Elanco Animal Health Incorporated (ELAN) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 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 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 first quarter 2018 financial results call. Joining me today from the management team at KindredBio are Denise Bevers, our COO; and Wendy Wee, our CFO. As most of you know, we recently received the approval of Mirataz for the management of weight loss in cats. This is the first and only drug approved by the FDA for this very serious condition. Not only that, but it is the first transdermal drug for cats approved by the FDA ever. It is a major milestone for KindredBio and marks our transition to a commercial organization. Mirataz is a breakthrough drug and perfectly illustrates our business model. We've taken a validated drug, mirtazapine; applied cutting-edge technology to make it suitable for companion animals, namely an advanced transdermal technology; developed it quickly and efficiently in less than five years, at a cost of less than $5 million; and will address a serious and pervasive unmet medical need. Now what's even more exciting is that we're doing the exact same thing with our other drug candidates, and Mirataz is a just the first of series of great drugs in our pipeline. For example, our second generation IL-31 antibody that we're developing for canine atopic dermatitis is against a validated target, is fully canonized and appears to have extremely high potency. Our goal is to develop it as a best-in-class molecule. Our IL-13, IL-4 molecule is also against a validated target, and at upstream of IL-31, which we believe may result in a highly efficacious therapy. As many of you know, canine atopic dermatitis is a very large market, currently at $500 million and climbing. And as all of you know from the human precedence in rheumatoid arthritis, multiple sclerosis and other similar diseases, in a large market like this, atopic dermatitis, there are multiple blockbusters. Different patients need different therapies, and our goal is to have multiple blockbusters in the atopic dermatitis space. And we believe we are very well positioned to do that. As another example, our long-acting cat EPO, or epoCat, is looking very promising. We believe this is another market where we can take a validated target, improve upon it and customize it for pets and address on large unmet medical need. Furthermore, our biologics plant we are constructing in Kansas will give us a competitive advantage and will lower the cost of goods considerably. Turning back to Mirataz, I'm very proud of the commercial organization we have built, which Denise will describe in more detail. As I said on the previous earnings call, we don't underestimate the challenges involved in product launches, having seen a lot of them, and we are fully prepared. Our commercial team is ready. Our distribution channels are ready. Our internal operations and finance teams are ready, and we're off and running. On Zimeta, we have completed all requirements, and we're just waiting for satisfactory inspection of our contract manufacturers. We're looking forward to having our second approval soon. In summary, we are very excited about the rest of the year. We are advancing our pipeline. We are continuing to build a world-class team. We are building a strong track record of execution. We are the leading veterinary biopharmaceutical start-up company by market capitalization. Already, we are a leader in the biologics space and plan soon to be the leader in the equine space. In short, we are pioneer in a burgeoning new field. Thank you. I will now turn the call over to Denise.

Thank you, Richard. I will begin today's update with an overview of our commercialization plans for Mirataz, followed by a review of the continued progress of our deep pipeline. Of course, I'd like to begin by congratulating our talented KindredBio team and our investigators on our very first FDA approval. This approval demonstrates the depth of talents of our research and development team. To develop a proprietary first-in-class transdermal medication in less than five years is an incredible feat and now we will be able to unveil to you the capabilities of our commercial team as well. As you've heard me describe in previous quarterly calls, we have been judiciously preparing for this commercialization for quite some time. From establishing our commercial operations in veterinary affairs departments to engagement with our thought leaders, designing our customer relationship management system and mapping out our customer base. Today, I am so pleased to tell you that in addition to our commercial operations and veterinary affairs team members, we have recruited 16 members to our sales organization. We have conducted over 150 interviews and hired the top talent in the industry with an average of 15 years of experience across the team. This team comes to KindredBio with a deep customer and distributor relationships, and we have specifically curated our initial team to include the most-experienced talent in managing corporate accounts, distribution, practice management, training and more. Now that we have FDA approval for Mirataz, our team will begin to train the distributors and their call centers and reach out to corporate accounts, specialty hospitals and other key accounts prior to product shipping. Our direct sales reps and distributor reps will begin to take preorders from customers in the next two weeks. We are working with our contract manufacturer to update and complete the printing of our packaging and intend to ship product in approximately two months. Our plan is to launch with enough material to supply stocking orders at the distributors, initial customer orders and to have enough stock for anticipated reorders. We want as many clinics to try our products, so penetration will be very important. We have set our introductory price for Mirataz at $15 per tube. We have done a lot of pricing sensitivity work with both veterinarians and owners, and know this is the best price to reach maximum penetration and usage by all cat owners, as well as to maximize revenue long term. We will likely increase this price over time. We look forward to providing details regarding initial stocking orders and penetration during our next quarterly call. We will be able to report revenue 90 days after the initial launch shipments are made to the distributors or to the customers, or upon distributor reorders, should they come in within this one-time 90-day initial stocking period. Now let's discuss Zimeta IV, our product for the control of fever in horses. As we reported previously, we have FDA approval for the effectiveness and safety technical sections. FDA has informed us that they have no additional questions for KindredBio on our CMC technical section. We are awaiting the preapproval inspection of our contract manufacturer, which is scheduled in July. And additionally, we are awaiting the resolution to findings from the inspection of our API provider. The API provider has already responded to these findings and anticipates a timely resolution. Following successful inspections, we will file the Zimeta IV new animal drug application upon the completion of our CMC technical section. Now turning to our deep pipeline, I will provide updates on some of the key programs. As we have reported, the pivotal field effectiveness study for Zimeta Oral has been completed with positive results. This was the third consecutive positive pivotal trial for KindredBio. As a reminder, Zimeta Oral is a proprietary oral gel that is expected to expand the use of the drug and build upon the success of Zimeta IV. The Target Animal Safety Study is also completed, and the drug was found to be well tolerated. We are in discussion with FDA regarding our submission and are in the process of transferring the product to our commercial manufacturer. As Richard outlined, we are taking a multipronged approach towards the treatment atopic dermatitis with a portfolio of promising biologics. We have initiated or in the process of initiating pilot field effectiveness studies for several molecules for atopic dermatitis, including a fully canonized IL-31 antibody, a fully canonized IL-17 antibody and a canine IL-4/IL-13 SINK molecule. We hope to report pilot data from one or more of these studies before the end of this year. 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 specially engineered by our protein engineers with a prolonged half-life compared to endogenous feline erythropoietin. Our PK data suggests that the molecule may have a sufficiently long half-life to allow for once-monthly dosing. The pilot field study of KIND-014 for the treatment of equine gastric ulcers has been completed, and KIND-014 was very well tolerated. We have completed dose range finding and palatability studies and based on the study results, we have advanced 2 formulations into pilot field studies. The pilot studies have been initiated and enrollment for one of the formulation candidates has been completed. By the end of the second quarter, we expect to have completed the review of the data and determine which formulation will move into a pivotal field study assuming the data support further development. The pilot field efficacy study of KIND-011, our anti-TNF monoclonal antibody targeting sick or septic foals has been completed with positive results. Sepsis in foals can cause up to 50% mortality and is an important unmet medical need for which there is currently no FDA-approved therapy. Since our last call, we have optimized this fully equinized anti-TNF monoclonal antibody and intend to continue field studies during the 2019 foaling season, following discussion with FDA regarding the development plan. Lastly, as we previously reported, we have completed a pilot field study assessing the oral tolerability and palatability of KIND-015 for the management of clinical signs associated with equine metabolic syndrome. We have optimized the formulation and have initiated a pilot field effectiveness study. Now switching to the manufacturing front, I am pleased to tell you that we have started construction to support our biologics manufacturing lines in our Elwood, Kansas facility that we acquired in August of 2017. We anticipate construction to be fully completed by 2019 to support our initial manufacturing needs for our monoclonal antibodies for atopic dermatitis. So as you could see from this update, the KindredBio team has been incredibly productive. We are well prepared to support a successful launch of Mirataz, to complete our precommercialization work to support Zimeta IV, to diligently and efficiently advance multiple product candidates in our pipeline and to build out a state-of-the-art manufacturing plant in Kansas to complement our fully commissioned plant in San Francisco. We are well positioned to have a very productive and successful 2018, and we look forward to keeping you apprised of our achievements. With that, I will now turn the call over to Wendy to provide an update on our first quarter 2018 financials.

Thank you, Denise. For the quarter ended March 31, 2018, we reported a net loss of $10 million, or $0.36 per share, as compared to a net loss of $6.5 million, or $0.30 per share, for the same period in 2017. Total research and development expenses for the quarter ended March 31, 2018 were $5.3 million compared to $3.8 million for the same period in 2017. The $1.5 million year-over-year increase in research and development expenses was primarily due to higher headcount and related expenses, as we focused on advancing our biologics programs as well as increased biologics batch production and testing costs, including lab supplies. Total general and administrative expenses for the 2018 and 2017 first quarters were $4.9 million and $2.8 million, respectively. Expenditures in the first quarter of 2018 increased across the board. The $2.1 million increase in the first quarter of 2018 over the same period in 2017 included a mix of higher payroll and related expenses, marketing, travel and conference expenses as a result of prelaunch activities and the build-out of a small commercial team. In addition, higher corporate infrastructure costs and stock-based compensation expense also contributed to the increase in expenses. As of March 31, 2018, we had $70.8 million in cash, cash equivalents and investments, compared with $82.5 million as of December 31, 2017. Net cash used in operating activities for the first quarter of 2018 was approximately $11.2 million. We also invested approximately $0.4 million in capital expenditures for the build-out of our Elwood, Kansas manufacturing facility. For the 2018 calendar year, we reiterate our previous guidance for operating expenses to be in the range of $44 million to $48 million, excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. We are preparing for the commercial launches of Mirataz and Zimeta, including the scale up of our commercial team, and we will continue to focus on the development of our core pipeline candidates and programs. Additionally, we plan to invest $14 million to $16 million in capital expenditures on the construction of biologics manufacturing lines in our Elwood, Kansas facility for our biologics programs. Revenues for Mirataz and Zimeta are expected to 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 are ready for questions.

[Operator Instructions] Our first question or comment comes from the line of Andrew D'Silva from B. Riley FBR. Your line is open.

Hey, good afternoon, thank you for taking my questions. I just have a few quick questions, and my apologies in advance, I was hopping between calls, so I'm very sorry, if you retouched on this. But can you please refresh my memory and let me know what the next steps are for you to actually commence the commercialization of Mirataz? And perhaps since you're actually in the real world, and I'm sitting behind the computer screen, just let me know what you need to achieve or what infrastructure you need to have in place to be successful and perhaps what challenges you potentially see and how would you expect to minimize risk related to that as you launch the product?

Okay, great. Hi Andy, it's Denise. So we have very little to do. We're really quite prepared. So the main activity is to actually shipping product is getting our packaging finalized, based on our final label and getting it out, shipped into the community. So as I said on the call, we will start to take orders in the next couple of weeks. Our third-party logistics is ready with its call center. Our sales reps that we have on board are already prepared and so we have a lot of that work already completed. In addition, our distributors are ready and so as far as success, we have judiciously built out our commercial infrastructure. We have some of the top reps in all of the industry. We've conducted over 150 interviews and really picked the cream of the crop. And what's beautiful about that is we have our next tiers of representatives already identified as well so we can grow accordingly depending on the market. So we don't see any issue with inability to expand revenue and grow the team.

Okay, great. And just from a revenue recognition standpoint, could you refresh my memory? Is there some sort of a return criteria on the first shipment that we should figure in when we start modeling? Or shipments that take place this quarter shall we actually start thinking about that as revenue?

Yes, that's an important question. So we will likely not ship a product for the next couple of months, depending on how long it takes for our manufacturer to finish the packaging, do the QC release it according to their SOPs, so we're a little bit limited as per their time line. But once we ship the product to the distributors or to our customers, there will be a one-time 90-day initial stocking period, for which there can be returns. So once that 90-day initial stocking period is over, then we would be able to book revenue. Additionally, should distributors place reorders in that time, we'll also be able to report that revenue.

Okay, great. So just back on the envelope, not holding you to any exact timing, it would probably make the most sense to just start modeling revenue in the fourth quarter based on that, so two months plus 90 days puts you into some time in the fall?

I think that's reasonable. I mean, obviously, we're doing everything humanly possible to make that as quick as possible, but I think that's a reasonable expectation.

Great, great. And then with Zimeta IV, did the FDA give you any guidance for a stage that they will prioritize or expedite approval once the CMO preapproval inspection is completed in July?

Well, we have a very good relationship with our review team, and they have certainly indicated that they're just waiting for resolution of this issue now. We have been told that before, so we take it with a grain of salt. But yes, I mean, our understanding is once the API inspection findings are resolved, and we have our preapproval inspection at our contract manufacturer, we expect to have approval of that technical section relatively quickly.

Okay, perfect, and then just my final question. At this point, you should have two approved and commercial launched products in the market in the not too distant future, and with essentially two distinct sales teams effectively targeting two separate end markets. Does it make sense for you to look to your in-license or acquiring additional offerings at this point to increase sales force utilization or should we expect that a focus on getting other products in the pipeline over the regulatory goal line would be a primary focus and then utilization will just increase through that process as more products receives approval that you internally develop?

Sure, this is Richard. Ideally, if we have additional products, we could amortize the commercial costs over more products and increase the profit margin. So we are looking for potential products. Having said that, we do not need to have additional products in order to be cash flow positive on these individual products, so it's nice to have, not a must-have. Now balance against that are the products in our pipeline that are looking very, very attractive. So what we have been doing so far is that unless we find a compelling opportunity at a compelling price, we have been prioritizing our internal candidates, because, as I said, they look very, very attractive. Our atopic dermatitis products are coming along very well, and we think that each one of our atopic dermatitis products has the potential to be a blockbuster. So far the - when we look at sort of cost benefit, the products in our internal pipeline have been more attractive, but we wouldn't rule out acquiring outside products.

Okay, wonderful. Well, thank you very much for the color and congrats on the approval, I know it was a long time coming and best of luck getting your things set up in commercializing the offerings.

Thank you.

Thank you, I will say that we are hoping that approvals would be earlier, but what we are hearing from other people, now that we're hearing congratulatory messages is that they have never seen nor ever heard of anyone getting a drug to market in less than five years. So it's still on the original five-year, $5 million plan.

That's great to hear, I'm really happy that worked out that way.

Thank you.

Thank you. Our next question or comment comes from the line of Swayampakula Ramakanth from H.C. Wainwright. Your line is open.

Thank you. Congratulations, Richard and Denise. It's a great thing to have a product approved and you're just going to be launching it as well. So just getting started on the pricing, you gave us a pricing of $15 per tube. So two questions, how do you come up with that pricing model? And how many doses or administrations can a cat get out of one tube?

Okay, so yes. So we came up with the price based on truly extensive market research. We did market research with both veterinarians and owners. We spent a lot of time looking at maximum long-term revenue potential, short-term penetration, and we sliced and diced those data in many different ways. One of the nice things about this product is what, well, we don't know the exact margins until we get into revenue. We have very attractive margins, which really allows us the opportunity to price the product in a way that cat owners, who are very likely managing other illnesses or diseases can afford the product. And penetration is extremely important to us because don't forget, we have quite a pipeline coming behind this, I mean, largely our epoCat products. So it will be wonderful to be in so many clinics as we launch future products. So that's really how we came upon the pricing. As far as the number of doses, we will have certainly the two weeks of dosing in our tube per our label. Given that the dose quantity is so small, there is the potential that there will be additional dosing in a tube, given a smaller cat. And obviously, FDA has worked with us on that packaging. So the tube will have certainly enough to cover the 2 weeks of dosing for any cat.

So on - in clinical studies, is it just two weeks per script or per instance or do they - do the vets need the cats to take this for longer than two weeks?

So our clinical studies had a two-week end point because the drug works very rapidly, and we can see a difference in two weeks or less and that's what we'll be promoting it for. Having said that, about half the drug - half the cats right now that are getting oral mirtazapine are getting it chronically, because if the underlying condition is a chronic condition, like diabetes or cancer or kidney disease, then the administration will need to be continual. But I caveat that by saying, obviously, we're focusing on the on-label duration, not beyond that.

Okay, thanks. Then switching to Zimeta, so is it possible for you to give us a little bit more color on as to what are the issues at the contract manufacturer and what is your sense of about how easily it can be resolved?

So we haven't given any specific detail other than to say that the findings were, in our opinion, in our quality and regulatory teams' opinion, minor and addressable. And I think the fact that the API provider has already responded to FDA is a sign that they were certainly addressable. So that's really about all we're going to say on that at this point.

Okay. And then switching to Zimeta Oral, do you have a sense of, like, how much work needs to get done before you can complete the filing?

Well, we're working on our filings as we speak, and we're working with FDA to submit those filings. One other things that we're doing is we are moving to our commercial manufacturer to ensure that we can have enough supply for commercial launch. So that will take just a little bit of time, but we plan to do our filings as quickly as possible.

Okay. So the last question from me is now of the three biologics that you talked about in your press release, is there or which ones would we see get through the development first or are you kind of looking at doing couple of them in a simultaneous fashion?

So we are currently pushing them forward in parallel. Certainly, epoCat will be one of the first ones approved, and then for atopic dermatitis, given that we are a small company, at some point, we may need to stagger the development. So right now, we have three candidates for atopic dermatitis that have completed Phase I successfully. And we have two that have just started or about to start Phase II studies, IL-13 antibody and then IL-4/IL-13 SINK molecule. And depending on the pilot study results and some of the manufacturing, cell line development will probably stagger them. So I think it will most likely be epoCat plus one of the atopic dermatitis candidates that get to migrate first, followed closely by the second atopic dermatitis candidate, followed by the third atopic dermatitis candidate.

Perfect, thank you very much and good luck with the launch.

Sure, thank you.

Thank you. Our next question or comment comes from the line of David Westenberg from CL King. Your line is open.

Hey, thanks for taking the question and congrats on getting Mirataz through. So given that the administration route of Mirataz is much easier than crushed up and pilled mirtazapine, do you anticipate may be higher use in chronic cases than maybe the 50% that's quoted right now or if you can talk about that?

I think any administration that lasts more than one day will have a significant advantage, because getting the cat pilled the first day is quite difficult, but after that, it becomes a nightmare. So I think, it's fair to say that we'll have pretty good penetration across the board, I think.

Got it, thank you. And then can you remind us on label, I think you said it's labeled for two weeks. Is there any need to do may be a different label or do you anticipate that is going to be effective in getting both acute and chronic use cases? And then as a follow-on to that, your pricing strategy. I mean, I'm sure it's - you thought of acute versus chronic cases. Just run through - can you just give a little bit more detail and run through in pricing consideration in the chronic versus acute cases.

I'll take the first part of that question. Currently, we don't plan to expand the label to beyond two weeks. We may do that. It really depends on the uptake. As you know, off-label use of medicines is very common in the veterinary field, and while we will not be promoting off-label, I think based on the current practice patterns, it will be little surprising if people - if veterinarians didn't use it beyond two weeks. But it would not be tremendously difficult to expand the label, if we needed to. And then on the pricing, I'll turn it over to Denise.

Sure. So I'm sounding like a broken record, but I do want to highlight that we really have done a lot of market research. We have a tremendous amount of information internally, based on acute and chronic use, number of tubes that may be anticipated to use depending on the underlying illness or disease. So we took all of that into account as we did our pricing. And we think that no matter how we look at the potential, this price point seemed to be, again, the best balance price for penetration and long-term revenue. So we feel really good about this price.

And then just as a continuation of that, just to answer. On terms of you talked about being able to have pricing label at $15 or you believe that you could raise the price over time. Would you do that with just one price increase on this one kind of product? Or do you anticipate may be expanding a lot of - a number of SKUs in order to do that?

Well, initially, we're looking at this particular SKU and as you've seen in the industry, I mean it's very common to take regular price increases. So we'll determine that as the time comes, but certainly, we anticipate that much like the rest of the market, we would do the same.

Yes, it's much easier on the veterinary side to come in a little bit lower and get adoption, and then subsequently, increase prices than to come into high and not get that penetration, and then try to drop the price or discount it. That's a much more difficult approach.

Got it. That's really helpful. And then just a final question on the sales force, can you talk about maybe regions or practice types that you're targeting with your sales force and then their relationships with distributors in terms of which distributors you're working with? I'm just trying to get a sense of coverage with your existing sales force and how that could multiply in the future with a successful launch.

Sure. So yes, as I said, we really have, we think, hired the best of the best, and we - for this initial team, we, of course, wanted to make sure that these were sales specialists who have a tremendous amount of experience, very long-lasting relationships both with customers and with distributors. And so we have not publicly shared our sales region breakdown necessarily, but what I can tell you is, we will certainly be covering all of the major metropolitan areas with our direct sales specialists. Our distributors, of course, have sales forces and will be covering much of the white space. And again, these sales specialists have great relationships with their distributor reps. So initially, we will be targeting certainly feline-only clinics, high-volume practices, those types of account. And we have those mapped out really in great detail as far as our launch plans.

All right, thank you very much and congrats on the approval.

Thank you.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Ben Haynor from Alliance Global.

Good afternoon guys, congrats on the on-time, on-budget approval of Mirataz.

Thank you.

Thank you.

Just first from me, and I don't know if you can quantify it, but maybe you could characterize it on the feedback you've gotten now that we're, I don't know, 40 or so hours into the approval post announcement, what kind of feedback have you heard, if any, from veterinarians?

So we have had actually quite a bit of outreach from veterinarians. Our - even our clinical operations team has gotten down requests from our clinical investigators. So again, we have done a lot of prework with our thought leaders, with the feline community to prepare them for this launch. So there's quite a bit of excitement.

Okay, great. And then outside of Zimeta on the equine compounds, which ones do you see as having the potential to advance the quickest, of course, assuming things go well? And would you consider potentially doing something during foaling season in the southern hemisphere for KIND-011?

So I will take the first question to start. We think that as far as the most likelihood to advance more quickly would be our treatment for the signs of equine gastric ulcers. And equine gastric ulcers, as you can imagine, it's an acute treatment as opposed to our product for metabolic syndrome, which will be a much longer clinical trial. And as I mentioned earlier, we're very excited. We've already completed enrollment for one formulation of our pilot studies for our equine gastric ulcers. So we hope to report those out soon and assuming that the data is supported, we will move into pivotal trial. As far as our anti-TNF for sepsis, Richard's smiling at me across the table because this is quite a passion project for our team. And I could tell you that we have veterinarians lined up for foaling season, certainly within the United States, and we've also had some interest outside of the U.S. So I don't think that enrollment during foaling season will be an issue for us.

Okay, great. And then lastly for me, I know in the past you've talked about additional products that you could put in sales people's bags that don't require FDA or USDA approval. How soon, now that you have Mirataz approved, should we expect those? You guys have started talking about those or are they more for the equine market than the feline market and it might be a little bit before we hear about those?

Sure. So yes, we've been working on some potential candidates for quite some time. The focus is most definitely going to be Mirataz and then shortly after, Zimeta. And our teams will be solely focused on those. What we wanted to do was to add on potential products that veterinarians have inquired about that we could develop and then add to the bag when we think it's appropriate. But what I will say to your question, Ben, is most definitely the focus will be on our innovative FDA-approved products, certainly, in the short term.

Okay, all right, great. Thank you very much.

Thank you.

Sure.

Thank you. [Operator Instructions] Showing no additional questions in the queue at this time, I would like to turn the call back over to Dr. Chin.

Thank you, operator. I'd like to thank the listeners for your support as we launch our first product and transition to a commercial stage company. It's a very exciting time. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.