Elanco Animal Health Inc Q3 FY2020 Earnings Call

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. 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 operating expenses. The epoCat and the IBD studies continue to enroll, and we expect the IBD 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 a 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 operating expenses by 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 burn rate. 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, focused 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, decreased general and administrative expenses, and refocused 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 the 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 realize 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 the three and nine months periods, 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 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 months 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 operating expenses 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 catalysts 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 pilot 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.

And your first question comes from Jon Block with Stifel.

Hi, this is Trevor standing in for Jon. Thank you for the questions. To start, could you provide some insight into the interest you've received from potential partners regarding the parvovirus asset? Will this be a global agreement, or can you share any additional details? 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 for 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 the prophylaxis and the treatment indications and for worldwide rights.

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.

We haven't disclosed the specifics of the study design, but we expect it to be similar to other antibodies currently available in the market. When going to the USDA, they tend to adhere closely to existing precedents. Regarding the timing, we previously mentioned that studies like the IL-31 study usually take about 12 months. However, we are uncertain about how COVID might affect the enrollment rate, so we won't be able to provide definitive timelines until we have at least two or three months of enrollment data.

Great. Thank you.

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

Good afternoon, everyone. I appreciate you taking my questions. I am curious about the progress of the first parvovirus submission. Additionally, regarding the decision to pursue both indications for parvovirus, could you share the thought process behind that? Was it aimed at expanding the market? Will the doses differ? Is it mainly to attract potential partners and increase interest in having both indications? Any insights you could provide would be very helpful.

Yeah. Sure. The submission is coming along very well. So, the team has already been 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 it from an indirect exposure. 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 the number of animals, but probably smaller or has less serious of medical unmet needs because they have not developed a disease yet. However, there are two distinct unmet medical needs, and you can’t 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 would think that many of them would be used off-label if approved for one or the other. But I guess it makes sense to pursue both options.

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 into both indications, but you're right. Getting it approved for either indication would probably be beneficial for both.

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

Sure.

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

Hi. Thank you for taking my question. A recent competitor has launched a product targeting hunger in cats. I understand it's currently just a royalty stream, but this royalty could be beneficial given our cash burn. How should we view the differences in that launch compared to our competitive launch in 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; 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 competitive arena plays out.

Got it. Thank you. Moving on to IL 13, KIND-016, it seems to be slightly delayed. I believe your estimate was 12 to 18 months, which was on the higher end. Do you still expect to be the second to market? If you are third, does it make a significant difference if the second product is a JAK inhibitor compared to another monoclonal antibody?

We are not fully aware of all the products being developed, but among those we do know for atopic dermatitis, we believe we are still in the lead and expect to be the next product to reach the market. We think that antibodies will dominate the market. Therefore, we are not overly concerned about additional JAK inhibitors entering the market compared to other possible biologics. If COVID slows down, our study will similarly affect ongoing studies, but we don’t believe this will alter the approval order for the drugs in the pipeline. Currently, we feel we have a significant lead over other potential products for this condition.

Thank you. I have a housekeeping question regarding the burn rate over the past four or eight quarters. With a $10 million burn, that amounts to $80 million, and considering you have $67 million in cash, does this imply an assumption for a contribution of $13 million from royalties and contract manufacturing? Am I correct in that assumption? How should we think about that cash burn? 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.

And your next question comes from Swayampakula Ramakanth with H.C. Wainwright.

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

Hi, RK.

Hi. I understand that most of the questions about KIND that I've been asked are related to the support work you've been doing over the past year. Can you provide an update on the current status of the studies? Additionally, how has COVID-19 affected the study and its execution? Please give some insights on this.

The study is still enrolling, and we were aware that it would be a slow process because, unlike conditions like atopic dermatitis where the disease is easy for owners to identify, anemia requires a lot of testing. We always expected the enrollment to be slow. COVID has significantly impacted the enrollment rate, but it has improved somewhat as veterinary clinics have reopened. However, we believe it will still take a long time. This program is also a lower priority compared to some others, so we are not allocating as many resources to it as we are to the atopic dermatitis program, especially since we are managing our operating expenses carefully. Overall, it is progressing, but at a slow pace.

Thanks for that update. Regarding the equine business, can you share the current status of the strategic options you are exploring? How close are you to reaching a decision? Is the process also being affected by COVID-19, contributing to the delays?

Yeah. So, it's been indirectly impacted. I wouldn't say COVID is 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 shut down, it's hard to estimate what the true value of Zimeta, for example, what the sales would be if this were under normal circumstances. But it has 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 advance our promising pipeline.

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