Elanco Animal Health Incorporated (ELAN) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2019 Financial Results Conference Call and Webcast for Kindred Biosciences. At this time, all participants have in placed in a listen-only mode. At the end of the prepared statements, participants will have the opportunity to ask questions. [Operator Instructions] As a reminder, this conference call is being recorded. Please note that the remarks today will include forward-looking statements and that actual results could differ materially from those projected or implied in 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 Kindred Bio’s, CEO, Richard Chin, Dr. Chin. Please proceed.

Thank you, operator. Good afternoon and welcome to our second quarter 2019 financial results call. Joining me today from the management team of Kindred Bio are Denise Bevers, our President and COO; Wendy Wee, our CFO; and Katja Buhrer, our VP of Corporate Development and Investor Relations. We are very pleased with our Q2 performance. Mirataz revenues exceeded $1.2 million, which reflects the continued positive reception it is getting from veterinarians. Denise will go into more detail on the commercialization, but our sales and marketing teams have been working hard. And we introduced several new initiatives last quarter, including our direct-to-consumer outreach to pet parents. As you know, we hit a major milestone in our IL31 antibody development program. Earlier this week, we announced that our pilot field efficacy study of our IL31 antibody was positive. These promising data from the study makes us confident that we will have a successful drug, as I [indiscernible] is a large and attractive market and we are excited about the results as [indiscernible] this year. We believe there is tremendous potential in the dermatitis market, which includes atopic dermatitis, allergic dermatitis and other preventive diseases. Today, we’re pleased to announce our positive pilot efficacy study of our parvovirus antibody, which had not been previously disclosed. Parvovirus infection is a devastating disease that affects mostly puppies and there is currently no therapy for it. It is highly contagious and typically fatal. Even with supportive care in an intensive care unit, which can cost thousands of dollars, mortality remains high. So there is an enormous unmet medical need in this area. Now our pilot was small but when a disease is uniformly fatal, you don’t need very many patients to know that a drug works. Take (CAR) T therapy as an example, you only need a couple of patients to know if a product candidate has efficacy. The study exceeded our expectations, especially in the treatment indication, it was generally thought that antibodies would be unlikely to work for this infection unless administered prophylactically, but our product candidate is so good that it worked even post infection. Our goal is to get this drug approved by end of 2020 or early 2021. This is one of several product candidates we have not previously announced and we have a pipeline of other undisclosed products. And, of course, we continue to be very careful with our capital. We have been and continue to be conscientious about that, we are working hard to secure non-dilutive financing, we believe we have been strategic in our deployment of capital and are proud of our ability to deliver what we promised on a very rapid timeline and in a capital-efficient manner. Mirataz cost less than $5 million and less than five years to develop, Zimeta, assuming approval later this year, will also fit into that range. The development of each of these products have been exceptionally fast by almost any standard. We expect continued news flow during the rest of this year and we are in active discussions with various parties about sources of non-dilutive capital that can meaningfully extend our runway. We are also in active due diligence on our IL31 antibody. And our goal is to reduce burn for 2020. If we take a step back, we have accomplished an enormous amount in a very short period of time and with the funds we have deployed. We’ve successfully launched our first product. We have finished the GMP manufacturing plant, which has successfully produced its first GMP runs. We have completed construction of a second plant, which has the capacity to manufacture over $1 billion worth of commercial product as currently designed. We demonstrated mortality benefit in six-folds with our TNF antibody. We have now demonstrated mortality benefit in dogs with parvovirus. We’ve read out two pilot efficacy studies this year alone and we are on track to read out two more. We have an approval and another on its way and multiple products that have had positive pilot data. And we will be starting three pivotal studies this year. So we’ve built a tremendous amount of value in a very capital-efficient manner. With that, let me turn the call over to Denise.

Thank you, Richard. Needless to say, we are pleased with the progress we are making as a company. The positive study results we announced for our IL31 antibody earlier this week and canine parvovirus virus today, provide further validation of our deep biologics pipeline and having completed construction on our Kansas Biologics manufacturing facility, we are now one of the only companies in this sector with virtually end-to-end capabilities in-house to be a leader in companion animal biologics. As we move into the second half of 2019, we look forward to a steady stream of additional catalysts. Turning to our second quarter performance. Revenues rose to $1.2 million as our key distributor partners returned to a more normalized order behavior. We’re excited to announce that we’ve executed an agreement with leading e-retailer Chewy and expect that to drive continued positive second half 2019 momentum. As many of you will be aware, Chewy is one of the largest online pharmacies for pet owners. The addition to Chewy’s product catalog is a testament to the growing appeal of Mirataz in the marketplace. We are also encouraged by post approval market research and feedback from veterinarians, technicians and cat owners on Mirataz, which remains uniformly positive. As we discussed on last quarter’s call, conversion from oral human generic mirtazapine pills is a key area of focus for us. While many veterinarians in hospitals have made the complete switch from human generic pills used off label, others are taking longer to change practice behavior. Importantly, our internal analytics show that reorders grow and practice patterns change as we engage and account multiple times. Accordingly, we’ve been expanding the number of educational programs showcasing our thought leaders KindredBio professional service veterinarians and our sales specialists. As we discussed last quarter, while we believe that it will take longer than we originally anticipated to change practice behavior, we remain confident in the commercial prospects for Mirataz. Key metrics we use to track the launch, including penetration, reorder rate and size continue to increase in the quarter. Additionally based on market data, Mirataz is tracking favorably against other successful feline launches. With regard to European approval of Mirataz, we will provide an update following our oral hearing with the European Medicines Agency in September. Turning to our pipeline, the announcement of positive results from our pilot field effectiveness study of our IL-31 antibody candidate for the treatment of canine atopic dermatitis and today’s announcement of positive results from our pilot efficacy study of KIND-030 for the treatment parvovirus virus in dogs represent major milestones for our biologics pipeline and KindredBio more broadly. Because of the more favorable safety benefit profile of biologics and economic alignment with our veterinarians, we believe that many large companion animal markets will be dominated by biologics and we are proud to be at the forefront of the shift to antibody-based solutions. As Richard highlighted, we are very pleased with our pilot field effectiveness results for our IL-31 antibody candidate and look forward to initiating our pivotal effectiveness study by the end of this year. We believe there will be multiple biologics that become blockbusters in this category as different patients respond better to certain therapies over others or rotate through different treatments. And, of course, we expect there will be combination therapy. By having a broad portfolio of biologics for the disease, we’re well positioned to be one of the leaders in this space. On that note, the pilot effectiveness study for our IL-4/13 SINK molecule is progressing and we expect results by year-end. Alongside positive IL-31 study results, we’re also excited to unveil promising results on previously undisclosed monoclonal antibody we’ve been working on behind the scenes. Canine parvovirus or CPV is the most significant contagious viral cause of enteritis in dogs, especially puppies with mortality rates reportedly as high as 91%. There are currently no FDA or USDA approved products treating CPV nor any other available treatment for that matter. So this really is a significant unmet medical need. We are excited to move into the next stage of development. The maturation of our biologics pipeline trends nicely with other key achievements for KindredBio, particularly the completion of construction on our Kansas biologics manufacturing facility. The facility has sufficient capacity to support our existing pipeline and we have the ability to expand our capacity in lockstep with our portfolio, I really can’t overstate the importance of this capability, not only are we one of the only companies in the companion animal or human sector with end-to-end capabilities but this provides an enduring competitive advantage given the importance of speed, cost of development and cost of goods. Our vertical integration also gives us full control over commercial manufacturing. As a company, we’ve distinguished ourselves by our ability to gain approval of safety and efficacy technical sections quickly and without issue. Given that biologics represents the majority of our near-term pipeline candidates, we believe that being in control of manufacturing will lead to a shorter, more straightforward approval process going forward. Now turning to dipyrone injection. I’m pleased to report that the responses to follow-up questions from the FDA have been submitted by the active pharmaceutical ingredient manufacture and the FDA has issued an establishment inspection report indicating that the facility was compliant with good manufacturing practices. We have since reactivated the new animal drug application with a shortened 135 day review window and approval is expected in the fourth quarter of this year subject to FDA review. We are making steady progress on our feline recombinant erythropoietin candidate and our first GMP drug substance past release at our Burlingame, California plant, which is a milestone and our cGMP’s fill and finish will be undertaken at our Kansas facility in the third quarter. Thereafter, pivotal effectiveness study will commence before this year’s end. Our third pivotal study that will be initiated in 2019 is for KIND-014 for the treatment of gastric ulcers in horses. And we expect this to get underway in the second half of this year. Finally, the pilot field effectiveness study of our anti-TNF antibody for canine inflammatory bowel disease is progressing with results anticipated by the end of this year. As we’ve discussed, this is a disease that impacts both the dog and the owner, creating a very promising market with a high willingness to pay. So as you can see we’ve been making great progress and are on track for our second half milestone. Alongside continued growth in Mirataz sales in the coming quarters, we expect steady results across key pipeline candidates and additional FDA approval and the commencement of three pivotal studies to drive continued positive momentum. With that, I will now hand the call over to Wendy for a review of our financials.

Thanks, Denise. I’ll begin with an overview of our second quarter and first half financial performance before providing an update on our capital position and expectations moving forward. For the quarter ended June 30, we reported a net loss of $14.3 million or $0.37 per share as compared to the net loss of $11.2 million or $0.39 per share for the same period in 2018. For the first half, the net loss was $30.4 million or $0.79 per share as compared to a net loss of $21.2 million or $0.75 per share for the year-ago period. As Denise mentioned, we recorded $1.2 million in Mirataz net product revenues in the quarter and $1.8 million for the first half. There were no net product revenues for the same year-ago periods as test became commercially available in July of 2018. Moving to our expenses we continue to be very focused on managing expenditures and preserving cash, while making the necessary investments to realize the full deep value of our pipeline. The cost of product sales totaled $0.2 million in the second quarter and $0.3 million in the first six months of 2019, resulting in a gross margin of 86% and 85% respectively. Now turning to our research and development expenses. The year-over-year increase is primarily due to higher headcount and related expenses as we advance our biologics programs, a number of which have blockbuster potential. R&D expenses for the three and six months ended June 30 were $6.7 million and $13.9 million respectively, compared to $5.8 million and $11.2 million for the same periods in 2018. Stock-based compensation expense, included in R&D expense was $0.5 million and $0.9 million for the quarter and first half as compared to $0.4 million and $0.9 million for the year-ago period. Selling, general and administrative expenses were higher year-over-year to support the commercial launch of Mirataz and the commissioning of our Kansas Biologics manufacturing facility, which represents a key competitive advantage for KindredBio as we expect monoclonal antibodies to be the mainstay of veterinary c therapeutics. SG&A totaled $9.1 million and $19 million for the three and six months ended June 30 compared to $5.8 million and $10.7 million for the same periods in 2018. Stock-based compensation expense was $1.4 million and $2.8 million for the first three and six month periods in 2019 versus $1 million and $2 million for the year-ago period. This leads us to our cash position. As of June 30, we had $79.6 million in cash, cash equivalents and investments, compared with $73.9 million as of December 31. The net cash used in operating activities for the first six months of 2019 was approximately $31.8 million, offset by $43.1 million of net cash proceeds from an underwritten public offering of our common stock in the first quarter. We also invested approximately $6.7 million in capital expenditures for the remaining portion of the build out of our Kansas manufacturing facility and the purchase of associated lab and manufacturing equipment. With respect to spending in 2019, we continue to expect operating expenses of between $57 million and $59 million, excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. In addition, we are on track with an investment of between $8 million to $10 million in capital expenditures for the year. We believe our existing cash, cash equivalents, restricted cash and short-term investments will be sufficient to fund the current operating plan through at least the end of 2020. As Richard mentioned, we are also in active due diligence on our IL-31 antibody. Our discussions around other sources of non-dilutive capital, which has the potential to meaningfully extend our runway are likewise advancing and we hope to finalize terms before year-end. While we are confident in our ability to prolong cash runway and in the commercial prospects of Mirataz, we are also focused on managing our operating expenses to align with our commercial momentum. Our goal is to reduce cash burn in 2020 and we have the necessary flexibility to substantially reduce expenses if conditions warrant. In closing, I want to emphasize that the whole KindredBio team is energized and motivated as we move through the second half of 2019 and beyond. Our focus is on managing our operating expenses, creating further top line momentum and delivering on our corporate milestones. Alongside readouts on key programs with meaningful revenue potential, we will be advancing core programs into the final stages of development in the second half of the year. These catalysts have the potential to create significant value for the company and we look forward to updating you on our progress next quarter. With this, I’ll turn the call back over to Richard.

Thank you, Wendy. Operator, we’re ready for questions?

Thank you. [Operator Instructions] And our first question comes from Brandon Folkes from Cantor Fitzgerald. Your line is now open.

All right, thanks for taking my questions and congratulations on new data and the solid quarter. Firstly, can you help us frame the size of the parvovirus opportunity? And then secondly on Mirataz, can you provide some color on the types of clinics we are seeing make the switch more rapidly right now and those that are potentially taking a little longer to convert? And then maybe I know, Denise, you touched on this, but the ordering patterns in the quarter, I know you said they are back to normal, but was there any catch-up in the quarter from 1Q? Thank you.

Great, thank you. Yes, so for parvovirus, it’s a really interesting infection disease there is, as I said over 90% mortality rate in puppies. So really capturing the opportunity in the incidents can be challenging through market research, because there is a lot of use in Asia, and a lot of dogs who are lost to this disease prior to even getting to a treated veterinarian. But with these results, which were particularly exciting and the complete unmet medical need, we feel like this will be a really meaningful opportunity in the market and as we continue to do deeper dive market research in-house, we’ll certainly share that as appropriate. But it’s certainly an opportunity that we think is going to be a game changer for the industry, for shelters, for breeders et cetera. And then on Mirataz, so, yes, the changing, it has been interesting, so changing practice patterns within the clinics from oral mirtazapine used off-label has been more challenging than we originally anticipated. However, once we’re able to make that switch, there is no going back. So it’s really been a matter of efforts on our team’s part of course and then also for our professional service veterinarians to talk about the safety profile of our product, the effectiveness of our product and certainly the good quality manufacturing. So we’re starting to see that happening. We’re really getting a foothold on it and momentum is building really week-over-week almost. And then as far as catch-up, what we’re seeing is that, as you know we had a little bit of lumpiness in Q1 and we did have to play some catch-up from Q4, but we’re starting to see what we think is normalized order patterns. Move in and move out is starting to equilibrate as we would expect. And so I think over the coming quarters, we’ll be able to have a better sense of that.

Great, thank you very much.

You’re welcome.

Thank you. And our next question comes from Jon Block from Stifel. Your line is now open.

Great. Thanks, guys and good afternoon. I’ll start off with Mirataz. I guess, Denise, the good news is that almost half of the practices have purchased Mirataz but I guess one of the keys of real strong revenue growth going forward from here will be driving utilization. So can you talk about specifics of what the company is doing to achieve that to really go ahead and drive the utilization. And are you seeing a big difference, where your 25 direct reps have a bigger presence in their ability to get into practices and get an uplift specific to Mirataz and then I’ll ask a shorter follow up.

Absolutely, yes. So, I mean, the more we’re able to engage with the single clinic, there is no question that the utilization and certainly the re-order size grows. So we are a function of our 25 person sales force, so lot of the initiatives that we’ve been working on and focusing on is amplifying that voice and really getting the message out through our direct to consumer campaigns, through our social media campaigns and we’re starting to see that foothold take place. So you’re absolutely correct in your questioning in that the more that we can touch a clinic, the better that the utilization becomes.

Okay, great. And then I’ll actually also stick with the same theme from early. But on parvovirus, Richard or Denise, if successful, you might have something that’s truly unique that others don’t have in the marketplace. So when we think about your selling approach and how you go to market looking forward, is this something where you can really leverage maybe your 25 plus reps by that point, keep it specific to KindredBio and sell direct or would you still expect to lean on the distributors in order to get the product out there? Thank you.

Sure. Yes, this is something that we’re really excited about. So as you know, we’ve hired an outstanding team of sales specialists. I mean, these are really cream of the crop individuals and for Mirataz for example, we are spending time in shelters. I mean, we have a shelter program because as you know Mirataz is agnostic as far as the indication is for the management of weight loss in cats. So we’re seeing use in shelters, we’re seeing use in populations that would make a lot of sense for parvovirus. So this is actually a perfect product for us to leverage our sales force and really use them to sell this product. Obviously, we haven’t had any discussions at this point with distribution. But if they are able to be additive, we would certainly consider that, but this product is primed and perfect for KindredBio’s field sales force.

Perfect. Thanks, guys.

Thank you.

Thank you. And our next question comes from Balaji Prasad from Barclays. Your line is now open.

Hi, everyone, this is Ann Hunter on for Balaji also sticking with Mirataz, you mentioned the three sales metrics that you’re tracking. Could you drill down for us which of those do you think is having the largest impact driving sales maybe quantify how much it’s outperforming compared to other comparative launches and what levers you can use to grow those individual metrics?

So we, I mean all of those metrics certainly play into driving revenue. I mean, as I mentioned earlier, size of reorder rates, obviously, has – plays a big role and the more we’re able to penetrate those clinics and exchange with those clinics, we’re definitely seeing a linear result. So we are again hamstrung a bit by the size of our sales force. But I mean we’re doing a great job and this lines up really beautifully against other successful feline launches, we have paged for some data and we have mapped out how this is launching compared to those and we are right in lockstep with this becoming a successful feline launch.

Okay, thank you.

Thank you.

Thank you. And our next question comes from Ben Haynor from Alliance Global Partners. Your line is now open.

Good afternoon, guys. Thanks for taking the questions. First off, for me on parvo, you mentioned earlier that it doesn’t take a whole lot of dogs to see efficacy when the mortality rate is as high as it is. Do you an idea of what the pivotal study might look like there? And then I assume that would be something that is regulated by the USDA is that a correct assumption?

That’s right. So mortality is close to 100%. So the published data indicates mortality somewhere between 90% to 100%. So if you have six dogs survive the likelihood that that is by chance is something like 0.00001. So we’re very confident that the – so it works very well, which means that the size of the study is going to be very small, especially since it’s regulated by the USDA as you correctly assume. So the safety study is going to really drive the size of the clinical program, efficacy will be fairly small

And then I know it’s obviously very expensive to treat as dogs with parvovirus. I know it’s very early on in the whole program. But do you have any sense of what the you might seek out or seek to get it in terms of pricing there?

We’re going to look at the market research that comes in. There is a little bit of a bifurcated market, there are a lot of dogs that end up in shelters who are currently not being treated. And then there are dogs that are taken into the clinic where the owners pay thousands of dollars to treat their puppies in an intensive care unit. So we know that there is willingness to spend quite a bit of money because this is a really devastating disease. So we haven’t decided in our pricing policy. Yet, but what I can say is that given how much people are willing to pay now, we think there is a substantial market

And then lastly for me, just wondering what the funnel is looking like with Centaur Biopharma Services and when we should expect to see some revenue there.

Sure. So we are talking to multiple parties about our manufacturing capacity. It takes a while to get manufacturing work in, because there is a fairly long lead time for the due diligence, but I will say that it’s looking reasonably good.

Okay. Thank you very much.

Sure.

Thank you. And our next question comes from David Westenberg from Guggenheim Securities. Your line is now open.

So can you talk about the factors helping on the decision to go direct to Chewy. Did you explore other retailers? It’s going to be Chewy specifically and not other retailer. Just kind of walk us through why working with – direct with retailers is the right decision and how you came to that and what might come as a result of maybe other retailers as well. Thank you.

Absolutely. Sure, so yes, we are in discussions with other e-retailers, really it’s driven by the pharmacy given that this is a prescription product. There has been some demand at the pharmacy level, it became attractive. The other thing for us in particular as you probably all well know with Chewy. I mean, they’ve got over 1,000 customer service representatives. So there is a tremendous amount of opportunity at the pharmacy level even as they’re filling prescriptions for human generic for example. So that really drove the decision and again anything that we can do at this point to enhance and expand the voice of our team is very helpful at this stage.

And so I realize I’ve asked this on another call a couple of quarters ago. But any change in your attitude on perhaps bringing additional drugs to leverage your – fully leverage your sales force. Just maybe change in attitude from the last time I asked that question just two quarters ago.

So, you’re asking about at bringing in assets. Is that the question?

Yes. Exactly. For the sales force or I really know – think you said you had three assets In pivotal. So maybe you will have a lot of drugs for your sales force to sell, but just thinking about what you’re doing in the meantime with the sales force, is there a way to put them to work with more than just Mirataz right now.

Sure. So we are interested in bringing in additional products, but it has to be the right product and the economics have to make sense. So we have not found a product that fits that criteria. We have a fairly high bar because we have very innovative productS and we wouldn’t, for example, want to sell pure generic. So we have a very full pipeline and many of these products are maturing. So it’s not critical that we bring additional products, and it’s nice to have, because it would amortize our commercial infrastructure cost.

And if I can ask just a couple more. When you think about Mirataz, I would think it would be kind of a chronic use case, however, are you may be seeing some in the key acute setting? In other words, there’s maybe this more effective – is Mirataz maybe more effective than you thought maybe sometimes it actually kind of jump started some cases where maybe they thought it would have even taken up for more of a chronic setting.

Sure. So of course our label is for 14 days of use so we’re not promoting the chronic use of the product we know from March has opinion generic pills being used off label that there certainly chronic treatment and I think one of the important things about this product is, this is for the management of weight loss in cats, which is significant and something that veterinarians really need to be paying attention to, and that’s part of our campaign with veterinarians is having them understand that weight loss can lead to a series of other conditions and issues within the cat and should be managed very carefully. So, while there are some veterinarians who are certainly using it very acutely there are others who use it as labeled and then certainly some that we’ll use it more chronically once they better understand the product.

Great and thank you. And then maybe just one last questions by differ, when do you maybe, Richard. In terms of cost reduction for 2020 like you can you give me little bit more color just to priorities in which may be things you’ll be emphasize this may be earlier stage pipeline assets is this maybe slow our expansion into Europe with maybe Mirataz. I mean, just maybe if you can give us maybe some high level stuff about what might be the most efficient levers that could not spend or forgo spending in 2020. Thank you.

Sure I think there are three drivers. First is revenue, so obviously as revenues go up our spending will go down. Second is CapEx, we are spending about $8 to $10 million on CapEx this year and likely that number will decrease and then of course, the third is current up x and we have not yet decided that will largely depend on several things, one is the commercial uptake. If I can, is a launch date of Zimeta and the third, of course, these clinical data from our upcoming programs. I think what’s important to keep in mind though is that we have that ability to turn up spending or turned down spending and we will respond as the additional data warrants.

Got it. Thank you.

Thank you. And our next question comes from Swayampakula Ramakanth from HC Wainwright. Your line is now open.

Thank you. This is RK from HC Wainwright. On power wires, it is – it possible for you to give us a little bit of color on the timeline as to how we want to progress from here? Because I think just quite a bit going on the development side with – I think about three or four programs entering into the late stage evaluations. I’m going to let the new fill it in – fill in some of the details, but part of powerwires we think have a rapid path, because it is such a huge unmet medical need.

So we think that we’ll be able to push that along quite quickly. But you’re right, there are multiple competing priorities and I’ll let Denise to sort of take you through.

Sure sir. I mean that’s a very good question, RK. because you’re right, we do have a number of things that are in development that would obviously require our manufacturing resources. So when I tell you that we have a Gantt chart like you’ve never seen in your life for our manufacturing in our development activities. I’m not kidding. So, yes, so I mean it will be – everything is slated in and as Richard said, we’re anticipating what we hope to be approval by the end of 2020, early 2021, assuming everything goes well with the program and of course regulatory review. But this is such an exciting program that we’re hopeful that the development will be very expeditious.

And then, I’m talking about portfolios and portfolios of drugs progressing through development, you have three molecules an atopic dermatitis, I apologize, that I got on the call a little bit late and I did not hear what Richard was saying in his presentation. With IL31 positive data and IL31, IL4 h – IL31 data coming up later in the year and IL17 is getting to be starting. So I understand you’re looking for partnerships on IL31 molecule. Is it – I’m just trying to understand what the long-term strategy is within that portfolio is? Would you look at yourselves as the differentiator. In fact, I would be to give away IL31, but – other two molecules so that you can keep quite a bit of that atopic dermatitis of indication or is there some other strategy. Whatever color you could provide, it will be helpful?

Sure. So we look at the atopic dermatitis market as a large market that will be shared among multiple, very successful drugs and the model for that is the human market for many of the biologics such as rheumatoid arthritis, multiple sclerosis some of the other autoimmune diseases. And that’s because often different patients respond better to different drugs. There is rotation among drugs, there is combination therapy among drug. So it’s unlikely that and one particular drug will dominate what it’s likely to be a very large market. So our strategy is to take multiple shots on goal because right now, we don’t know which class is going to be the best. It’s very common for fields like this to have six, seven very good drugs and one or two of them turned out to be at that. So we want to have several drugs in the field and we want to have one of the best drugs, which means that we need to take multiple shots on goal. The advantage we have is that we have an excellent protein engineering group and we have multiple candidates including ones we have not disclosed. So that’s sort of the overview of how we see the market evolve. Now in terms of the economics and how we did it up and the go-to-market strategy, will obviously depend on what kind of turns we can get from our partners and it’s not so much that we want to partner IL31. It’s more that lot of people, lot of companies would like to partner with us. So we are in very active discussions with multiple partners who would like to get into the atopic dermatitis market. And as far as we know, we are in the lead by quite, quite a substantial margin. the next biologic to reach the atopic dermatitis market. So which ones we partner and which ones we don’t it will largely depend on the economics.

Thank you. And then the last question is on cat EPO with – you say that you are going to start this pivotal study at the end of 2019. Is the rest of the timeline stands the same, any changes there any commentary there will be helpful.

Sure. No, we’re right on time for that we’re really excited. We just had very successful release of our drug substance. We’re in the process of fill finish for the product. And then once that’s released will be in a position to start the pivotal study and our clinical operations team is doing a terrific job of getting sites ready. So yes, we’re very excited to start that study by the end of the year.

Thank you. Thank you, folks.

Thank you. And our next question comes from Nathan Weinstein from Aegis Capital. Your line is now open.

Hey, good afternoon, guys and thanks for taking my question. I just wanted to start with a quick big picture question, but if we look out maybe a couple of years and you have multiple drugs that are approved on the market and that’s a big and fragmented market. And you have 25 people in the sales force. So when you think about what parts of the organization, you might need to augment to be a multi-product and with a large sales line. And where would you need to invest in the organization.

So yes, as our pipeline matures, obviously we’ll hope to grow the sales organization in lockstep with the pipeline. I mean I think as most of you on the phone know we’re phenomenally judicious about our head count in our hiring and if you could be in the stream Wendy, our CFO, shaking her head right now. So we tried to be very thoughtful but we drive expansion of the organization based on success of the programs and we’re willing to invest in internal head count for particularly things that are really challenging and will separate us from the pack. So I think what you could expect to see is for us to grow in lockstep with our manufacturing needs as well as our commercial needs.

Okay, thanks. And then a quick modeling want to look like you guys had maintain OpEx guidance for the balance of the year, but if I break that down, and like a quarterly number, it seems like it might be a little bit lower than what you’ve been spending in recent quarters and in light of the fact that you’re moving into multiple pivotal trials. Is that not a bit of a tight situation?

While we are expecting to see R&D increase for the balance of the year, slightly, because of the pivotal trials in the meantime in our SG&A area, we going to see a slight decrease so that’s where you see expenses evening out.

And my last one is just on has for people who’ve switched to merit has versus the prior standard and they really like they have already accepted as the premium product in the category is there maybe room to raise the price on it and ahead.

So we will, we will take standard price increases, but yes, I mean we’re always talking about pricing, and positioning of the product. So I think you certainly expect to see price increases in the future.

All right, thanks again, guys.

Thank you, Nathan.

Thank you and our next question comes from Andrew D’Silva from B Riley, FBR. Your line is now open. Andrew D’Silva: Hey, good afternoon. Thanks for taking my question. Just a few quick ones. So kind of related to the last question. We ran a couple of checks on Meritaz. Obviously just anecdotal data points, but it seems like there be some bets that have Meritaz for in-office users actually selling it to pet owners. So is that something you’re seeing to and if it is, could it imply that Mirataz actually working better for weight loss in practices than expected and thus it might actually warrant increasing the price. Because they’re not actually selling it to pet owners?

Yes. So we definitely see both, I mean the majority is going home from our data with pet owners. But you’re absolutely correct. What we’ve heard anecdotally is, there is always an open tube in the recovery room and all of that and then what we’re hearing anecdotally is that they are they much prefer that over certainly trying to pillar compounded product for the cat. So we are seeing that and actually it’s a great thing we go into a clinic and they say listen, we’ve got an open tube in this room. But it is, education around sending at home and really looking at true unintended weight loss as a condition versus certainly appetite stimulation and recovery period. So we see both and of course the majority is going home. But we like seeing an open tube in the clinic. I think that’s a great sign. Andrew D’Silva: Okay, great. And then can you just clarify what a typical reorder is or what qualifies as that. And when you’re saying 64% re-order rates. Is that mean cumulative since launch last year is at 64% of the reorders actually taking place during the second quarter?

So it’s cumulative from the beginning. Yes, so it’s cumulative. And what we’re seeing we haven’t released specific data, but we are seeing reorder size grow which is great, it could always grow faster. Of course, as far as we’re concerned. But again it ties back to that, the more we can be in front of the clinic the larger the size is growing at any given time point. Andrew D’Silva: Last couple of questions related to Zimeta. So did the CVM give you and you would do if a date. And then can you just refresh my memory on where the API manufacturer is located? And then what you’ve learned that you can take forward as you bring your biologics manufacturing in-house?

So absolutely yes. We haven’t disclosed where the API manufacturer is located. But yes, we did get a new – a for-date and approval will be before the end of the year and then we’re on a shorten review 135-day clock versus 180 and of course, our hope is that they know these data inside and out. So we hope it’s as efficient as possible, but we are preparing for a launch. We have the AAEP conference coming up in December and if everything goes we will be prepared to launch at that meeting and then yes, I mean this ties in nicely. So we, as I mentioned, even just on this call, we try to bring as much talent in-house as possible, particularly for things that are challenging. So for our small molecules. If you consider Zimeta for example sterile liquid injectable that talent is out there on this as a commodity from a CMO perspective, but we believe and this was Richard in my vision from the very start of the company was that controlling, manufacturing and having end-to-end capability was absolutely going to be the key to our success and hopefully what you will see with us controlling all of the data, all of the paperwork all of the submissions and certainly the man and woman power behind manufacturing, hopefully you will see more expeditious manufacturing as well as a more streamlined path to approval. That’s the whole goal.

And I should add the manufacture biologic manufacturing is a very specialized skill and we should underscore the fact that it’s going to be very difficult for a lot of other companies, the veterinary space to develop what we have already developed certainly in the timeline that we’ve developed. So we think over the long term, it will also be a source of competitive advantage for us. Andrew D’Silva: Okay, great. Thank you very much for taking my questions and good luck going forward.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Brooks O’Neil from Lake Street Capital. Your line is now open.

Hey, you have Frank talking on for Brooks O’Neil. I was hoping you could take a little bit of a deeper dive into your direct to consumer initiatives and maybe some of the specific things you have planned for the end of the year and if you could also maybe think about tying that into how that may impact the – relationship on some of those initiatives building immaterially.

So yes. So we hope to walk in lockstep with –. I mean that’s part of the excitement and the advantage to being partnered with them is to have our materials available in all of that. So we do have some website campaigns, some social media campaigns. We’ve got a lot of collateral at the clinics. So pretty exciting direct to consumer marketing. I will say that owners are attracted to it, they like our branding, they like Fred to CAT. And we’re trying to do a lot of education, of course, both for the veterinarian but definitely for the owner as well about the impact of unintended weight loss. So it’s a multi-pronged approach. And there is no question that we’re seeing response from it, and our hope is that it will continue to build upon itself.

Okay and then just my last question, if you could dig a little deeper dive on SG&A, that would be great as well. I heard your previous comments about R&D potentially trending up the rest of the year and SG&A coming down. My initial intuition was it would probably not be trending down on some of these direct to consumer initiatives in place. If you could just talk about some of the moving parts there would be great. Thank you.

Sure. SG&A we’ll be looking at – we are always managing our expenses and we’re looking at in the marketing area expenses, where we can, some of which we can do in-house versus outsourcing. As you know, outsource marketing is very expensive. So we believe that we have the talent in-house to be able to do that. And so that’s where we are managing our sales and marketing expenses.

I think just underscores the fact that we are very judicious with our spending and we’re always looking for ways to be more efficient.

Yes.

Thank you. And we have another follow-up question from Ben Haynor from Alliance Global Partners. Your line is now open.

Hey, guys. Thanks for taking the follow-up. I just wanted to throw out there. I know that there are parvoviruses that affect cats as well, is that something that we could see you guys taking a look at down the line.

You know, we haven’t disclosed anything at this point, I think you probably know that there are similarities between canine and feline part and I think we should just leave it at that.

Okay, fair enough. That’s right. Thanks a lot guys.

But yes, we’re very excited about paralyzed and really I can’t underscore how [indiscernible] disease, is and how excited our team was to see this data that really exceeded everyone’s expectations.

Thank you. And there are no further questions at this time, I would now like to turn the call back to Dr. Richard Chin, CEO for any further remarks.

Thank you, operator. I’d like to thank our listeners for your support as we continue to advance our products and our promising pipeline.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.