Welcome to the Fourth Quarter and Full Year 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 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, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon and welcome to our year end 2018 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our President and COO; Wendy Wee, our CFO; Katja Buhrer, our VP of Corporate Development and Investor Relations. 2018 was a transformational year for us. With FDA approval of our first product Mirataz, we have transitioned to a commercial stage company. Denise will discuss Mirataz in more detail, but we're very pleased with its performance and the reception to-date by the veterinary community as well as by pet parents. We've delivered a high-quality product for an important medical need and we're proud of it. The sales doubled from Q3 to Q4 of last year and the penetration and reorder rates clearly show that veterinarians are eager for the product. Our approval of Mirataz is a very important milestone for several reasons. First, it demonstrated our ability to start from scratch and bring our product all the way to market. Second, it validated our capital-efficient business model of developing drugs for on average $5 million to $8 million in three to six years. Third, it demonstrated that we can build a commercial organization and launch our product. These are impressive achievements. Based on what we know very few companies can develop veterinary drugs for this cost and on this timeline. To develop a drug for $5 million to $8 million and to be able to generate tens or hundreds of millions of dollars per year in revenue for each product; that is a very attractive business proposition. Combined that with a very rich pipeline, and you end up with a compelling business model. We've shown that we can do this with Mirataz and we can replicate that with other compounds. We anticipate that 2019…

Thank you, Richard. I will begin with an overview of Mirataz's fourth quarter performance, followed by a look at year-to-date trends, and then turn to our key pipeline developments. The Mirataz launch continues to perform well and meet our expectations with momentum building nicely in the fourth quarter and into the first months of 2019. As we disclosed earlier this year we doubled third quarter net product revenue in the fourth quarter achieving $1.3 million in quarterly sales and rounding out the year with $2 million in total revenues. This strong result reflects uniformly positive customer feedback with penetration reaching our year-end goal to have Mirataz stock in approximately one-third of U.S. veterinary clinics and the reorder rates among participating clinics rising to 56%. The fact that within six months of our launch, more than two-thirds of U.S. veterinarians were aware of Mirataz, one-third orders the product, and over half of those clinics placed reorders, underscores the broad appeal or a transdermal treatment for unintended weight loss that does not rely on a cat's willingness to eat or the owner's ability to administer a pill in order to be treated. Having made strong early headway in clinic penetration, our strategy for the quarter was to encourage veterinarians to reach more frequently for this new transdermal tool in their bag and thereby accelerate the shift away from human generic oral medication. To this effect, we have been conducting a number of different sales and educational events such as lunch and learn that are already yielding strong results. The initial success of our efforts to change practice behavior is evident in increased re-order, rate and order size quarter-over-quarter. And I'm happy to report that, we're where we expected to be. Our penetration of corporate accounts is likewise encouraging. I'm particularly proud of…

Thank you, Denise. This was a banner year for KindredBio marked by the approval of our first product and with that transition to a revenue generating company. Mirataz validates our capital efficient business model of developing drugs and we continue to expect it to be an important contributor to our cash position over time. For the quarter ended December 31, 2018, we reported a net loss of $15.4 million or $0.46 per share compared to a net loss of $9.7 million or $0.35 per share for the same period in 2017. For the full-year, the net loss was $49.7 million or $1.60 per share versus a net loss of $30.9 million or $1.23 per share in 2017. We recorded net product revenues of $1.3 million and $2 million for the quarter and year ended December 31 respectively. Keep in mind, Mirataz became commercially available in July 2018. Our combined sales to four large distributors namely MWI, Henry Schein, which is now Covetrus, Patterson and Midwest each accounted for more than 10% of total revenues in 2018. On a combined basis, these distributors represented approximately 91% of our product sales last year with regional and home delivery partners making up the remainder. The cost of product sales totaled $0.2 million in the fourth quarter of 2018 and $0.3 million for the year resulting in the gross margin of 84% for both periods. As Denise mentioned, we continue to see subsequent move out of Mirataz from distribution into the clinics at an increased rate from what we saw in the first few months of launch as the sales, distribution and marketing teams effort reached veterinary customers. Having achieved strong uptake to date, our focus is on driving reorders and further increasing reorder size. As veterinarians have gained experience and are becoming familiar…

Thank you, Wendy. Operator, we are ready for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is now open.

Hi. Thanks for taking my questions and congratulations on all the progress in 2018. Firstly, following the two conferences, could you please give me your assessment of how you view your commercial footprint currently? Could we expect that to build throughout the year? And then, maybe staying with Mirataz, do you have any insights into what usage the product is getting off-label in chronic use? And do still -- are you still looking at a possible label expansion there? Thank you.

Great. Hi, Brandon, it's Denise. I'll take those questions. So, yes, I mean, we are certainly expecting the footprint to grow. Certainly, both with penetration as well as a depth of orders, size of orders reorders. We did see even some nice growth just between VMX and WVC, which I think showed the awareness increase from one conference to the next. I think as I mentioned, I think, previously we also see a nice response from the conferences in the sense that we had thought leaders on podium and we would immediately see focus come through the boost and ask about the products. So the word is spreading, the team has done an outstanding job of marketing initiatives which will continue to build, obviously, right now, directly to the veterinarian, eventually potentially to the cat owners. So, yes, the answer is, I would expect to see the footprint continue to expand accordingly. As far as chronic usage, it's very difficult for us to get patient level data outside of market research. So we're continuing to do market research. Obviously, we are only promoting the product to label, which is for two weeks of use. At this point, we do not have any chronic study currently being conducted, but we will continue to look at label expansion, both for that and other indications as well.

Okay. Thanks. And maybe one additional question, if I may. Following the good data you had on KIND-016 or IL-31, have you had any discussions with the USDA following that data? And where are you in terms of the master seed? Thank you.

Sure. We have not had any discussion with the USDA beyond what is normal. And with the master seed, we are waiting for the USDA to get back to us.

Great. Thank you very much.

Our next question comes from the line of Ben Haynor with Alliance Global Partners. Your line is now open. Mr. Haynor, your phone maybe on mute. Mr. Haynor, your phone maybe on mute.

Sorry, guys. Thanks for taking the questions. I apologize. So on the feline atopic dermatitis compound that you're working on, how is the affinity looking on that so far in the development?

Canine

Did you mean canine? Because we have not disclose any feline product in that field.

Well, I thought I heard something about the attractive market in feline atopic dermatitis, but there might be something there?

Yes. Yes. That is a very attractive market. Certainly, one of the markets we would consider among others. I think that's all I can talk about at this point.

And a market like that, would that be something that you are looking at for non-dilutive capital or out licensing opportunities, could that be in the portfolio that you might look to out license?

It could. We have more products than we can pursue. And that's certainly one of the ways that we could bring in non-dilutive capital, because there is a lot of interest that's growing in the monoclonal antibody space for companion animals.

Okay. That makes sense. And then, just general point of clarification, you mentioned the reorder size increasing, both in the prepared remarks and in the press release. I guess, I'm curious if you mean on practices third and fourth and so on orders? Or for a given account? Or do you mean the second order that the people that are reordering now is larger than what, say, the people that originally ordered in September was, or is it both? If that makes sense.

Sure. Yes. So, yes, without getting too granular, I mean, we're seeing steady reorder order-over-order. And we have – we certainly had data to support that. So I think that one of the things that we've really focused on, as I mentioned, is going back into those clinics and the multiple touches and we're doing analytics looking at the value of a sales specialists touch. So, yes, what I can say comfortably is that we are seeing orders increase order-over-order.

Got it. That's very helpful. And then lastly for me, it's probably not the crucial thing to do necessarily, but with the Zimeta API manufacture inspection taking as long as it has? And just knowing that the drug -- dipyrone does get compounded by others, would it ever be something that you'd considered a compound that yourself that the FDA is going to take forever?

It's definitely something that certainly could be done. We have talked to FDA to just make sure that they are as committed to approving this drug as they once were and have broached that subject with them and our impression is that they are absolutely committed to approving this drug and would not encourage us compounding in the meantime. So I feel confident that certainly our review team, as I said before, they have no question -- more questions for KindredBio. And all of our interactions would intimate that they are ready to approve this drug with a positive inspection.

Got it. Thanks for taking the questions. I'll hop back in queue.

Terrific.

Our next question comes from the line of Andrew DeSilva with B. Riley FBR. Your line is now open.

Yes. Thank you. Good afternoon and thanks for taking my questions. Just a few quick ones here. First, just as it relates to gross margins, they creeped up fairly significantly, once we start talking about, as you start to scale up the business. Should we expect that there will be around the mid-80% range? Or could they actually get closer to the high 80% range, once you start getting a little more volume?

While, we're expecting to see it in the mid-to-high 80% range. Now, remember we have a price increase that took effect on February 1. So you're going to see higher gross margin.

Okay. Great. Good to hear. And then just kind of curious on how the sales force is doing. Has there been any churns since you started? And then perhaps like just color on how sticky they've been in the caliber of the team at this point? And then crossing over just from Mirataz to Zimeta sales team, I believe you previously said you had an equine sales force identified, has that changed as time has passed obviously the original time frame for Zimeta has been pushed out by essentially over year at this point?

Sure. Absolutely. So I'll try not to take up too much time in gush. What I will say is we were phenomenally selective in choosing the sales force. I believe I mentioned previously that we really curated the smaller maybe team bringing in people with distribution experience, corporate account experience and other sets of expertise. So as we expected from the get-go, they have been exceeding our expectations. I mean, we had one sales rep start within I think a month of her being here, she had us in all of the AAHA the American Animal Hospital Association. So that just gives you a sense of caliber of people as soon as they hit the ground running. We have not had any turnover. And we have had many, many, many inquiries about joining the team. So as we did as we were growing the team, we continue to keep all of those CDs in our back pocket. And so should there be future growth? We’ll be prepared to do so. In regard to the equine team, so we have a regional manager and a sales specialist, both of whom are the cream of the crop in the entire industry. So those were hires that we could not pass up. They have both turned into phenomenal feline sales specialists. They have been dedicated to Mirataz while of course managing their thought leader relationships and all of the appropriate pre-launch activities for Zimeta. We do have our eye on a couple of other sales specialists and that has not changed. I mean these are people who were willing to wait for the opportunity to join the company. So we feel very comfortable that we’ll be able to pull the trigger as appropriate once we're close to launching the product.

Okay. Great. And just two more questions for me, just kind of carriers over a little bit on the sales side. You mentioned getting approval in Europe this year. I know previously we discussed a distributor model in Europe. Have you refined that at all? And maybe give a little context as far as what the market looks like over there from a distribution side? Is it fairly easy to find quality distributors or is it a little bit more fragmented than perhaps easier?

So we're looking at various options for you. We're talking to potential partners. There's been quite a bit of interest from traditional pharma company. We have also been talking to distributors and we've been looking at launching it ourselves. So it's ultimately going to come down to a matter of economics. Certainly, any one of those paths are viable. We have shown that we can launch it ourself. And there are distributors in Europe that can cover these territories effectively. So ultimately, we're going to do what makes the most economic sense.

Okay. Wonderful. Go ahead.

I just want to make sure that I answered your question.

No, no, that was good. I'll have a follow-up offline. But just the last question related to the competitive landscape. Obviously, I think we discussed this previously with Regeneron and Zoetis striking a licensing deal last year. What are you hearing now after you go to your conferences about how the industry views those events and how your company specifically is positioned with that change taking place or that partnership?

We have not heard much about that particular deal. What we have been hearing is that there is a lot of interest in monoclonal antibody. I think the veterinary sector is becoming more and more excited about the clinical profile that you can get with monoclonal antibodies. So I think there's general excitement about how the monoclonal antibodies are probably going to reshape veterinary medicine.

Okay, great. Sorry, it's because you're so good at the science stuff. Would you ever go down like antibody fragments kind of like an EYLEA or anything to that extent? Or would you stay with traditional mAbs?

We'd certainly go for -- go with antibody fragments for certain indications. There are certain indications that are more suitable for different types of they're called scaffolds, antibody fragments, antibody-like structures. So we have a large expertise in multiple scaffolds. One of them of course is our KIND-Bodies, which is a brand new scaffold that we have invented. So I think it's fair to say that all the successful technologies on the human side we have our eye on. And if the situation is to offer it at the right opportunity we have the capability of pursuing it.

Awesome. Thank you so much. Good luck going forward, and take care.

Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright. Your line is now open.

Thank you. Thanks for taking my questions. The first question is on Mirataz. Now that you have a sales force of 25 folks it is -- in your view is that the optimal number that you would like to have? Or since there are yet two-thirds of the clinics that have not currently stocking Mirataz, do you need to increase that number? And would that happen? If so would that happen anytime in 2019?

Great. Hi, okay. So we think that 25 field specialists right now is a sweet spot for us based on our spend on commercial versus our spend on our exciting pipeline. We're obviously watching that very closely. We're as I mentioned earlier really doing some deep dive analytics based on each impression from the sales specialists. I should note that beyond the specialists in the field, we have a number of inside sales representatives who are really doing an outstanding job of supporting corporate accounts. They're also making new sales as well. We've got our professional services veterinarians, and of course, all of our commercial operations behind that. So these 25 are the cream of the crop. They are in their territories, but they are supported by a very large -- relatively speaking, large commercial infrastructure behind them. So we feel good about the size. Do we think if we had 200 reps out there we could sell more Mirataz? Absolutely. But we're very much trying to balance our capital and think this is the right place to be at this time.

Thank you, Denise. Again regarding Mirataz with the success that you have had so far in the U.S., how much of that is helping with your current discussions with EU partners? And also do you think you would need to wait until approval, so that you could get better economics? Or you want to see if you can get ahead of that?

So, it's helping quite a bit with the discussions. I think the other companies that have launched products know what's involved and what a typical trajectory is. And they have been quite impressed with Mirataz, how Mirataz is doing. So I think that bodes well. And…

And as far as waiting for approval. I think, obviously, the more you derisk a program, obviously, the value will go up. I think the partners with whom we are discussing as part of diligence they’ll be looking at the questions from the EMA as well as the responses. And we’ll be able to make a judgment call and certainly what many of these partners and those who are just observing learned from the U.S. experience is we're not afraid to launch something ourselves if it makes sense. I mean, it's going to really come down to economics what makes the most sense as far as whether we partner, whether we work directly with distribution, whether we launch it ourselves, so we're doing those analysis as we speak. But I think we're close enough to approval that we should realize the appropriate value for the product.

Great. So one last question again a little bit on the strategic side, Richard we have certainly heard loud and clear about biologics progress, and especially competitively better strength than in companies such as Zoetis that they need to go to vision around for help. How are you utilizing that strength? Or how could you utilize that strength in forcing better or new collaborations? And also at the same time, I’m trying to get some non-dilutive financing in that process?

Sure. I wouldn't say we are -- I wouldn't compare ourselves to Zoetis. I think, Zoetis is very good in the biologic space. I think that we are ahead of most of the other veterinarian companies. We started earlier and we – our background, Denise and I, our background is largely biologics. So when I said we have opportunities for non-dilutive capital, this is one of the things that I mentioned. We have products we're not pursuing. And those products -- rather promising for another companies to get to where we are on those it would take them several years. So it perhaps may take them forever some of these products are special. So that's one of the things we are looking at in terms of trying to raise non-dilutive capital.

Thank you. Thank you folks for taking my question.

You bet.

Thank you.

Our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open. Brooks O’Neil: Thank you. Good afternoon. Given the shortage of manufacturing capacity in the industry and your strong position there, how do you expect to take advantage of your manufacturing during 2019 and beyond?

So we have – we are in a fortunate position in that we have a fully commissioned plant in San Francisco and another one that will be completed this year. And you're fully right; the demand for biologics manufacturing is far outstripping supply. The waiting period is at least 18 months, sometimes stretching to over two years. So, one advantage of having those is that we can probably extend our lead over most of the other companies in the veterinary biologics space. The second is that we could potentially utilize some of our excess capacity. We have actually already been approached by other companies that would love to have some thoughts. Now we haven't made up our mind yet whether this is something that we want to do, because there are pros and cons to this. So we're just testing the waters right now. It's certainly not going to be our core business. But manufacturing thoughts call for a pretty high price. So it may make sense for us. Brooks O’Neil: Interesting. So I have to ask you, you guys have mentioned non-dilutive financing a number of times. Should investors assume that it's unlikely we'll see an additional equity offering in 2019?

I think we never want to say never. We think we have a lot of options on the table. So it will come down to how many of those options pan out as well as cost of capital. So depending on the stock price, we'll make the decision. But I will say as we've iterated in the past, we have control over our spending. So we have a lot of options here and it really depends on cost of capital, how fast the revenues come in and some of the options that are on the table. Brooks O’Neil: Sure. It makes sense. In the past you guys have talked about nine million cats having inappetence and big percentage perhaps as many as 50% being chronic. What have you seen in the U.S. market so far in that regard? And can you say if you see any big differences between the international opportunity for Mirataz and what you're seeing domestically? Thanks a lot.

Sure, Brooks. So again I'll just reiterate that our product is labeled for two weeks and that's what we're marketing toward. The challenge we have of course as I'm sure you understand is getting down to patient level data. The way to do this is through market research. We have ongoing market research initiative. What we do know is that unintended weight loss impacts many chronic conditions, cancer, chronic kidney disease, hypothyroidism, diabetes. How the veterinarian chooses to use the product is obviously up to his or her clinical discretion. So we will continue to collect market research and report on that accordingly. As far as opportunity, as I said it's about two-thirds typically is about the opportunity in Europe versus the U.S. And we suspect that veterinarians will be treating the same host of cats with these conditions, chronic and acute. Brooks O’Neil: Great. Thanks a lot.

You bet.

Our next question comes from the line of David Westenberg with Guggenheim Securities. Your line is now open. Q – David Westenberg: Hi, thanks for taking the question. So few more just on Mirataz, I know that’s kind of dominated the call, but couple of more, just can you talk about your confidence in terms of you've price Mirataz correctly that it's definitely perfect for the chronic case, but maybe not too high or low that you're leaving money on the table?

Sure, absolutely. We did a tremendous amount of truly deep dive market-research both at the veterinarian level and the owner level as far as how we priced it. We chose to present an introductory price which our sales specialists were very transparent about with their customers and that as you know is at $15. So we knew that we would take a customary bump in price as well as premium price given that we start with an introductory. And it was really important to us to price this correctly because this is a premium product with attributes certainly above and beyond the oral which is oral generic used off-label which is obvious, but this is a product where we took great pains in developing a transdermal that it's bioavailable and so we knew that we would be able to take a premium on the product. Our thinking still stands that these are sick cats and they will be having other diagnostics, other therapies in conjunction with their care. So we feel that we're at a sweet spot. And as I said before, we'll continue to do market research and pricing will certainly be part of that. Q – David Westenberg: Got it. Thank you. That's very helpful. I appreciate all the color in terms of non-dilutive strategic thinking here, but maybe just on the other side of the spectrum, you built out a sales force of 25 reps. They're very highly qualified reps. Any chance you might be looking may be to add to your product bag or any change in your thoughts about adding to the product bag? A – Richard Chin: We're definitely looking for additional products to add to the bag because they’ll certainly increase the efficiency and actually if it allows us to expand the sales…

So, yeah, the approval will likely come in towards the end of the year. And again, that's dependent upon whether we have to generate any additional data to support the approval. As I said we're in -- and Richard also said we're in our analytics around the best way to launch this product and our intention is always would be to launch as quickly following approval as possible. But we'll continue to update our investors and analysts accordingly along the steps of the way. So, as we get closer, we will have a better sense of launch timing versus approval timing. Q – David Westenberg: Okay. And congrats on a good year.

Thank you very much.

[Operator Instructions] We have a follow-up question from the line of Ben Haynor with Alliance Global Partners. Your line is now open.

Hey, guys. One more quick one, just taking a spin through the 10-K and looking at KIND-0888. Just curious on what disease states you're thinking about targeting there? Is it blood cancer? Is it arthritis? Is it other autoimmune diseases or all the above? How do you think about that?

So, 0888, I believe that's the anti-CD20 antibody.

Yeah, CD20. Yeah.

Yeah, that's right. So, we're looking at both cancer and autoimmune. I used to be in charge of the autoimmune diseases for Rituxan and Genentech and was also in charge of ocrelizumab which is, as you know, a blockbuster drug approved for rheumatoid arthritis anti-CD20. So, we have extensive expertise such as from me, but other members of the team. So, we're looking at several indications. But this is what I mean, we have a lot of great products and we can't pursue them all. So, that is one of the lower priority products right now.

Fair enough. Thanks for taking the follow-up.

That concludes today's question-and-answer session. I will now turn the call back to Dr. Chin.

Thank you, operator. I'd like to thank our shareholders as we look forward to a very successful 2019.

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