheet will remain fixed at $49.8 million. In addition, foreign exchange variances within our income statement moving forward will only relate to non-U.S.

dollar amounts, which should significantly reduce foreign exchange volatility in our results. .

This functional currency change also resulted in a reclassification of certain stock options with Canadian dollar exercise prices from equity to liability accounting, and you will now see a new line item on our balance sheet for the liability-classified stock options. .

The balance is approximately $1.8 million as at March 31. Liability options are remeasured at each reporting date with any change being recorded in our income statement. Changes in the fair value of our liability options will largely correspond to movements in our share price. .

Moving forward, all stock options awarded to employees will be priced in U.S. dollars and accounted for using equity accounting and not subject to this repricing issue. .

Subsequent to the quarter close, we accepted the resignation of 2 founders of OnCore, one of which was announced as he was a Section 16 filer. The company held share repurchase agreements with all founders of OnCore, which were subject to acceleration on termination.

The result of this termination is an anticipated noncash earnings charge in the amount of $14 million in the second quarter of 2016. The balance of repurchase rights will continue to be amortized over the term of these agreements, and all lockup agreements related to the original transaction remain in full effect..

At the end of Q1 2016, we had a cash and investment balance totaling $182.7 million. We'll continue to use this funding to advance our development programs and general corporate purposes, and we expect our current cash runway extending to late 2018..

Now turning to our income statement highlights for Q1. Our net loss for Q1 2016 was $15.9 million as compared to a net loss of $12 million for Q1 2015. Our non-GAAP net loss for Q1 2016 was $9.9 million as compared to $10.8 million in Q1 2015..

As a reminder, we introduced our non-GAAP net loss in Q1 2015 to provide normalized loss figures that we believe better reflect the underlying performance of Arbutus' business.

The improvement in non-GAAP net loss includes decreased operating expenses as Q1 2015 included acquisition costs of $9.3 million and a $1 million technology license exercise payment from Monsanto received in the first quarter of 2016. .

Now turning to revenue. Revenue decreased significantly from $4.7 million in Q1 2015 to $0.6 million in Q1 2016. The decline was due to the termination of our Ebola contract with the U.S. Department of Defense and termination of our collaboration with Monsanto in the agricultural field.

We continue to earn royalty revenue from Marqibo commercial sales as well as revenue from our collaboration with Dicerna for the use of our delivery technology, in combination with their proprietary payload technology, to develop a treatment for PH1. We do expect revenue to be notably lower in fiscal 2016 as we remained focused on our HBV pipeline..

Turning now to expenses. Total research, development, collaborations and contracts expenses increased to $13.1 million in Q1 2016 from $10.6 million in Q1 2015. This increase relates largely to efforts on our HBV product candidates, including the ongoing clinical trial for ARB-1467 now in a multi-dose Phase II trial in HBV patients. .

General and administrative expenses were consistent quarter-over-quarter after adjusting for stock-based compensation on repurchased shares. .

The most significant item in other income was foreign exchange gains of $7 million in Q1 2015 as compared to $2.9 million in Q1 2016. Exposure to foreign currency gains and losses has been reduced following our conversion to the U.S. dollar as functional currency. Gains in the quarter relate to the strengthening of the Canadian dollar in the period.

Approximately 25% of our investment holders -- holdings are denominated in Canadian dollars and form a natural hedge for anticipated business needs moving forward..

Finally, a comment on cash burn and runway. Cash burn for the quarter was $10.9 million, lighter than the anticipated quarterly burn rate for the year. As a reminder, cash burn from operations in 2015 was $54.8 million, and we anticipate 2016 cash burn to be slightly higher than this level. We believe the company has cash runway until late 2018. .

I wish to remind shareholders of our upcoming Annual General Meeting scheduled for Thursday, May 19 in Vancouver, Canada. The meeting will be held at the Terminal City Club at 2 p.m. .

Now I would like to ask the operator to open the call for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Michael Yee with RBC Capital Markets. .

This is Judy on for Mike Yee at RBC. I have 2 questions, if you don't mind. One is a little bit more clarity on your next catalyst. So you told us about the Phase II data that's coming, the single- and the multiple-dose data.

What exactly are you looking for in terms of that data? What would be considered a good readout? And then I guess, beyond that, at the end of this year, we'll have to wait until next year after you file the IND for the new product to get further data from your hep B pipeline, right?.

That's right. Judy, this is Mark. I'll take that. So I think what we said is we're expecting to be able to present the data with respect to the completion of the first cohort. Remember, this is a dose escalation study. We're doing 2 doses of our 1467 in chronically-infected patients.

After we have collected the data from the first cohort, we'll present those results and the total study by the end of the year. We're not providing any guidance with respect to the extent of knockdown, if that's what you're asking. .

Got it. Well, I appreciate the additional details, though. And second question, if you don't mind, given the interest among pharma and big biotech companies in the hepatitis C space, for example, Gilead that Mike covers has mentioned their interest in the hep B space.

What is your sense on the interest of other companies, especially pharma and big biotech companies, on how interested they are in hepatitis B? Like, are we at a turning point this year? Or do you think it will have to wait until next year? Like, any kind of color you would provide on this?.

Well, my sense is that we are seeing growing interest in the field of hepatitis B. I think many of our business colleagues were focused on hepatitis C in the last few years, and now many of them are turning their attention to hepatitis B.

So I think you're going to see growing interest from large biotech and pharma companies over the next couple of years.

Did I answer your question?.

Yes. .

[Operator Instructions] Our next question comes from the line of Michael Schmidt with Leerink Partners. .

This is Varun Kumar on behalf of Michael Schmidt. So I have a couple of questions.

The first one, will we be seeing any nonhuman primate data from combination study this year?.

No, we will not. Nonhuman primate studies are really not available at this point in time, so we'll -- you'll be seeing data from us in a number of different models that we believe are appropriate to look at specific mechanisms of action and in some relevant rodent studies as well. .

Okay. That makes sense.

In the ongoing Phase II study, what is the e antigen status of patient? I'm not sure if you guys have disclosed that, but can we have a fair idea, like, what percentage of patient are e antigen positive versus negative?.

So the study is designed to start out in e antigen negative patients, and then we will enroll a cohort of e antigen positive patients once we've completed the e antigen negative series. .

Okay. I understand. It's great. And my final question, how fast can you transition from hep B to HBV patient for combination studies? We understand the transition is much faster with single RNAi agent, but just trying to understand how long will it take once you have the combination studies. .

Can you help me understand the -- you're asking us how quickly we can go from single agent to combination studies?.

No.

Once you initiate, like, the combination studies next year, how long will it take to transition from hep B to HBV patients?.

I see, I see. I apologize. Okay. Yes, yes. So you have to understand that at this stage of the game, we don't have specific clinical protocols, right? But we would imagine that you would evaluate combinations in a efficient, fairly rapid adaptive way. So your initial studies might be, for example, 12 weeks of combinations.

But I just want to caution you that these are not -- these studies have not been developed yet, not been designed yet. .

[Operator Instructions] Our next question comes from the line of Liisa Bayko with JMP Securities. .

This is Jon Wolleben for Liisa. Just had a couple of questions for you guys.

What were your key takeaways from EASL as far as the HBV front? And what else you're seeing out there in development, anything that interests you? And then as far as the new asset, the RNase H inhibitor, can you talk a little bit more color about what you plan on combining it with and kind of your development plans for that asset?.

Well, maybe -- well, let me ask the RNase H -- answer the RNase H question, and then I'll ask Mike to chime in on takeaways from EASL.

So the bottom line is, Jon, we don't yet have a specific plan for what it would be in combination with, right? But as I said earlier, we imagine that RNase H could contribute to further crippling viral replication, and we know that, that is really going to be required to prevent all of the downstream activities of HBV.

So it's a direct-acting antiviral agent, and our overall thesis is that we need very likely to combine direct-acting antiviral agents to fully suppress viral replication and then agents to reengage the immune system. So generally, that's how we see it.

We certainly couldn't tell you at this point in time whether we -- what the specifics of a combination would look like.

Does that help?.

That does help.

Do you have any guidance on studies you're going to be looking at this year when we might expect the first bit of data from that program?.

For RNase H? No, I think it's early, so we are not providing any guidance with respect to when you might see data or -- but we'll do that in due course. .

Got it. .

Okay.

Mike, do you want to spend a minute talking about takeaways from EASL for you?.

Sure. I think, EASL, I think as we mentioned before, this is really a transition year in the viral hepatitis space, right? There -- you're seeing a wind down of the HCV focus of many of the companies and a engagement into the HBV space.

What you're seeing now is beginning to see preclinical and some early clinical data coming out on a number of the sort of capsid or core protein assembly inhibitors, where you saw Novira/J&J present some of their clinical data on their core protein inhibitor that was recently released Phase I/Ib data on that agent.

That demonstrated proof of concept for that mechanism of action. They've been doing combination with interferon. And that data, I think, is from an HBV DNA loss. There wasn't much additivity for that combination. But clearly, that is -- some longer-term studies are warranted for that combination.

You're also seeing a lot of interest in the immunomodulatory, immune stimulation area associated with HBV. So there was a symposium on immune modulation and how the -- how HBV controls the host immune response and what kind of targets one would look at there.

And there were a lot of discussion on looking at pattern recognition receptors, like toll-like receptors and RIG-I. There was certainly a discussion about checkpoint inhibitors in that symposium.

And there's a general view that the virus does really have a significant impact on host immune response, and there needs to be some activation of that host immune response to be part of this cocktail of agents that will ultimately lead to a cure. And how you get there, however, is still up in the air, I think, because it's very early days. .

Thank you, Mike. Oops, sorry. .

No, and I think there were some data presented on woodchuck data on the RIG-I pattern recognition receptor agonist that looked very promising for an approach there, and we continue to see data coming out about agents that knocked down S-antigen, both from an RNAi standpoint and other molecules that impact S-antigen as a viable approach for being part of that cocktail to enable host immune response reactivation.

.

Terrific. .

Thank you, Mike.

Jon, does that answer your question, I think?.

Yes, it does. .

[Operator Instructions] And I am showing no further questions at this time. I'd like to turn the call back over to Adam Cutler for any closing remarks. .

Thank you, and thanks, everybody, for dialing in. We appreciate your participation in the call today, and we'll be looking forward to sharing updates on our progress with you in the months ahead. This concludes our call today. Thank you very much. .

Ladies and gentlemen, thank you for participating in today's call. You may all disconnect. Everyone, have a great day..