Elanco Animal Health Incorporated (ELAN) Q4 2018 Earnings Report, Transcript and Summary

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 will be just successful or perhaps even more so. We have already announced the positive pilot field study for epoCat. And as Denise will discuss, we're continuing to see Mirataz performing well. In the rest of the year, we expect two approvals and initiation of three pivotal studies as well as readouts from additional pilot field studies. 2019 will be a very catalyst-rich year for us. As you know we announced positive results of our long-acting feline EPO earlier this year, the results were without exaggeration, spectacular. The mean increase in hematocrit was over 50% and we went demonstrated benefit and quality of life measurements. Let me tell you showing quality of life benefit in cats is not an easy task. The drug has to work pretty well in order to demonstrate that. We're really excited about this product because we believe the market could be very large. About half of all cats develop kidney failure when they get old and many of those cats develop anemia. There are, we estimate, millions of cats who can potentially benefit from this drug. There is no available therapy for these cats because human EPO is immunogenic in cats. I should also add this positive EPO study was the third positive pilot efficacy study in a row coming out of our biologics program after the positive study of TNF antibody and the positive study of IL-31 antibody for atopic dermatitis. With regard to the IL-31 program, let me remind you that atopic dermatitis and associated indications like allergic dermatitis and itching it's a key areas for us. According to the latest figures, this market is at close to $600 million right now and continuing to grow. The market is not fully penetrated yet by any means and let's keep in mind that atopic dermatitis is only a subset of diseases and conditions that cause itching in dogs. I should also note that the feline market is very attractive as well. And for the reasons we outlined previously, namely, the more favorable safety benefit profile and economic alignment with veterinarians, we believe dermatitis and itching market will be dominated by biologics and that veterinarians will be making a matching biologics to optimize therapy for individual animal. Also our IL-4/13 SINK molecule is also a few months behind our IL-31 program and one advantage it has is that it addresses disease itself, rather than just itching. dupilumab which blocks IL-4 and IL-31 has been approved for atopic dermatitis in humans and it's doing very well in the market. It's very safe and effective. We believe our SINK program is as promising -- or perhaps or even more promising than our IL-31 program and we're very excited about it. They may both become very successful product. Beyond atopic dermatitis we see multiple other markets that may be similar in size. The companion animal factor has been evolving rapidly and we think we will see many other products that approach human products like revenues. So, as I said before, we believe we're going to see multiple products in the industry that fell into several hundred million dollar range, especially, biologics across multiple diseases. We have had much lower attrition than we expected in our pipeline and we have several programs that look very promising. So, we have decided to increase our investment in our pipeline. We're starting three pivotal studies this year which has reflected in our operating expenditures as when you will detail later. I should note that we're exploring several options to bring in non-diluted capital we think there is a lot of opportunity for non-diluted capital given our assets given that we're commercial stage company. Thank you and I will now turn the call over to Denise.

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 Mirataz's inclusion into two largest U.S. corporately owned veterinary groups of pet hospitals VCA and Banfield within six months of launch. We announced in early January that Banfield Pet Hospital, the largest owner of veterinary clinics in the U.S. made Mirataz available for order meaning veterinarians in their more than 1,000 hospitals across the U.S. are able to prescribe Mirataz to cats experiencing unintended weight loss. Corporate accounts have been very supportive of the launch to date, across the board we're seeing a promising ramp and efforts to promote the product internally including VCA, Banfield, The American Association of Feline Practitioners, VetCor and the American Animal Hospital Association to name a few. As we’ve mentioned previously, we've taken a judicious approach to initial stocking orders meaning that shipments to distributors are tightly correlated with underlying clinic demand. As is customary at year-end, we did see some inventory build to cover the holiday shipping period. Importantly, move out that is product moving into the clinic from the distributor's warehouses to fulfill orders, increased steadily throughout the quarter prompting an increase in cycling of distributor inventory. Turning to 2019 year-to-date performance, the positive trends identified during the fourth quarter continue to build with the Mirataz rollout tracking favorably across key metrics. As we discussed last quarter, the first two months of the year represent a pivotal period for the launch of Mirataz with the two largest veterinary clinics – conferences, pardon me, VMX and WVC taking place during this time. Veterinary conferences are growing in influence and attendance with these two particular events attracting over 30,000 attendees combined. Because VMX and WVC are where most veterinarians obtain information about new products this is an opportunity to really drive adoption. In fact companies will sometimes defer their product launches to coincide with these events. Having expanded our sales force to 25 field specialists throughout the year, we headed into VMX and WVC with full team. And while it's too early to gauge the full impact of these conferences, I can tell you that the initial indications are promising. Of course, it takes some time post initial purchase to change behavior, implement a new protocol and get product on the hospital's shelf. So we expect to continue to realize the benefit of these conferences for many months to come. As is customary in animal health, we implemented a price increase on Mirataz earlier this year as of February the price rose to $18.50 from our introductory price of $15.02. And we do not expect nor are we seeing pricing sensitivity in response. So all-in-all we're pleased with Mirataz's performance to-date and look forward to the continued positive momentum on the heels of VMX and WVC. Turning to the pipeline, 2019 will be a busy year for news flow. We expect two approvals this year namely Mirataz in Europe and Zimeta IV alongside readouts on multiple programs, some of which have blockbuster potential and the initiation of several pivotal studies. In addition, construction to support our initial production lines on our biologics manufacturing facility in Elwood, Kansas is expected to be complete mid-year this year. Beginning with Zimeta IV which is for the control of fever in horses. As we announced in the press release earlier today, we have filed a new animal drug application with FDA and pending a positive inspection of the contract manufacturer of the active ingredient dipyrone. We expect FDA approval in mid-2019. Zimeta IV is expected to be the first half FDA-approved product for the control of fever in horses, which is a significant unmet medical condition that affects millions of horses each year. On average, a horse will experience one episode of fever per year. And based on our market research 95% of veterinarians believe that Zimeta is a good fit for their practice, while 83% said that they would use it in the first year. Regarding Zimeta oral, which is a proprietary oral gel that is expected to expand the use of the drug and build upon the expected success of Zimeta IV. We remain in discussions with FDA regarding the data required for submission and are in the process of transferring the product to the commercial manufacturer. Our second expected approval in 2019 is Mirataz Europe. We've now responded to the European Medicine Agency's list of questions and assuming no additional data are required, we expect approval this year. The European market is traditionally two-third the size of the U.S. market. Partnership discussions are ongoing and our launch strategy will be in place well in time for launch. Now turning to our biologics pipeline. We reported positive study results on our epoCat program in January, marking our third positive efficacy study in our biologics pipeline in a row and further validating our position as a leader in companion animal biologics. EpoCat is a long acting feline recombinant erythropoietin that is being developed for the management of anemia in cats and has been engineered to have a prolonged half-life. While this market will take time to build, we expect it could be quite sizable. Anemia is a common condition that is estimated to afflict millions of older cats. It's also associated with chronic kidney disease, which affects approximately half of older cats making it a leading cause of feline mortality. Human erythropoietin, which are multibillion-dollar products in human market are immunogenic in cats. Currently, there are no approved treatments for this disease. Regarding our IL-31 antibody for the treatment of atopic dermatitis in dogs, the pilot field effectiveness study is ongoing and we expect to initiate a pivotal study by the end of this year. As we continue to expect pilot efficacy results in 2019 for our canine anti-IL-4/IL-13 SINK molecule which addresses not just the symptoms of atopic dermatitis, but also the underlying disease and we're advancing other programs for this condition as well. The pilot field efficacy study for our anti-TNF antibody for canine inflammatory bowel disease has been initiated and is currently enrolling. Inflammatory bowel disease can affect dogs at any age, but it is more common in middle-aged and older dogs. We think this has the potential to be a large market opportunity given that this is an indication that significantly affects the quality of life of both the dog and its owner. Finally, as I mentioned earlier, construction to support our initial production lines at our biologics manufacturing facility in Elwood, Kansas is expected to be complete by mid-year. From an operational standpoint, I'm very pleased that we were able to align our spend in lockstep with the progress of our biologics pipeline. If you consider that since founding the company in late 2012, we will have a fully commissioned manufacturing plant with potential capacity expanding approximately 180,000 square feet, but this is a really remarkable feet and a testament to the value we've created in this business. Before I turn the call over to Wendy, I would like to share some of the external recognition we have received in recent months. In January, we faced some strong competition from our large domestic peers to be named best company in North America by animal farm, which is the leading animal health industry publication. In announcing the honor, animal farm noted our transition to a commercial stage company in 2018, positive IL-31 study results and our robust pipeline. We also took home numerous awards for our Mirataz launch campaign namely Gold VETTY Awards which is the only animal health marketing awards competition as well as gold medal in the PM360 Pharma Choice Awards animal health category. This recognition is again a testament to the value we've built to date and the incredible talent that resides within our organization. We look forward to building on these achievements in 2019 and sharing with you the progress from our Mirataz rollout and our pipeline advancement over the coming quarters. With that, I will now turn the call over Wendy -- to Wendy for a review of our fourth quarter and full year 2018 financials.

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 with the product and its potential uses, our average order sizes have increased quarter-over-quarter and we expect continued revenue growth in 2019. Fourth quarter research and development expenses totaled $7.8 million compared to $5.1 million for the same period in 2017. For the full-year, R&D expenses were $26.4 million versus $17.7 million in 2017. Stock-based compensation expense related to research and development was $1.7 million for both years. The $8.7 million increase in full year research and development expenses was primarily due to higher headcount and related expenses as we advance our biologics programs. In addition, increase clinical trial costs and expanded biologics manufacturing as well as lab supply expenses drove research and development expenses higher. Selling, general and administrative expenses were at $9.2 million for the fourth quarter compared to $4.8 million for the same period in 2017. In 2018, SG&A expenses were $26.5 million compared to $14 million for 2017. That $12.5 million increase in full year SG&A was due to higher headcount and related expenses as we transition to a commercial stage company as well as higher corporate administrative and stock-based compensation expenses. Stock-based compensation expense included in SG&A was $4.5 million in 2018 versus $3.6 million in 2017. As of December 31, 2018 we had $73.9 million in cash, cash equivalents and investments compared to $82.5 million at year-end 2017. Net cash used in operating activities last year was approximately $45 million offset by a total of $49.2 million of net cash proceeds from an underwritten public offering of KindredBio's common stock and an ATM equity offering program. We also invested approximately $13.9 million in capital expenditures for the build-out of our Elwood, Kansas manufacturing facility including equipment purchases. On January 23 of this year, we closed our public offering of approximately 4.8 million shares of common stock at 9.50 per share. The gross proceeds were approximately $46 million before deducting underwriting discounts, commissions and offering expenses payable by KindredBio. The net proceeds will be used for the development of KindredBio's therapeutic candidate, the expansion of our commercial infrastructure and for other general corporate and working capital purposes. With respect to spending in 2019 as Richard mentioned, we have had much newer pipeline attrition that we had expected and given the ROI potential of our pipeline, we have chosen to increase investment. Our focus this year is on advancing our core pipeline at progress spanning more than 20 drugs and development including starting three pivotal studies, increasing the adoption of Mirataz and preparing for the commercial launch of Zimeta IV. Accordingly, for 2019 we expect operating expenses of between $64 million to $68 million excluding the impact of stock based compensation expense and the impact of acquisitions if any. Additionally, we plan to invest $8 million to $10 million in capital expenditures on lab and manufacturing equipment for our biologics program and the remaining portion of the build-out of our Kansas facility. As Denise mentioned, we have been strategic in our spend keeping it aligned with the progress of our biologics pipeline. With the proceeds from our January capital raise and increasing Mirataz sales, we're well funded for the year ahead. We also believe there is a lot of opportunity for non-dilutive capital given our assets and are actively exploring different alternatives. We look forward to updating you on our progress throughout the year as we further advance our pipeline, launch additional products and capitalize on attractive dynamics and growth within the sector. With this, I will turn the call back to Richard.

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 force, there is no doubt we can increase rate of uptake. As Denise said, certainly if we have more sales reps, we can increase the uptake, but we're balancing capital obviously. However that product had to number one, the right fit and number two, be at the right price. And by fit what I mean is, we want to bring innovative product to our customers. We don't want to be marketing a generic for example. We've looked at some products like that and we think the effectiveness of our sales force is we want to maintain the brand of the company as well as we also want to make sure that the message we're sending to our customers is that, we're going to not to sell on the basis of price, but rather on value and innovation. So to make long answer little shorter, answer is yes, we're looking for additional products, but has to be the right one. A – Denise Bevers: I think one of the things to add is that for us, I mean it does not have to be a blockbuster acquisition. Some smaller products as well will make a meaningful impact for us both on offsetting the cost of our sales force as well as given that we can develop a product for $5 million to $8 million, there's value even in smaller products. So we have a large swap that we're able to look at and perhaps some assets that other companies would not consider and that could be still very attractive to us. Q – David Westenberg: Got it. No, thank you. That's very helpful. And then one last short one and then I have couple for offline. Just in the 2019 launch or expected approval of Mirataz, can you just maybe run through is that the end of the year? And then I know you still hadn't really worked out European strategy whether it's distribution or direct, but how long after that should we expect it for to go-to-market? Then, thank you very much.

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.