Elanco Animal Health Incorporated (ELAN) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2017 Financial Results Conference Call and Webcast for Kindred Biosciences. [Operator Instructions]. Please note that the remarks today will include forward-looking statements and that the 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 the 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 second quarter 2017 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our Chief Operating Officer; and Wendy Wee, our Chief Financial Officer. Before I begin, I'd like to congratulate Wendy on her promotion to CFO. She has been a highly valued member of the KindredBio team and her promotion is well deserved. She has demonstrated her abilities as we have built our ERP system and completed our recent financings and we're very fortunate to have her. We had a very strong second quarter. We filed our New Animal Drug Application or NADA, for Mirataz in June. This keeps us right on track for 27 approval for Mirataz transdermal ointment for the management of weight loss in cats. The feedback from key opinion leaders continues to be excellent and the pre-commercialization activities are proceeding well. Likewise, we continue to expect approval of Zimeta IV for the treatment of fever in horses. We now expect approval either in the second half of 2017 or in early 2018, depending on FDA review timeline. The change in timing, should it occur, reflects a revision in the proposed labeling and is not expected to affect approvability or require generation of additional data. Based on FDA's suggestion, we're changing the dosing up to twice a day instead of to 3 times a day. This will now materially impact our revenue expectations. Preparations for the commercial launch of Zimeta remain right on track, but the drug's launch is anticipated shortly after approval. As Denise will detail, we continue to make excellent progress on the rest of the pipeline. In our epoCat program, for example, we saw a strong efficacy signal and a very long half-life. And we continue to advance our deep pipeline of over 20 programs. We're enrolling our pivotal study for oral Zimeta as well and it is proceeding rapidly. On the manufacturing side, we have also made significant progress. We have completed our state-of-the-art full cGMP biologics manufacturing plant in California. This is one of the first dedicated veterinary monoclonal antibody manufacturing plant in the world. In addition, we're excited about the recent acquisition of 180,000 square foot manufacturing plant in Kansas which we closed today. We anticipate that the quantity of biologics we need to manufacture for atopic dermatitis will be very high. And the plant will allow us to meet the market demand. On the finance front, we're very well capitalized, as Wendy will discuss, as we continue to exercise financial discipline and engage in capital efficient drug development. The proceeds from our recent successful public offering will support the expansion of our commercial infrastructure and manufacturing capacity as we prepare to transition to a commercial stage company. On the business development front, we continue in discussions with the EU and Japanese rights to Mirataz. In addition, our biologics program is generating significant interest, especially our IL-31 antibody. In summary, we continue to look forward to our 2 upcoming approvals and launches in the near future. I will now turn the call over to Denise.

Thank you, Richard. I will begin with an update of our commercial ramp-up to support the launches of Mirataz and Zimeta IV and then move into the progress we have made on our pipeline since our Q1 update. We continue to be very well prepared for the launches of our first 2 products. Regarding the commercial manufacturing for Mirataz and Zimeta, all activities are on track. At this time, we do not plan to make any adjustments to our manufacturing schedule for Zimeta. As we discussed during previous updates, we've worked very diligently to forecast our inventory needs. Both of our products, if approved by FDA, will be the only products approved for their respective indications. Therefore, we have designed our commercial agreements such that we can add on additional manufacturing capacity and increase production with appropriate notice if demand exceeds our initial expectations. In addition to adding top talent to our Commercial and Veterinary Affairs organizations in Q2, we're working closely with the veterinary congresses, such as the American Association of Feline Practitioners and the American Association of Equine Practitioners to share our scientific data for Mirataz and Zimeta. We're continuing our thought leadership engagement both for Mirataz and Zimeta as well as many of the other products in our pipeline. For example, in this quarter, we had a very productive advisory board regarding atopic dermatitis in dogs. I will now turn to our pipeline and give an update on the progress our team has made this past quarter. Patient enrollment in the Zimeta oral pivotal effectiveness study is progressing quite well with over half of the patients already enrolled. Additionally, we're nearly complete with our Target Animal Safety Study of Zimeta oral. We plan to have data readouts on both of these trials before the end of 2017. As we have said previously, we believe the IV and oral formulations of Zimeta are highly complementary. By providing veterinarians with an approved IV formulation and an elegant oral gel to leave behind with horse owners and trainers, we expect to capture the full market opportunity for the Zimeta brand. For both Mirataz and Zimeta, we have received approval of the effectiveness technical sections from FDA. We have responded to comments on the CMC and safety technical sections and submitted the NADA for Mirataz. For Zimeta, we have responded to comments on the CMC technical section and are in the process of responding to comments on the safety technical section, as Richard has detailed. We continue to anticipate approval of Mirataz in the second half of this year and approval of Zimeta in 2017 or early 2018 assuming the FDA finds our responses acceptable. We're pleased to report that all comments were addressable and we do not consider any to be showstoppers. Turning to epoCat. Our enhanced version of epoCat, a feline recombinant erythropoietin for the control of non-regenerative anemia in cats has completed the initial pilot study which has demonstrated efficacy. In addition, the PK data from the study suggests that the molecule may have sufficiently long half-life to allow for once monthly dosing. We plan to initiate a pilot effectiveness study with the molecule in the third quarter of this year. Anemia is a common condition in older cats which is often associated with chronic kidney disease resulting in decreased levels of endogenous erythropoietin. We have especially engineered our epoCat with a prolonged half-life compared to endogenous feline erythropoietin. We have completed the first pilot study, field study, of our KIND-014 molecule for the treatment of equine gastric ulcers. Based on the study results, we have optimized our formulation and expect to initiate the pilot safety study in Q3 of this year and the pilot effectiveness field study in Q4 of this year. A pilot field study assessing the oral tolerability and palatability of KIND-015 for the management of the clinical signs associated with equine metabolic syndrome has been completed. I'm pleased to say that our lead formulation was well tolerated and had 90% to 95% palatability with no signs of oral toxicity. We plan to initiate a pilot effectiveness study in Q3 of this year. The second stage of the pilot field study of KIND-011, our anti-TNF monoclonal antibody targeting sick or septic foals has completed enrollment. The team is busy cleaning the data and closing out the study. We plan to review the data this quarter and determine our next steps for the program. The pilot field study of atopic dermatitis in dogs to assess safety and efficacy of several anti-cytokine antibodies has also been completed. The initial pilot safety and PK studies of anti-IL31, anti-IL17 and SINK have been completed and all of the molecules were well tolerated. It is very exciting to have clinical data for our various antibodies targeting atopic dermatitis. We plan to initiate additional pilot efficacy study shortly. Once again, we're able to demonstrate how much progress our talented team has made in just a single quarter. And as a reminder, we have a number of other pipeline programs in the early stages of development which have not yet been disclosed as well as some smaller products we plan to launch that do not need regulatory approval and this is to help amortize the cost of our commercial infrastructure. We look forward to keeping you up-to-date on our progress in the coming months. And with that, I will now turn the call over to Wendy to update you on our second quarter 2017 financials.

Thank you, Denise. For the quarter-ended June 30, 2017, KindredBio reported a net loss of $6.8 million or $0.29 per share as compared to a net loss of $4.9 million or $0.25 per share for the same period in 2016. For the 6 months ended June 30, net loss was $13.3 million or $0.59 per share as compared to a net loss of $11 million or $0.55 per share for the year-ago period. Total research and development expenses for the 3 and 6 months ended June 30 were $3.9 million and $7.6 million compared to $3.2 million and $6.6 million for the same periods in 2016. Stock-based compensation expenses included in research and development was $0.4 million and $0.8 million for the 3 and 6 months ended June 30, 2017, as compared to $0.4 million and $0.7 million for the same periods in 2016. The increase in research and development expenses in 2017 compared to 2016 was primarily due to higher field trial and material costs including formulation development costs associated with the advancement of our pipeline and as well as consulting expenses. Total general and administrative expenses were $3.1 million and $5.9 million for the 3 and 6 months periods compared to $1.9 million and $3.9 million for the same periods in 2016. The increase in general and administrative expenses in 2017 was primarily due to higher headcount and related expenses as we begin to expand our commercial organization as well as other corporate expenses. Stock-based compensation expense was $0.9 million and $1.7 million for the 3 and 6 months periods as compared to $0.5 million and $1 million for the same periods in 2016. As of June 30, we have $74.5 million in cash, cash equivalents and investments compared to $57.8 million as of December 31, 2016. Net cash used in operating activities for the first 6 months in 2017 was approximately $11.4 million, offset by $29 million of net cash proceeds from the sale of securities in conjunction with an At Market Issuance Sales Agreement with FBR Capital Markets & Co. We also invested approximately $0.9 million in capital expenditures for the build-out of our GMP Biologics manufacturing facility in Burlingame, California. In addition, in July 2017, we completed an underwritten public offering of our common stock resulting in net cash proceeds of $21 million. For the 2017 calendar year, we reiterate our previous guidance for operating expenses to be in the range of $30 million to $32 million excluding the impact of stock-based compensation expense and the impact of acquisitions if any. Our anticipated expenditures for the remainder of the year includes the build-out of a small commercial team and preparations for distribution, commercial scale-up and manufacturing for Mirataz and Zimeta. Additionally, we plan to focus on the development of our pipeline candidates, as mentioned by Denise, as well as the necessary manufacturing requirements for our biologics program. With that, I will turn the call back over to Richard.

Thank you, Wendy. Operator, we're ready for questions.

[Operator Instructions]. And our first question comes from Kevin DeGeeter from Ladenburg.

Richard, a few questions on Mirataz, if I may. Just -- can you provide a little bit more of the thought process with regard to twice daily dosing and your thoughts as how this may impact commercialization, specifically the trade-off between pricing versus potential for lower cost of goods sold on a daily basis?

Sure. So I think you meant Zimeta which is the one we reduced to twice a day. So most of our modeling was done on twice a day. Because in our efficacy study, while we allowed for up to 3 times a day, none of the horses needed a third dose, because drug works very well. So we, of course, are being conservative with our modeling. So we don't think it's going to have a major impact on our modeling. However, you do bring up a good point which is that we may actually have little more room to move on the pricing and could have an impact on the margin. So that's a positive.

Okay. And with regard to the epoCat, two questions. First, can you walk us through your thought process with regard to future studies on for the [indiscernible]

Sure. So we really tried to stick to objective endpoint whenever possible. This is an important lesson we've learnt over the years. So the endpoint for the epoCat study will be hematocrit or hemoglobin which basically measures the amount of red blood cells. Now we will collect other measurements, including things like activity and quality of life and so forth. But our primary endpoint will be an objective endpoint.

And how many subjects roughly?

Well, there are about 100 minimum exposed animals that the FDA requires. And so that will probably dictate the size. Because in terms of showing efficacy, we're able to show specifically significant difference in the red blood cell levels with 10 or 20 animals. It's very effective. So the efficacy won't drive the sample size, the required size of the safety database will.

Great. One more from me, then I'll get back in the queue. Can you just comment with regard to epoCat? Just in terms of volume, how that [indiscernible] is playing out with the current formulation, the potential impact on cost of goods sold down the line?

You mean in terms of volume of material API...

That's correct; of API, that's correct.

Yes. So erythropoietin is a hormone that is very, very potent. So the amount that is required to dose a cat is in the microgram range instead of the milligram range. And that means that we can manufacture a lot of erythropoietin even in a small facility. So our current California facility will be large enough to supply the entire market.

And our next question comes from Ben Haynor from Aegis Capital.

First for me, some of the survey work that we've done here recently suggest that veterinarians see acceptable Mirataz pricing to the pet owner little bit north of $4 per day. I was wondering if you -- if that sounds right to you and whether you've done any price-sensitivity studies for Mirataz that you might be willing to give us some color on?

Sure. Ben, it's Denise. So we have done some very deep pricing sensitivity work. And I will tell you that your robust survey that you conducted is not out of line with what we're finding, but we have to balance out, of course, with our own owner assessments that we have done in market research and of course uptake for the community. So we want to make sure we price it just right. But I have to say, I was very pleased to see the results of your survey. We're very much in line about percentages of veterinarians who leave. So it was a nice validation of the work that we have already done.

Yes. So [indiscernible] really surprised with results, that's great. And then, secondly, on the international rights to some of the things that you [indiscernible] Mirataz or the atopic dermatitis program or things of that nature. Is there any chance that we might see an agreement internationally rather than later on any of these pipeline compounds?

There is a possibility that we may see it within the next several months. However, we're not in a hurry and we have a lot of confidence in the uptake [indiscernible] And we'll have to balance out the terms that we get now versus terms we may potentially get once the size of the Mirataz market is proven. So the good thing is that we're not in a situation where we have to license any of these products. We can wait until we achieve maximum value.

And our next question comes from RK from H.C. Wainwright.

My first question is on Mirataz. How quickly can you get to the north of [indiscernible] products once the product gets approved by the FDA? In the sense, if there [indiscernible]

Sure. Thanks, RK. Yes, Richard is actually smiling at me. I won't tell you the exact mandate that Richard and our board has given us for launching. But I will tell you that, we're really well prepared. I mean, we have all of our manufacturing set up. And of course, assuming approval, we'll be able to launch very quickly. Our commercial team has done just an outstanding job. And our Veterinary Affairs team have already penetrating both the equine and the feline market places. And with our scientific data, there's certainly great awareness of both of these compounds. So with our sales force which we're in the process of starting to hire up at the end of the third quarter, early fourth quarter, in place and our distributer contracts in place, we'll be able to launch very quickly after approval.

Staying with the feline market. Just trying to understand the epo market or the epoCat -- the M&A market for the epoCat product, could you kind of help me with some metric as to what's the market out there? How or what percentage of cats [indiscernible] and owners seeks out for some therapy for anemia in cats?

Sure. So for the benefit of other listeners, in case the questions didn't come through clearly. I think the question was about the potential market size for epoCat and some of the characteristics around the market. This is potentially very large market. Because about half the cats, when they get older, will develop kidney failure. And as a result, become deficient in epo. And you can't hear human epo because it is immunogenic. And once you develop neutralizing antibodies, then it no longer works. And in fact, it can cross reaction against endogenous epo, so it can be fatal. So that's why human epo is generally not used unless it's a very dire situation. So the current market size is, well, the market really doesn't exist yet because there is no product yet. But if you take the number of cats which is 90 million or so in the United States and just assume that almost half of it when they get old enough will develop kidney failure and require epo, you can imagine it's a very large market.

Moving to the little larger animal, dogs with atopic dermatitis. Can you just tell us that there was a meeting of advisory board on the indication [indiscernible]. Could you share with us any of the learnings? And also, with 3 antibodies getting ready to get into a pilot study situation, how will you prioritize them and what are their advantages against some of the entrenched products already in the market?

Sure. Absolutely. So the advisory report we had was -- went very, very well. I think the key opinion leaders were very impressed that we have such a broad pipeline of atopic dermatitis candidates. We got the impression that we were ahead of almost all of our competitors certainly in the press and in many cases in terms of how far ahead -- how many years ahead we're. So our thinking is that this market will be similar to, let's say, the rheumatoid arthritis market or the inflammatory bowel disease market on the human side. In that, there are probably heterogeneous subgroups of populations, some of whom will respond better to one type of therapeutic than the other. And that's why we have multiple candidates for the disease. We think that IL-31 is an excellent target and it's a validated target. We know that it works. So that is a positive for that. IL-4/IL-13 that we're also targeting. The advantage to that maybe that it works very thoroughly in the cascade. So it had a potential to actually stop the disease very high in the cascade. But we're going to test all these molecules and see which one looks better in clinic and probably advance 2 or 3 of them forward based on the data.

[Operator Instructions]. And we have a follow-up from the line of Kevin DeGeeter.

Just to complete out the pipeline update. Can you provide us a little bit more color with regard to your assessment of KIND-014 for equine gastric ulcers And specifically, I think you called out some formulation optimization, can you talk a little bit more about where that program is going and some of the changes you've made?

Sure. So yes, so we've actually worked very hard on formulation. I think formulations are the areas where we may be able to differentiate from the current treatment opportunities. So right now, there are some products on the market. And they have a pretty sizable market. And we think we can really capitalize on that largely due to our formulation which we haven't specifically disclosed for competitive reasons. But we're very pleased with what we've been seeing in our pilot program. We think the equine gastric ulcer opportunity for -- in regard to equine, is a sizable opportunity within the equine space.

And then just lastly for me. Little bit more of a big picture pipeline prioritization question. You've called out epoCat and the opportunities in the context of atopic dermatitis as being 2 high priorities. But when we look at the remainder of the pipeline which is still extremely broad, can you help us prioritize which programs from your perspective for internal commercialization you either have -- your profiles are do you think are particularly promising or markets that you think are very attractive, but that Kindred as an integrated commercial group could go after yourself?

Sure. So both KIND-014 and KIND-015, because they're into the equine market, we think we're very well positioned to commercialize ourselves. Because that is a compact market. And we're able to go head to head against even large competitors. Because the largest equine sales force is only 12 reps. For epoCat, we also think that we'll be well positioned to commercialize it, partly because we'll already have a feline product on the market, Mirataz. But also because there will be no competition. There are no other companies that have been able to develop an epo. And certainly, even if they were to develop that, our once a month formulation which looks like it's going to be possible would be far superior to even the best human epo technology that's out there. On atopic dermatitis, part of the reason we're looking at potential partnership on that is, because it is a competitive market and we think that economically favorable partnership with a large competitor could be a win-win. That they could increase the sales and we could share in that increased market share. So we don't have to commercialize things just because we want to or out of pride, we're doing things that make the most economic sense and would return the best value to our shareholders.

And at this time, I'm showing no further questions. I will now hand the call -- turn the call back to Dr. Chin.

Thank you, operator. We're very excited about the launch of our first product. Between the launches, our rich pipeline, especially our industry-leading atopic dermatitis antibodies, our newly completed biologic manufacturing facility and our healthy balance sheet, we're very well positioned for success. I'd like to thank you for your support as we embark on the next stage of this exciting journey.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.