Welcome to the Fourth Quarter and Full Year 2019 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 be advised that today's conference is being recorded [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's, CEO, Richard Chin. Dr. Chin, please proceed.

Thank you, operator. Good afternoon and welcome to our year-end 2019 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our President and COO; Wendy Wee, our CFO; and Katja Buhrer, our VP of Corporate Development and Investor Relations. 2019 was an extremely successful year with two approvals, multiple positive pilot studies, the commencement of two pivotal studies, as well as the development of our Half-Life Extension technology. We're very proud of the progress we made last year. Today, we're very pleased to announce a transformative transaction on Mirataz. We have agreed to sell Mirataz to Dechra in exchange for $43 million upfront payment and global royalties. We're excited about this partnership which places Mirataz in the hands of a global leader in the veterinary industry. We anticipate that Mirataz growth will accelerate with this, and that we will stand to reap financial rewards from this great medication in the years to come. There was intense interest in the rights to Mirataz for multiple parties. The size of this transaction validates the value we're creating. Given that it costs us approximately $5 million to develop Mirataz, this will be an excellent return for us. Concurrent with this transaction, we will be reducing our commercial footprint. It has become clear that even with an excellent commercial organization with top people from industry, we just didn't have the scale necessary to maximize the potential for Mirataz. When we decided to launch Mirataz, we did it based on data. We had extensive market research data that indicated self-commercialization was the right decision. And while Mirataz has done extremely well, given the economics, we're now able to get for it, it made commercial sense to find a partner. We believe part of good management is the ability and…

Thank you, Richard. When Richard and I first discussed starting a company, developing innovative medicines for our pet family members, and a number of you on this call will recall me recounting this story, we agreed that biologics would need to be central to our approach. In fact, we were so convinced that biologics represented the future of veterinary medicine, that we waited nearly a decade to start KindredBio, until the cost of large molecules made sense for pet parents. With this clear vision that biologics would one day dominate pet therapeutics, we set about building the capabilities that would make us a leader in this technically rigorous field. We hired world-class protein engineers, responsible for some of the most successful human drugs approved, and built a state-of-the-art biologic manufacturing facility with virtually end-to-end capabilities, all the while securing two small molecule approvals to show the potential of our business model early on. And that is why I'm confident that prioritizing and accelerating our innovative biologics candidates, while transitioning to a more capital efficient model for commercialization will position us even more strongly for future success. Turning to Mirataz, as Richard said, we view today's announcement as further validation of the value we have created in this product and as a company. By commercializing this product, we have learned that a much larger infrastructure is needed to change practice patterns when a generic is on the market. That being said, our team has done an outstanding job given their resources. In the quarter, we’ve recorded Mirataz revenues of $1.3 million with market penetration reaching 55%, and the reorder rate among purchasing veterinary clinics growing to 71%. Average order size continued to grow quarter-over-quarter. Looking ahead, we are confident that Dechra is the right strategic fit to deliver results for Mirataz…

Thanks, Denise. The transition to a biologics only company that leverages the commercial capabilities of multinational partners to maximize product value, will result in a more capital efficient business model, with less reliance upon diluted sources. By focusing on our highest value biologics programs and realizing partnering capital, we expect to reduce operating expenditures and extend runway, through the launch of key biologics candidates. Proceeds from the sale of Mirataz to Dechra, together with the workforce and operational reduction announced today are expected to prolong runway through 2022, while maintaining a focus research engine. As Richard mentioned, we will remain in late stage discussions with a number of parties regarding the commercial partnership for our IL-31 antibody for atopic dermatitis. For 2020, we anticipate operating expenditures of $58 million to $61 million, which includes a one-time restructuring charge of approximately $1.7 million, and first quarter expenditures consistent with the full organizational structure. Excluding first quarter expenditures, the annualized run rate is expected to be between $54 million and $56 million this year. It is important to note here, that the success of our development model and lower than expected attrition rate, the continuation of small molecule candidates would have resulted in a much higher operating base. As part of the strategic realignment, we plan to eliminate approximately 53 positions, which primarily relate to the companion animal sales force, and research and development for small molecule programs. The associated restructuring charge of approximately $1.7 million includes severance, and the extended health care benefits in recognition of the current external environment. The reduction in workforce is expected to lower compensation and benefits costs by approximately $7.1 million annually. In the coming year, we intend to hire additional staff to enhance our biologics manufacturing capabilities, but still expect a net reduction in headcount,…

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

Thank you. [Operator Instructions]. And our first question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is now open.

Hi, thanks for taking my questions and congratulations on the announcement today. Could you just elaborate in terms of how are you thinking about taking these products that you have in the biologics pipeline through development? And what stage in development of these drugs will you seek partners versus develop them further? Just any color to help us think about that. And then maybe if you could just update us on -- I know we talked about them partnering with IL-31, but is this something that partners are looking to partner on IL-31 as well as SINK? Any color on how to think about that would be great.

Sure. Absolutely. So the partnering strategy will depend on the molecule, so it'll be molecule-by-molecule. There are some molecules such as the atopic dermatitis molecules, where the market is fully validated and there is a lot of interest even at an earlier stage. And then there are molecules where we anticipate the value maximization will be towards the later end of the development. So, our preference would be to partner later rather than earlier, because number one, it doesn't cost us very much to develop the molecule at least compared to the human industry. And number two, we've seen from Mirataz that the value could go up 10x or more once it's been derisked. So, it will be molecule by molecule. In terms of IL-31, there are certain partners who are interested primarily in IL-31. And then there are partners who are interested in a broader dermatitis franchise. So, we're having discussions on both types of partnerships.

Okay. Thanks so much. And maybe just one follow-up, if I may. How should we think about the investment in the Kansas facility going forward with regards to the partnership model? Would you be looking to manufacture products out of there? Should we think of bit of a CDMO-type business as well? Just any color there would be great.

Sure. So, we expect to manufacture most or all of our products from Kansas, because right now there is a shortage of manufacturing capacity. So, most of the partners we're talking to do not have the capacity to manufacture. Even if they have a human parent that has manufacturing capabilities, those are usually completely booked, so that's number one. And number two, we have been getting inbound inquiries about contract manufacturing in the Kansas plant. We don't have plans to expand capacity solely for contract manufacturing, but in areas where we have excess capacity and that's in the filling line in Kansas and some capacity in Mitten Road, we're certainly having discussions with those potential partners.

Right. Thank you very much.

Thank you. And our next question comes from the line of Jon Block with Stifel. Your line is now open.

Thanks, guys. Good afternoon. This first question maybe built on the prior questions. But, I think you talked about starting the pivotal for IL-31 in the back half of 2020. I think you said 2H '20. So Richard, now with the cash runway extended with the sale of Mirataz and you talked about the more favorable terms of further out you go, are you guys giving any thought on sort of waiting longer to secure a partnership until you have the IL-31 results, the pivotal results in hand in order to call it sort of maximize those terms? Just would love your thoughts there.

That's an excellent question. At one point, we were thinking maybe the terms on the veterinary side were not as favorable as on the human side, but it just turns out that you just have to wait a little bit longer before you can get those kinds of terms. So that is certainly something we're looking at. With our new model, it changes our burn rate and we would not rule that possibility out.

Okay. And then maybe just a pivot on Mirataz. I think you mentioned -- maybe I'll try to dig in a little bit into the agreement with Dechra. So I think you mentioned a royalty amount, does that royalty amount differ here in the U.S. versus Europe since it's a little bit more established here in the U.S.? And then the follow-on to that would just be, is it royalty and milestone or strictly royalty? Thanks for your time, guys.

Yes. So, it's strictly royalty, and the royalty does not differ. It's a global rate.

Would you want to ballpark for us what that rate may be?

I think we can say it’s low-double digits.

Low-double digits. Okay. Perfect. Thank you guys.

Thank you. And our next question comes from the line of Balaji Prasad with Barclays. Your line is now open.

Thank you. Good afternoon, everyone. And firstly, glad to see this focus evolving or narrow focus on biologics now, post these divestments and your pure play positioning. So that side, you just spoke about the royalty in Mirataz. Also I wanted to understand your timelines around the Equine subsidiary and what your thoughts are behind that? Thanks.

Sure. So, we're exploring that. I mean, we find the Equine space very interesting. It's almost a specialty area if you will. So we have a very talented small team, and we have an exciting pipeline as you know. So we will be sequestering all of that into the Equine franchise, and at the same time looking at whether to spin that out to stand on its own or to divest of those assets, and we'll work closely with our Equine team to make that determination.

Our second question, basically tying up your cash flows on your pipeline thoughts over 2020 and 2021. The way I see it right now, after the details you’ve provided, it looks like you have an OpEx plus CapEx of around $67 million and current cash is $74 million, you get $43 million more and $7 million of workforce reduction. So, if I back out all of this, I'm left with approximately $60 million of cash at the end of 2020, how would that be sufficient for 2021 and 2022? Is there something that I'm missing here?

I’ll let Wendy, take you through that calculation.

Well, yes, we have $73 million at the end of the year, and on top of that you add the $43 million. We’re reducing our operating expenditures to a run rate of roughly $54 million to $56 million. Included in there are depreciation expense. So, if you back out depreciation expense, you'll find that we should -- our cash would last us until the end of 2022.

Got it. Can you also kind of extrapolate this to what it would mean for your pipeline developments now? What is going to be a priority in 2020 and in 2022 ?

Yes. So, we will be advancing our atopic dermatitis candidate as well as parvovirus and Epo. And then the repositioning allows us to start moving ahead with some of the biologics that we had not been able to, and we will focus on validated commercial markets over less validated markets. So there are a handful of markets like pain, dry eye, and few others, where the commercial potential has been proven. And since we are queuing more closely to the human model, we think that will attract more partners. So, that's a decision that we'll be making over the coming couple of months.

Thank you. And our next question comes from the line of David Westenberg with Guggenheim Securities. Your line is now open.

So I think, Parvo now, I think you have the timeline of end of 2021. Is that the next major approval that you expect? And why did Parvo come so much faster than maybe some of the other compounds?

Sure. So, we expect the approval at the end of this year or early 2021. And the reason is, we have a very streamlined development program, because as you can imagine, Parvo is highly contagious. So the agency has agreed to laboratory studies. And so it's very confined, very controlled, we have control over the timeline. And so we believe, given how collaboratively we've been working with USDA, that we should see an approval by the end of this year or early next year, assuming that the studies are positive.

And then can you talk about your decision about wind partner? I think you just mentioned that you found in animal health, maybe you want to partner a little bit later. So yes, just any kind of color in terms of when we're looking at your on the market -- I mean, you're in development compounds because, right now, with the new business model, I mean, all these will likely be partnered. So I mean, are we going to be seeing the vast majority of your partnerships now after approval? Thank you.

It's going to depend on the molecule, on our capital requirement and the amount that partners are willing to pay at different stages. For certain indications like atopic dermatitis, or let's say pain, we think that the amount that partners are willing to pay earlier in the development program could be quite attractive, for certain other molecules, we may wait until later on. So as I said, our preference would be delay if we can, but having said that, part of our business model is to rely on upfront payments more going forward than additional financing where possible. So, it'll be a balance.

Okay. Thank you very much.

Thank you. And our next question comes from the line of RK with HC Wainwright. Your line is now open.

Thank you. Congratulations, Richard and Denise and Wendy. Thank you for giving me this time. Most of my questions have been asked, but a couple of them. Number one, as you think through the Equine business either as a separate entity or a divestiture. Are you going to start accounting for that business as a separate business in your financials? And would that happen either from the first quarter or second quarter of this year?

I'll answer and then Wendy can add to it. We eventually will. We haven't decided exactly when to fully segregate it.

So right now our financials do include Equine activity in it.

But right now there is -- we haven't moved assets into it. Yes, that's right. That's correct.

Thank you. Richard, and then you and I talked a little bit about your Half-Life Extension technology when you initially announced about this. Certainly, it's an exciting piece of technology that you and your team have developed. How do you plan to take that forward? And also, I would think the folks on the other side of the aisle in the human health business would be interested in this sort of technology. Do you see any interest there? And, do you want to make any commentary at all about this?

Sure. So we plan to incorporate this into much of our portfolio going forward, because almost every molecule we have can benefit from longer half-life or lower cost of goods. Both of those things give us a competitive advantage. So for the molecules we have in the pipeline already, we'll continue developing them. But for many of them, we'll have a follow-on molecule. And then for new molecules, we will likely incorporate the technology. In addition, other companies seem very, very interested in this and we think that there's licensing opportunity for the technology. Now turning to the human side, it's a very interesting question you asked, because on the human side, there are technologies that extend half-life and entire companies have been built solely on Half-Life Extension. We have developed our own technology, because the human technology does not work very well for other species, and that's why we've developed our own. So what I can say is it's a very valuable technology on the human side. It doesn't quite crossover across species.

Thank you. Thanks for taking my question.

Sure.

Thank you. And our next question comes from the line of Ben Haynor with Alliance Global. Your line is now open.

Good afternoon guys. Can you hear me?

We can.

Yes.

Excellent. So just first for me, was part of the reason to do the Mirataz deal to kind of set a marker saying, "Hey, look, we've got $43 million upfront plus worldwide royalties for it." And the atopic dermatitis market is at least, as you said, an order of magnitude larger, "Hey, how about a little something for the effort, give us in order of magnitude higher economics on some of these other programs that we're working on?

I don't think our thinking was directly that, but if you'd like to draw those conclusions, that's fine. But really, it's a business decision a difficult one. But clearly the scale of commercial efforts needed to maximize the potential for Mirataz was larger than what you could provide. So rather than spending more cash on pursuing that, we recognized that we needed to make a pivot. Now, having said that, once we started discussing terms, we realized what we said which is that for an asset that's approved, where there's market demand, companies are willing to pay.

Okay. That makes sense. And the questions that have already asked, maybe I did overthink that a little bit, and perhaps this next question, too, but with the statement you just made in that you're seeing companies that are willing to pay. But in getting rid of the commercial organization switching to the new model, do you worry that you have less leverage with would be partners? And you won't be able to say go pound sand will go commercialize it ourselves?

That is a possibility, but given how much interest there was. We had enough competitive tension among the bidders. So I don't think that's what's going to happen. If we only had one or two bidders then we might run into that situation. But when you have multiple, multiple bidders, they're really bidding against each other less than they are bidding against sales commercialization.

Okay. That's fair enough. And then lastly for the overthinking questions. What proportion of the economics do you think was attributable to the package inserts accolades that you've gotten with Mirataz? Was it half, two-thirds? What do you think there?

Oh, I love this question. For those of you on the phone who have no idea what this is about, at our last conference, there was a regulatory discussion at western veterinary conference and Mirataz was used as an example of an excellent package insert. And I think, right there, I mean, that's just a testament to our team. And we have an outstanding team, they made an incredible footprint for Mirataz. And as Richard said, I mean, this was a gut-wrenching decision because we've hired the best talent and they were entrepreneurial folks. And unfortunately, we just couldn't quite sustain it at this point. But yes, thank you for that question.

And you know, I want to echo that the package insert, promotional material, our logistics, our outside and inside sales reps, our reps who handled the corporate accounts, executed perfectly, all executed perfectly. So it was a fantastic team doing a fantastic job, which made this decision difficult. So it really comes down to scale and the amount of capital that is available to absorb the initial cost.

Thank you. And our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open.

Good afternoon. I was just curious, I have a sense that Denise's primary role has related to the commercial side of the business. Do you guys envision her role evolving under the new approach?

I don't think so. I mean, my role spans clinical development, regulatory, commercial manufacturing, all of the operations. So yes, there's plenty. We have an outstanding team that supports me. I've hired exceptional leaders, which is why I think the scope of my responsibility has been able to be so great. But we will be focusing now, certainly, on the biologics, the Equine subsidiary of which, there is still a commercial team certainly, as well as business development. So there's quite a bit to do.

Should go from wearing four hats to three.

As you think about the discontinued efforts with the small molecules, do you see any opportunity to harvest any value there? Or are you just going to shut everything down?

Oh, no. We will look into out licensing those molecules, many of those are very promising. And if we didn't have the top priority molecules that we're focusing on, those will be excellent candidate.

Thank you. And our next question comes from the line of Nathan Weinstein with Aegis Capital. Your line is now open.

Hey guys, congrats on the news and thanks for taking my question. Just firstly, broad-based macro question on current events with COVID. Any anecdotal comments on what you're seeing from the vet channel in terms of traffic. And then if you could secondly, give us an update or remind us what the most recent update was on epoCat? And then finally, with Dechra, do you have a system in place just to make sure that there's no supply interruptions on Mirataz in the channel?

Sure. So I'll take all of those Nathan. So for COVID, we haven't seen any disruption just yet. However, we are preparing that it may impact some of our clinical trial enrollment, and certainly, potentially some temporary sales with owners sequestering and not going to the vet as often. So we hope that short-lived, but we are preparing for that certainly. On epoCat, I think your question was around timeline, we are enrolling in the pivotal study. As we said, we expect that to take about 18 months, so we'll continue to give any updates, if there are any. And then as far as channel disruption, I could tell you that Dechra has been exceptional. Our teams have been working together. We are way ahead of the curve, so we really don't anticipate any issues. Not to mention, our CMO has been terrific, in working with both companies to make sure that's the case.

Thanks so much. I appreciate it.

Sure.

Thank you. And there are no further questions at this time. I would now like to turn the call back to Dr. Richard Chin, CEO for any further remarks.

Thank you, operator. I'd like to thank our listeners for your support as we continue to advance the promising pipeline and execute on the strategy, we laid out today. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.