Elanco Animal Health Incorporated (ELAN) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the Third 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 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 notes 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 third quarter 2017 financial results call. Joining me today from the management team of Kindred Bio are Denise Bevers, our Chief Operating Officer and Wendy Wee, our Chief Financial Officer. We have had a strong third quarter, marked by numerous successes and excellent progress. We have had a slight adjustment in our regulatory timeline, which I will discuss, but we believe it will have minimal impact on the overall commercialization timeline. We remain very excited about the upcoming launches. Let me start with Mirataz. We have been in discussions with the FDA, including label negotiation and they have been proceeding well. Based on the discussions, we continue to be confident that Mirataz will be approved and will become an important therapeutic for cats. We have satisfied almost all of the requirements for approval, except for one additional piece of data they have requested, having to do with an assay in our manufacturing process. This is not a difficult request, but likely means that the approval will be pushed out to next year, most likely to Q1, but possibly Q2 depending on the FDA review speed. Now, I should note that we have not received the official response from the FDA on the NADA yet. However, the FDA has been working with us in a very cooperative fashion and has given us an advance notice. So what I'm describing is all based on unofficial communication, but in the spirit of full transparency to our shareholders, we are disclosing this information real time. The good news is though that because we have already made so much progress on the label negotiations, we believe we will be able to move ahead with the printing and packaging of the launch supply on schedule. As you might know, in most launches, the label printing and packaging is what determines how fast you can launch. Therefore, we believe that the launch date and the commercial timeline will not be affected substantially, assuming Q1 approval. We believe that the 2018 revenue will not be affected materially either. As we've stated in the past, the regulatory path can be unpredictable, but the most important thing is that approval is still very likely and we will achieve approval well within the three to five years of starting the project, which is extremely fast. In terms of commercialization, we remain on target and we continue to be very excited about the upcoming launch. In fact, as Denise will outline, our commercialization activities are proceeding extremely well and we are building an outstanding team. We continue to believe that Mirataz targets a substantial market and it will be the only FDA approved therapy for the indication. As we've described before, the advantage of a transdermal administration versus pilling a cat with an oral drug is tremendous. Our extensive market research suggests that transdermal administration is favored over an oral administration by a wide margin. Furthermore, we are in the fortunate position of not having to share the economics with a partner on the molecule and will be booking the entire revenue stream. And as you know, we do not have a royalty or milestone burden on the product. Likewise, we continue to expect approval of Zimeta IV for the treatment of fever in horses. We expect approval in 2018, most likely in Q1, but possibly in Q2, depending on regulatory review speed. Since the last quarter, we have responded to questions on the CMT technical section and we submitted it. Preparations for the commercial launch of Zimeta remain on track. Again, for this product, we project that we will achieve approval well within the three to five years of starting the project. Now for the other progress we've made in the last quarter. We are pleased that enrolment in Zimeta oral program is nearly complete. This was an incredibly well executed, rapid study and we're very proud of the team. We anticipate that the study will read out this year. In addition, we had positive results from our pilot field efficacy study of anti-TNF antibody in foals with sepsis. The study demonstrated a statistically significant survival benefit in the active group versus placebo group. This is [indiscernible] can cause up to 50% mortality and there is no FDA approved therapy. We are very excited about this program. We also had positive results from the KIND-014 safety study and have initiated the pilot field effectiveness study of equine gastric ulcer syndrome. On the business development front, we had interest from eight different parties in our anti-IL31 antibody and received several very attractive offers. We have however decided to keep the program internally because the market is turning out to be even larger than we had previously thought. Given this, it didn't make sense to share the economics. For context, a large veterinary company recently reported that it expects to exceed $500 million in sales in the dermatology franchises here, mostly for atopic dermatitis. Also after discussions with potential partners, we realized that we were in a better position; especially in terms of technical ability to execute the program and that we could bring it to market faster by developing it ourselves. One of the takeaways from our out-licensing discussions is that, number one; companies are extremely interested in atopic dermatitis and in antibodies. Number two, there are a few, if any, other clinical candidates in development for atopic dermatitis right now at the clinical stage. And three, we believe KindredBio is several years or more ahead of even most large veterinary pharmaceutical companies when it comes to biologics. We have, as you know, several exciting molecules for atopic dermatitis, and while at this point, it's premature to predict whether some of them may be better than the currently marketed molecules, I will say this. Our anti-IL31 antibody will be, if approved, the very first fully caninized anti-IL31 antibody. In addition, we have the anti-IL4/IL13 SINK molecule. This is a very sophisticated highly engineered fusion protein that incorporates canine IL4 receptor, canine IL13 receptor and the canine antibody backbone. IL4 and IL13, both act upstream of IL31, so there is reason to believe that our SINK molecule may be more efficacious than the molecules currently on the market. Our key opinion leaders are particularly excited about our SINK molecule. As you may know, dupilumab, which was recently approved for atopic dermatitis in humans blocks IL13 and -- IL4 and IL13 and it's highly effective with a very favorable safety profile. So far, our SINK molecule looks promising and we're excited to put it into the pilot field effectiveness study. As Denise will detail, we continue to make excellent progress on the rest of the pipeline. Our epoCat program continues to look exciting and we have made considerable progress across our other programs. On the manufacturing side, we have started the process of retrofitting the recently acquired 180,000 square foot manufacturing plant in Kansas, which will support our pipeline, while lowering cost of goods and improving margins. We anticipate that the quantity of biologics we will need to manufacture for atopic dermatitis alone will be very high and the plant will allow us to meet the anticipated market demand. In summary, we continue to look forward to our two upcoming approvals and launches in the near future as we transition to a commercial stage company. I will now turn the call over to me Denise.

Thank you, Richard. As Richard mentioned, our commercial preparations for launching Mirataz and Zimeta IV remain on track. While the regulatory review has not moved as quickly as we initially anticipated, I would like to take just a moment to outline our overall timelines for the development of these two products. We began development of our transdermal ointment for Mirataz only 3.5 years ago. For Zimeta IV, we began development only three years ago. We are proud of our drug development timelines and we will of course always continue to learn from our experiences. We continue to be very well prepared for the launches of Mirataz and Zimeta IV. Regarding commercial manufacturing of these products, all activities are again on track. We have our commercial manufacturing contracts in place for both products and do not plan to make any adjustments to our manufacturing quantity for Mirataz or Zimeta IV. As we’ve discussed during previous updates, we have 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 drafted our commercial agreements so we may add additional manufacturing capacity and increase production with appropriate notice if demand exceeds our initial expectations. We have added some top talent to our commercial and veterinary affairs organization since our Q2 update. We have hired outstanding veterinarians to manage our small animal and equine peer-to-peer interactions in veterinarian affairs as well as regional sales managers to lead our small animal and equine sales efforts. As you know, we have been quite judicious about our timing for hiring a sales force and are pleased with the fact that we have not been sitting on idle headcount, as we await regulatory approval. We have the majority of our sales reps identified and look forward to hiring, training and deploying them in time for the launches. I will now turn to our pipeline and give an update on the progress our team has made in the past quarter. Patient enrollment in the Zimeta oral pivotal effectiveness study is nearly completed with less than a handful of horses needed. We anticipate reporting the results of our pivotal effectiveness study before the end of this year. We have also completed the in-life portion of the target animal safety study. As we've said previously, we believe the IV and oral formulations of Zimeta are highly complementary. By providing veterinarians 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. As forecasted, we initiated the pilot effectiveness study of our enhanced version of epoCat, which is a long-acting feline recombinant erythropoietin for the control of non-regenerative anemia in cats. We initiated this study in Q3, 2017. Anemia is a common condition in older cats, which is often associated with chronic kidney disease, resulting in decreased levels of endogenous erythropoietin. About half of elderly cats develop chronic kidney disease, so this is potentially a large market. epoCat is a recombinant protein that we have specially engineered with a prolonged half-life compared to endogenous feline erythropoietin. The pilot field study of KIND-011, our anti-TNF monoclonal antibody targeting sick or septic foals was completed in the third quarter of this year. As outlined in more detail in our press release, we saw a statistically significant difference in survival in fouls treated with our anti-TNF antibody versus placebo. We plan to discuss the development plan with FDA and will conduct additional studies in this program. The safety study of KIND-014 for the treatment of equine gastric ulcers looks promising and I am pleased to announce that we have started the pilot effectiveness field study. We are also pleased with the development of anti-IL31, anti-IL17 and SINK remain on track. We are in the process of initiating the pilot field effectiveness studies. We've made a lot of progress in the last quarter across programs with pilot, pivotal and safety studies. The timelines that are in our control have been expeditious and we are moving our pipeline forward and generating quality data. And as a reminder, we have a number of other pipeline programs in the early stages of development, which we have not yet disclosed as well as some smaller products we’ve planned to launch that don't require regulatory approval. This will help amortize the cost of the commercial infrastructure. Similarly, our commercial team is doing a terrific job of getting us prepared for successful launches following regulatory approval. We look forward to keeping you updated on our pipeline and launch progress in the coming months. Before I turn the call over to Wendy, I would also like to give you a quick update on our Kansas manufacturing facility. We have chosen our architectural and engineering firm and have generated our initial plans for this space. We have begun discussions with the relevant regulatory bodies and look forward to building out a state-of-the-art manufacturing plant that will ensure our control over quality manufacturing and cost of goods. With that, I will now turn the call over to Wendy to update you on our third quarter 2017 financials.

Thank you, Denise. For the quarter ended September 30, 2017, KindredBio reported a net loss of $7.9 million or $0.29 per share, as compared to a net loss of $5.7 million or $0.29 per share for the same period in 2016. For the nine months ended September 30, 2017, net loss was $21.1 million or $0.88 per share, as compared to a net loss of $16.7 million or $0.84 per share for the year ago period. Total research and development expenses for the three and nine months ended September 30, 2017 were $4.9 million and $12.5 million, respectively, compared to $3.8 million and $10.4 million for the same periods in 2016. Stock-based compensation expense included in research and development expense was $0.4 million and $1.3 million for the three and nine months ended September 30, 2017 as compared to $0.4 million and $1.1 million for the same periods in 2016. The increase in research and development expenses in 2017 compared to 2016 was due to higher field trial and material costs, including formulation development costs associated with the advancement of our pipeline, as well as consulting and other operating expenses. Total general and administrative expenses were $3.3 million and $9.2 million for the three and nine months ended September 30, 2017 compared to $2 million and $5.9 million for the same periods in 2016. The increase in general and administrative expenses in 2017 was due to higher headcount and related expenses as we begin to expand our commercial organization, as well as higher stock based compensation expense and other corporate expenses. Stock-based compensation expense included in general and administrative expense was $0.9 million and $2.6 million for the three and nine months ended September 30, 2017 as compared to $0.6 million and $1.6 million for the same periods in 2016. As of September 30, 2017, we had $89.3 million in cash, cash equivalents and investments, compared with $57.8 million as of December 31, 2016. Net cash used in operating activities for the first nine months in 2017 was approximately $16.1 million, offset by $52.2 million of net cash proceeds from the sale of securities in conjunction with an At Market Issuance Sales Agreement and an underwritten public offering of 3,314,000 shares of our common stock. We also invested approximately $1 million in capital expenditures for the build-out of our GMP biologics manufacturing facility in Burlingame, California and $3.7 million for the acquisition of a manufacturing facility in Elwood, Kansas. For the 2017 calendar year, our revised guidance for operating expenses is expected to be in the range of $26 million to $28 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 include 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 well as the necessary manufacturing requirements for our biologics program and we anticipate investing an additional 1 million to 2 million in capital expenditures. I will now turn the call back over to Richard.

Thank you, Wendy. Operator, we’re ready for Q&A.

[Operator Instructions] Your first question comes from the line of Kevin DeGeeter with Ladenburg.

Richard, can you just talk a little bit more about future development plans for the IL31, the lead compound and just more generally in atopic dermatitis. Now that you've chosen to retain your rights to the program and you identify that you know you think you can move more quickly in a development path. Can you just provide a little bit more granularity on your thought process?

So, I think that is a two-part question, in terms of speed, what we have realized is that in talking to partners, if we partner the program, they don't have the technical capabilities including manufacturing capability to move the program along as quickly as we can because we do most of our work internally and we already have a commissioned GMP manufacturing plant. We will be able to get the products to market much quicker. And given the size of the market, every year is going to make a big difference. In terms of development, we have several molecules, IL31, SINK molecule, and several other ones. We are conducting pilot studies currently and we plan to select two maybe three of those molecules and put them into further development. And the reason we are trying to develop two or three is that we believe that the atopic dermatitis market is large enough to support multiple products. And furthermore that it's probably a heterogeneous disease, much like let’s say rheumatoid arthritis is on the human side. So we don't believe that we can have just one blockbuster, we think we can have potentially multiple blockbusters.

You can guys help us think through with regard to resources within the organization specifically, personnel, how we think about balancing the demands of this pipeline. I mean, by my count there's at least seven compounds moving through some stage of kind of, call it mid stage development moving towards potentially registration studies. From bandwidth standpoint, how do you prioritize and are there either specific compounds or group of compounds now that you've decided to hold onto atopic dermatitis that maybe are more attractive for potential out-licensing just from a bandwidth and resource perspective.

You are absolutely right, we have multiple products in the pipeline, seven is probably approximately right if you're looking at clinical programs. Our goal is to have two products approved per year, which means that we will have around that many products in clinical development at any given time since we are developing products in that three to five year time frame. We are prioritizing and there are certain products for example, our checkpoint inhibitors for cancer that we are putting lower on our priority list and we may partner on. So we will expand the headcount, but you're absolutely right, we are going to be very disciplined about prioritization.

Your next question comes from the line of Ben Haynor with Aegis Capital.

First from me is on the - now that you've decided to go it alone on atopic dermatitis, do you still plan in other geographic areas, Europe, Asia et cetera to potentially partner out atopic dermatitis like you plan to do with Mirataz or presumably plan to do with Mirataz? And then any discussions that you might have had with regard to Mirataz on partnering in EU, Japan, I think you reference on the last call.

We are planning on licensing ex-US rights to both the atopic dermatitis programs and Mirataz. We are in active discussions on both of those sets of programs. We have the, I might say, luxury of waiting until we've built more value in both of those programs. We don't have to license it on a particular time frame. And longer we wait, so for example, once we file for approval of Mirataz in Europe, we think the value is going to go up once we start showing revenues for Mirataz in the US and certainly once we get the approval in Europe, the value will go up. So we're trying to decide when it's the right timing is to maximize the value of these products.

And on the atopic dermatitis program, it sounds like there's two or three molecules that you might go after, how soon might those move into pivotal studies and others, how it's going on and such, but just curious on how you see the timeline playing out for those compounds.

Sure. I think we don't want to give precise timeline here, but I think a good way to answer that is, our goal is to develop drugs within two to five years and these programs for the most part we've been actively working on as high priority for once in two years. So that should give you a rough idea. I will say the timeline is largely driven by manufacturing and the clinical programs are fairly rapid. So it's really going to depend on for example how fast we can get the Kansas planned up.

Your next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright.

I have two other questions here. On the Zimeta program, you had said that the agency had asked for some data, sorry, it was on the Mirataz program. And have you responded with that piece of data or your still trying to get the data for that assay.

We are on track to submit that this month.

And how long do you think the agency normally takes on this kind of submissions especially now that you are already in the label discussions.

So we expect they're going to give us a shorten review. Really it depends on how many other things they have in the queue at the agency. The information itself should not take them very long to review, a few days perhaps. And that is why we think the approval is going to be in Q1 most likely. However, regulatory review time is unpredictable that's why we've said possibly Q2, but our expectation is that it will be very fast.

On the Zimeta program has the label discussions started or you are yet to begin that kind of discussions.

Not quite yet, we expect that would be starting shortly.

And then a question for Denise I guess, in terms of getting the commercial folks ready for the launch, how much of a training do these folks require or these people are generally aware of such products and the training programs are shorter. I’m just trying to gauge how much lead time these folks need.

So that's a good question, so we're going to be hiring seasoned sales representative who are familiar with systems like customer relationship management system. So those need to be trained operationally on our own Kindred Bio internal systems. And then the sales training, we already have that largely built. So they'll go through some rigorous sales training on the product, but it's really just a matter of weeks before they are deployed. So we've got everything in place and the commercial infrastructure is built. Like I said in the call, we really were very, very conscientious about not bringing headcount on too soon because all you want to do with sales reps is train them and get them in the field. So we're ready to train them and as we have more substantial clarity around our regulatory timelines, we’ll pull the trigger and we've got most of them identified or ready.

One question for you, Richard, on the strategy. I know you've been talking about bringing our additional products that require less regulatory review. Have you identified these products and you're basically waiting for launch of Zimeta and Mirataz and once you have them you can get these on board so that you can maximize the commercial structure that you are building. Is that pretty much the game plan or these discussions are still ongoing and you're still you have to identify products.

No, we have them identified. We don't want to launch those products until we have launched our other products because we don't want to be leading with one of these sorts of lesser products we want to launch with either Mirataz or Zimeta. But you're right; once we launch those, the other products will come online and help defray the commercial infrastructure cost.

[Operator Instructions] Your next question comes from the line of Andrew D'Silva with B. Riley FBR Silva.

I just really wanted to dive a little bit more into the sales team. As far as you noted that you identified the appropriate sales teams, how long ago did you identify them and that will kind of give me a sense of the amount of likelihood of being able to actually bring them on because of the wait time that's there. What level of confidence do you have of being able to bring on the sales people that you've actually identified at this point due to wage?

We've had going discussion with a number of key reps who are waiting to come on board and they are current as I speak today. There's also been some additional movement within the industry which has most recently made some other reps available. So we feel really good about our current real-time discussions. There maybe even be some contingency offers put out there things like that. So we're in very current discussions with them.

And I might add, most of our physician we had good candidates for even before we advertise.

Yes. They were unsolicited, yes.

So we have quite a few very talented applicants.

And I think it's important to know that our commercial team largely and as well as our clinical development team, we have very seasoned animal health professionals who have been in the industry for quite some time. So there are number of very good relationships that are ongoing among their colleagues. So again these are very active discussions.

Am I correct in understanding that you guys are going to look at utilizing the sales team once it's established to deploy licensed products out into the market so you're fully capitalizing on their endeavors? Or in reference to the last gentlemen's comments, where you saying that you had some other products that you were going to launch simultaneously, but they were internal.

Oh yes, these are not in-licensed. These are products - smaller products that do not require FDA approval. So there are certain categories of products that are small, but we can launch ourselves without requiring a license. And it's purely to help defray the commercial infrastructure cost.

Would you look to in-license at all to increased utilization of the sales team or are you at this point just happy with what you have developed internally.

We are always on the lookout for additional products. We have not found one that is - that makes sense from a return on investment point of view because we have such a full pipeline and our ROI is so attractive. So we tend to be I guess you could say value buyer.

Last question for everyone, as far as building up the Kansas facility, do you have a sense of the cost there, the CapEx we should model into the next couple of years.

So we have a rough estimate, we're trying to decide how much capacity do we need. Every time we look at the market, it seems larger and larger. So I think it will be probably at least 20 - it will probably be in the $20 million to $25 million range, but we'll probably have better range for you as we finalize the plan.

And there are no further questions at this time. I'll now turn the call back over to your host Richard Chin.

Thank you, operator. This has been an exciting quarter and we have made excellent progress across the board despite some obstacles and we are confident of the successful future ahead. Thank you for your support and I look forward to providing you with further updates as we continue in our mission of bringing innovative therapy to our patients and building a world class companion animal company.

Ladies and gentlemen, this concludes today's program. Thank you for your participation. You may now disconnect.