Vincent Anzalone - VP, f IR Christopher Anzalone - President and CEO Bruce Given - COO and Head of R&D Ken Myszkowski - - CFO.

Judy Liu - RBC Capital Markets Aan Yang - Jefferies Benjamin Adler - Piper Jaffray.

Ladies and gentlemen, welcome to the Arrowhead Research Pharmaceuticals Fiscal 2016 Second Quarter Financial Results Conference Call. [Operator Instructions] I will now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead..

Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its fiscal 2016 second quarter ended March 31st, 2016. With us today from management are President and CEO, Dr. Chris Anzalone, who will provide an overview of the quarter; Dr.

Bruce Given, our Chief Operating Officer and Head of R&D who will discuss our clinical programs; and Ken Myszkowski, our Chief Financial Officer who will give a review of the financials. We will then open up the call to your questions.

Before we begin I'd like to remind you that comments made during today's call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934.

All statements, other than statements of historical fact, including without limitation those with respect to Arrowhead's goals, plans and strategies, are forward-looking statements.

These include, but are not limited to, statements regarding the anticipated safety and/or efficacy of ARC-520, ARC-521, ARC-AAT, ARC-F12, ARC-LTA, ARC- HIF2 and our other programs, as well as anticipated timing for study enrollment and completion, and the potential for regulatory and commercial success.

They represent management's current expectations and are inherently uncertain. Thus actual results may differ materially. Arrowhead undertakes no duty to update any of the forward-looking statements discussed on today's call.

You should refer to the discussions under risk factors in Arrowhead's annual report on Form 10-K and the company's quarterly reports on Form 10-Q for additional matters to be considered in this regard. With that said, I'd like to turn the call over to Dr. Christopher Anzalone, President and CEO of the company.

Chris?.

ARC-F12, ARC-HIF2, and ARC-LPA. These programs represent not only our expanding pipeline of RNAi therapeutics against a wide range of diseases, but also progress we are making on our underlying technology platforms. I will quickly go over these one by one. First, ARC-F12 is designed to inhibit the production of Factor 12.

In an edema model in rats, ARC-F12 led to a significant reduction in swelling. In animal models of thrombosis, ARC-F12 reduce the risk of blood clot formation without the undesirable bleeding risk caused by anticoagulants. These support our belief that ARC-F12 has the potential to treat both hereditary angioedema, or HAE, and to prevent thrombosis.

These are very different patient populations, and we have both subcutaneous and intravenous formats for this program, so we are currently assessing what the best clinical path will be for this product. We plan on discussing this more in the future. ARC-HIF2 is the first candidate to use a DPC vehicle designed for extra-hepatic delivery.

ARC-HIF2 targets HIF-2alpha for the treatment of renal cell carcinoma. We presented preclinical data showing proof of concept for the delivery vehicle, and that ARC-HIF2 could inhibit tumor growth and promote tumor cell death in multiple RCC mouse models. This represents both an exciting new candidate and expansion of our DPC platform.

Lastly, ARC-LPA is the first RNAi therapeutic to use Arrowhead's new delivery vehicles designed for subcutaneous administration. This preclinical candidate is targeting lipoprotein(a), or Lp(a), for the treatment of cardiovascular disease.

High levels of Lp(a) are associated with an increased risk of cardiovascular disease independent of cholesterol and LDL, and there is currently no good way to deeply reduce circulating levels of Lp(a).

Data we recently presented show that ARC-LPA can achieve up to 98% reduction of Lp(a) in mice, and 85% to 90% in primates with significant reductions through at least six weeks.

We think this is a very attractive candidate on its own, and we are excited about our new subcutaneous platform that may create additional opportunities to address diseases that require chronic treatment and where the subcutaneous route may be preferable to patients and physicians.

So as you've heard, this has been another highly productive quarter for us at Arrowhead. We're confident that novel medicines like the ones we're developing at Arrowhead that treat intractable diseases will in the end always have a great value. We are committed to pushing our pipeline forward and unlocking that value.

With that overview, I would now like to turn the call over to Dr. Bruce Given, our COO and head of R&D.

Bruce?.

Thank you, Chris. Good afternoon, everyone. Before I review the status of our various clinical studies, I wanted to describe the ARC-520 data presented at EASL, the International Liver conference that took place last month.

We presented a poster on the full and final cohort 7 single-dose results from the 2001 study and a poster on new data from our groundbreaking chimpanzee study.

In addition, our colleagues from the Victorian Infectious Disease Reference Laboratory in Melbourne, Australia presented a poster on some of their leading edge analytical work from the first five cohorts of the 2001 study. Let me touch on some of the more intriguing findings. All three of these posters can be found on our website.

First, regarding our Hep-ARC 2001 cohort 7 poster, ARC-520 and entecavir produced very rapid HBV DNA suppression in hepatitis e-antigen positive, treatment naive patients, achieving serum HBV DNA reductions of around 4 logs after only two weeks and up to 5.5 logs overall.

All e-antigen negative, treatment naive patients achieved reductions that put them below the limit of quantitation, with all but one achieving this by two weeks. We have previously reported that ARC-520 showed moderate to strong synergism with both entecavir and tenofovir in mice, so we see this data as consistent with those findings.

We suspect that synergism is seen because mechanistically ARC-520 would be expected to reduce levels of polymerase and pre-genomic RNA. This leads us to believe that synergism could well be seen with other mechanisms and agents that would similarly benefit from reductions in viral antigens or pre-genomic RNA.

Capsid inhibitors and drugs targeting X antigen would be clear candidates for such a benefit. The full three-month data also showed that ARC-520 effectively inhibited HBV CccDNA-derived mRNA with observed viral protein reductions in naive e-antigen positive patients of up to 2 logs, or 99% after a single dose.

Chris mentioned this earlier, but I think it bears repeating -- the duration of effect for s-antigen reduction in the e-antigen positive, treatment naive patients is very intriguing. The mean reduction at the last study visit on day 85 was still 75% from baseline after a single dose of ARC-520.

There was also an interesting flattening of the rebound curve between days 57 and 85. Mean e-antigen and core-related antigen levels where measurable also were still reduced at day 85. As previously reported, naive e negative patients had a delayed mean s antigen response that didn't manifest until around three weeks post dose.

The overall mean reduction was less in e negatives, but also had still not returned to the mean baseline by day 85. The academic community continues to recognize these data as important and the poster was again selected as a stopping point on the HBV expert tour and was featured in the what's new and important general lecture on HBV.

We were also asked to present our data at a recent NIH workshop dedicated to HBV. In the poster on our chimpanzee study, we showed that after monthly administration of six to 11 doses of ARC-520 in chimpanzees chronically infected with HBV, the ARC-520 target site sequences remained virtually unchanged.

This suggests to us that no drug resistance developed during the treatment period. While we did not expect that mutation and resistance would be a problem, this gives us additional comfort as we conduct our multi-dose studies in HBV patients. We also showed additional biopsy data with deep sequencing of the HBV mRNAs after treatment with ARC-520.

These results demonstrated that all sequences containing the ARC-520 target sites were deeply knocked down in both e positive and e negative chimps.

This again supports our perspective that while surface antigen knockdown can be impacted by the relative amount of integrated derived surface antigen transcript, the other transcripts, which will be cccDNA-derived, should be equivalently reduced in either e negative or e positive patients.

As the field gets more interested in the pathologic roles of all hepatitis antigens, not just surface antigen, the unique ability of RNAi and ARC-520 in particular to knock down all HBV viral transcripts takes an even greater significance. Finally from EASL, Dr. Stephen Locarnini has been studying patients that sero-clear surface antigen.

While rare, sero-clearance does occur in a small minority of NUC treated patients. Dr. Locarnini has used a panel of monoclonal antibodies that bind specific parts of the surface antigen to look for changes in binding patterns as a way of studying the host immune response.

He previously reported what he calls a clearance profile in patients that sero-cleared on tenofovir based changes in the monoclonal antibody binding. In the EASL poster from his group, he reported data from the four e negative NUC experienced cohorts and the first NUC experienced e positive cohort from our 2001 study.

He showed that by week three around 50% of the ARC-520 treated patients were showing a clearance profile compared to zero placebo treated patients. There was a corresponding trend in detection of immune complexes.

We don't yet know the significance of these data on the ability of ARC-520 to achieve sero-clearance, but the findings continue to intrigue the academic HBV community. I will now give a brief status update on some of our clinical studies. The 1002 study is a singles dose study to evaluate tolerability of increasing infusion rates of ARC-520.

We have also dosed 5 mgs per kg and will be dosing 6 mgs per kg at an infusion rate about twice as fast as we are currently using in our patient studies.

It continues to be well tolerated, and because of this we have added 5 and 6 mgs per kg single-dose cohorts to the 2001 study, just to give us dosing flexibility should we decide it is helpful to the program. Because it is in the 2001 study this will be in HBV patients.

In the 2001 open-label extension, most patients who completed the 2001 study are eligible to enroll if they wish. Those who elect to participant will receive up to 13 doses once every four weeks. This study has begun, and some patients from cohort 7 have already initiated dosing.

2002 and 2003 are multiple dose studies in e-antigen negative and positive patients respectively, both of which are recruiting patients on existing entecavir or tenofovir therapy. The 2002 study is about two-thirds enrolled and the 2003 study is about half enroll. We are still on schedule to complete enrollment for both studies this year.

Patients in 2002 and 2003 that achieved greater than 0.5 log reduction in s-antigen are eligible to roll over into 2007, which is a long-term extension that allows patients to be dosed up to a year. 2007 has been initiated in Hong Kong and South Korea, and patients have begun to be dosed.

For the MONARCH study, in which most initial cohorts employ a triple combination with ARC-520, entecavir, and interferon, dosing began in January. We have enrolled patients in three different cohorts, but have not completed any of those three cohorts yet.

The initial triple combination cohorts are planned to receive ARC-520 every four weeks for 48 weeks, daily entecavir for 60 weeks, and pegylated interferon for 48 weeks. We hope to look at other combinations as new therapies mature to the point that they can be included.

Ever since we learned of the importance of integrated DNA from our chimp study, we have fast tracked our development program for ARC-521. As perhaps all of you are aware, 521 combines our best RNAi trigger from ARC-520 with our best trigger targeting integrated transcripts.

As such, we believe it can be effective against all HBV-derived RNA transcripts, whether from integrated or cccDNA. We set a breakthrough goal to submit an application for a Phase 1 study by the middle of this year and achieved submission in April.

We feel that we understand the likely doses and safety profile of ARC-521 based on everything we've learned from ARC-520. Because of this we have proposed a trial design that moves quickly into multiple doses in healthy volunteers and HBV patients.

If this design is agreeable to IRBs and regulators, we should have a lot to report from this program in coming quarters. Moving on to ARC-AAT, we have enrolled more than 50 subjects between Part A in healthy volunteers and Part B in patients in the single dose Phase 1 study.

We intend to have both parts of the study fully enrolled before the end of the year. We're also applying to begin a pilot Phase 2a multiple dose study. This study will look at the effect on circulating levels of AAT after multiple doses of ARC-AAT. More importantly, we also intend to take biopsies to determine the effect at the hepatocyte level.

We have had discussions with regulatory authorities and our goal is to have this study under way later this year, so stay tuned. Finally, with our corporate name change we also created a new website at arrowheadpharma.com.

The pipeline section of this website has descriptions of our active clinical trials and links to the respective clinicaltrials.gov entries. Please refer to that if you would like more information about the studies I've mentioned. With that, I'd like to turn the call over to Ken Myszkowski, Arrowhead's Chief Financial Officer.

Ken?.

Thank you, Bruce, and good afternoon, everyone. As we reported today, our net loss for the three months ended March 31, 2016, was $20.8 million, or $0.35 per share, based on 59.8 million weighted average shares outstanding.

This compares with a net loss of $28.7 million, or $0.51 per share, based on 55.7 million weighted average shares outstanding for the three months ended March 31, 2015. Total operating expenses for the three months ended March 31, 2016 were $21.3 million, compared to $29.7 million for the three months ended March 31, 2015.

The decrease in operating expenses compared to the year-ago period are primarily due to a prior-year non-cash charge of $10.1 million for acquired and processed research and development costs, a component of the accounting related to the Novartis acquisition.

This was somewhat offset by higher general and administrative expenses of $2.1 million during the current period, primarily to increased legal and patent costs.

R&D costs declined by $1.6 million due to lower drug manufacturing costs but higher clinical trial costs, as our ARC-520 manufacturing campaign was completed last year and this year we are incurring higher critical trial costs related to the ARC-520 Phase 2b studies.

Net cash used in operating activities during the second fiscal quarter was $14.7 million, compared to $16.4 million in the prior-year period, a decrease of $1.6 million. This was driven by lower R&D costs and the receipt of a refundable R&D tax credit from Australia, somewhat offset by higher G&A expenditures.

Turning to our balance sheet, at March 31, 2016, including our investments in fixed income securities, our cash and investments balance was $61.5 million, a decrease of $15.1 million from December 31, 2015.

Our common shares outstanding at March 31, 2016 were 60 million, which increased from 59.6 million at December 31, 2015, primarily due to the issuance of shares from restricted stock vesting and the exercise of stock options. Also at March 31, 2016, there were 15,652 shares of preferred stock outstanding.

These preferred shares are convertible into 2.7 million shares of common stock. Common shares outstanding including the conversion of our preferred shares would be 62.6 million. With that brief overview, I'll now turn the call back to Chris..

Thanks, Ken. Thanks, Ken. As you've heard, our data continue to be good and we are hitting the operational goals in our clinical programs. As I mentioned earlier, we have two candidates in the clinic, one that's about to enter the clinic, three more not too far behind, and some additional undisclosed programs that we are working on.

This is a robust pipeline for a company of our size, which gives us a lot of opportunity to build value. It also is about the limit of what we can handle with our current resources, headcount, and facilities.

Because of this, we are for the first time in a position where we can support and are actively looking for potential partners and collaborators to expand the reach of the assets and potentially be a source of capital.

This type of strategic shift could take some time, but we think that our broad IP, advanced technologies, and expertise from working in the field for more than a decade make us an extremely attractive partner. Looking ahead over the next 12 months and beyond, there are multiple events that could drive value for our shareholders.

The ARC-520 MONARCH study and the 2001 extension are open-label studies that may provide opportunities to share data ahead of study completion. In addition, the clinical plan for ARC-521 is aggressive, but we feel responsible given our knowledge base. If IRBs and regulators agree, we may provide a read-out faster than some think.

The ARC-AAT Phase 2a is anticipated to begin later in the year, and Phase 1 is planned to complete enrollment with a read-out this year. Behind these programs are ARC-F12, ARC-HIF2, and ARC-LPA, which are all progressing nicely and should provide additional opportunities to give updates on the candidates and their respective technology platforms.

I would now like to open the call up to your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Michael Yee with RBC Capital Markets. Your line is now open..

Good afternoon, congrats on the quarter and thanks for taking the question. This is Judy Liu on for Michael Yee from RBC Capital Markets. Two questions if I may, please. First, since you addressed that you are actively talking with potential partners, just wondering if we could get a little more clarity there.

What types of discussions have you had? If you're willing to disclose what are the gating factors involved in this discussion, could you perhaps provide illustration of potential scenarios and for options. And I know you said it might take some time, but do you have any sense of broad timing? Thank you..

Thanks very much Judy. You know, what, there is not much we can say on that.

The reason that we bring it up is that as you point out and as we said in the prepared remarks this is a something that we are now a bit more focused on that we have in a past because we have built up this infrastructure, we built up these capabilities that enable us to do this. And our pipeline at least for the time being feels pretty complete.

And so we've got the ability to do this and I think we are an attractive partner because we can move quickly, because we've got, I think, pretty attractive IP, because we've got good data with ARC-521. We just pick the data in ARC-AAT and ARC-521 for all these reasons I think that it makes sense for us to start reaching out to potential partners.

Now having said all that, we don't control the timing of any of the supports, so we'll just have to see how it plays out, but it is certainly our hope and intention to enter into some of these agreements going forward..

Okay. Thank you. And my follow-up question is, you told us that 2002 is about two thirds enrolled and 2003 seems to be on track for that enrollment as well. We heard previously that you expect some open label data by maybe later this year.

Is there some more specific timing you could give us, especially on the other studies, like 2002 and 2003 where enrollment is progressing, when she would be expecting readouts from that norm 2017, is that a good guess?.

Hi, Judy. It’s Bruce Given. It’s always a little hard to estimate. I mean, the gating items here as you have to enroll your last patient, your last patient then has to get there four doses and then have their follow-up after the fourth dose and then you have to clean all the data and lock it because both 2002 and 2003 our double blinded studies.

So, everything has to be perfect in the database before you can finally lock it, load in the codes and analyze the data. So, it's a little hard to get to precise. I think we've been guiding that - that we thought it was likely to be 2017 readouts for 2002 and 2003 and that still feels like the most likely scenario.

I certainly wouldn't expect it to go beyond 2017. It's really just a matter of when - how early in 2017 might those appear and I just can't give you perfect guidance on that at this point..

And as you mentioned, the 2001 extension and MONARCH are open label, so of course we've got much more flex ability on how and when we could disclose some data there. That's really on a kind of wait-and-see basis.

People asked us you know, what will be the trigger point for talking about those data, and unfortunately we don't have those criteria set in stone. It's something that we address as we see those data. So I would just say stay tuned on those open label studies..

Thank you..

You're welcome..

[Operator Instructions] And our next question comes from the line of Aan Yang with Jefferies. Your line is now open..

Thank you.

The study 1002 varying infusion rates, I think you guys mentioned that about two times faster than the current infusion rates, so what's the current infusion rate?.

So the current infusion rate is 0.4 MLs of minute, which depending on the dose, if you're at the 4 mig per kig dose most people their infusion rates will be somewhere around 20 some minutes. So, we were curious as to whether faster rates are possible. So for instance in this 5 and the 6 mig per kig dose group we're using infusion of 0.9.

So a little bit faster than two times. And that's the infusion rate that we're planning to use in the 521 study, for instance. So it looks like we could probably have shorter infusion times than we've been using, that’s at least our current interpretation of the data.

And it felt like something that we should go back and visit - but the 1002 study is a normal volunteers….

Yes….

Jut to be clear about that..

Okay.

And then, in the past you mentioned that you would anticipate announcing a clinical collaboration for ARC-520 this year, can you give us kind of a status update?.

Sure, we're still hopeful that we can bring in collaborators to MONARCH. I'll tell you, our gating function here is the lack of a huge number of these potential compounds to combine with ARC-520. We see an awful lot of interest currently in the space, the vast majority of that interest is early stage, preclinical, early clinical programs.

And so it takes a little while to move those things to the clinic. So, certainly 2017 and beyond there will be more to choose from. But, we still think that 2016 we will bring in at least one additional compound into a MONARCH cohort in addition to of course what we're doing with interferon..

Okay. And then in the past you also mentioned, I mean, there a lot of studies, so one study you mentioned was 2006.

Is that still in the plan and if so what's 2006 about?.

Yes, so 2006 was a study that we were thinking about that was looking at very detailed immunologic measures, such as T cell markers and T cell function and things of that sort. In the end that was one of the things that we decided to not do this year. Largely as a way to just sort of control our capital usage during the year.

We still plan on doing a study like that, but we did set that aside for this year..

I think the fact that we have all these studies going, is really an important marker. It means a few things, at least a few things. One, it means that we are serious about this disease. We are going at this with guns blazing trying to find this functional cure, but it also means that we're going about this I think in a very mature way.

This is a very difficult virus, as you know. There are a number of variables. It's not just e-antigen status, it's not just NUC experience, its also the phenotypes and we think the only way to really get a handle on how a drug works with this virus is to do this large number of studies.

It’s too bad because its going to require a lot of people, but it's important to understand how this thing works. And again, I think it's a reflection of our understanding of the virus and the maturation of this company as a real clinical organization..

Okay. Thank you..

Okay..

And our next question comes from the line of Benjamin Adler with Piper Jaffray. Your line is now open..

Hi, guys. Thanks for taking the question.

I wanted to maybe change gears a little bit and talk about ARC-F2 [ph] I really like the approaching ARC-HIF2 renal cell, but as you known its an area which is evolving very rapidly and I want to get your thoughts on where the drug fits in when the dust starts settling, you have more advances in antiangiogenic, you have immuno oncology coming in.

Do you see this ultimately going in a combo do you see this still as a monotherapy? So I just sort of wanted to see how things are shaping up from your end?.

Yes, that’s really a great question. You know, renal cell carcinoma has been a bit of an outlier in cancer in that it's been receiving monotherapy mostly because the drugs that have been available really didn't play well with each other and when people tried to do combination therapy there were toxicity limited.

We've always thought that the best approach for HIF2 and the best approach in renal cell carcinoma would be to find new agents that could play well with others and that would allow commendation therapy.

So, we've always envisioned that we would hope that we would find the ability to treat in combination and the neat thing of course about RNAi is that we administer it and then it has a durability of a month or more with a single injection, for instance.

So, we're very hopeful that we will fit well into combination therapy which generally in cancer that's how you really make the big strides when you are able to go combination.

So, we like the fact that there is a diversity of different drugs being developed in clear cell, renal cell carcinoma and we are very hopeful that we will play well with others..

And also I think the way to look at that is twofold. One, as a candidate we're excited about that as candidates and we think that we'll be treating this disease in a unique and powerful way. But the other way to look at this is as a platform. We view this ability to deliver to certain tumor cells as a franchise unto itself.

Once we can validate that with ARC- HIF2 or anything else or others for that matter, we can use that for other targets, for other cancer types. And so we view that as really salable and a program with real legs. So, we're extremely excited about pushing that into the clinic at some point and really blowing that out into a business unto itself..

I see that. So maybe just a quick follow-up, and this is more long-range thinking. So once you establish that you can target different extra-hepatic tissues and this case tumors, a lot of cancers obviously have more than one driving mutation or more than one driving pathway.

Do you guys look at the potential or do you see the potential with your DTC to deliver more than one trigger? Is that something which you think is feasible?.

Yes, we do. And it's certainly feasible. I mean, basically we're doing right now with ARC-520….

With 521….

In ARC-520. So….

And also 521..

Yes, and 521, you're right..

Fair enough….

So, sure, it’s feasible and we think that's something that absolutely could be developed. ARC-HIF2 has been important for us in trying to work out extra-hepatic delivery which you probably know in the field has been extremely difficult.

About the only way people have been able to do it up to now has tend to do with liposomes which are very problematic delivery systems. So, we are targeted delivery, but once we've achieved the kind of profile that we want I don't see any reason why we couldn't do multiple genes at the same time..

Okay. Thanks, guys..

You're welcome..

And I'm showing no further questions at this time. I would now like to curl turn the call back over to Mr. Chris Anzalone, CEO of Arrowhead for closing remarks..

Thanks everyone for your interest and we look forward to speaking with you again next quarter or sooner..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect..