Earnings Call Transcript - ARWR Q3 2020

Operator, Operator

Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. I will now hand the conference call over to Vincent Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince.

Vincent Anzalone, Vice President of Investor Relations

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today to discuss Arrowhead's results for its Fiscal Third Quarter ended June 30, 2020. With us today from management are President and CEO Dr. Christopher Anzalone, who will provide an overview of the quarter; Dr. Javier San Martin, Chief Medical Officer, who will discuss our clinical programs; and Ken Myszkowski, our Chief Financial Officer, who will give a review of the financials. In addition, James Hassard, our Chief Commercial Officer, and Dr. Curt Bradshaw, our Chief Scientific Officer, will be available during the Q&A session of today’s call. Before we begin, I would like to remind you that comments made during today’s call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 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 statements regarding our expectations around the development, safety, and efficacy of our drug candidates, projected cash runway, and expected future development and commercialization activities. These statements represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially. Arrowhead disclaims any intent and 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 subsequent quarterly reports on Form 10-Q for additional matters to be considered in this regard, including risks and other considerations that could cause actual results to vary from the presently expected results expressed in today’s call. With that said, I'll turn the call over to Chris Anzalone, President and CEO of the company. Chris?

Christopher Anzalone, President and CEO

Thanks Vince. Good afternoon everyone and thank you for joining us today. We’ve already made significant progress this year, despite the challenges that COVID-19 has posed globally and especially for those of us working on new medicines. We acted decisively and voluntarily paused new patient screening enrollment in some of our clinical studies to protect participants. We take seriously our responsibility to ensure the health and safety of our employees, business partners, and patients involved in our studies. This was the right decision. The good news is that we don’t believe any of our development programs were materially impacted. This reflects Arrowhead’s commitment to innovation, speed, and precision. We find paths forward even in unclear situations. This resilience is a defining aspect of Arrowhead’s culture, and I take great pride in it. Although COVID continues to create some uncertainty, we are confident that the latter part of 2020 will be highly productive as we aim to expand our pipeline, advance multiple clinical programs, and obtain clinical proof-of-concept for our first extra-hepatic candidates. So, what progress have we made and what are our plans to achieve these key goals? Let’s review some important programs. I’ll begin with an overview of our discovery stage programs. Our partnership with Janssen, initiated in 2018, comprises three potential new products against targets selected by Janssen. While we cannot disclose the specific targets or data on these candidates, we have made substantial progress on all three. We previously discussed ARO-JNJ1, as the first target was chosen early in our partnership, and work began shortly after. We are now ready to add the other two potential candidates to our pipeline, naming them ARO-JNJ2 and ARO-JNJ3. The collaboration with Janssen has been fruitful, particularly for ARO-HBV, now known as JNJ-3989, which continues to advance rapidly in various Phase 2b studies led by Janssen. Shifting to earlier stage development, let’s discuss our pre-clinical programs utilizing our TRiMTM platform, which targets the pulmonary space. After ARO-ENaC, our second program is ARO-LUNG2, aimed at treating COPD by inhibiting an undisclosed target in pulmonary epithelia. We announced that it has officially been nominated as a candidate and has moved into Pre-IND stage. We are making good progress on the IND-enabling studies and expect to potentially file a CTA for ARO-LUNG2 by the end of this year. Our goal is to achieve clinical proof-of-concept and then quickly expand the pipeline for the pulmonary platform. We believe we are on the verge of that expansion phase now. In pursuit of this goal, we are concurrently working on several additional targets in the pulmonary sector. We consider the lung a target-rich environment with numerous opportunities for asthma, COPD, Idiopathic Pulmonary Fibrosis, and other inadequately treated diseases. We have also advanced potential candidates aimed at treating the novel coronavirus responsible for COVID-19. This marks the first time we have disclosed that we are pursuing multiple therapeutics simultaneously, which I believe is crucial. This virus is challenging, and we think the best approach is to explore various strategies. One is to block the entry point by targeting a receptor that the virus uses to invade cells; another is a direct antiviral approach targeting the viral mRNA; and a third involves exploring anti-inflammatory pathways. We are pursuing all these avenues in parallel and believe this comprehensive strategy provides multiple opportunities for success in tackling a poorly understood virus. With our expertise in lung and HBV treatment, I believe we are well-equipped to address COVID-19 and potentially other coronavirus outbreaks. With ARO-ENAC, ARO-LUNG2, our COVID-19 programs, and additional rapidly advancing candidates, we are confident that our emerging lung pipeline can substantially create value in the near to mid-term. What we have accomplished in the liver, we now aim to replicate in the lung. Now, turning to our clinical pipeline, I will start with ARO-AAT, our Phase 2/3 candidate designed for a rare genetic liver disease related to alpha-1 antitrypsin deficiency. We have fully enrolled, dosed, and collected six-month repeat biopsies for the first cohort of the open-label 2002 study. We are currently analyzing the biopsies and plan to present data by the end of the year. This is significant progress and a crucial milestone. It will be the first data for a therapy targeting alpha-1 liver disease, providing insights into changes occurring at the hepatocyte level post-treatment. Our focus will primarily be on the change from baseline in Z-AAT monomer levels, which directly measures the drug's effectiveness in inhibiting the production of the faulty mutant protein. We are confident in our ability to demonstrate improvement there. We will also assess measures that may require a longer treatment duration to show effects, such as Z-AAT polymer content and inflammation. We don’t believe that six months of therapy will be sufficient to see changes, but as the first company investigating this disease in humans, we don't have prior data to guide expectations. In the Phase 2/3 SEQUOIA study, patients are expected to receive about two years of treatment. Notably, if we observe signs of improvement sooner than anticipated, that would be an exciting outcome and might prompt us to engage regulators for a potential study modification. Next, I’ll address our cardiometabolic programs, starting with AMG 890, the candidate we licensed to Amgen for targeting Lp(a) in cardiovascular disease treatment. We announced last week that Amgen initiated a Phase 2 study, triggering a $20 million milestone payment. These are important advancements for the AMG 890 program, supporting Arrowhead’s approach to building a valuable pipeline using our RNAi therapeutic platform and expertise. Amgen has significant experience in developing and marketing innovative cardiovascular treatments, and we are eager to see the program progress. Our two wholly-owned cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, are moving rapidly toward critical value milestones, including multiple data readouts this year and advancements into the next stages of clinical development. The second half of 2020 will be a pivotal period for both initiatives. Both candidates are currently in Phase 1/2 studies, with nearly 200 healthy volunteers and patients enrolled across both studies, which include assessments of single and multiple doses and various cohorts of specific patient populations. This expedited first-in-human study design will yield safety and tolerability data, dose response results, duration of effect, and patient responsiveness to therapy. It will allow us to present data from both programs at two or three conferences in the upcoming months. Additionally, it provides enough actionable information to engage with regulators regarding the next clinical development stages, possibly leading to registrational studies. We have already begun discussions with the FDA regarding ARO-APOC3, and our strategy is forming. We will initiate similar discussions for ARO-ANG3 and engage with European authorities for clarification on various design aspects, endpoints, and target patient populations. Both candidates offer significant flexibility regarding which patient populations and disease characteristics to concentrate on and how to structure the studies to assess the candidates' potential. For instance, ARO-APOC3 has various patient populations, from extremely rare genetic conditions, such as FCS with very high triglyceride levels, to more common conditions involving mildly elevated triglycerides. Each group has distinct characteristics that would require different clinical designs in terms of study size, duration, and endpoints. Altogether, this represents a substantial market opportunity. In the U.S. alone, approximately 1 million adults have triglycerides exceeding 1000 mg/dL, over 3 million have levels between 500-1000 mg/dL, and more than 41 million have levels between 200-500 mg/dL. Although not every one of these patients will qualify for therapy, viewing ARO-APOC3 solely as an orphan drug candidate overlooks the broader range of upcoming opportunities. This potential exists for ARO-ANG3 as well, specifically in patients with mixed dyslipidemias regarding triglycerides, LDL-C, and other cardiovascular and metabolic conditions. I believe investors may not fully recognize the magnitude of the commercial opportunities for both ARO-APOC3 and ARO-ANG3. This is an exhilarating time for these programs as we are beginning to identify potential commercialization pathways. We will discuss these avenues and timelines in the future, providing essential details for investors to effectively gauge how significant the opportunity is for large patient populations seeking new treatment options. We have also made substantial progress on ARO-HSD, which is in development for alcohol and non-alcohol-related liver disease. We started dosing in a Phase 1/2 study in March and have completed the healthy volunteer cohorts while activating cohorts that enroll patients with NASH or suspected NASH. The target, HSD17B13, is not a secreted protein, requiring us to collect liver biopsies to measure target engagement. This program experienced a brief pause in screening and enrollment due to COVID-19, but like our other initiatives, we do not expect this to materially impact our timelines. If patient screening and enrollment proceed as planned, we should generate data by year-end and expect to present it in the first half of 2021. Finally, I want to mention ARO-ENaC, our first inhaled RNAi candidate targeting the pulmonary epithelium. We anticipate dosing to begin this month in our Phase 1/2 study involving healthy volunteers and patients with Cystic Fibrosis. The candidate aims to reduce expression of the epithelial sodium channel, or ENaC, in the lungs to aid in rehydrating CF-related mucus and potentially enhance mucociliary clearance. As discussed during our ENaC webinar last week, there has been considerable progress in developing new therapies for CF over the past decade, but significant unmet needs persist. We estimate that around 14,000 patients in the U.S. are either ineligible for the most advanced therapies due to specific genotypes or have been identified as non-responders or insufficient responders in clinical trials. These patients continue to suffer from CF and require alternative treatments. We believe ENaC may serve as that alternative, with its mechanism of action expected to be theoretically applicable across genotypes. This is an exciting program, and we hope to gather data throughout the remainder of 2020, potentially resulting in a data readout in the first half of 2021. Our preclinical data has been very promising, and we are eager to see the translation of animal findings to humans in our new pulmonary TRiMTM platform. With that overview, I’d like to hand the call over to Dr. Javier San Martin. Javier?

Javier San Martin, Chief Medical Officer

Thank you Chris and good afternoon to everybody on the call. I want to highlight a few of our clinical programs and some key progress we made since our last conference call. Just like all biotech companies, COVID had an effect on some of our programs, but I'm very pleased to say that it appears this has been generally minor. In fact, some programs experienced little to no delay in our anticipated timeline. We continue to monitor the situation closely to ensure that study participants are not being exposed to additional risk, while at the same time moving forward rapidly when it is safe to do so. Even in the challenging environment of the last several months, I’m proud that Arrowhead’s clinical development team has executed at a very high level. Let’s start with ARO-AAT, our second-generation investigational RNAi therapeutic being developed as a treatment for the rare genetic liver disease associated with alpha-1 antitrypsin deficiency. As we announced last quarter, we voluntarily put the SEQUOIA Phase 2/3 study and the 2002 open-label study on a temporary pause for new screening and enrollment due to concerns around COVID-19. Both studies are now back up and running and open to new patient screening and enrollment. The pause caused a delay of approximately eight weeks for SEQUOIA and for the second cohort in 2002, after which, sites began to reopen and resume patient screening. The first cohort in 2002 was already fully enrolled and, importantly, we did not experience any concerning protocol deviations for those already on study. Let’s talk more about the 2002 open-label study, because we plan to have a data readout this year. To review, the study is designed to enroll approximately 12 participants in two sequential cohorts. Between the two cohorts, biopsy data will be assessed at baseline and after six months, 12 months, 18 months, and 24 months of treatment with ARO-AAT. As I mentioned, the first cohort, which is four patients, was already fully enrolled prior to COVID-19, and patients have continued on study as planned. All doses were administered and the six-month repeat biopsies have all been collected. Samples are being processed as we speak, and our plan is to have analysis completed in time to submit a late-breaker abstract to the AASLD Liver Meeting later this year. This is a potentially important readout for the program and for the field, because it is the first view of what happens inside the liver in alpha-1 patients after receiving therapy. We will be assessing reduction in the Z-AAT monomer, which we would expect based on plasma data from our Phase 1 healthy volunteer study. The Phase 1 data demonstrated that ARO-AAT treatment led to reductions in serum AAT levels down to below the level of quantitation with a multi-month duration of effect. This suggests that we might be achieving near complete suppression of the liver production of the mutant Z-AAT protein. At this time, no other therapies have shown this type of result using any modality. We will also be looking at whether the accumulated Z-AAT polymer can start to decrease after six months, which we are not expecting but would be pleasantly surprised to see. In addition, we will look at changes in inflammation and in various histologic parameters. Again, we wouldn’t expect to see these measures change after only six months of treatment, but it would be a very exciting result if we were to see improvements this quickly. Let’s now move to our cardiometabolic pipeline. I will start with AMG 890, an investigational siRNA therapeutic designed to lower lipoprotein (a), or Lp(a), for the treatment of cardiovascular disease, which is licensed to Amgen. As Chris mentioned, Amgen recently started a Phase 2 study, which we are very excited about. The study is a double-blind, randomized, placebo-controlled Phase 2 study to evaluate efficacy, safety, and tolerability of AMG 890 in approximately 240 subjects with elevated Lp(a). The primary endpoint is the percent change in Lp(a) from baseline to week 36. Key secondary endpoints include the percent change in Lp(a) from baseline to week 48, and percent change in LDL-C and Apolipoprotein (B) from baseline to weeks 36 and 48. Moving to our two wholly-owned cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, let’s begin with ARO-APOC3, our candidate targeting apolipoprotein C3, being developed as a potential treatment for patients with hypertriglyceridemia. We continue to be very impressed and encouraged by results from the ongoing Phase 1/2 clinical study called AROAPOC31001. I will talk about the study design and progress and then discuss where and when we expect to present data. AROAPOC31001 is a Phase 1/2 single and multiple-dose study to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamic effects of ARO-APOC3. There is a single-dose and multiple-dose portion of the study in adult healthy volunteers and a multiple-dose portion of the study in patients with hypertriglyceridemia. The study reached full planned enrollment of 80 subjects, and we subsequently expanded the study to assess a total of up to 112 subjects. As of today, 100 subjects have been treated. The first data from the single-dose healthy volunteer portion was presented at the American Heart Association in 2019. We have been accepted to present additional data at the European Society of Cardiology meeting, the National Lipid Association meeting, and we may potentially have additional data at the American Heart, pending abstract acceptance. Between these three meetings in the second half of 2020, we plan to have multiple-dose and follow-up data in both healthy volunteers and patient cohorts. Together these represent a rather full dataset and should be a good view on the safety and activity of ARO-APOC3. Data from the ARO-APOC3 Phase 1/2 study have indicated very potent triglyceride reduction, frankly more potent than anything I’ve seen before. Because of this, we are exploring potential designs for the next stages of clinical development to study the drug in multiple patient populations that may benefit from triglyceride reduction. We have been engaging with regulators on that topic and hope to provide some clarity later this year. We are hopeful that during the first half of 2021 we will be able to initiate a Phase 3 study in smaller populations and a Phase 2b study in larger populations. Our other wholly-owned cardiometabolic candidate is ARO-ANG3, targeting angiopoietin-like protein 3, or ANGPTL3, and is being developed as a potential treatment for patients with mixed dyslipidemia. The current clinical study is called AROANG1001. It is a Phase 1/2 single and multiple-dose study to evaluate safety, tolerability, pharmacokinetic, and pharmacodynamic effects. Both the healthy volunteer and patient portions of this study have reached full planned enrollment of 93 subjects. Similar to ARO-APOC3, we continue to be very encouraged by the clinical data and plan to present at ESC and NLA, and hope to also present at the American Heart Association, pending abstract acceptance. We are working on a clinical development plan and will be engaging with regulators shortly to discuss the plan. Our hope is to start a Phase 2b study in the first half of 2021 in an appropriate patient population that may benefit from a lowering of both triglycerides and LDL-Cholesterol. This may affect multiple cardiovascular risk factors simultaneously, which is potentially very exciting. I will now briefly touch on progress in our earlier stage pipeline. ARO-HSD is our investigational candidate for the potential treatment of alcohol and/or non-alcohol related liver disease. The genetic validation is strong for inhibiting the target HSD17B13 in NASH cirrhosis, and alcoholic hepatitis and cirrhosis patients. This is an exciting program for us as it is the first candidate against this novel target using any modality to enter clinical studies. We are conducting a Phase 1/2 single and multiple-dose escalating study to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamic effects of ARO-HSD in normal healthy volunteers as well as in patients with NASH or suspected NASH. Additional exploratory objectives include assessment of various measures of drug activity using liver biopsy. We have completed enrollment and dosing of the healthy volunteer portion of the study and we have initiated the multiple-dose portion of the study. There was a short delay in this study due to COVID-19, but it did not materially affect our anticipated timelines. We anticipate that initial data should be available to present in 2021. Our two other early stage programs, ARO-HIF2 and ARO-ENaC, are also our first candidates targeting tissues outside the liver. ARO-HIF2 is designed to treat renal cell carcinoma, and we are currently screening patients to begin a Phase 1b study. ARO-ENaC, designed to treat cystic fibrosis, is scheduled to begin dosing in a Phase 1/2 study this month. We hosted a webinar last week to talk about the target, the preclinical data, and the plan for the candidate. The webinar also featured outside cystic fibrosis expert Dr. Marcus Mall. It was full of good information about the program and I highly recommend you watch a replay if you didn’t see it live. It is still available on the Events and Presentations page on our website. I will now turn the call over to Ken Myszkowski, Arrowhead’s Chief Financial Officer. Ken?

Ken Myszkowski, Chief Financial Officer

Thank you, Javier. As we reported today, our net loss for the quarter ended June 30, 2020 was $13.6 million or $0.13 per share based on 101.8 million fully diluted weighted average shares outstanding. This compares with net income of $20.3 million or $0.21 per share based on $98.9 million fully diluted weighted average shares outstanding for the quarter ended June 30, 2019. Revenue for the quarter ended June 30, 2020 was $27.4 million compared to $42.7 million for the quarter ended June 30, 2019. Revenue in the current period relates to the recognition of a portion of the upfront payments and milestones received from our license and collaboration agreements with Janssen, as we continue to work toward completing our performance obligation of managing the current Phase 1/2 HBV clinical trial. Revenue from the Janssen agreement is recognized based on our estimate of the proportion of effort expended toward fulfilling our performance obligations, primarily overseeing the completion of the current Phase 1/2 HBV clinical trial. We expect the remaining $26.3 million of deferred revenue to be recognized in this calendar year. In addition, current period revenue also included the $20 million milestone payment we accrued due to Amgen initiating their Phase 2 clinical trial for AMG 890. Revenue in the prior period related to the recognition of a portion of the upfront payments and milestones received from our license and collaboration agreements with Janssen. Total operating expenses for the quarter ended June 30, 2020 were $43.3 million compared to $24.1 million for the quarter ended June 30, 2019. This increase is primarily due to increased non-cash stock compensation expense. Stock compensation expense has increased because the valuation of new stock option and restricted stock awards granted has increased with the growth in our stock price. Additionally, stock compensation expense increased due to the timing of achievement of certain performance-based awards in each period. The increase in our total operating expenses was also driven by the increased clinical trial costs as our pipeline of clinical candidates has increased and increased personnel costs in both R&D and G&A as our headcount continues to grow. Net cash used by operating activities during the quarter ended June 30, 2020 was $33.4 million, compared with net cash provided by operating activities of $10.5 million during the quarter ended June 30, 2019. The increase in cash used by operating expenses during the quarter is consistent with the increase in our cash operating expenses. The cash provided by operating activities in the prior period was driven by the receipt of a $25 million milestone payment from Janssen due to the initiation of the triple combination cohort in the HBV Phase 1/2 clinical study. We estimate our near-term cash burn to average $30 million to $35 million per quarter. Turning to our balance sheet. Our cash and investments totaled $464.6 million at June 30, 2020 compared to $302.9 million at September 30, 2019. The increase in our cash and investments is primarily due to the December 2019 equity financing we completed, which generated $250.5 million in net cash proceeds for the company. Our common shares outstanding at June 30, 2020 were $102.3 million. With that brief overview, I will now turn the call back to Chris.

Christopher Anzalone, President and CEO

Thanks, Ken. As we have discussed Arrowhead has a lot going on in all of the following stages: one, platform development and expansion into new extra-hepatic tissues, such as lung, tumor, muscle, and other cell types; two, early discovery as evidenced by several COVID-related programs, ARO-JNJ1, 2 and 3 and other undisclosed programs; three early development such as ARO-LUNG2, ARO-HIF2, ARO-ENaC and ARO-HSD; and four, emerging mid to later stage developments such as ARO-AAT, ARO-APOC3, ARO-ANG3, and partner programs JNJ-3989 and AMG 890. This is a very large pipeline with enormous opportunity for a company of only 200 people that currently only burns between $30 million to $35 million per quarter and has a market cap of less than $5 billion. This again speaks to Arrowhead culture of finding a way forward and not allowing bureaucracy or legacy processes to block innovation. It is also a testament to our commitment to capital efficiency and being good responsible stewards of the capital that we have been entrusted with. Even as we continue to grow, these attributes will be important parts of the Arrowhead culture. The rest of 2020 is going to be very busy. We anticipate multiple data readouts, important clarity on the future paths and timelines for some of our programs and new announcements about previously undisclosed targets and candidates. Our existing programs continue to advance and the reach of our technology platform continues to expand. This is a very exciting place to be. Thanks again for joining us today. I would now like to open the call to your questions. Operator?

Operator, Operator

Our first question comes from Alethia Young. Your line is now open.

Unidentified Analyst, Analyst

Hi. Thank you. This is Alberto on for Alethia from Cantor Fitzgerald. Congratulations on the quarter. And I have two quick questions. So first is the HIF2 program, which we started in December, if I recall correctly we were just curious about how you're thinking regarding updating the street on that. Would you do an interim readout later this year? Or are you waiting for all patients to be treated?

Christopher Anzalone, President and CEO

Thank you for the question. We are not planning an interim update this year. The progress has been slower than we anticipated. We submitted the IND in December, and I expected us to begin dosing by June, but COVID has significantly delayed that. Because it's a biopsy study, we are primarily focusing on academic institutions, which has prolonged the contracting process to initiate the study. We are hopeful to start dosing soon and intend to provide updates once the study is complete. It is unlikely we will have results by the end of this year; perhaps we can provide updates in the middle of next year, but that will depend on the timeline. We will offer more detailed guidance once we commence dosing.

Unidentified Analyst, Analyst

Thank you for that. And then just on the HSD assets, do you have a view on potential differentiation that different RNAi approaches can have in liver disease? And along those lines is still your goal to find a partner for this program? Or are you considering going at it alone? And if so or either way, I guess, what gives you the confidence to continue investing in this given the challenge in this stage?

Christopher Anzalone, President and CEO

Sorry, which program did you say?

Unidentified Analyst, Analyst

Yes.

Christopher Anzalone, President and CEO

Yes, I'll share that our primary differentiator is our speed. To my knowledge, we are the first company in any modality to bring an HSD-based therapeutic to the clinic. This is a significant milestone for us. Secondly, I anticipate that this will be an effective therapeutic, likely to be potent and capable of achieving a substantial knockdown. I believe we have a strong chance of effectively reducing that protein. However, there are challenges. The first challenge is that the protein is not as secretive, and currently, there are no identifiable biomarkers. This means we will likely need a biopsy study in the near term, which we are prepared for. The current study supports this, and I think we will be able to enroll without issues, but it remains a challenge. The second challenge is that the mechanisms behind these targets are not fully understood. Genetic validation indicates that reducing HSD should greatly benefit NASH and could be even more advantageous for alcohol-related hepatitis, but the underlying biology is still somewhat unclear. We are enthusiastic about the program and may target it in the future, but for now, we are comfortable moving it forward as is. NASH is a complex area, but we are pleased to continue making progress at this early stage. We will remain flexible and open to opportunities, and if a favorable deal arises, we will consider it, but for now, we are focused on treating patients.

Unidentified Analyst, Analyst

Thanks again for that. And congratulations.

Christopher Anzalone, President and CEO

Sure. Thank you.

Operator, Operator

Next question from the line of Salveen Richter of Goldman Sachs. Your line is now open.

Salveen Richter, Analyst

Great. Thank you for taking the question. What levels of the polymer reduction do you expect to see in the 6-month liver biopsies? And what do you think is necessary in order for you guys to approach the FDA on changing the primary endpoint or shortening the Phase II/III trial? And then I have a follow-up on the ENaC program?

Christopher Anzalone, President and CEO

I'm glad you asked that question because I want to clarify this. We don't expect changes in polymer content after just six months. However, we do anticipate significant monomer reduction, which is in line with our expectations based on the drug's activity observed in the healthy volunteer study. Although those levels were plasma levels, we noted good deep production, and therefore, we foresee a substantial reduction in monomer at this stage. The situation with polymer is different and less clear regarding its metabolism. Being pioneers in this field has its pros and cons; while we're the first, it means there's still much we need to learn. One aspect we need to understand is how this polymer is metabolized. It’s possible that we may need liver cells to help reduce that polymer, and it’s also conceivable that its metabolism could be very slow, if it can be metabolized at all. Our main message is that we expect significant deep production of monomer, virtually no reduction in polymer, and likely no changes in inflammation at this early six-month mark. There’s a higher probability that we would begin to see such changes emerge after approximately a year of therapy.

Salveen Richter, Analyst

Got it. That's helpful. And then on the ARO-ENaC program, what dose level would you penetrate the tissue? And how do you see your asset differentiated from the competitors in the space?

Christopher Anzalone, President and CEO

Javier?

Javier San Martin, Chief Medical Officer

So this is how while dosing patients healthy volunteers first and then patients, and this is coming from the experiments in the preclinical lab. When you see the total dose that we will dose patients approximately 25% of that dose is expected to be delivered to the lung, and that is an efficiency related to the nebulization process. So that's an estimation, but right now, we don't know for sure, but that's what we've seen in the preclinical work and expected to see in the clinical. However, in clinic it's very difficult to know of course. And what's the second?

Christopher Anzalone, President and CEO

Yes. Regarding competition, I believe we have a favorable position from a competitive perspective; it’s a well-established target. Others have attempted to target ENaC with small molecules in the past but have generally struggled to achieve sufficient reduction in the lungs while preserving function in the kidneys. We are confident that we will not see reduction in the kidneys. Our studies in animals suggest that we do not expect a reduction in kidney function. Therefore, I think we are practically the only ones targeting this area in cystic fibrosis at the moment. There have been some antisense programs, but I believe they will likely face the same challenges that previous antisense programs encountered, which are related to task.

Salveen Richter, Analyst

Great. Thank you.

Operator, Operator

Next question is from the line of Ted Tenthoff from Piper Sandler. Your line is now open.

Ted Tenthoff, Analyst

Great. Thank you very much for taking my question. I wanted to ask a little bit more in terms of the COVID program. With so much going on in the space what are the benefits of RNAi mechanism potentially for COVID? And can you tell us a little bit more about sort of maybe how that clinical program looks? Thanks.

Christopher Anzalone, President and CEO

Sure. There's not much we can tell you on that because we're still early there and we're still really exploring a lot of things. But as I mentioned in the prepared remarks, there are three broad areas that we are interrogating simultaneously. One is knocking out or knocking down receptors in the lung that enable the virus to get in. That biology is reasonably clear or as clear as it can be for this virus. So we will be going after that. I think we have a role to play there. Look we've got a clinic-ready lung program. We've been leaders in HBV. We were the first ones to show a good potent antiviral effect in hepatitis B. And so I think we're well positioned to play here, so we feel good about that. Second is direct antivirals. Again, we show with HBV that we're pretty good at that and I think the opportunity here is not just to look at the current coronavirus but to think of this more broadly. If one were to expect there will be coronavirus outbreaks in the future and it passes is prevalent, that's probably a good assumption. We would hope to find some well-conserved regions among known coronaviruses that we can knock down and have antiviral effects. We are interrogating that right now and we think we can play in that space. And then third with anti-inflammatory, this jogs well with our other lung programs. We think that there are good indications for anti-inflammatories. And so we're developing that right now and we think that that might play a role in a therapeutic for coronavirus.

Ted Tenthoff, Analyst

Cool. Sounds interesting. I look forward to hearing more.

Christopher Anzalone, President and CEO

Yes. Thanks, Ted.

Operator, Operator

Next question from the line of Luca Issi of RBC Capital. Your line is now open.

Luca Issi, Analyst

Terrific. Thanks for taking my question. Luca Issi from RBC Capital. Two questions. Maybe one for Javier on ARO-AAT and maybe one bigger picture question for you Chris. So, on ARO-AAT, it sounds to me that you're saying that there is somewhat of a time lag between the reduction in the monomer versus the reduction in the polymer, however, when I see the preclinical data published at JCI, I don't see there much of a lag there as actually the peers to the monomer and the polymer just reduce concurrently there. So, just curious about what am I missing there? That's the first question. And the second question Chris on the strategy. You obviously have a very impressive pipeline at this point. Can you just maybe dichotomize the world for us between assets that you feel you have generated enough data that you would consider a partnership now versus assets that you want to further derisk before entertaining any type of partnership? Thank you.

Javier San Martin, Chief Medical Officer

The first part of your question concerns the relationship between preclinical work and clinical outcomes. A key difference is that preclinical work often looks at very early stages and has a longer-term perspective. Therefore, we currently lack the ability to observe the dynamic reduction of various components of the misfolded proteins in the liver. Additionally, we are gathering more insights from our natural history study in collaboration with others, which highlights that chronic diseases are dynamic and unfold in different stages over time. The central issue we face is the production of these abnormal misfolded proteins, which initially accumulate in the liver as monomers and eventually organize into polymers, leading to complications. This accumulation is why patients experience inflammation, which can progress to fibrosis and ultimately advanced liver disease. We view this as a dynamic process; an immediate focus can be on inhibiting the production of the mutant protein, which should gradually decrease the levels of both monomers and polymers in the liver, thereby reducing inflammation and slowing the progression of liver disease. The 2002 study is likely to provide more precise answers, as we are analyzing biopsies at four intervals after therapy initiation—six, 12, 18, and 24 months. This will help us understand how these dynamic events occur and how we can intervene by inhibiting insulin to allow the liver to recover.

Christopher Anzalone, President and CEO

Thank you. Regarding your strategic question, this is crucial for our approach. We have been concentrating on developing a substantial pipeline and maintaining momentum. We anticipate moving forward with 10 clinical programs soon and potentially expanding that to 20 in the coming years. This expansion will provide us with significant opportunities for partnerships, as I believe no company of our size, or even larger, can handle the commercialization of all these programs independently. We can identify clusters of assets for our own commercialization while seeking partnerships for others. Looking at our current clinical programs with data, including AAT, APOC3, and ANG3, I believe we have sufficient data to pursue partnerships for any of these, as the results have been promising. For AAT, we have demonstrated decreasing plasma levels in healthy volunteers, and we will soon have biopsy data to assess intrahepatic effects. I believe we've achieved clinical proof-of-concept and are performing as expected with a good safety profile. For APOC3, we've observed a 95% reduction in triglycerides and a decrease in LDL, with positive tolerance observed in approximately 100 patients or healthy volunteers. As for ARO-ANG3, we've noted an 85% reduction in triglycerides and a 40% decrease in LDL, also well-tolerated, with 93 patients dosed so far. I believe these candidates are ready for potential partnerships, and it's up to us to advance these programs and determine the optimal timing and candidates for partnering.

Luca Issi, Analyst

Superb. Thank you. Thank you again and congrats on the progress.

Ken Myszkowski, Chief Financial Officer

Thank you.

Operator, Operator

Next question is from the line of Maurice Raycroft of Jefferies. Your line is open.

Maurice Raycroft, Analyst

Hi everyone. And congrats on the progress and thanks for taking my questions. First question was on ARO-AAT. Just wondering if you validated inflammatory biomarker assay you had for that program.

Javier San Martin, Chief Medical Officer

We haven't fully validated our approach yet, but it provides a recognized method for assessing inflammation. We plan to conduct an early analysis similar to our preclinical work, focusing on quantifying inflammation forces in specific portal areas. This quantification of inflammation is expected to be standardized and well-defined, allowing for reliable comparisons between baseline and post-baseline data.

Maurice Raycroft, Analyst

Got it. And wondering for that program too if you can provide any details on the baseline characteristics of the patients that you've got in the open-label study, and how do those baseline characteristics compared to some of the patients that you've enrolled in the pivotal Phase II III?

Javier San Martin, Chief Medical Officer

Yes. Well, so I don't have any detail right now. We can follow-up, if you want offline. So I don't recall exactly. But we can get back to you later on.

Christopher Anzalone, President and CEO

Of course, the goal there was to be treating similar patients. And so what we see in the open-label study, our anticipation is that that will read on what is likely happening within the blinded study. So the question is, are they different to one of patients? The answer is they really shouldn't be.

Javier San Martin, Chief Medical Officer

Because the inclusion criteria is similar and so, I was about to repeat that, but essentially the age groups is 18 to 50 or 55. Of course, they have ARO-AMG1, and higher than 65. So inclusion criteria are very, very similar. So we expect that this result will be applicable to understand what happened on the larger Phase II/III study.

Maurice Raycroft, Analyst

Got it. And I think in the prepared remarks you said, you've been having discussions with regulators for APOC3 and ANG3. Can you provide more clarity on when you're going to finalize plans and disclose some more of the details from your discussions with the regulators in the U.S. and the EU?

Christopher Anzalone, President and CEO

Yes. I don't think we're ready to provide guidance on that yet. We did have interactions with the FDA over the summer. And so we're still formulating our strategy there.

Maurice Raycroft, Analyst

Got it. Okay. Thanks for taking my questions.

Christopher Anzalone, President and CEO

You're welcome.

Operator, Operator

And the next question from the line of Madhu Kumar. Your line is open.

Madhu Kumar, Analyst

Hi everyone. Thanks for taking my questions. So my first one is on, AAT, so kind of following up on, Luca's question so you can imagine there are two schools of thought around clinical benefit in the alpha-1 antitrypsin liver disease, related to either a reversal of polymer and globular formation versus liver cell turnover. So based on your belief that six months will not be enough for AAT knockdown to translate to clinical benefit. Do you pay your health in the liver turnover school of thought? Or do you think you're spread between the two? Or how do you think about it in terms of which realm do you think you'll get benefit in terms of the alpha-1 antitrypsin liver disease?

Christopher Anzalone, President and CEO

I'll let Javier answer this. I'm not sure we have a clear understanding. We believe that polymer should be reduced in the liver or that there has been a turnover at the site. That's our current understanding. Beyond that, I don't think we have a good grasp on the metabolism. Javier?

Javier San Martin, Chief Medical Officer

Yes. As I mentioned earlier, this liver disease often begins with an insoluble factor, such as hepatitis or NASH. Removing that insoluble factor is likely to lead to liver improvement, as demonstrated in various situations. This new treatment aims to eliminate the insoluble factor. Over time, the remodeling process will help remove the polymers and globules, which we hope will enable the hepatocyte to heal and prevent complications or the disease from progressing to cirrhosis. That's our perspective on this.

Madhu Kumar, Analyst

Interesting. So you all don't think the preclinical data suggests there's a back reaction that occurs where polymer or monomer converts back to a states you don't have a nascent AAT form. You don't think there's a bad reaction that happens?

Christopher Anzalone, President and CEO

A bad reaction meaning unpolymerization if you will?

Madhu Kumar, Analyst

Exactly.

Christopher Anzalone, President and CEO

Yes. I just told that we just don't know.

Madhu Kumar, Analyst

Okay. And then on ARO-ENaC, so you obviously have gone into the long and that's really exciting as an opportunity. What data do you need to see from ARO-ENaC to kind of more broadly pursue the lung including the COPD indication either, kind of, pulmonary facility on directed lung indications like what do you need to see? Maybe one benefit or do you need many more proximal to that that will give you confidence that you can hit targets in the lung?

Javier San Martin, Chief Medical Officer

Yes, this is a Phase 1 study, and we are conducting two assessments in patients: FEV1 using spirometry, which is well-documented, and LCI or lung clearance index. We believe this method is particularly sensitive for detecting early changes, likely related to mucociliary clearance. We held a webinar about a week ago with several details you might find useful; it's available on our website. In this Phase 1 study, we have enough patients to likely observe changes in LCI. Additionally, LCI will be conducted on a subset of patients with an FEV1 greater than 70% since the methodology is accurate for this population. We are assessing FEV1 across all three cohorts of patients with cystic fibrosis, putting us in a good position to observe changes from baseline and possibly detect an initial difference if a significant change occurs. We are optimistic that we will obtain proof-of-concept data, as the study is designed to achieve this objective in Phase 1.

Madhu Kumar, Analyst

Okay. So then following that logic, the lung clearance index as a measure for each individual like it's a surrogate measure for ENaC inhibition. That's the kind of key parameter for you to broadly pursue the lung?

Javier San Martin, Chief Medical Officer

It will provide us with information indicating a pharmacodynamic effect, not just inhibition. This will show improvements in respiratory ventilation and homogeneity, which are linked to mucociliary clearance and may lead to clinical benefits. Therefore, this represents a pharmacodynamic outcome. Clinically, we won't be able to measure this directly with this target since it requires a lung biopsy. The study is designed to identify these changes, particularly using the Lung Clearance Index, and hopefully also FEV1.

Madhu Kumar, Analyst

Got you. Awesome. So then stepping back and thinking I know previously we've all talked about this idea of kind of the fancy term I guess the bispecific RNAi hitting multiple targets at the same time. Like where is your progress on that? And where are you thinking about pursuing that? Considering you've got this whole kind of basket of cardiometabolic targets where I think a not unreasonable expectation would be, well, why not go after multiple targets at the same time. So how are you thinking about that? What do you need to do to kind of really pursue that in gusto?

Christopher Anzalone, President and CEO

Yes, that's a very intelligent question, and it's something we consider often. The data we have collected so far regarding APOC and ANG in the cardiometabolic area is fascinating. Combining those findings is even more compelling, and there are several targets within the lung that could also be interesting to explore through combination approaches. Additionally, when thinking about NASH, there are multiple pathways that need to be addressed, and a bispecific or dimer approach could be valuable. We share the same enthusiasm for the potential of bispecific or dimers, but we are still navigating some challenges related to potency as we work on these concepts. We can see the possibilities, but we are not quite there yet. Stay tuned for more updates as we make progress towards clinical trials on this idea, but it's still early for this concept.

Madhu Kumar, Analyst

Okay. Great. Thanks very much, guys.

Operator, Operator

Next question from the line of Mani Foroohar of SVB Leerink.

Mani Foroohar, Analyst

Hi. Thank you very much. So I don't think I can match the elegance of Madhu's question around law of mass action and ARO-AAT. So thinking about it and perhaps some more, well we'll say a little bit more of a craft way going back up 10,000 feet. When you think about the time horizon to see a polymer benefit and clearly probably six months it will be some longer period versus the time horizon to see ecology improvement should we expect a polymer benefit to lead to histology improvement by a year two years some very long period of time? Or should it be very quick one striking after the other given what we know about from the preclinical data, data and natural history? And then I have one quick follow-up on a finance question.

Javier San Martin, Chief Medical Officer

Well, we really don't know the goodness I think we're going to answer the questions as we go along. And the Phase 2/3 study states the post baseline biopsy is right now at two years post position of the study. So we're taking right now a relatively conservative approach to do the post baseline biopsy two years after initiation therapy to allow enough time to be able to see what we've seen in the preclinical work. Now exactly how that will look like? I don't know, but 2002 as a sequence of biopsy a different time point different patient population might help us to fine-tune the time frame of changes monomer polymer globulus and the consequence lever that much associated with that. So more to come.

Christopher Anzalone, President and CEO

Yes, to reiterate our timeline and expectations, we are currently analyzing the biopsies and anticipate having data in time to submit a paper or abstract to AASLD. I hope that we receive acceptance there, which will enable us to have more informed discussions about our findings and future possibilities. However, it is still too early to provide definitive insights. Our preclinical data was promising, showing improvements across all measures, but we are uncertain how these results will translate from preclinical studies to human subjects.

Mani Foroohar, Analyst

That's really helpful. You mentioned the impact of stock-based compensation. It's clear that your stock has been volatile over the last couple of years, but that makes sense considering the data you've produced and the milestones you've achieved. When we model stock-based compensation, we focus on total shares issued rather than dollar amounts to account for that volatility. Should we anticipate that the shares or options issued will remain flat compared to this year, increase significantly, or decrease slightly? How should we approach this in our modeling for stock issuance instead of relying on dollar figures for such a variable equity security?

Christopher Anzalone, President and CEO

Yes. I would expect that to be pretty flat on a stock basis. Again to use your differentiation right? You're not on a dollar basis, but on a number of share basis.

Mani Foroohar, Analyst

Great. Thanks really helpful. Thanks guys.

Christopher Anzalone, President and CEO

You’re welcome.

Operator, Operator

Thank you. Next question from the line of Mayank Mamtani of B. Riley. Your line is open.

Mayank Mamtani, Analyst

Congrats team on the progress. Just no more ARO-AAT question, I just want to drill down on the cardiometabolic portfolio. Starting with the 890 the Amgen compound could you just comment on what data they have presented or they will present? And in context of another agent that is already in an outcome study. Just kind of anything that is out there you can talk about the data that they have so far?

Christopher Anzalone, President and CEO

Right. Yes. As far as I know, they haven't presented any data yet. I'm not in a position to share anything I shouldn't because we haven't been informed about anything. I expect they will present some data by the end of this year, but I don't know the venue or timing, and I don't know what the data will reveal. We are optimistic that it will be positive data because we believed it would be a significant trigger. We anticipate it to be published and we expect it to lead to good and lasting LP(a) knockdown, though that is speculative based on animal models. We look forward to seeing the results alongside you.

Mayank Mamtani, Analyst

I'm noticing a slight shift regarding APOC3 compared to what was previously discussed about Ag being aimed at the broader population. It seems like there's also an intention to include APOC3 in the broader hypertriglyceridemia category. Can you clarify whether this change is due to developments in the landscape, ongoing regulatory discussions, or is it based on the data that will be presented at NLA and other conferences? Any additional insight you can provide would be appreciated.

Christopher Anzalone, President and CEO

Yes. Thanks for asking that question because I think it's important. Part of this may be that we could have messaged this better, but another part is that our thinking really has evolved. We've talked a lot about addressing smaller populations because that looked like a near-term as commercialization. And so we've always thought that that's how we approached this asset. We get into these smaller populations relatively quickly and then expand the label by essentially walking down the triglyceride levels. And so you think of this just in broad terms of say about 1000 and then say, 500 to 1000 and then say, 200 to 500 as we talked about in the prepared remarks. I think Vascepa, I think their first tranche, if you will was to was 500 to 1000 I think was their first group that got approved on. In any event so our – so A, we are trying to message is a bit better that we see this as a whole as a spectrum of patients that we can address from a small market to larger market. So I don't want to talk about that a bit more. But also as I mentioned I think our I think that our thinking has changed here a bit in part because the data has just been so good as we look at the safety profile and as we look at the depth of triglyceride knock down seen. And frankly the increase in HDL we have not talked very much about but we think still could be important. As we look at all that we just add ourselves. We've got something here that really should be product to larger populations. And so and so again our goal here is to maybe start with small populations because we can get to that commercial opportunity most rapidly, but then to expand this out. And look I think this is at least as large a market opportunity at ANG3 maybe larger, but at least as large as that given the hyper patients that we can address. Look the numbers we talked about 41 million adults are estimated to have triglyceride between 200 and 500 in the U.S. alone. That's a pretty big swath for us to potentially treat some set of that.

Mayank Mamtani, Analyst

Okay. Great. Can you confirm if you still have some part level disease patient subjects enrolled in ANG3 and if you are still planning to continue with some of these subjects?

Christopher Anzalone, President and CEO

Yes. So, Javier couldn't understand what you said. Are you referring to the different patient groups and whether we are still enrolling?

Javier San Martin, Chief Medical Officer

So ANG3 is completely enrolled. So we complete that ADI where to look at the data as it comes. So no we complete that study together. And we're planning on the first interaction with the regulatory agency here with the FDA to plan the Phase 2b study. To start hopefully at the beginning of this first half of 2021. So the study is complete in terms of enrollment. And very soon we have completed 113 days final data for all patients all subjects and patients in the study.

Christopher Anzalone, President and CEO

And we've talked about liver panels for all these patients. And what has always excited us about this pathway in this target has been the possibility of lowering LDL in non-LDL receptor mediated fashion and lower the triglycerides. That's been the core of our interest. Now if you go a bit beyond that you look at the possibility of insulin sensitivity and liver fat the data that we and others have seen in animal models have been interesting. And so that was nice to have but not a need to have if you will and we were looking forward to seeing whether or not we see that translate into humans given the data from antisense candidates we are not expecting to see that translate. We're not expecting to see changes in or improvement in insulin sensitivity. We're not expecting to see changes in liver fat. Now that we have some data here. So maybe we're wrong there, but just given what we've seen from any sense we're not expecting to see that. We think that's fine, because it's the triglyceride and LDL that makes a really powerful asset. But we do have those cohorts enrolled and so we'll find that out and we'll be reporting on those as well.

Mayank Mamtani, Analyst

Excellent. Look forward to those updates. Thanks for the questions.

Christopher Anzalone, President and CEO

You’re welcome.

Operator, Operator

Thank you. The last question comes from Robert. Your line is open.

Unidentified Analyst, Analyst

Hi. Thank you so much for taking my questions. First off, congrats on your progress and continued growth. I only have a couple of quick matters as you cover my other questions. I'm sorry, if I missed it, but did SEQUOIA Part B start dosing at?

Christopher Anzalone, President and CEO

No, it has not.

Unidentified Analyst, Analyst

Okay. And I know that you mentioned before that Arrowhead is comfortable in rolling out its own orphan drugs. Would you consider partnering or selling any of your orphan drugs, especially ENaC or AAT or are your orphan drugs off the table when it comes to these kinds of deals?

Christopher Anzalone, President and CEO

No, I would say that is off the table. We don't want to be seen solely as an organ indication company, nor do we intend to keep everything we have in those areas. If you look ahead five or ten years, you'll likely see a portfolio of drugs that includes some with smaller indications and others with larger ones, including potentially very large indications. So, there's nothing about the smaller indications that would suggest we are firmly committed to them regardless of the circumstances.

Unidentified Analyst, Analyst

Okay. That's all I have. Thank you so much.

Christopher Anzalone, President and CEO

Thank you.

Operator, Operator

Thank you. And that concludes today's conference. Thank you everyone for participating. You may now all disconnect.