Elanco Animal Health Incorporated (ELAN) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter and Full-Year 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 over to KindredBio's CEO and President, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon and welcome to our fourth quarter and full-year 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. We are very pleased with our progress in 2017. In the space of a single year, we announced positive pivotal results for Zimeta Oral, which is our third consecutive positive pivotal study filed for registration of Mirataz in Europe, commissioned a cGMP biologics plant in California, purchased 180,000 square foot manufacturing plant in Kansas, and announced positive pilot study results for multiple molecules. Last year, we also became the leading veterinary biopharmaceutical start-up as measured by market capitalization, a significant milestone that is a testament to our business model, and our team. I’m particularly proud of the remarkable team we have, both on the R&D side and now on the commercial side, which Denise will describe in more detail. We don't underestimate the challenges involved in product launches and we are fully prepared. Having been involved in multiple very successful launches at companies like Genentech, I must say that the team we have is on par with some of the best I’ve seen. They are executing very well, and we are ready from marketing, sales, commercial operations and veterinary technical affairs standpoints. I’m pleased to note that we have heard back from the FDA on the safety technical sections for Mirataz and Zimeta. They have approvied the Zimeta technical section and they have no further questions on the Mirataz technical section; that only leads to the CMC technical section. Therefore, we still expect the approval of Mirataz within the first half of this year, more likely the first quarter than the second, and we still continue to expect approval of Zimeta in the second quarter of this year. Of course, regulatory approvals are inherently unpredictable as we all know, but our expectation is for approval on that timeline assuming no unanticipated issues. On the pipeline front, we are hitting full stride on our biologics program. We have initiated a pilot efficacy studies for epoCat and for some of the atopic dermatitis candidates. The current market leader in the atopic dermatitis field is expecting over $500 million in sales in this market as some of you know. We believe that our products have the potential to be very competitive, and we believe that we’re the only company with mid-clinical stage atopic dermatitis candidate. Similarly, we’re making progress on our small molecules with very promising results from some of the programs. And in fact, given the successes across our pipelines we will need to prioritize because the success rate is actually higher than we expected and we’re seeing a lot less attrition than we thought we would. In summary, we’re very excited about the year ahead. We expect to have two products approved, we’re advancing our pipeline, we’re continuing to build a world-class team, we're building a strong track record of execution. Thank you for your continued support. I will now turn the call over to Denise.

Thank you, Richard. I will begin today's operational update by detailing our commercial preparedness as we anticipate the FDA approvals and launches of Mirataz and Zimeta followed by updates on our product pipeline and the buildout of our Kansas manufacturing plant. As Richard stated, we feel very well prepared for launch regarding our marketing, sales. commercial operations, and veterinary technical affairs capabilities. We have prepared our launch materials for both Mirataz and Zimeta, and expect to launch Mirataz very shortly after approval. Our marketing teams have done an outstanding job of developing compelling campaigns to represent these first-in-class medications. Likewise, our veterinary affairs team, comprised of very talented and experienced veterinarians have developed scientific materials for peer-to-peer interactions with our veterinary customers. We have successfully completed our commercial manufacturing scale-up and our commercial operations and supply chain management teams have put in place all of our logistics from manufacturing, forecasting, all the way through warehousing and distribution. We have executed or in the process of executing agreements with many of the key distributors both national and regional in the United States. We have hired our sales managers and a handful of key sales representatives who are working on our distribution partnerships and laying the groundwork for our important corporate accounts. We have contingent offers accepted by the remaining sales representatives we intend to hire this year. This is the most talented group of commercial team members with whom I’ve had the pleasure to work in over 25 years in my pharmaceutical career. As a reminder, we are very excited about the commercial potential of Mirataz. Mirataz is expected to be the first FDA approved product for the management of weight loss in cats, which is a serious and potentially fatal condition. It’s the leading cause of visits to the veterinarians for cats. 9 million cats experience inappetence every year, making it an attractive market. However, at this time only 3 million get treated because of the challenges associated with pilling a cat or compliance. While Zimeta represents a smaller market size, it’s a highly attractive market given the cost of commercialization is so low. We have hired some outstanding talent in equine sales and marketing, and have established excellent relationships with the equine veterinarians, trainers, and owners. We’ve also been very active at veterinary conferences and we just had a very successful veterinary meeting at expo in Orlando, Florida. We had record traffic in our booth and terrific engagement with the veterinarians. We are looking forward to our participation in the Western Veterinary Conference in Las Vegas next week. Now turning to the remainder of our pipeline, as Richard mentioned, we were very pleased to report out our third consecutive positive pivotal trial outcome for Zimeta oral in the fourth quarter of last year, which underscores our ability to rapidly and successfully develop products. In the same quarter, we also completed the Target Animal Safety Study for Zimeta Oral. The team is working very hard to prepare both the effectiveness and safety technical sections for submission to the FDA, as well as the CMC technical section. We anticipate submitting the effectiveness and safety technical sections in the first half of this year, and the CMC section by the end of this year. This drug will allow us to realize the full fever therapy opportunity and we’re excited to bring to veterinarians this owner friendly, easy to administer fever reducing agent for horses. Regarding updates on the rest of our equine portfolio, we reported positive pivotal results from our pilot field effectiveness study in 2017 for KIND-011, our anti-TNF monoclonal antibody, which targets sick or septic foals. As we’ve discussed, Sepsis in foals can cause up to 50% mortality and it’s an important unmet medical condition for which there is currently no FDA approved therapy. In 2017, we completed our pilot field study of KIND-014 for the treatment of equine gastric ulcers and found KIND-014 to be well tolerated. We completed dose finding and palatability studies and based on those results we have advanced two formulations into pilot field studies. These pilot studies have been initiated and we plan to complete the review of the data by the end of the second quarter of 2018 to determine which formulation will move into a pivotal field study assuming the data are supportive of further development. We have optimized our formulation of KIND-015 for the management of clinical signs associated with equine metabolic syndrome and initiated our pilot field efficacy study. As you may remember, we completed our oral tolerability and palatability studies in 2017. Now moving to our small animal pipeline, we are continuing to enroll our pilot field effectiveness study of our enhanced version of epoCat. epoCat is a long-acting feline recombinant protein that has been specifically engineered by KindredBio with a prolonged half-life compared to endogenous feline erythropoietin. Our PK data suggests that the molecule may have sufficiently long half-life to allow for once monthly dosing. Now, let’s talk about atopic dermatitis, which is an immune-mediated inflammatory skin condition in dogs. It is one of the most common skin diseases in dogs and represents a significant unmet medical need. KindredBio is taking a multi-pronged approach toward the treatment of atopic dermatitis with a portfolio of promising biologics. Based on the positive results of our previous pilot studies, we are in the process of initiating pilot field effectiveness studies for several molecules for atopic dermatitis, including fully canonized anti-IL31 antibody, a fully canonized anti-IL17 antibody and our K9 anti-IL4, IL13 sink molecule. As we continue to develop our robust pipeline of biological candidates, we realize the importance of being able to manufacture these products in a cost effective and timely manner. Our GMP manufacturing plant in Burlingame, California is fully commissioned and is engaged in GMP manufacturing of epoCat. Once again, I would like to acknowledge this accomplishment that in less than six years since founding the company, we have a fully commission plant and we have also completed the design and construction plans for the biologics manufacturing lines in our Elwood, Kansas facility that would be acquired in August of 2017. The facility includes approximately 180,000 square feet with clean rooms, utility, equipment, and related quality documentation suitable for small molecule and biologics manufacturing. We plan to start construction shortly. With that, I will now turn it over to Wendy to update you on our 2017 Q4 and full-year financials.

Thank you, Denise. For the quarter ended December 31, 2017, we reported a net loss of $9.7 million or $0.35 per share, compared to a net loss of $5.8 million or $0.29 per share for the same period in 2016. Research and development expenses for the fourth quarter of 2017 totaled $5.1 million, compared to $3.5 million for the same period in 2016. General and administrative expenses for the fourth quarter of 2017 were $4.8 million, compared to $2.4 million for the same period in 2016. For the year ended December 31, 2017, we reported a net loss of $30.9 million or $1.23 per share versus a net loss of $22.5 million or $1.13 per share for the same period in 2016. Research and development expenses for the year ended December 31, 2017 were $17.7 million, compared to $13.9 million in 2016. Stock-based compensation expense related to research and development was $1.7 million versus $1.5 million in 2016. The $3.8 million year-over-year increase in research and development expenses was primarily due to higher headcount and related expenses as we advance our biologics programs. In addition, increased clinical trial costs related to the pivotal field effectiveness study of Zimeta Oral and other higher biologics manufacturing, as well as lab supplies expenses, including other operating expenses drove research and development expenses higher. General and administrative expenses for the year ended December 31, 2017 were $14.0 million, compared to $8.3 million in 2016. General and administrative stock-based compensation expense was $3.6 million in 2017 versus $2.2 million in 2016. The $5.7 million increase in general and administrative expenses was related to increased headcount, including higher marketing and corporate expenses as we initiated prelaunch activities and the buildout of a small commercial team. In addition, higher stock-based compensation and corporate infrastructure costs also contributed to the increase in expenses. As of December 31, 2017, we had $82.5 million in cash, cash equivalents and investments. Net cash used in operating activities for 2017 was approximately $21.9 million. We also invested approximately $5.9 million in capital expenditures for the purchase of the Elwood Kansas facility and the buildout of our GMP biologics manufacturing facility in Burlingame, California With respect to spending in 2018, we are preparing for the commercial launches of Mirataz and Zimeta, including the scale-up of our commercial team and will continue to spend on our core pipeline and programs. For 2018, we expect operating expenses of between $44 million and $48 million, excluding the impact of stock-based compensation expense and the impact of acquisitions if any. The revenues for Mirataz and Zimeta will have a substantial impact on cash utilization and expenses. With that, I will turn the call back over to Richard.

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

Thank you. [Operator Instructions] Our first question is from Kevin DeGeeter of Ladenburg. Your line is open.

Hi good afternoon guys. Thanks for taking my questions and congratulations on the progress. Can you comment a bit with regard to the potential regulatory filing for Zimeta Oral, specifically on the CMC, can you remind us of whether the manufacturers are similar or the same as the IV, and just more generally can you comment on any learning or potential synergy that you may have picked up through the process of filing the IV that you may think will cause the CMC review of the oral, maybe a bit faster, bit smoother?

Sure. Thanks, Kevin. It’s Denise. So, we are using a different CMO than we used for IV, IV obviously being a sterile liquid injectable, this is an oral gel and we have a CMO that is exceptionally talented in that regard. As far as lessons learned, we spend a tremendous amount of time as an organization looking at lessons learned. We have teams that compile very comprehensive lists of any types of comments, feedback whether it be written on an actual technical section or based on a meeting and meeting minutes and memorandum of conference from the FDA, and we analyze that on a regular basis, and certainly as we put any filings together, we’re constantly trying to improve on lessons learned. Some things are unpredictable, it depends on the review team you get and obviously there are different teams for different types of dosage formats, so we are definitely doing the best we can to learn from any lessons from the FDA.

Terrific. And then perhaps on a separate note, can you just talk about how you think about addressing the potential sizing and your best route certain markets outside the U.S., Europe being the most obvious. We’re focused primarily on U.S. regulatory review of Zimeta and Mirataz, but can you provide your thoughts as to how you view the relative economic opportunity in the U.S. versus the ex-US?

Sure. Europe generally tends to be above one-half to two-thirds the size of the U.S. market, and if you combine the rest of the world together, that equates to about half of the U.S. market including Japan in those numbers.

Great. That's very helpful. Then maybe just one last one from me, then I will get back in the queue. And then sort of to get into the guidance for burn for 2018, can you provide a little bit more granularity in terms of the increase over 2017, how much of that in relative terms comes from G&A and selling and how much comes in the R&D side?

Sure. The increase comes mainly from sales and marketing. The G&A portion, we’re seeing a slight increase, but we are also doing a lot of spending in our R&D section because of the programs that we have for biologics manufacturing.

That is very helpful. Thank you for taking my questions.

Thank you. Our next question is from Ben Haynor of Aegis Capital. Your line is open.

Good afternoon everyone. Thanks for taking the questions. First off from me, just the VMX conference not too long ago, can you talk maybe a little bit about the interest level you saw for some of your pipeline, particularly Mirataz and the atopic dermatitis compounds?

Sure. I would just say, Richard and I spent a lot of time talking about - when we started the company it was just the two of us at this conference and now to see the booth and the team and the level of engagement, and I have to really give particular kudos to our commercial team because obviously we don't have products to sell at this point. So, it was really important for us to engage on a scientific level. We had a tremendous amount of traffic from veterinarians. We did some relevant work in the booth. We taught veterinarians how to properly body score cats for body conditioning, and there was a lot of discussion around Mirataz. There is a lot of interest as you can imagine in a dosage form that is not oral, that’s not a pill, and so while obviously we do not have an approval and can't discuss it in any length, we do get a sense that there is a lot of anticipation and excitement. And similarly, what we’ve really seen is excitement around biologics. Veterinarians have really embraced the concept of biologics that keeps the products in their hands, and most importantly it’s typically a much safer way to treat an animal than a small molecule. So, certainly, the atopic dermatitis pipeline was of great interest because one size does not fit all and there is really a need for a portfolio approach to this disease.

Okay great. That’s very helpful. And then you mentioned earlier the distribution partnerships that are kind of in progress now, do you have kind of a preliminary idea on what pricing might look like for Mirataz that you would be able to share? And barring that, would you say it was similar to what you thought maybe a year ago or several years back when you started the program?

Sure. That’s a good way to ask a question because you’re right Ben, I’m not going to disclose that information at this point, but it was a good try. To be honest, we’ve done as you know some very deep pricing sensitivity studies both with veterinarians and importantly with owners. Each iteration of market research we were able to disclose more data whether it be effectiveness or safety, obviously gives us more robust data. And so, our pricing hasn't changed markedly from what we thought a year ago, but we’ve certainly refined it. We do of course know that both veterinarians feel and owners are willing to pay a premium for a dosage format that is easy to do and veterinarians are very excited about that from a compliance perspective. So, we feel pretty comfortable like any launch we will be refining that up until the absolute minute we announced our pricing, but we feel good about it. We feel like we are there.

Okay, great. And then on the undisclosed programs that you have in the pipeline, should we expect at all to hear anything about any of those this year and at what point might we hear about them, will it be after kind of a pilot dosage or palatability trial or would it be more after a pilot efficacy trial for competitive reasons?

Sure. It depends on the molecule Ben. Some of them we will disclose after the pilot stage, others we will probably keep under wraps under after the pivotal study. So, it’s possible we may have some turnouts this year, but the goal is to try to put it off for as long as possible because we don't want to give our competitors any ideas.

Okay great. That makes sense. Lastly from me, you mentioned less attrition in the pipeline than you thought you would have, any particular surprises you want to call out there?

Only that almost all of them seem to be working and that was the idea behind the business when we started, but being used to 5%, 10% success rate on the human side it’s still almost startling how high of a success rate we have been seeing in our pilot studies.

Okay. Well thank you for taking all the questions.

Sure.

Our next question is from Andrew D'Silva of B. Riley FBR. Your line is open.

Good afternoon. Thank you for taking my questions. Just a couple of quick ones here. I will start-off with the atopic dermatitis, obviously. Obviously, APOQUEL and CYTOPOINT had made a pretty big splash in the space, could you maybe educate me on what your pipeline offers as an advantage relative to those offerings?

Sure. So, APOQUEL is a small molecule jack inhibitor and CYTOPOINT is an anti-IL31 antibody. In general, if you look at the human side, antibodies almost always are more successful than small molecules because they tend to have similar efficacy, but much cleaner safety profile. So, in cases where small molecule has been in the same market with antibodies, the antibodies have almost always captured the vast majority of the market. So, we see our primary composition as CYTOPOINT. We have several molecules in our pipeline, including, what we think is a potentially better anti-IL31 antibody, as well as molecule that inhibits IL3 and IL13, various other molecule as well. But the disease - atopic dermatitis has been inflammatory component and an itching component. An IL31 addresses the itching, IL4/13 addresses inflammation and our other molecules inhibit various other parts of the biological process. So, we think that targeting the inflammation may work better or it may work in different patients or it may work very well in combination. So, I think we have multiple shots on goal. And I think this is going to, atopic dermatitis is going to be similar to rheumatoid arthritis on the human side or psoriasis on the human side where you will have multiple successful drugs and our goal is to have as many of those as possible.

Okay perfect. Thank you for the color on that. And then as it relates to sepsis for KIND-011 perhaps you can you give me a sense of what the market looks like? I’m assuming it’s smaller than Zimeta from a population that’s impacted standpoint, but the offering potentially would have a higher price tag, is that an accurate way of thinking about it and if you can maybe refine my thoughts or give any color on that it would be very useful?

Sure, Andy. I think you’re exactly right. I think it’s obviously a smaller field. There's less foals in any given year than there are adult horses. However, there is a high willingness to pay because there is a quite a large investment in breeding and typically in these foals and there is nothing else to treat with a 50% mortality rate, if we have a drug that proves to be successful that will be obviously a very attractive candidate for veterinarians and for the owners of these new foals.

Okay, perfect. And then just last question, I remember we touched on this maybe one of the last conference calls, but has there been any update on the domestic commercial rollout from enhancing your sales utilization related to potentially in-licensing any technologies, so that when you do rollout you have multiple offerings that your sales force can plug into your end markets?

So, yes. We have several other products that we have been evaluating. So, we're still applying on doing that, including some product that don’t need approval. At this point, we haven’t disclosed them yet.

But it would be fair to assume as the year goes on and you get approvals that that’s something that we should at least keep our eyes or our minds aware of?

Yes. I think we will have some additional products.

Yes, and the important point will be as we launch these products they will be our priority. Obviously, Mirataz and Zimeta are our flagship products and we’ll get the attention they deserve from our small and mighty salesforce, and we will amortize the cost of that salesforce as appropriate when the time is right?

Great. Thank you. Congrats on the progress and good luck throughout the year.

Thank you.

Thank you.

Thank you. Our next question is from Sean Lee of H.C. Wainwright. Your line is open.

Good afternoon. Guys. And thank you for taking my questions. Just a couple of things. For Zimeta, I noticed that you guys mentioned that in December EMA has accepted the applications of Mirataz, are there any plans to submit Zimeta either the IV or potentially the oral form to the EMA as well?

Sure. That’s a good question. So, Zimeta, the IV form is actually available in Europe already, known as known as metamizole, the active ingredient as it's named in Europe. However, there is not a normal marketed oral formulation. So, we think there is most definitely a market for oral and at that time we may look at packaging IV with it as well as an offering. We haven't made that determination get, but yes, we will likely be pursuing an oral submission for Europe.

I see. My second question is on KIND-011 and epoCat, what’s the planned time line for those pivotal studies right now?

So, we haven't disclosed those yet. They are subject to a couple of things, including the discussions we’re having with the FDA right now on the study design, as well as the timing of the completion for the current studies. We’ll probably disclose some time lines later this year.

I see. Nice. And my final question is on the build-out of the Kansas manufacturing facility. Could you provide us a little more color on what’s the timeline like, what products are you planning to manufacture there, is it only biologicals that are coming up or will you move, say Mirataz and Zimeta manufacturing there as well and also what kind of efficiencies we can see on COGS lines when that facility is up and running?

So, we are primarily planning on using that plant for our antibodies. And eventually, we may bring some small molecules in, but that’s not in our current plans. And your question is, right on the mark we think the plant will give us an advantage in terms of cost of goods. Now, if you look at the economics of contract manufacturing you will see that the profit margin is roughly 30% to 40% at most CMOs. So, at a minimum we will save that much, but potentially more because by having the manufacturing under our control we should be able to achieve additional efficiencies. And on the timing, we will start building the plant shortly. However, some of the buildout schedule will depend on our revenues. We’re being very judicious about our capital expenditures. So, we are going to be watching our revenue stream very closely so that we’re controlling our cash burn.

Okay. That’s good to hear on that. I actually have a final question on the commercial build-out. I see that the SG&A cost went up quite a bit in the last quarter. I’m assuming that’s from building out the commercial team. So, where are you at on the buildout and are you like halfway through your plan and where do you expect to be at by the end of 2018?

Sure. So, I can start with the headcount as far as - we’ve got all of our marketing team in place. Our commercial operations, our sales management, and like I said just a handful of sales reps who we brought on prior to approval because they have other skill sets whether it be in managing distribution or key corporate accounts helping us to map all of that out. We have contingent offers out to likely what will be the remaining headcount through the end of the year. We anticipate having about 15 reps or so by the end of the year, and we will be again judicious about that because don't forget with the reps really the main plan is to bring them and train them and deploy them. Other than that, we’re sitting on the headcount. So, I know we’re using this word quite a bit, but we are being very judicious about expenses that relates to headcounts as well.

Great to hear that. That’s all I have and congratulations on the progress and thank you again for taking my questions.

Thank Sean.

Thank you.

Thank you. [Operator Instructions] Our next question is from David Westenberg of CL King. Your line is open.

Alright. Thanks for taking the questions. Just a couple of timeline reminder questions. First, when do you expect pilot data readouts for any of the atopic dermatitis drugs and then also when do you expect approval of Mirataz in Europe?

So, I’ll take the first part of that question and Denise will answer the second part. We should have read out for at least one of the topic dermatitis pilot sometime this year. We are currently enrolling the study right now and it has a little bit of an adaptive design, so it really depends a little bit on the results.

And then as far as Mirataz for Europe, we announced that our EMA submission has been validated and officially accepted in December, and it’s a little bit of an iterative process. We will get some feedback at about the 120-day point, and at that point we may be able to give some better guidance, but we’re anticipating it will take approximately a year or so from acceptance of the filing.

Perfect. Thank you very much and then have you talked about partnering with that one and at what time frame in the - looking to approval process would you look at partnering?

We have quite a bit of interest on Mirataz ex-U.S. both Europe and Japan. And so, we're talking to several partners. We will most likely wait for some of the revenue numbers to come in because we think that the revenue numbers, if they are in-line with our forecast will allow us to get maximum value from the deals. So, most likely a deal won't happen in the immediate future, but the discussions are ongoing.

Perfect. Thank you. And then one of your smaller competitors recently launched a drug for hunger in dogs, I know it’s early in the process, but is there anything you are looking for, or any key learning from what they might see in terms of veterinary adoptions for novel drugs in hunger that you are particularly looking forward that would have maybe applications for Mirataz?

Well first we are really hoping that drug is going to do very, very well. We wish nothing, but success for that product. By our market research, the canine market is much smaller than the feline market and the advantage that we have in terms of transdermal for the cap market, we think we will offer a market advantage to what is currently out there. So, I think there might be some learnings, but it may or may not translate across species.

Got it. Thank you very much. And then maybe just one last final question, can you remind us what the breakdown was between chronic and acute inappetence in cats? And then with respect to Mirataz, what do you anticipate in terms of label or restrictions if you have it, if any?

So, let me start with the second part of the question. We will be labelled for two weeks and we will only be promoting on label. So, with that caveat what I can say is, of the current cats that are being treated about half are being treated chronically for the rest of their lives.

Got it. Thank you.

Thank you. And that does conclude our Q&A session for today. I like to turn the call back over to Dr. Chin for any further remarks.

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