Elanco Animal Health Incorporated (ELAN) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2020 Financial Results Conference Call and Webcast for Kindred Biosciences. At this time, all participants have been placed on a listen-only mode. [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 CEO, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon, and welcome to our second quarter 2020 financial results call. Joining me today from the management team of KindredBio are Wendy Wee, our CFO; and Katja Buhrer, our VP of Corporate Development and Investor Relations. We are pleased with our progress in the third quarter. Manufacturing for our IL-31 antibody, tirnovetmab, has been completed. The protocol has been finalized, and we continue to expect a pivotal study to initiate this year. We remain excited about the blockbuster potential for this product candidate. And as we've said before, we think it could capture a significant share of what is likely to become a multi-billion dollar market. Our candidates for atopic dermatitis are progressing well. And we recently initiated another pilot study for our IL-4R antibody. We believe we have one of the broadest and most advanced dermatitis pipelines in the industry. With the exception of the current incumbent, we estimate that we are ahead of our competition in this field. So, we're very excited about a highly promising dermatitis pipeline. Turning to the parvovirus program. We earlier reported compelling results from the prophylaxis pivotal study. We are in the midst of remaining pivotal studies right now, and we look forward to the results from the safety study and the treatment efficacy study. There is a lot of excitement, both within the company and outside about this program, which offers hope for what is a terrible and currently untreatable disease. We remain on track for approval early next year, and discussions with potential partners are ongoing. We're also making good progress on our other programs. We are prioritizing programs as we continue to carefully manage OpEx. The epoCat and the IBD studies continue to enroll, and we expect the IB study to read out this year. In sum, the projects are proceeding well, and we expect to deliver the program on time and on budget. With regards to the equine assets, we could not finalize the terms with the previous lead potential partner. So, the process is still ongoing. Turning to financials, which Wendy will discuss in more detail, we're pleased with the royalty revenue. Our partner is doing a fantastic job with Mirataz. We're also pleased with the revenue we're generating from our contract manufacturing business. The work is coming along well on our Vaxart partnership. And we expanded that agreement recently. We also continue to discuss potential CDMO work with several other companies. As you know, we have world-class manufacturing plant and personnel. This gives us a major competitive advantage and presents an opportunity to bring in non-dilutive capital from contract manufacturing. At the same time, our number one focus remains executing on our very attractive pipeline. We continue to be judicious with our spending and we were able to reduce our OpEx approximately $10 million per quarter in Q3, which is a quarter earlier than we had initially anticipated. This gets us more than two years of runway during which time we expect to achieve important milestones on our programs and realize the value of our assets. We intend to supplement this financing with other sources of non-dilutive capital. The progress on our deep pipeline and robust runway, position us strongly for the future. The net takeaways are that we operate in a resilient and growing industry. We are amply capitalized. We are reducing our burned. We are making strong progress on high value, potential blockbuster products, and we are executing well across the board. We are very excited about our future. With that, I will turn the call over to Wendy for a review of our third quarter financials.

Thanks, Richard. We commenced the second half of the year with a streamlined organizational structure, focus on our highest value biologics assets, positioning KindredBio with the financial resources and R&D expertise to realize the value of our late-stage pipeline. Having identified cost savings, decrease general and administrative expenses and refocus R&D on our most attractive candidates in the first six months of 2020, we have succeeded in significantly reducing operating expenses from its peak, creating a more capital efficient organization moving forward. Operating expenses totaled approximately $10 million in third quarter. And we expect this quarterly run rate to hold broadly steady in the coming year. This equips KindredBio with funding through mid-2022, as we realized key pipeline milestones. Turning to our financial results. We reported a net loss of $12.2 million or $0.31 per share in the third quarter as compared to a net loss of $15.3 million or $0.39 per share in the year ago period. For the nine months ending September 30, the net loss was $10.9 million or $0.28 per share versus $45.7 million or $1.18 per share in the year ago period. The variance reflects proceeds from the sale of Mirataz to Dechra, which was completed on April 15. Net revenues totaled $1.0 million and $41.2 million in the three and nine months periods compared with $1.1 million and $2.9 million for the same timeframes in 2019. Here again, the variance in the year-to-date result was primarily due to proceeds from the Mirataz sale totaling $38.7 million. We recorded royalty revenue of $255,000 in the third quarter and $413,000 for the first nine months of 2020. Substantially, all product revenues in the nine month period relate to Mirataz. Consistent with the completion of the sale in the second quarter, no Mirataz revenue was recorded in the third quarter. Product revenues for Zimeta were $4,000 and $19,000 for three and nine months period, reflecting a downturn in equine events and transportation due to COVID-19. Contract manufacturing revenue related to the manufacturer of Vaxart's oral vaccine candidate for COVID-19 totaled $772,000 and $1.3 million based on the percentage of completion of specific milestones in the three and nine months ended September 30. On October 7, we recorded an expansion of the original -- we announced the expansion of the original Vaxart agreement as we seek to make use of excess capacity in both our Burlingame and Kansas manufacturing facilities, and thereby subsidize our internal pipeline development. We see the expansion of the Vaxart agreement as an important endorsement of our biologics manufacturing capabilities, which, of course, are a key component in the success of our own pipeline advancement. Research and development expenses were consistent year-over-year, totaling $7.4 million in the third quarter versus $7.3 million in the same quarter of 2019. SG&A expenses declined to $4.7 million from $9.4 million in the prior year quarter. This reflects the inclusion of Kansas plant expenditures as R&D expenses, as Kansas began to manufacture clinical trial material combined with a lower payroll and related expenses as a result of the elimination of KindredBio's companion sales force. Prior to 2020, construction and commissioning expenditures associated with the Kansas facility had been categorized as general and administrative expenses. Stock-based compensation expense was $1.7 million in the quarter. In connection with the prioritization of KindredBio's late-stage programs and associated workforce reduction, we recorded a restructuring charge of 282,000 in the third quarter. We maintain a strong cash position. As of September 30, cash, cash equivalents and investments totaled $66.8 million compared with $73.5 million at December 31, 2019. The 2020 cash balance benefits from the Mirataz sale, which constituted a payment of $38.7 million, with a balance of $4.3 million held in escrow to be paid out in 2021. Net cash used in operating activities for the first nine month of 2020 was approximately $3.3 million, reflecting payment received for the Mirataz assets sale. We also invested approximately $3 million in capital expenditures for the purchase of lab and manufacturing equipment for the Kansas facility. With respect to spending in 2020, as Richard mentioned, we continue to be judicious in our spend and expect quarterly operating expenditures to remain broadly stable on a sequential basis in the fourth quarter. On a full year basis, we continue to project OpEx to range between $53 million and $55 million, which includes the restructuring charges, first quarter expenditures that reflect a full organizational structure and second quarter expenditures that reflect various mid-stage development programs. Excluding these non-recurring factors, the annualized run rate for 2020 is anticipated to be between $41 million and $43 million. Investment in capital expenditures related to lab and manufacturing equipment for our biologics programs is on track to reach between $3 million to $4 million in 2020. We believe our existing cash, cash equivalents and investments, the net reduction in the company's workforce, remaining proceeds from the Mirataz sale, and revenues in the form of royalties and contract manufacturing, will be sufficient to fund the current operating plan through mid-2022. In closing, we believe we now have the right operational footprint to position us for success with our business model. We look forward to important pipeline catalyst by year-end, including the completion of the pivotal efficacy study for our second parvovirus indication, initiation of the IL-31 pivotal study and completion of our pilots study for IBD. Thereafter, we will have the necessary cash runway and R&D talent to realize important development milestones on our promising pipeline. We look forward to updating you on our progress next quarter. I will now turn the call back over to Richard.

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 Trevor on for Jon. Thank you for the questions. Just to start things off, wondering if you can give a little color on any interest you've gotten from potential partners on the parvo asset and this would -- would this be a worldwide agreement or can you give any other detail there? Thanks.

Yeah. Sure. We've got quite a bit of interest on the parvo asset, because this is a very, very significant unmet medical need and it's a unique product that will help in many instances sell other products or the potential partners. Most of the partners we're talking with are interested in worldwide rights. And what we're doing right now is taking time to discuss the various terms with each of the partners. But we anticipate that it'll be a deal for both of the prophylaxis and the treatment indications and for worldwide right.

Great. Thank you so much. And then maybe just shifting over to the IL-31, can you give any color on the trial, number of dogs, timing, just any detail there would be great.

Yeah. So, we have not disclosed the details of the study design, but what we have said is that you can expect the design of the study to be similar to the other antibodies that's on the market. If we are going to the USDA as well, they do have to usually stick relatively close to precedent. In terms of the timing, what we have said in the past is that typically studies like the IL-31 study would take about 12 months. However, we do not yet know the impact that COVID might have on the enrollment rate. So, we won't be in a position to give firm timelines until we've had a couple of months -- at least two or three months of enrollment under our belt.

Great. Thank you.

Your next question comes on the line of Ben Haynor with Alliance Global Partners.

Good afternoon, guys. Thanks for taking the questions. Just curious on how the first parvovirus submission is coming along? And then just thinking about pursuing both indications for parvovirus, what was kind of the calculus that you went through in deciding to do that? I mean, was it something related to expanding the market? Are the doses going to be different? Is it mainly for the purposes of partner out and the desirability of having both indications, anything you could -- any color you could provide there, would be helpful.

Yeah. Sure. The submission is coming along very well. So, the team has already working on that. And in terms of the indication, there are two unmet medical needs in the parvovirus field. One is, obviously, dogs that have gotten infected. And right now, there is no treatment. There's only supportive care. So that is a very, very large unmet medical need. And more serious medical needs because the fatality rate is very high if the animals are untreated. On top of that, there is a need for preventing a disease in animals that have been exposed or may be exposed. And that's because the disease is very contagious and you can get a docking contract parvovirus from even a small exposure, and they can get from an indirect exposure. And for every dog that is infected, there are at least three dogs or more that are exposed to parvovirus who are at risk of developing it. So, this is a market that is larger in terms of number of animals, probably smaller or less of -- has serious of medical -- unmet medical needs because they have not developed a disease yet. However, there are two distinct unmet medical needs, and you can tell we extrapolate results from one versus the other. So, we wanted to make sure we captured both markets and that's why we're doing both studies.

Okay. That makes sense. I mean, I would think that a lot of them would be -- or if you got approved for one or the other, it would probably be used extra label or off label. But I guess, it makes sense to go after both of them, is the thing?

Yeah. Yeah. I think, you're absolutely right. If we got on the market with just one, then I think the veterinarians and the owners would definitely use it in the other indication. Fortunately, these studies are fairly quick and fairly inexpensive. So, we decided to invest the money in -- into both indications, but you're right. Getting it approved for either indication would probably be -- for both.

Okay. And that's a good point on the cost of it being relatively inexpensive. Then, I suppose with the Pfizer news today, does that change anything with the vaccine candidate or anything you can speak to there? And then when you're looking at CDMO worked for other companies, what kind of enters the equation in terms of -- is there a certain gross margin target that you have for these things? Is -- obviously considerations need to be made for your own capacity either now or down the road. What enters into the equation there?

The -- today's announcement by Pfizer, which is fantastic by the way. It doesn't impact us directly. It may impact Dechra [ph], but we can't speak to them. The contracts we have I think will move forward. So, I don't think that's going to change. Now, in terms of your second question, what we do is we try to fill up the excess capacity. So, we don't wants to slowdown any of our internal programs. So, we set aside the manufacturing spots for those, and then we try to fill the excess capacity. And there's not a specific target in terms of margin. However, the CDMO business has relatively good margins. And what we're finding is that we can get business or it looks like we're going to get business by charging the standard going rate, which does get us pretty attractive margins.

Healthy margins?

Yeah.

Okay. Fair enough. Thanks for taking the questions guys.

Sure.

And your next question comes from the line of David Westenberg with Guggenheim.

Hi. Thanks for taking the question. Recent competitor launched a product in hunger for cats, I realized it's now just a royalty stream, but it is probably helpful to have that royalty given that -- with the cash burn. So, how should we think about the difference in that launch -- the competitive launch in terms of the market?

Yeah. So, the product that you were thinking of was approved for a narrower indication than for Mirataz. So, I think they'll be targeting a subset of the market. They won't be able to target the entire market. When you have a second competitor enter a market like weight loss or management of weight loss, it often counter-intuitively increases the sales of the first product. And that's often the case when it's a new market that needs to be developed, and having multiple companies talking about the disease state can often be beneficial to both products. So, we think that may happen. We don't know yet. So, we think that Mirataz is a very, very strong product and it's doing very well in the hands of our partners. So, we anticipate that that'll continue to climb. Then we'll have to watch to see how that -- how the competitive arena plays out.

Got it. Thank you. Then on to IL 13 -- KIND-016 a bit of rolls, a little bit late and I think your estimate was, correct me if I'm wrong, 12 to 18 months, it was on the high-end of that estimate. Do you still think you'd be second to market? And if you're three or radically third, how much of a difference does it make if the second to market is a JAK versus another monoclonal antibody?

Yeah. So, we don't know all the other products that are being developed, but of the ones that we do know that are being developed for atopic dermatitis, we are still in the lead and our expectation is that we would be the next product come onto the market. Now, we believe that ultimately the antibodies are going to take a lion's share of the market. So, additional JAK inhibitors that come onto the market, we're not nearly as concerned about as compared to potential other biologics. And if the COVID slows down, our study is -- will have a similar impact on any other studies that are ongoing. So, we don't think that's going to change the order of approval for the drugs that are in the pipeline. But we -- right now, we believe we have years of headstart on other potential products for this indication.

Thank you. And then just a -- maybe a housekeeping question, the burn rate of four quarters of cash -- I mean or eight quarters of cash -- $10 million burn, that would be $80 million. And you have $67 million in cash. Does that mean in the assumption -- there's this assumption for royalty and contract manufacturing contribution of $13 million, Am I doing that -- correct in that assumption? Or just the way to think about that cash burn for us. Thank you.

I'll let Wendy.

Yes. The cash runway takes into consideration Mirataz royalty, as well as contract manufacturing revenue. So that comes into play.

Perfect. All right. Thank you very much.

Sure.

[Operator Instructions] And your next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright.

Thank you. Good evening, Richard and Wendy. This is RK from H.C. Wainwright.

Hi, RK.

Hi. I know that most of the KIND related questions I've been asked. Regarding the feeling that [indiscernible] the supporting work that you have been doing for the last one year. So, where are the studies at this point? How -- and how much of an impact does a COVID-19 have on the study itself and how it's being conducted? Just color on it.

Yeah. The study is still enrolling, and we always knew that this would be a slow study to enroll because unlike atopic dermatitis, for example, where it's very obvious the owner that the animal has the disease, anemia, you have to screen for -- you have to do lots of tests on. So, we always knew it would be slow. The enrollment has been significantly impacted by COVID. And the rate has picked up a little bit as the veterinary clinics have opened, but we still anticipate it's going to take quite a while. This is also a program that's lower priority than some of the other programs. So, we're not devoting as much resources to it as, let's say, the atopic dermatitis program, obviously, because we are managing all OpEx carefully. So, it's going well. But it is going fairly slowly.

Okay. Thanks for that. And then on the equine business, so I know you have been trying to evaluate appropriate strategic option for this business. Where are you in that process? How close are you to getting to a solution? Are -- is this also another -- is this process also getting impacted by COVID-19 and that's the reason why it's taking a little longer time?

Yeah. So, it's been indirectly impacted. I wouldn't say COVID impacting the discussions. But what it has done is made it a little bit harder to agree on a valuation, because with all the horse shows being shutdown, the -- it's hard to estimate what the true value of Zimeta, for example, what the sales would be if this were under normal environment, but has -- it had an indirect impact. But right now we're talking to multiple partners. The original deal, that we were looking at, didn't quite go all the way through to confirmation, which is not uncommon. Often you can have a non-binding term sheet and then things can change. What I can say is there are multiple interested parties and we hope to have this wrapped up in the next several months.

Okay. Thank you, Richard. Thanks for your time and talk to you.

Thank you. I will now like to turn the call back over to Mr. Richard, CEO. Thank you for any further comment.

Thank you, operator. I'd like to thank our listeners for your support as we continue to attend our promising pipeline.

This concludes today's conference call. You may now disconnect.