Elanco Animal Health Incorporated (ELAN) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2021 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 the prepared statements, participants will have the opportunity to ask questions. [Operator Instructions] Please note that remarks made 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 a 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 first quarter 2021 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 said previously that we expect 2021 to be a banner year and it's certainly turning out to be that. We announced recently that we have developed a long acting IL-31 antibody that lasts up to three times longer than a normal canine antibody. This is one of the most important announcements in the history of our corporation. This means that the antibody could potentially be administered three times less frequently than a typical antibody or potentially every three to six months. The standard dog antibody has a head size of 10 days there's of approximately, which is why it's usually given every month or two. Our long-acting antibody has a half life of up to about 30 days. This technology also allows us to reduce cost of goods to as low as one-third of a typical antibody, rivaling the cost of goods for small molecules. Even better, this new antibody is based on tirnovetmab and the binding part of the molecule that binds to the IL-31 has not been changed. This means that we already know that the molecule works and works well for atopic dermatitis. We can proceed to pivotal study with very little additional work because we can rely on the tirnovetmab pilot studies. Our goal is to initiate the efficacy pivotal study as soon as end of this year. This is really important news because the duration of action is a key driver of market share in this space according to the information that we have. Simply put the antibody program that simply puts the antibody is likely to take a substantial portion of the market share and very possibly a dominant share. So what we have is a molecule that's highly likely to work that at the duration of action advantage that has a cost of goods advantage we believe and which targets which targets a market that is at least $1 billion a year and growing. Now, this is a great technology and a major breakthrough. And it's a very complicated and difficult technology to develop. If you don't know exactly what you're doing, and if you don't understand how every single atom in the antibody molecule works, you could spend years and years trying literally trillions of different modifications and not getting get anywhere. Hangjun Zhan, our CSO and his team is world class, and it's because of them that we've been able to achieve this so quickly. As an aside, I will also note that veterinary antibodies are in many ways more difficult than human antibodies to develop. There are a lot more that's unknown, and the reagents and the contract organizations that exist for human antibody development typically do not exist for veterinary antibodies. We have built an organization that can now on a very consistent basis yield high quality antibodies, high producing cell lines and consistent manufacturing. We plan to develop both the regular and long version of the IL-31 antibody, dermatitis is a huge market and there will likely be demand for both acute and chronic versions of the product. There are some acute indications like fleabite or seasonal allergies where the customer may once only pay for one or two months of therapy, for example. Turning to the tirnovetmab pivotal study, the enrollment has been slow because we've been required by the USDA to dermatology sites and most dogs we need to enroll are seen as journalists. We still expect 12 to 18 months from start of the study to completion, but it may be toward the longer end of that. It's still too early to give a more definitive timeline, since we just brought on some additional sites and will likely continue to add more. As previously noted, we believe we have one of the broadest and most advanced dermatitis pipelines in industry, including several molecules that we have not yet disclosed. Now, in addition to this exciting announcement about the long acting IL-31 antibody, we also announced that we have an acceptance from the USDA for the prophylaxis efficacy study for the parvovirus antibody. An acceptance is the term that USDA uses when it has finished through review and has found a satisfactory and sufficient to support an approval. Our efficacy data for prophylaxis has been approved, and the USDA has approved the prophylaxis indication. Of course, in addition to that, we still need approvals for the safety and the manufacturing before we get the final approval. We still expect the treatment study to read out soon and assuming that it is positive, we will receive approval of both indications. The other programs are on track and we are happy with the progress so far. Turning to Mirataz. As Wendy will discuss, the sales for this drug has been on a rapid upward trajectory, and we're extremely happy about the great job that our partner, Dekra is doing. U.S. Mirataz sale to veterinary customers continues to grow and we're 60% higher in March of this year compared to April of 2020 when Dekra first took over the commercialization of the product. This highlights our partnership model and also reinforces that Mirataz is on its way to becoming a very successful drug. On the contract manufacturing side, we have additional potential clients we're talking with right now. There is a severe backlog of manufacturing capacity right now, as I've noted before, in addition, there is a severe shortage of manufacturing supplies. And as Wendy will discuss, this may push back our revenues from Vaxart. But since its take-or-pay contract, we will receive that revenue eventually. Now in the midst of this manufacturing capacity shortage, we are very lucky to be in a position of having ample capacity. Our plant has been designed to hold up to eight bioreactors once it's fully built out. And with the 4,000 liter reactors now being available, it has maximum capacity of 32,000 liters, which is quite substantial, and each reactor can produce up to 24 batches a year. And as you may know, the market price for each batch, which has been going up, it can be several million dollars. We have also had multiple successful manufacturing campaigns with both our products and with customers' product. And as I should note, it's not easy to consistently manufacture biologics products. So we're very happy with that. We're also happy that we've raised significant additional capital through the ATM, which now extends the cash run rate to end of 2023. This will allow us to get to approval of not just IL-31, but IL-4 as well and possibly the long-acting IL-31. And the bulk of the ATM was through block sales to a very highly regarded blue-chip investors, and we're very pleased to have their support. We're not utilizing the ATM currently and don't expect to utilize a small amount that's remaining in the foreseeable future. To summarize, we have three major drivers of value at Kindred Bio; number one, products and pipeline; number two, IP and platform Technologies; and number three, manufacturing and CDMO business. On the product side, we have several potential blockbusters, each one of which could generate hundreds of millions of dollars in sales every year and at least one of which has the potential to become the market leader in the dermatitis space. Dip including the half-life technology is, we believe, a very valuable set of assets, and the value will continue to grow as the role of biologics in the veterinary space grows. And those of you who follow the CDMO space will appreciate the value of the contract manufacturing business that we're building. The net takeaways are that we are very well positioned in terms of assets, strategic position and cash runway. We're very excited about our future. With that, I will turn the call over to Wendy for a review of our first quarter financials.

Thanks, Richard. We further strengthened our capital position in the first quarter with proceeds from our ATM facility, prolonging runway and providing further resources to guide our late-stage biologics programs through the final stages of development. With a streamlined expense structure in place, the additional funds will extend our cash runway through the end of 2023. As Richard noted, we are also very pleased with the performance of Mirataz in the quarter, a near tripling of royalty revenues on a sequential basis, underscores the promising growth trajectory of this drug and our partnership-based approach to commercialization. Turning to our financial results. For the first quarter, we reported a net loss of $9.7 million or $0.24 per share compared to a net loss of $22.8 million or $0.58 per share for the same period in 2020. The variance is primarily due to the elimination of our commercial organization as we rely on a partnership-focused model and further prioritization on our late-stage biologics programs for dogs and cats. We've recorded net product revenues of 227,000 point Zimeta in the first quarter, compared with $603 in net product revenues for Mirataz in the year ago period. As a reminder, Dekra was granted exclusive marketing, sales and distribution rights to Zimeta in the U.S. and Canada, and the first quarter product revenue reflects excess inventory sold to Dekra. Zimeta sales in the U.S. have been consistent after a soft launch by Dekra amid the transition in sales from KindredBio to Dekra. With in-person meetings between Dekra sales personnel and veterinarians starting to occur as the pandemic isolation is resolving. Sales conversations are expected to become more frequent in the coming months and opportunities to promote Zimeta should likewise increase. The launch of Zimeta in Canada is being planned and is expected to occur sometime in 2021. Royalty revenues rose from $122,000 in the fourth quarter to $326,000 in the first quarter of 2021. This strong quarterly result reflects continued growth in U.S. sales, alongside the initial contribution from launch of Mirataz in the EU on February 4, with sales now to over 25 countries. In addition, the manufacturer of Vaxart's oral vaccine candidate for COVID-19 drove contract manufacturing revenue of $1.8 million for the first quarter based on the percentage completion of specific milestones. Due to recent disruptions in the bio manufacturing supply chain, lead times for certain supplies have been lengthening. So there is a possibility that up to half of the $20.5 million agreement will be recognized in 2022. Keep in mind, this is a take-or-pay contract so the timing of receipt should not affect our cash runway. The cost of product revenue totaled $207,000 in the first quarter of 2021 compared to $3.6 million in the same period in 2020, which included a $3.5 million inventory write-off on Mirataz. The cost of contract manufacturing revenue, which consisted primarily of the cost of direct material, direct labor and overhead costs was $383,000. Research and development expenses for the quarter ended March 31 was $6.3 million compared to $8.9 million for the same period in 2020. The $2.6 million decrease was primarily due to lower costs across the board, consistent with our decision to discontinue small molecule development in favor of late-stage biologics programs. Stock-based compensation expense for the first quarter of 2021 was $0.4 million as compared to $0.6 million for the same period in 2020. Selling, general and administrative expenses declined to $4.7 million from $8.9 million in the year ago quarter, reflecting the elimination of our companion animal sales force. Stock-based compensation expense was $2.1 million for the 2021 first quarter versus $1.5 million in the year ago period. As discussed, we further strengthened our cash position in the first three months of the year. As of March 31, we had $63.3 million in cash, cash equivalents and investments compared with $59.9 million as of December 31. Net cash used in operating activities for the first quarter of 2021 was approximately $9.4 million reflecting a smaller organizational structure and, to a lesser degree, the contribution of contract manufactured revenue. We also invested approximately $260,000 in capital expenditures mainly for the Kansas facility. Cash use was offset by $13.7 million of net cash proceeds from the sale of securities in conjunction with an at market issuance sales agreement. In April, we sold an additional $13.1 million of securities through the ATM. The proceeds will be reflected in the second quarter financial results. Our projected full year operating expenditures remain unchanged at between $41 million to $43 million, and we expect to invest approximately $2.9 million on capital expenditures on lab and manufacturing equipment for our core biologics programs. With the additional funds from the ATM facility, we have further extended our cash runway and now expect our cash, cash equivalents and investments, remaining proceeds from the Mirataz sale, revenue from contract manufacturing and revenues in the form of royalties and partner licensing to be sufficient to fund the current operating plan through the end of 2023. In closing, we look forward to important pipeline catalysts in the quarter ahead and have the operating runway in place to see key late-stage programs through to approval. We look forward to updating you on the progress next quarter. I will now turn the call back over to Richard.

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

Our first question comes from the line of John Block from Stifel. Your question please.

This is Trevor on for John. Thanks for taking my question. Maybe just to start off on the parvovirus program, the deal with Elanco, you've said that you may achieve up to $16 million in development milestones. With the remainder of the potential milestones being related to sales, maybe just relating to the $16 million, should we be thinking about any of the development milestones coming through in 2021? Or do you have any other sort of timing guidance that you could help us out with there?

At this point, we're not providing guidance on the timing of those milestones.

Okay. Got it. Maybe just on the IL-4 program, you mentioned that your preparations are underway for a pivotal study. And I think you alluded to potential approval by the end of 2023. Could you just talk a little bit about how you anticipate the study will look in terms of time line, end points and maybe in relation to your other atopic dermatitis programs?

Yes. So what we said is that the IL-4 program is about six months behind the regular IL-31 program. And most likely, the design will be similar -- the study design will be similar to IL-31. We're still discussing the specifics with the USDA.

Thank you. Our next question comes from the line of Ben Haynor from Alliance Global. Your question please.

Just first for me, on the IL-31 molecules to tirnovetmab and KIND-039. It sounds like the half-life extension really opens up some opportunities for you there in terms of a choice between the vet and the pet owner of how to dose, presumably, having that longer option would kind of blunt any competitive impact from Cytopoint because if you were going to dose the first dose with an IL-31 antibody to see if it works, you would dose tirnovetmab and then potentially switch to KIND-039, you wouldn't go from Cytopoint to KIND-039 if that was your intention, I would think. I mean, is that a fair read on how you view it competitively?

Yes, we think that is likely. We think the bulk of the market will go to the long-acting conversion, maybe two-thirds of the market or more. We'll go to the long-acting version, but we do think that there will be a market for the shorter acting version, the normal version. Some of it will be for acute indications. Other will be for a trial, as you say. But certainly, most medical professionals would prefer to switch from one version of a product to another and completely different product, we believe.

Okay. That makes sense. And then just thinking about the up to threefold longer half life, the up to how much variance is in that? I mean is it some dogs, maybe it lasts 1.5 months and some of the last threefold longer? Or is it pretty tight within a range depending on, I suppose, depending on the breed?

Yes. So, there is variability from dog-to-dog with any antibody. We believe in the way that we're going to administer our antibodies that we will likely get consistent threefold increase, and a dog that might normally need to be retreated every month probably will go to every three months in between treatment. A dog that may need the regular version every two months will probably go to every six months, but we will need to do the additional studies before we are sure.

Okay. That makes sense. And then is there -- are there plans to apply this to IL-4 as well?

So, we haven't announced what are the molecules we are applying this to. However, for almost any chronic disease, increase in half-life would be an advantage. And for any disease, whether chronic or acute, threefold reduction in cost of goods for veterinarians, yes, it will be very compelling.

Okay. Got it. And then lastly for me, you called out in the R&D savings, a good portion of that being attributed to CCN small molecule development. I guess the question is. How much small molecule development were you pursuing a year ago?

So before we had the strategic realignment, we were spending probably about 40% of our resources on small molecules.

Next question comes from the line of Balaji Prasad from Barclays. Your question please.

Good afternoon, Richard, and thanks for the questions. A couple of things. Firstly, with the acceptance of the prophylaxis data for the borrowers map, can you summarize where you stand currently with both the prophylactic indications on the therapeutic indication? And any updated thoughts around this? Secondly, also, I see that you have a revised agreement with Elanco that you just published today. Can you highlight, if there's any major changes from the past agreement on this? Thanks.

Sure. So, we have two indications we're pursuing. They are independent in terms of the indication itself, but they share the same manufacturing. So both of those indications are -- the time lines are driven by the manufacturing portion. And we're basically done with the efficacy portion of the prophylaxis. We are in the midst of the treatment study, which we still expect to read out this quarter. If the treatment indication is positive then when we get the manufacturing section approved and of course, the safety, but manufacturing is the rate limiting factor. When the manufacturing section is approved, then we would get both indications. If the treatment indication study does not work for some reason, which we think is unlikely then we would still get the approval for the prophylaxis indication. Well, in the second part, the agreement that was filed with Elanco is basically a more detailed version of the initial letter of intent that we signed. So, it doesn't change any of the major terms. It just feels in the detail.

Thank you. Our next question comes from the line of Brandon Folkes from Cantor Fitzgerald. Your question please.

Congratulations with a lot of progress. Maybe just the first one in on the long-acting IL-31, can you just walk us through the process from here through to the initiation of a pivotal program and your ratemaking step to when we should expect that? Maybe just quickly on the USDA, any color in terms of how their review time lines have been I guess time line, but how the reviews have been coming out of the USDA? I know, we obviously in human side team delay at the FDS, so just any color there would be great? And then lastly, on Vaxart, we saw -- you called out sort of some of the challenges they called out a few challenges at their -- one of the other suppliers much yourselves. But I guess, just on that, is there a possibility for expansion of the Vaxart contract done once they've resolved some of the issues with the other supplier? Or I guess you did touch on capacity, but any color on capacity and taking that on or would you look to diversify your CDMO business instead of just having one sort of very large payer? Thank you.

Sure. And please, let me know if I'm not answering the question in the way. So, the long-acting IL-31, the beauty of the long-acting IL-31 is that almost the entire molecule is the same as the parent molecule. So that means all the safety data and all the pilot efficacy data applies. The only thing that's different is the half life. So from a clinical standpoint, we're essentially ready to start the study. The manufacturing is what is driving the time line at this point. And if all goes well, we expect to have the efficacy clinical material ready by end of this year. Now there's always risk. So that's why we haven't said definitively. We'll start this year. We have -- what we've said is that our goal is started by end of this year. So really, it will only be about one year behind the regular version. In terms of the second question, I believe you're asking about reviewed time lines at the USDA and the FDA. The review time line that the USDA seems to be longer than typical probably due to COVID, and we factored that into our time lines. FDA, we have not been interacting with the FDA very much at this point because we don't have the small molecule portfolio anymore. So I can't provide much color on that. And in terms of Vaxart, I believe you're asking if there might be additional business from Vaxart. So we haven't agreed to any additional batches. Typically, though, once you have a partnership between a sponsor and a contract manufacturer. Generally, the sponsor likes to keep the manufacturing with the same contract manufacturer because transfer of the technology takes a fair amount of time. And often, there are difficulties in transferring it to a different manufacturing facility. So if their clinical studies are successful, then I think we would be in a good position to get additional business, but at this point that's not something that is under discussion. We do want to diversify our business. However, we can do that even if we expanded the agreement with Vaxart because, as I mentioned, we have the ability to go up to 32,000 meters of capacity and that's a lot of capacity.

Thank you. Our next question comes from the line of John Lee from H.C. Wainwright. Your question please.

Maybe a little bit of follow-up on the contract manufacturing side. You mentioned that the plant has a facility capacity for up to 32,000 liters. I was just wondering, how much of that -- how much capacity do you still have right now for external contracts? And could you provide some color on maybe on the timing of the backlog that you said earlier in terms of the manufacturing capacity?

Can you repeat the second part of that question?

Like earlier during the prepared remarks, you mentioned there's been a backlog in terms of capacity. So I was wondering, do you have any insights to the timing of that?

Sure. So there's backlog across the industry in terms of capacity because most contract manufacturers are completely full. So there's a two year weight or sometimes longer to get a slot, which is what puts us in a good position. And we're in that position because when most companies build a plant and they need, let's say, 30,000 square feet or 50,000 square feet. They build a building of 30,000 square feet or 50,000 square feet. We are looking that we purchased a plant that was 180,000 square feet for very, very low price and we were able to design and build out the square 60,000 square feet we're using with expansion built in. So there's space that's built out. So it's designed to have two upstream suites two downstream suites, and two still in finish lines. So it's all ready to go. So very, very quickly, we can expand from current two bio reactors to eight bioreactors. So that's very, very unusual. If you're building from greenfield, you would not build extra space in the middle of the manufacturing plants, as we have done. So we currently have additional capacity that we could take on additional manufacturing contracts, a few tens of millions of dollars of manufacturing contracts before we needed to add additional bio reactors. And then once we added the bio reactors then we could take on hundreds of millions of dollars of additional business per year. So, we are in an unusual and fortunate position. Does that answer both parts of your question?

Yes. That's very helpful. Thank you. My second question is on the half-life expansion technology. So with the positive PK results from the long-acting IL-31 antibody, I was just wondering whether the Company would plan to accelerate the development of other long-acting antibodies since, as you mentioned, they offer a pretty obvious competitive and commercial advantages?

Yes. So for almost all future antibodies, we plan to incorporate the technology because there are very few instances where you want a shorter half-life. And in the veterinary space, cost of goods is so important. And biologics, the regular acting antibodies, they're still a little more expensive to manufacture than small molecules, sometimes significantly more expenses, but our manufacturing titers and calls are such that for us, it's slightly more expensive. But once you get to the long-acting versions, then the COGS start to more like small molecule COGS. So that becomes very, very attractive and in the veterinary space calls really do matter.

Our next question comes from the line of David Westenberg from Guggenheim Securities. Your question please.

This is John on for Dave. Regarding Mirataz, how do you feel about how it's being commercialized and how the partnership with Dekra is progressing? And has Elanco's joined the category helped by educating the end markets on the category? Thank you.

So I'm going to actually turn the question over to Katja. She is managing our partnerships with Dekra and she's also Head of Corporate Development. So Katja, do you want to speak to this one?

Sure. So with regard to Meritas, I think that Dekra has done an outstanding job since taking over that product. As we noted today, monthly sales to clinics have increased about 60% since their launch, which is a pretty phenomenal result in 12 months during a pandemic when sales and technical teams or at times limited in their ability to access hospitals. And then we're pleased with the initial results that in contribution from the EU launch, and we expect that to further accelerate the ramp and the peak sales potential for the product. And sorry, your second question. Could you repeat that?

Yes. Would you say that Elanco is having gotten into the category helped you by helping to educate like veterinarians on the space on the category?

Yes. I think yes. I think that they see this as a category creator and are intending to invest considerable resources to open up a new market with this first-in-class product. And obviously, I don't need to tell you what impressive commercial reach they have. Obviously, their marketing and technical expertise and therapeutics and vaccines are second to none. And we're very pleased in general terms of how the partnership is proceeding. As Richard mentioned earlier, we just executed the final co-license agreements and all the launch preparations are firmly underway. So, it's clear that they're very excited about this program as we are in devoting a lot of resources to launch the drug success.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Richard Chin 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.

Thank you, ladies and gentlemen should be as patient as today's conference. This does conclude the program. You may now disconnect. Good day.