Elanco Animal Health Incorporated (ELAN) Q3 2016 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2016 Financial Results Conference Call and Webcast for Kindred Biosciences. At this time, all participants have been placed on listen-only mode. At the end of the prepared statements, participants will have the opportunity to ask questions. [Operator Instructions] Please note that the remarks today will include forward-looking statements and that actual results could differ materially from those projected or implied in our forward-looking statements. For a description of important factors that could cause actual results to differ, we refer you to the forward-looking statements in today’s press release and the note on forward-looking statements in Company’s SEC filings. It is now my pleasure to turn the call over to KindredBio’s CEO and President, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon and welcome to our third quarter 2016 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our Chief Operating Officer and Wendy Wee, our VP of Finance. I will begin the call with a general corporate update. Denise will then follow with an update on our lead programs, and Wendy will conclude with the third quarter financial highlights. We had a very productive and busy quarter. We are making excellent progress on our upcoming approvals of our lead product candidates Zimeta and Mirataz, and we have established a necessary infrastructure for the commercial launches next year. We also received promising preliminary data from pilot studies on our industry-leading biologic pipeline. Let me start with an update on Zimeta, our leading equine for fever in horses. All sections of the New Animal Drug Application or NADA have been submitted and we recently announced that the efficacy technical section has been approved by the FDA, which is a major milestone. We have already responded to the FDA’s comments on our CMC technical section and are in the process of responding to questions on our safety technical section. We expect approval by the first half of next year assuming that the FDA review proceeds as expected. I am pleased to note that because of the proactive work by our team, we anticipate the launch to be at the same time as approval. We have already built a small but highly experienced commercial team to support the launch of Zimeta including veterinary services, marketing and commercial operations. We plan to add to this infrastructure as we get closer to launch, though obviously in a very prudent manner. As we’ve discussed fever in horses is an important need with the close to 1 million horses treated each year for fever. Turning next to Mirataz, our transdermal ointment for the management of weight loss in cats, we submitted a last major technical section of the NADA during the quarter and the review is proceeding well. Over the coming weeks, we plan to respond to questions on the CMC technical section. And based on the timing, we expect approval in mid-2017, assuming that the FDA review proceeds as expected. Again, because of the proactive work by our team, we anticipate the launch to be at the same time as approval. Now, we have had substantial interest from several potential partners on Mirataz, and they are in our data room currently conducting due-diligence. And as we mentioned previously, if the economics are more favorable to partner the drug, we will do so. In the meantime, we are also preparing to launch the drug ourselves. With 9 million cats experiencing this condition every year, it is a very attractive market. Denise will go into more detail on the progress of other promising candidates in our pipeline, but I want to touch on our biologic program. The antibodies are progressing well and the new scaffold technology KIND-Bodies is also making excellent progress. We have built a world-class team that can take a molecule all the way from hypoderma to a feline [ph] development to commercial production. And our program utilizes some of the most advance protein engineering techniques in industry for designing and manufacturing. We believe that biologics will become the cornerstone of companion animal therapeutics just as they have on the human side. In addition, I am pleased to report that we have nearly completed the commissioning of our biologics manufacturing plant. We have performed our initial engineering runs. As I have mentioned in the past, ours is one of the most advanced cutting-edge plant in the world and it is a critical part of our strategy to become the leader in veterinary biologics. Also, Wendy will discuss this, but we remain extremely judicious with our cash expenditures. For example, we saved a substantial amount by completing the Mirataz pivotal study ahead of schedule and we have also been able to push off some of our manufacturing spending to 2017. This has allowed us to substantially reduce our burn this year and we continue to look for ways to achieve further efficiencies. In summary, we are very excited about the year ahead. We expect to have two products approved within five years of launching the Company. We are advancing our pipeline in line with our strategy to develop each drug for $3 million to $5 million within three years to five years. We are building a strong track record of execution. Already we are leaders in the biologics space, and plan to assume become the leader in deep line space. In short, we are a pioneer in burgeoning new field. Thank you. And I’ll now turn the call over to Denise.

Thank you Richard. At the risk of sounding like a broken record, and I am here to tell you that Q3 was another very productive quarter for our Company. Our team is really firing on cylinders. We are dedicated to advancing our pipeline and planning for the anticipated approvals and launches of Zimeta and Mirataz. We have made a lot of progress on our equine pipeline since last quarter. In addition to the commercial activities that Richard outlined for Zimeta, we are also planning our initiatives for the American Association of Equine Practitioners Meeting in December. AAEP is considered the Super Bowl of equine meetings and we look forward to our abstract and podium presentation as well as meetings with thought leaders as we prepare to launch Zimeta, our first equine product. Additionally, our team and investigators in conjunction with our thought leaders are diligently working on peer-reviewed publications for Zimeta. Executing well on our early commercial and veterinary activity is critical because we plan to launch our products immediately following FDA approval. Alongside our activities on the IV formulation, I am pleased to provide an update on the oral gel formulation of Zimeta for fever in horses. We have completed our formulation development and are planning to start the pivotal trial in the first half of 2017. We are excited to bring veterinary in this owner-friendly easy-to-administer fever reducing agent for horses. KIND-014 is our product for the treatment of equine gastric ulcers. We have completed a pilot laboratory and the pilot field study to demonstrate the effectiveness and safety of two different dosage strengths. Both formulations showed efficacy and were well-tolerated. Based on the results of our pilot field study, we have selected our dosage strength and are optimizing that formulation, a larger pilot field study will be initiated in early 2017 followed by the pivotal field study. KIND-015 is our development candidate for metabolic syndrome in horses, a disease similar to type 2 diabetes in human. We are in the process of optimizing our formulation of KIND-015 and plan to initiate a pilot filed efficacy study in the first quarter of 2017. As we reported last quarter, we completed the first stage of a pilot field study in sick or septic foals to assess the safety and efficacy of anti-TNF. All five foals enrolled survived to day seven, which was the primary endpoint of the study. We are still on track to continue the second stage of our pilot work in early 2017 during the next foaling season. For Mirataz, the commercial and veterinary sales teams are preparing for the anticipated approval and launch of this product. We are also preparing a number of abstracts for upcoming therapeutic conferences as well as peer-reviewed manuscripts. We continue to work with our thought leaders who are looking forward to this product coming to market to address this large unmet veterinary need. We continue to make progress on our feline erythropoietin program for the control of non-regenerative anemia in cats. We saw evidence of effectiveness in our initial laboratory studies, manifested by increased reticulocyte formation. As a result, we initiated a pilot field efficacy study which is currently underway and will continue until we move into GMP manufacturing for this product early next year. We are further advancing our biologics pipeline every day. We continue to enroll pilot field study of atopic dermatitis in dogs, the purpose of which is to assess the safety and efficacy of several molecules, including anti-cytokine antibodies. Based on the results, we will select certain product candidates for further development. Our candidates against immune checkpoints and other biologic candidates continue to progress on track with initial pilot studies for some expected in 2016. And as Richard mentioned, KIND- Bodies, our novel biologics scaffold with certain advantages over antibodies including bispecific binding is also proceeding as planned. With that, I will now turn the call over to Wendy to update you on our third quarter 2016 financials.

Thank you, Denise. As Richard noted, we continue to advance our pipeline in a capital efficient manner as we reduce R&D expenses while maintaining broadly stable G&A levels. We reported a net loss of $5.7 million or $0.29 per share in the third quarter as compared to a net loss of $7. 1 million or $0.36 per share for the same period in 2015. For the nine months ended September 30, the net loss was $16.7 million or $0.84 per share versus a net loss $20.7 million or $1.05 per share for the year ago period. Total research and development expenses for the three and nine months ended September 30 were $3.8 million and $10.4 million respectively, down from $5 million and $14.8 million for the same periods in 2015. Stock-based compensation expense was $0.4 million and $1.1 million for the three and nine months ended September 30, as compared to $0.4 million $1.4 million in the year ago period. The decrease in research and development expenses in 2016 compared to 2015 was primarily due to lower field trials and material costs including consulting expenses, lower payroll and related expenses as a result of the Company’s restructuring in January and lower stock-based compensation expense. The prior year’s expenses also included costs related to pivotal studies for programs that we have been completed or discontinued. Total general and administrative expenses were $2 million and $5.9 million for the three and nine-month periods respectively versus $2.1 million and $6 million for the same period in 2015. General and administrative expenses year-over-year remained relatively flat with higher payroll, corporate and marketing expenses being offset by lower consulting, legal and professional fees. Stock-based compensation expense was $0.6 million and $1.6 million for the three and nine-month periods as compared to $0.6 million and $1.7 million for the respective 2015 periods. As of September 30, we had $62.5 million in cash, cash equivalents and investments, compared to $77.6 million as of December 31, 2015. The decrease was primarily due to cash used in operating activities of $14.3 million and capital expenditures of $0.8 million. For the full year 2016, we are lowering our guidance for total operating expenses to between $21 million and $22 million, excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. Anticipated expenditures for the remainder of the year include preparing for the commercial lunches of Zimeta and Mirataz, as well as the continued development of our pipeline candidates. With that I’ll turn the call back to Richard.

Thank you, Wendy. We are pleased with the progress we have made this year and believe that 2017 will be a very successful year for KindredBio as we launch our first products and transition to a revenue generating Company. We are proud to be accomplishment within five years of starting the Company, successfully delivering on our strategy of quickly and cost efficiently developing companion animal therapeutics. Our industry-leading biologics program in particular have significant revenue potential and we are excited about our deep pipeline of over 30 programs, which remain supported by our strong cash position. Operator, we are ready for questions.

[Operator Instruction] Our first question comes from a line of Kevin DeGeeter of Ladenburg. Your line is open, sir.

Can you comment with regards to Mirataz? How we should think about the addressable market opportunity in the context of any market research you may have done and just how to think about central sales force, if the company does choose to commercialize the product themselves?

Sure. So, Mirataz has a very attractive upside potential. There are approximately 9 million cats that have this condition every year, the weight loss combined with appetence. And of those 3 million are being treated right now, even though there is nothing approved which tells you that the medical need is very significant. With introduction of an easy-to-use transdermal formulation, we believe that we can certainly expand that market of 3 million cats that are currently being treated. So, I think based on that estimate the size of a market which we believe is substantial. We do have two choices with regard to launching the product; one is to partner. And as I said before, there is a lot of interest from potential partners. The upside of that of course is that the launch can be more rapid and that they have large sales forces to bring to bear. On the flip side, we have the ability to launch the product ourselves because as you know in the veterinary spread, you can launch a product with 30 reps or so and partner with distributors. And we think both options are very attractive. It will fundamentally come down to the economics, which of those options make the most sense, which we will decide after we get the term sheet.

Okay, great. And just one more from me, then I’ll get back into queue. With regard to the various options the Company is looking at to potentially advance in the treatment of atopic dermatitis, can you just talk a little bit more about what you envision as the optimal target profile for atopic dermatitis given the competitive landscape and areas you see the greatest opportunity for differentiation? Thanks.

Yes, absolutely. As we’re seeing from the success of product, [ph] it is a very large market now. We think that the ideal product would be a drug that’s very effective but also have a very safe profile. And antibodies, as a general rule, if you look at antibodies that are available on the human market, tend to be much safer than small molecules. In addition, we think it will be an advantage to have an antibody for atopic dermatitis because that aligns our economic interest with the veterinarian. So, the products that we are working on are biologics against various cytokines and we think that those check off all the boxes in terms of likely to be very effective, very likely to be safe and would be a benefit to veterinary practices from a financial standpoint.

[Operator Instructions] And I am showing no further questions in the queue. So, I will turn the call back to Dr. Chin.

Thank you, operator. I’d like to thank the listeners for your support as we embark on the next stage of a very exciting journey. Thank you.