Welcome to the First Quarter 2020 Financial Results Conference Call and Webcast for Kindred Biosciences. At this time, all participants have been placed on a 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 Kindred Bio's CEO, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon and welcome to our first quarter 2020 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our President and COO; Wendy Wee, our CFO; and Katja Buhrer, our VP of Corporate Development and Investor Relations. In the midst of this COVID-19 crisis, we hope that our listeners are all safe. It is a difficult time for all of our communities and it's a time for all of us to pull together. I'm happy to report that so far our team at KindredBio has been healthy. And while there has been some impact on our business, we are fortunate to operate in a market that has been resilient to past economic downturns and we have weathered the storm so far. In fact, we had a successful first quarter. Of note, we announced that, we had positive pilot study results for SINK. SINK blocks IL-13 and IL-4, which are very important in the biologic dermatitis. Its human analog, dupilumab is a very successful molecule approved for atopic dermatitis in people. If we step back, it's really remarkable that we have had 8 positive pilot studies in a row. I don't know of any other company that has a track record like that. And I think it speaks to the quality of the work we're doing in development. We also closed the $43 million transaction for Mirataz, plus ongoing royalties. As we mentioned on our last call, the size of that transaction validates the value we're building. That figure is significantly higher than our expectations and represents a very attractive ROI. Unfortunately, in the first quarter, we had to make some difficult decisions. Following the Mirataz transaction, we downsized the organization, which was gut-wrenching given the world-class commercial organization we've built and…

Thank you, Richard. We are pleased to update you on both our first quarter progress and the strategic realignment we unveiled in mid-March. As you know, the sale of Mirataz was completed within a month of announcement, which is a testament to Dechra's commitment to the product and desire to promptly begin marketing in the US and Europe. Given record sales from distributors to veterinary clinics in the first quarter, we are confident Mirataz is on track to be a successful product in the hands of Dechra's expansive commercial infrastructure. With the sale now finalized and strategic evaluation of the equine franchise advancing, our R&D team is fully dedicated to our promising biologics pipeline, which is where we believe, we can create the most value and have the clearest competitive advantage. While our other biologic programs progressed as planned in the first quarter. As a result of COVID-19, we have since observed some disruption to our ongoing field studies. A number of veterinary clinics are not conducting clinical trials, which affects our studies for non-regenerative anemia and inflammatory bowel disease. As a result, we are accelerating training of new sites that remain operational, all the while taking the necessary precautions to protect the safety of study participants, clinical trial staff and employees. Additionally, we are actively implementing practices consistent with guidance from FDA on studies conducted during COVID-19 to minimize the impact on time lines. This could include activities such as less frequent monitoring of patients, virtual study visits and in-home clinical services. Other than the delay to clinical trials, there has been little impact from COVID-19 on our operations more broadly. Because much of our workforce already works remotely, we are well equipped from an IT and system standpoint, for the current operating environment, so it's largely been business…

Thanks, Denise. The strategic realignment we announced in mid-March, not only sharpens our focus on our highest value biologics programs, but positions KindredBio strongly in the current operating environment. Proceeds from the Mirataz transaction, alongside the reduction in our workforce and operations, are extending cash runway during this period of uncertainty, while maintaining a focused research engine. In recognition of more challenging market conditions, we are diligently managing our spend. This includes the prioritization of investments, a reduction in discretionary expenditures, which has already lowered our planned annual spend versus the guidance provided last quarter. We continue to see opportunities for further savings and are conducting a rigorous evaluation of expenditures. Turning to our financial results. In the first quarter, we reported a net loss of $22.8 million or $0.58 per share as compared to a net loss of $16.1 million or $0.42 per share for the same period in 2019. This includes a non-recurring charge of $5.1 million. Net product revenues for Mirataz totaled $0.6 million compared to $0.5 million for the year ago period, while Zimeta IV net revenues were $7,000 in the first quarter. Cost of product sales totaled $82,000 in the first quarter of 2020 compared to $92,000 in the same period in 2019, resulting in a gross margin of 86% and 82%, respectively. In the quarter, we recorded a $3.5 million write-off on Mirataz, due to the transition to Dechra branding for the product. Research and development expenses rose $1.7 million year-over-year to $8.9 million, reflecting the inclusion of expenses from the Kansas facility given the commercial -- given the commencement of clinical trial manufacturing. Prior to the first quarter, construction and commissioning expenditures for the Kansas facility have been categorized as general and administrative expenses. Stock based compensation expense related to R&D was $0.6…

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

[Operator Instructions] And your first question comes from the line of Jon Block with Stifel.

Hi, this is Tom on for John. Thanks for taking my questions. Maybe to start off, is there any more color you can provide on the use of the manufacturing site in Kansas for contract manufacturing?

Sure. So as you know, we've been looking into doing contract manufacturing. And we have actually hired a business development person, so there is quite a bit of interest actually in the manufacturing capabilities, because as you probably know, there is shortage of biologics manufacturing. Having said that, there is a bit of a lead time for those types of contracts. So we are in active discussions, but currently we don't have any contracts yet.

Got it. Okay. And so more broadly speaking, with all the uncertainty in the last two months or so, just as a result of COVID. When we think about your ongoing partnership conversations with some of these larger players in animal health. At a high level, has the time of those conversations changed at all? Or are there any changes in these companies' mindsets over the next -- call it, three to six months? Thanks.

This is the beauty of the veterinary space, the answer is no. They seem just as enthusiastic. Before the last economic downturn, 2008 downturn, it was thought that the veterinary industry would be more vulnerable than other industries to an economic downturn, because it was -- thought that it was not a necessity, but it turned out veterinary industry as actually one of the most resistant industry when it comes to recession. So far the tenor of our conversations has not been affected.

Got it. Thank you.

Sure.

Your next question comes from the line of Brandon Folkes with Cantor Fitzgerald.

Hi, good afternoon. This is Carvey [ph] in for Brandon. Just a couple of questions here. Now that you have switched more of the partnership model, do you expect to present more detailed data readouts on your pipeline programs going forward? Or could we see this data showcased at animal health conferences? At the same time, how has the switch changed your pipeline prioritization? Do you expect to shift focus on to specific narrowed down therapeutic areas? Or you looking to leverage the bandwidth to explore more of your pipeline? Thank you.

Sure. So, with regard to the -- let me start with the second, first. So in terms of prioritization, we are focusing more on the larger markets. Previously, we were also looking at smaller markets, because for us smaller markets are worthwhile. But going forward, the -- since we'll be partnering our molecules, we expect that we'll spend less time on some of the smaller areas. However, we do expect that once we have the partnerships that it will allow us to pursue multiple indications. So more partnerships we have, more opportunities we'll be able to pursue. And I'm sorry, can you repeat the first question again?

Yes. So basically, now that you are switching to a partnership model. Should we expect more data readouts from your pipeline products?

Yes, sorry. Yes. So most likely no. We have been disclosing what we need to, because we're a public company and for us, those types of data are material. I'm sure that our larger partners would much rather prefer that we disclose less. The larger companies generally like to keep things under wrap for as long as possible. So most likely, we won't change what we're disclosing. What we're disclosing so far and looking at disclose so far generally has been material information that we need to get out to the market.

Yes, that makes sense. Thank you so much.

Your next question comes from the line of Sean Lee with H.C. Wainwright.

Hi guys, thanks for taking my question. So I just have a higher level question on the partnership discussion. As you mentioned, there's been fruitful discussions ongoing for the IL-31 and also for the other atopic dermatitis programs. I was just wondering, considering that the clinical costs in the veterinary space are a lot lower than in the human space. What are some of the advantages for you to partner now and what would be some of the advantages for partnering later?

Yes. So those are exactly the questions that we're grappling with right now. The advantage of partnering earlier is that, we get the upfront in earlier and that's a source of non-dilutive capital. So it means that we won't have to raise as much money. The advantage of partnering later is that the value goes up exponentially, as you derisk the molecule and we learned that from Mirataz. So it's really weighing the pros and cons of cost of capital versus the economics that we can derive from the various molecules in our pipeline.

I see. And in terms of the prioritizations, is that more driven based on the talks that are going on or more based on the results that you're seeing in the studies? Thanks.

Sure. So it depends on the specific molecules. In some cases, there are targets that our partners are really interested in. So obviously, we would prioritize those. In other cases, where we have multiple molecules and we have to pick among them. One of the first things we do look at, is the clinical data and the cost of goods. So it's molecule-by-molecule and we decide each one on its on merit.

Thanks for the additional color. And that's all I have.

Sure.

[Operator Instructions] Your next question comes from the line of Nathan Weinstein with Aegis Capital.

Hi guys, thanks so much for taking my questions. Just on the IL-31 pivotal effectiveness trial, could you just remind us what would the anticipated duration of such a trial be?

Why don't I hand that over to Denise? We're all in different locations. So you'll hear me hand questions off. Denise?

Yes. We're social distancing appropriately. Yes. So we haven't given any specifics around the exact protocol for competitive reasons as you can appreciate. What we have said is that, most of our pivotal trials will take 12 to 18 months. We expect that the atopic dermatitis pivotal trials will be closer to that 12 month range to recruit and complete. But we'll certainly keep you posted, if there are challenges associated with COVID-19 that persist. But at this point, we're expecting around 12 months.

Thank you. And then an another area on the equine assets, I understand that there may be some resolution as to your path forward there by July. But would you look to move those assets altogether as a whole to a potential partner or what could that look like?

I think Denise can answer that one as well.

Great. Yes, so we have many different potential acquirers at the table or partners at the table. And some want all, some want parts, so we'll certainly make that analysis, as we look at what the offers turn out to be. At the same time, we have still been considering a spin out of the equine assets, but that will depend on what the offers look like and where the value can best be derived.

Understood, thanks. And I guess just one more from me. I've asked this in the past, but I've seen some movement on the diagnostics front with regards to canine cancer. And I understand as a biologics player, that could be an area you could look at in the future. Can you make any comments on what you're seeing in canine cancer?

So canine cancer is an area we've been interested in for a while. Diagnostics, we have decided to stay away from because, there's -- it doesn't fit into our core competency and there are strong players in that space right now. There are a few types of diagnostics that could make sense for us eventually, such as companion diagnostics, so diagnostics that guide the use of our therapeutics. So I wouldn't rule it out completely, but our plan is to stick to areas where we have a competitive advantage, such as biologics, monoclonal antibodies.

Okay. So from the therapeutic side, it could be a monoclonal antibody approach in the future?

Well, we'll certainly look at diagnostics in conjunction with monoclonal antibodies for diseases where the diagnostic can improve the utilization of our drugs, much like what is happening on the human side. Street diagnostics, I think, it's not an area where we have a reason to believe that we can offer an advantage compared to the current incumbents.

Sure. Okay, thanks so much Richard, appreciate your time.

Sure.

And at this time there are no further questions. Richard, do you have any closing remarks?

Thank you, operator. I'd like to thank our listeners for continued support and we look forward to advancing the pipeline and executing on our business strategy.

Thank you for participating. This does conclude today's conference call. You may now disconnect.