Welcome to the Third 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] Please be advised that today's conference 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 third 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. As we stated in our press release, our revenue was $1.1 million in the third quarter, while this is lower than we expected. I should note that quarterly revenues reflect ongoing variability in the distributor ordering patterns, which are the norm in industry. Sales from the distributors to clinics grew strongly meaning customer demand for Mirataz continues to grow, which is an important metric and that is more accurately reflects true demand. As Denise will outline, other key metrics continue to look favorable for Mirataz. We are very excited about the anticipated upcoming approval for Mirataz in the EU, given the positive opinion from the CVMP. Europe is the second largest market for veterinary therapeutics globally. For Mirataz, we believe European sales may exceeded its sales in the US and uptake could be swifter, because in the EU veterinarians are usually prohibited from using human generic if there's an approved veterinary drug with the same active ingredient We are in active discussions with multiple partners about EU rights to Mirataz. We also continue to be on track for Zimeta approval in the US by end of this month. Regarding IL-31, we are in the process of scaling up the manufacturing process. As you know, often you need to make changes to the process during scale up and this is taking a bit longer than we expected. So that's going to push back the timeline for the initiation of the pivotal study in 2020. The good news is that we have found some potential…

Thank you, Richard. On today's call, I will detail Mirataz quarterly performance and provide some key pipeline updates. Our third quarter sales in Mirataz to distributors or our move-in reflects several factors including ongoing fluctuations in distributor ordering patterns. Our revenues declined slightly on a sequential basis this quarter. While we would have liked to see more move-ins in this quarter, we are encouraged by the 20% growth in sales from distributors to the clinic or move out over the same period which underscores growing customer demand for Mirataz. Consistent with what we've shared in our prior quarters, our commercial strategies are having the desired effect of driving conversion from all human generic mirtazapine pills. Based on the data we track not only have we taken market share from the human generic pill US off label as you'd expect, but we've also grown the category by expanding medication usage on cats that previously received nothing for their unintended weight loss. Having said this, the rate of change in practice behavior remains slower than we originally anticipated. This means that instead of an accelerated ramp to peak sales, what we've seen to date is consistent with a more normalized ramp for a feline product of five to six years. I'm pleased to report that over half of all veterinary clinics in the US have now ordered Mirataz, and the rate of clinic growth continues to show positive momentum with around 100 new clinics being added each week. This metric alongside first year sales position Mirataz ahead of other successful feline drugs at an equivalent stage of launch. As we've noted in the press release, the reorder rate among participating clinics grew to 68% in this quarter, given continued solid gains and market penetration this figure understates the reorder rate among early…

Thanks Denise. I will begin with an overview of our financial performance for the third quarter and the first nine months of 2019 before providing an update on our capital position and expectations moving forward. For the quarter ended September 30th, we reported a net loss of $15.3 million, or $0.39 per share, as compared to a net loss of $13 million, or $0.39 per share for the same quarter in 2018. For the first nine months of the year, the net loss was $45.7 million or $1.18 per share versus a net loss of $34.2 million or $1.14 per share for the year ago period. As Denise mentioned, we recorded $1.1 million in net revenues for Mirataz for the third quarter, up from $0.6 million in the year ago quarter. Revenues total $2.9 million in the first nine months of 2019. Turning to our expenses, the cost of product sales totaled $0.1 million in the third quarter and $0.4 million for the first nine months in 2019, resulting in a gross margin of 87% and 86%, respectively. Total research and development expenses increased year-over-year primarily due to higher headcount and related expenses as we advance our biologics programs. For the three and nine months ended September 30th, R&D expenses totaled $7.3 million and $21.2 million respectively compared to $7.5 million and $18.6 million for the same periods in 2018. Stock based compensation expense included in R&D expense was $0.5 million and $1.4 million for the three and nine months period compared to $0.4 million and $1.3 million for the corresponding periods in 2018. Higher selling, general and administrative expenses reflect the commercial launch of Mirataz and commissioning about Kansas manufacturing facility, which I'm pleased to say was completed on schedule and on budget. SG&A totaled of $9.4 million and…

Thank you, Wendy. Operator, we're ready for questions.

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

Hi, thanks for taking my questions. And congratulations on the progress during the quarter. And Firstly, can you provide some color on the growth that you saw in the quarter driven by your partnership with Equine and other retailers? And then secondly on parvo product. In the data readout on the pivotal, will this include prophylactically treated dogs as well as those treated after contracting the infection? And if it doesn't include prophylactically treated, can you help us think how this becomes something that is given a standard of care to a lot of dogs prophylactically. Thank you.

Sure, I'll take the second question and then I'll turn it over to Denise. So we do plan to run the studies for both prophylaxis and treatment, and we're talking to the USDA currently. And if it works, the way it would play out is that typically when one dog in a litter, let's say, comes down with parvoviruses than that puppy, in fact, all the litter makes. So ideally, what would happen is that the litter mates who would get our antibody before they come down with the infection. Similarly, if a dog in a shelter comes down with parvoviruses, there's high likelihood that the other dogs in the shelter would have been exposed. So a lot of those dogs ideally would get our drug as well.

Okay, and then regarding Equine and e-retailers, I mean we are seeing orders coming consistently. And so I think similar to what we're seeing on the clinic side we will start to see that growth really take hold, but we are we are pleased with what we're seeing and where it's headed.

Thank you. Our next question comes from Jon Block from Stifel. Your line is open.

Hi, this is Tom on for Jon, thanks for taking my questions. I guess a couple on Mirataz to start off. Can you talk specifically about how your initiatives are going and getting the hospitals off the generic mirtazapine over to Mirataz? And then do you know approximately what percent of accounts whether using Mirataz are still using the generic?

So yes, so we - I mean the initiatives are definitely working. I mean part of the challenge for us is manpower, women power, quite frankly. So the more we're able to get into a clinic touch a clinic the more changes we see and more rapidly. So the initiatives are definitely working for the clinics that we can go into multiple times. And, we've got a lot of really nice metrics on that as far as when a sales rep has been able to be into a clinic multiple times, we see the average dollar per order increasing, and as well as the dollar for the whole clinic increasing, which I'm sure is pretty obvious. So we haven't disclosed the exact percentage. It's hard to know how many clinics across the country are still stocking Mirataz. The human genetic mirtazapine rather the human generic off label. But we definitely believe we've made some significant strides in conversion.

Got it. That's helpful. And then just a quick one on IL-31. Is there any more color you can provide around the timing of when you expect to initiate the pivotal study? Thanks.

Right now, we are not providing that because process development during scale up can vary quite a bit.

Our next question comes from Balaji Prasad from Barclays. Your line is open.

Thanks for taking the questions. I had a couple of questions both on a small molecule side and on the biologics. On Mirataz, could I have a sense of the, what the reorder rate was and you had reached out around kind of 46% vets last quarter and that number was 51% now. So is this the kind of ramp phase that we should be building into going into 2020?

Yes. And I think that ramp is, I mean given the size of our salesforce, I think it's an appropriate, I mean we're pleased -we, in the first four full quarters of selling Mirataz, we sold over $4 million. I mean that positions us really nicely to potentially surpass any successful feline therapeutic that's on the market. So from a ramp perspective while we had hoped based on our market research and those even if some of our analysts to see a quicker ramp to peak sales. I think what we're going to end up seeing is a traditional feline ramp of five to six years. And as far as penetration and reorder rate, I mean we looked at a cohort intentionally some of our investors that said what about the cohort of people who were early adopters. What does that look like and so while we have a reorder rate of 68% across the board; it's closer to 75% in those who first purchase the product in 2018. So that's telling us that those who are trying it early are still using it. Ad so we're not just dependent on new clinics to drive the move out. And it also shows us that we're developing users and moving them through the sales funnel into driving behavior change.

Thanks, that's helpful. Maybe one more quick question on Mirataz before I change subject. So there are a few moving parts now you are expecting May approval and also traction Canada. So if a couple of different rates with move-in and move-out, so combining all of these and then your online campaigns, how should we think about Mirataz for next year? Some numbers would help here.

So well we're not giving specific revenue guidance. I think what you typically see is somewhere around 10% of peak sales potential in the first year, something more like 20% in the second year and so on and so on. And as you've seen in animal health, I mean a lot of times the volume traction build in a little bit more of a hockey stick trajectory. So it might not be a straight ramp, but I think at this point we're pleased with kind of where we've been in the first year. As it looks in guessing our trajectory moving forward. So I think that you can be pretty comfortable that we'll be in a very attractive range for a feline product.

Okay. So moving on to the biologic side, I think in our past conversations we gathered that the atopic dermatitis products is the first one that you want - you would likely to get on to the market. Is that still the case now with the delay to the pivotal study?

Even previously I think the last call we talked about parvo virus having a potentially fast approval path. So we now think parvovirus is likely to be the first biologic on the market. So we're talking probably end of 2020 early 2021. So regardless of -

For parvovirus

Yes. Whether there is delay to IL-31 or not I think parvo is likely to be the first.

Okay, that's helpful. And next would be epoCat.

Really depends on the enrollment rate. So right now I don't think we can say for sure which would be the second. I think what would be fair to say still have multiple approvals between let say end of 2020 and 2022. So a lot of products launching in few years.

Got it. And final quick question from me then I'll jump back into queue. On the biologic study, have you any other developments towards newer contracts and when will you start reporting revenues from the NCI contract?

Sure. So we have been discussing different projects with both NCI as well as commercial partners. And we hope to have some revenues over the next several months, but I think it's too early to tell for sure right now.

Okay. Too early to tell regarding newer contracts or regarding revenues from the NCI contract?

For both.

Our next question comes from Nathan Weinstein from Aegis Capital. Your line is open.

Hey, guys. Thanks for taking my question. If I could just start with asking about sales through the e-retailers that distribution channel versus going through a veterinary. Is there margin differential between those channels from your perspective?

The margins to e-retailers will be slightly higher than margins to our distributors. Is that answer your question?

Okay. Thanks. Yes. I understand and that is helpful. And then just my second question on the anti TNF antibody for IBD in canines, just the competing priorities for drug supply manufacturing. Can you just give a little color? I know you also you mentioned this already but what are those competing drugs that are taking priority?

Sure. The two main drugs that are our top priority are parvovirus and IL-31. And because we're a small company we have to allocate resources among different project. So but we'll be done with that program.

Okay, thanks. I actually just have one more question and there were some moving pieces around the timelines in the pipeline. And then with the Mirataz ramp taking a bit of time. Just curious if we think about peak sales for a number of these indications. If any of these timeline shifts change your perspective about what the peak could be for each of these indications?

I don't think the peak sales have materially changed for our products.

Our next question comes from RK from HP Wainwright. Your line is open.

Thank you. Thanks for taking my questions. So was 32% of - 32% of the distributors that have not done reorders that you talk. So what do you think is the -sorry for the 32% of the veterinary clinics that are not placing the reorders? What do you think is or the factors there? I'm just trying to understand what additional things you would need to be doing so that you can make sure that nearly all of the veterinary clinics that have taken in an order will place a reorder as well.

Sure. Yes, that's a good question. So really, it's a rolling, clinics are coming on. We're bringing on 100 new clinics a day. So some of that is just based on a week rather a day. I am sorry. I just got flags from across to realize, wish you were 100 clinics a day, 100 a week which is still impressive. So, yes, 100 new clinics a week. We've got folks who haven't had an opportunity to reorder yet. And as I mentioned earlier too, some of it is really just getting it in the veterinarians’ hands because we've had zero returns, the testimonials have been really truly exceptional. And one of the other things that we did that I didn't mention is at the American Academy of Feline Practitioners last week, we did a sampling program. So we find that once we sample them on a tube and they get it in their hands and they try it as opposed to using the human generic pill off-label, we often see adoption. So the way I look at this and as I said earlier, I mean there is a lot of upside opportunity still for this product. We had really expected the ramp to be faster than it is. However, I think if you look at us and map us out on a traditional five to six year animal health ramp; it's still a very attractive product.

Okay. I know you stated that is a 20% increase in outflow of drugs to the rest compared to the second quarter and that certainly looks encouraging. But what's making them, when I say them, intention is not to pull in more drug from you, if they are actually selling more drug to the veterinary clinics.

Some of it is dependent upon, we've seen a little bit of lumpiness based on year-end. So for example, one of our largest distributors this quarter was their fiscal year end. And so they ran inventory quite low. So we will see, I mean based on distributor ordering patterns there will be some up and down. And I think as we look at it on a yearly basis, we're starting to see some trends across an entire year, but quarter-to-quarter there is still some lumpiness based on distribution. And it really just depends, some of them have minimums that they keep on the shelves and that varies from distributors to distributor. But move out which again is from the distributor to the clinic is really the metric that we look at internally. Because to us that says veterinarians are still either adopting additional product or they're trying it as the first time. And when we see those numbers grow that makes us encouraged about the future upside opportunity for the brand.

Yes. But your accounting number is basically what you put into the hands of the distributors, correct?

Absolutely. That's how we book our revenues. That's correct. So you will see some lumpiness I think quarter-over-quarter. Ideally, we'd like to get on a normalized ramp that would be the ideal. So we can very easily with very simple math track trajectory, but I think what we're seeing in this industry is some, again some lumpiness.

Okay. In general, what is that you've learned running the commercial structure here in the US for almost a year and half especially when you start thinking about how to have a conversation with a new partner assuming that the way drug gets commercialized in the Europe is the same as in the US? I'm not sure if there any- anything different there, if there are none what are the things that you have learned that you want to make sure your counterpart on the other side will do the right job.

That's an interesting question. So for us, I mean as we look at a partner, obviously, we look at the footprint. And their ability to sell into the various regions. There are some advantages to Europe. Once a product is approved, you can no longer use that active ingredient in an off-label sense. So that I think helps as far as immediate uptake of the product, which is attractive for Europe. There's no question about that.

Okay. Regarding the biologic, sorry, regarding the -I think is the MCI relationship, is there something, is there anything more color can you give us to like when you would know about the regulatory pieces that you're supposed to get a clarity on. And I'm just trying to understand where you are in the process and how soon can things get started there?

Sure. We are hoping to get our first work order in the next few months. We're discussing the work order with MCI, but at this point it's too early to tell because until the decision comes out, we don't know.

Our next question comes from Brooks O'Neil from Lake Street Capital. Your line is open.

Hi. Good afternoon. I have a few too. So I guess to start with sounded like 10% of peak sales in year one for Mirataz potentially going to 20% of peak next year. I assume that means you think the product could conceivably grow a 100% year-over-year in 2020. Am I thinking about that the way you guys are thinking about that?

I think that's a possibility. I mean again we're not giving any guidance but if you look at successful products and kind of how they've ramped across animal health, that's a general. Obviously, they can go in a lot of different directions but just - I just wanted to provide some context of kind of where we were after four full quarters for a feline product. And again I mean we're pleased and we believe that the peak sale potential for this product is still very attractive.

Great. So second question I had as you mentioned potential partnerships both with Mirataz in the EU and with IL-31. Can you just give us a sense for what you would look for in terms of an attractive partnership proposal for each of those compounds?

Sure. So for Mirataz, we're looking at a fairly simple structure, some sort of upfront and royalties. It's -the drug that almost approved and we have data in United States in terms of sales so I think that would be a fairly straightforward discussion. For IL-31, there are several different options that we're looking at, but most likely it'll consists of some upfront and milestone payment along with royalties along the way. There are a few things that we're negotiating on such as co-promotion rights and few other things, but ultimately for both of these, what's kind of drive the decision is really the value, the economics. So those two structures that outlined is the most likely scenario, but if something else makes more sense economically then we would certainly consider it.

Sure. All that makes sense. I know it's probably a very indefinite situation but any sense of timelines, do you think with the pending approval in the EU that might be something we'd see either late this year or early next or what are you thinking now?

I think for both of these products that timeline is very feasible, but once again the negotiations can sometimes take a lot longer or a lot shorter than you expect. So I don't want to put a definite timeline out there.

I understand that. That makes total sense. Richard perhaps or Denise could you talk just a little bit about the seasonality you expect for Zimeta? I'm excited that product is about to get approved. What would you anticipate? How would you think the sales of that product might progress throughout the year?

Sure. So I think one thing that we can expect and we're anticipating approval at the end of this year. We know that with an AAEP the American Association of Equine Practitioner coming up that is right-it's certainly the biggest conference in the US and quite frankly a worldwide conference and a lot of ordering is done at that. And even more so than what we see in small animal oftentimes they'll order for six months and but from a fever perspective, I mean there will be different fluctuations depending upon the time of year whether it's seasonal fever or shipping fever based on sort of circuit timeline. So there will be some and as we launch, we will try to give some color around that and certainly obviously if we learn anything or anticipate anything we'll try to guide toward that seasonality.

Make sense and I think if I recall correctly you were thinking of salesforce in the five, six, seven professionals’ range that still what you think will be optimal for maximizing revenue from that product?

We do. We have said three to five folks and obviously they're supported by the commercial infrastructure we have in place. So we have some folks on board who have become incredible feline product sales folks in the interim, but really for equine it's exciting to us because the staff we have, we have a lot of top-notch equine industry folks on our team. And I'm not exaggerating when I say we really know the field. And obviously with the manufacturing timeline for dipyrone, the approval timeline we've had time to really engage these folks. So this will be a launch that we can do judiciously from a spend perspective with a small number of resources. And then of course our distributors also some of whom have discreet equine sales forces will support the launch as well.

Sure. That's great. Okay last question for me. I think Richard you talked a little bit about using the chemist manufacturing facility for human biologics. Do you see any different requirements on the human side than you would anticipate as you shift utilization of that facility or to the pet side?

Now the chemist's facility was built to meet the requirements of USDA, FDA and EMA. So it's fully compliant for all three regulatory agencies. And fully compliant with all human regulations.

Our next question comes from Ben Haynor from Alliance Global Partners. Your line is open.

Good afternoon, guys. Thanks for taking the questions. I just wanted to follow up on a couple of questions that were asked earlier. First off regarding the out licensing negotiations for the atopic dermatitis compound or compounds whether you're going to do it piecemeal or all to one potential partner. Seems obviously was the way this reporting is some pretty impressive numbers every time they report on their dermatology franchises. Does that - have you seen generate more urgency from the potential partners and do you gain anything by wait and seeing the market get bigger and bigger as time goes on?

That's an excellent question, Ben. Yes, as the revenues for Cytopoint continue to grow, we have seen increase in the interest on the part of our potential partners. So this is a sort of a judgment call right. Do we take what's available now or do we wait and take potentially more of the economics later? And so that's something that we're discussing internally.

Okay. That makes sense. And then just thinking about the cohorts of ordering. And who's reordered and who hasn't, have you noticed any commonalities between the ones that have not reordered? I mean is it older vets versus younger vets? One of them reorders more. Is it larger initial order or smaller initial orders? Is it guys who only and gals will only use human Mirtazapine off-label or ones that use maybe that and some of the other drugs that they sometimes use off-label for in appetence or anything common that you've seen there?

I was just going to say, yes, to all of your - but what I mean, one of the things that stands out is a lot of times for a first order they'll order the product and then they seem to wait for the perfect candidate to walk through the door. So sometimes it sits on the shelf for a little bit longer than we would expect. And then once they start using it then we see the reorder. And it does tie back to again having the resources to be in the clinic and saying Dr. Smith, I noticed that you ordered a month ago. Have you tried the product? How is it going? Let's see some of your cases that sort of thing. So probably predominantly it's ordering and then waiting for the perfect case. We haven't had to my knowledge any sites who have said we've ordered your product; we don't like it or the owner doesn't like it. So we do think reorders will continue to grow and as I said in that early cohort, we're really pleased to see that the early adopters are still using it, which I think is encouraging.

Okay. That's helpful and then lastly for me just, sure sounds like with the parvo that the safety, the sizing of the trial for safety is going to need to be larger than for efficacy based upon the early results that you had. Can you talk a little bit about what the trial design on that might look like?

So I think the cohort is going to be larger mostly because we can show efficacy with such small numbers. I don't think we've disclosed the design of the study at this point. We'll probably wait on disclosing that until we have the final agreement from the USDA. The protocol is being reviewed by the USDA right now. So I think we should wait just a little bit longer.

Thank you. And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Dr. Richard Chen, CEO for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.