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Kindred Biosciences (NASDAQ:KIN)
Q1 2020 Earnings Call
May 07, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the first-quarter 2020 financial results conference call and webcast for Kindred Biosciences. [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 Kindred Bio's CEO, Richard Chin.

Dr. Chin, please proceed.

Richard Chin -- Chief Executive Officer

Thank you, operator. Good afternoon, and welcome to our first-quarter 2020 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. In the midst of the COVID-19 crisis, we hope that our listeners are all safe.

It is a difficult time for all of our communities, and it's time for all of us to pull together. I'm happy to report that so far, our team at KindredBio has been healthy. And while there has been some impact on our business, we are fortunate to operate in a market that has been resilient to past economic downturns, and we have weathered the storm so far. In fact, we had a successful first quarter.

Of note, we announced that we had positive pilot study results for SINK. SINK blocks IL-13 and IL-4, which are very important in the biologic dermatitis, its human analog, dupilumab is a very successful molecule approved for atopic dermatitis in people. If we step back, it's really remarkable that we have had eight positive pilot studies in a row. I don't know of any other company that has a track record like that, and I think it speaks to the quality of the work we're doing in development.

We also closed the $43 million transaction for Mirataz, plus ongoing royalties. As we mentioned on our last call, the size of that transaction validates the value we're building. That figure is significantly higher than our expectations and represents a very attractive ROI. Unfortunately, in the first quarter, we had to make some difficult decisions.

Following the Mirataz transaction, we downsized the organization, which was gut-wrenching, given the world-class commercial organization we've built and the dedication of those employees. We ultimately did not succeed in our commercialization endeavor, and just as we highlight our achievements, we have to acknowledge our failures. We misjudged the size of a sales force that would be necessary to maximize Mirataz's value. However, the mark of a strong leadership team is the willingness to recognize the mistakes, pivot and turn a failure into a success.

We believe we've done that with Mirataz. In addition, when we have more successes than expected as is the case with our pipeline, we also have to respond to that. As we announced last quarter, we have decided to focus on biologics for dogs and cats because with a string of positive study readouts and no natural attrition, we did not have the resources to advance all of our promising programs. We chose biologics, of course, because of the market size and the strong competitive advantage we believe we have in that space.

We have a significant head start on many of our programs. We have end-to-end capabilities, including our manufacturing plant and we have intellectual property on technologies like half-life extension and Fc modification that will make it hard or even impossible for our competitors to do what we're doing. For example, we believe it will be very difficult for our competitors to manufacture some of the canine antibodies economically unless they license our technology. Now turning to dermatitis.

We have multiple promising candidates. And after internal assessment, we have decided to prioritize our IL-4 antibody over SINK at this point given how promising IL-4R is and how well it's progressing. Both Il-4R and SINK look very promising, but we have to prioritize one or the other. I should also note that the IL-4 program is also way ahead of schedule and has moved faster than we had expected, thanks to our team.

It's also worthwhile noting that given our partnership focused commercialization strategy and consistent with the interest we've seen in our dermatitis pipeline, SINK could still advance should partners want to absorb the development cost. We are continuing to also prioritize our IL-31 and parvovirus programs. We continue to expect initiation of the IL-31 pivotal study this year, and the parvovirus antibody program is on track. As we said on our last call, we anticipate that we will continue to look for larger commercial partners for our products going forward and heed more closely to the human biotech model, where smaller companies partner with larger companies for the majority of drugs.

It's a successful validated model that we expect to replicate. The discussions with potential partners have been proceeding exceedingly well. There's a lot of interest in our pipeline and in our manufacturing capabilities. Specifically, as you are aware, we have been in extensive discussions with potential partners on our IL-31 antibody.

We have attractive transaction terms right now on the molecule, and we are in the process of weighing the pros and cons of partnering now versus later. As we've learned from Mirataz, the value of the product candidate is much higher if the partnership is signed later in the development as compared to earlier. I know this process has been taking a long time, but we would much rather do the right deal even if it takes longer. For the equine molecules, we expect that we will come to a decision on the strategic options for that franchise by early July.

Turning to the financials. Wendy will discuss in more detail, but the restructuring last quarter did result in a onetime charge. Excluding our onetime charges, we will achieve our goal of turning opex around this year. We are committed to substantially reducing our cash expenditures even further next year, especially since we decreased spending on the commercial infrastructure.

Given the business model we have, we have the unique ability to be granular on spend and adapt to different market environments as needed. So to summarize, we have validated that we can monetize our assets on attractive terms and that there is strong demand for our innovative products, particularly after they have been derisked. We have a number of programs that we expect could have in order of magnitude greater commercial potential than Mirataz, and we're within one to three years of approval on those candidates. We now, however, have eight programs in a row that have achieved proof-of-concept in pilot studies.

We are in the fortunate position of having more products in our pipeline that we can pursue. So we're prioritizing those that are the most promising. We have an exceptional team that has proven that we can execute with two U.S. approvals and an EU approval.

The veterinary market has been resilient to prior economic challenges. And with the uptick in pet adoption rates more recently and ongoing trend toward humanization of pets, we believe the long-term fundamentals for this industry remain strong. We look forward to another successful year. With that, let me turn the call over to Denise.

Denise Bevers -- President and Chief Operating Officer

Thank you, Richard. We are pleased to update you on both our first-quarter progress and the strategic realignment we unveiled in mid-March. As you know, the sale of Mirataz was completed within a month of announcement, which is a testament to Dechra's commitment to the product and desire to promptly begin marketing in the U.S. and Europe.

Given record sales from distributors to veterinary clinics in the first quarter, we are confident Mirataz is on track to be a successful product in the hands of Dechra's expansive commercial infrastructure. With the sale now finalized and strategic evaluation of the equine franchise advancing, our R&D team is fully dedicated to our promising biologics pipeline, which is where we believe we can create the most value and have the clearest competitive advantage. While our other biologic programs progressed as planned in the first quarter, as a result of COVID-19, we have since observed some disruption to our ongoing field studies. A number of veterinary clinics are not conducting clinical trials, which affects our studies for non-regenerative anemia and inflammatory bowel disease.

As a result, we are accelerating training of new sites that remain operational, all the while taking the necessary precautions to protect the safety of study participants, clinical trial staff and employees. Additionally, we are actively implementing practices consistent with guidance from FDA on studies conducted during COVID-19 to minimize the impact on time lines. This could include activities such as less frequent monitoring of patients, virtual study visits and in-home clinical services. Other than the delay to clinical trials, there has been little impact from COVID-19 on our operations more broadly.

Because much of our workforce already works remotely, we are well equipped from an IT and system standpoint for the current operating environment, so it's largely been business as usual. We are considered to be an essential business, so our manufacturing facilities remain fully operational, which is the benefit of in-house capabilities in this current climate. Of course, employee safety is paramount. And for roles such as manufacturing that require employees to be on site, we have instituted practices to minimize risk, including social distancing procedures, more frequent and thorough cleaning and other such practices.

Turning to our biologics pipeline. There have otherwise been no changes to the stated time lines since our fourth-quarter update. Beginning with our K9 atopic dermatitis program, the scale-up process is proceeding as planned for our IL-31 program, and we are on track to start the pivotal effectiveness study in the second half of this year. As Richard mentioned, we saw positive results from the pilot efficacy study of our IL-4/13 SINK program.

For our IL-4R program, having unveiled positive results from the laboratory pilot study in December, a second pilot study to further assess efficacy and dosing is planned to commence shortly. The IL-4R program is advancing ahead of schedule and is being prioritized ahead of SINK. We expect to develop multiple products for industry to take advantage of heterogeneity among patients, rotation between different drug classes and the potential for combination therapy. As I discussed earlier, our programs for the control of nonregenerative anemia in cats and inflammatory bowel disease in dogs have been impacted by COVID-19.

Consequently, completion of the pilot field effectiveness study for our IBD program is now expected to extend beyond the first half of 2020. We are implementing practices to minimize the impact on time lines, and we'll provide an update with the second-quarter results. Finally, we are thrilled to be nearing our first biologic approval. Pivotal studies for our parvovirus program are expected to be completed in 2020 with the approval time line unchanged.

Now turning to Mirataz. Net product revenues totaled $0.6 million in the first three months of the year, reflecting limited distributor stocking during the Mirataz sale negotiation. Sales of Mirataz from distributors to veterinary clinics reached a record $1.6 million in the quarter, underscoring continued growth in customer adoption. Looking ahead, Dechra plans to launch Mirataz in the U.K.

and the European Union and intends to conduct the necessary regulatory activities to achieve approvals in other key international markets. With the sale completed in mid-April, royalties on future global sales of Mirataz by Dechra will be recorded by KindredBio as revenue. Regarding Zimeta, we recorded net product revenues of $7,000 in the first quarter of the year, reflecting expected limited equine activity during the winter months and a downturn in equine transportation as a result of COVID-19. Seasonally, the first quarter is the weakest in equine market, with activity picking up in the spring amid vaccination season and the resumption of equine events as temperatures rise.

An application for Zimeta was submitted to Canada in November with anticipated approval in the second quarter. On behalf of the entire KindredBio team, I look forward to achieving significant milestones in the second half of this year. We are proud to be developing innovative medications for our beloved family members, particularly during these challenging times. With that, I'll hand the call over to Wendy for a review of our financial results.

Wendy Wee -- Chief Financial Officer

Thanks, Denise. The strategic realignment we announced in mid-March not only sharpens our focus on our highest value biologics programs but positions KindredBio strongly in the current operating environment. Proceeds from the Mirataz transaction, alongside the reduction in our workforce and operations, are extending cash runway during this period of uncertainty while maintaining a focused research engine. In recognition of more challenging market conditions, we are diligently managing our spend.

This includes the prioritization of investments, a reduction in discretionary expenditures, which has already lowered our planned annual spend versus the guidance provided last quarter. We continue to see opportunities for further savings and are conducting a rigorous evaluation of expenditures. Turning to our financial results. In the first quarter, we reported a net loss of $22.8 million or $0.58 per share as compared to a net loss of $16.1 million or $0.42 per share for the same period in 2019.

This includes a nonrecurring charge of $5.1 million. Net product revenues for Mirataz totaled $0.6 million, compared to $0.5 million for the year-ago period, while Zimeta IV net revenues were $7,000 in the first quarter. Cost of product sales totaled $82,000 in the first quarter of 2020, compared to $92,000 in the same period in 2019, resulting in a gross margin of 86% and 82%, respectively. In the quarter, we recorded a $3.5 million write-off on Mirataz due to the transition to Dechra branding for the product.

Research and development expenses rose $1.7 million year over year to $8.9 million, reflecting the inclusion of expenses from the Kansas facility given the commercial -- given the commencement of clinical trial manufacturing. Prior to the first quarter, construction and commissioning expenditures for the Kansas facility have been categorized as general and administrative expenses. Stock-based compensation expense related to R&D was $0.6 million in the first quarter as compared to $0.4 million for the year-ago period. The recategorization of Kansas plant expenditures resulted in a corresponding decrease in selling, general and administrative expenses, which was partially offset by higher legal fees.

SG&A expenses declined $1 million year over year to $8.9 million in the first quarter. Stock-based compensation expense was $1.5 million for the 2020 first quarter versus $1.4 million in the year-ago period. Consistent with guidance provided in our fourth-quarter results, the first-quarter restructuring charge related to the strategic realignment and associated workforce reduction totaled $1.7 million. As of March 31, KindredBio had $54.6 million in cash, cash equivalents and investments, compared with $73.5 million as of December 31, 2019.

Net cash used in operating activities for the first quarter of 2020 was approximately $17.1 million. Keep in mind, the first quarter is historically our peak quarter for expenditures, comprising of key annual outlays, such as systems maintenance, corporate expenses and industry conference calls. It's also important to note that the first quarter reflects a full organizational structure ahead of the restructuring announced mid-March, alongside the $1.7 million onetime restructuring charge. We also invested approximately $1.4 million in capital expenditures with the purchase of lab and manufacturing equipment for the Kansas facility.

On April 15, we completed the sale of Mirataz to Dechra for an upfront payment of $43 million, of which 10% is held in escrow for up to 18 months post closing. With respect to spending in 2020, we remain focused on advancing our core biologics pipeline and programs, including the commencement of multiple pivotal studies this year. We anticipate operating expenses of between $57 million and $59 million, including the impact of stock -- excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. Additionally, we plan to invest $3 million to $4 million in capital expenditures on lab and manufacturing equipment for our biologics programs this year.

We believe our existing cash, cash equivalents, investments, proceeds from the Mirataz sale, revenues from anticipated partnerships, including royalties from Mirataz and additional drawdown of $30 million from the debt facility, which is contingent upon achievement of certain milestones, will be sufficient to fund current operating plan through 2022. As I mentioned earlier, given the current market environment, we are committed to further reducing opex and are currently conducting an in-depth evaluation of our expenditures. In closing, our transition to a biologics-only company that leverages the commercial capabilities of multinational partners to maximize product value is resulting in a more capital-efficient organization, positioning us for this current period of uncertainty and future success. I will now turn the call back over to Richard.

Richard Chin -- Chief Executive Officer

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

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of Jon Block with Stifel.

Tom Stephan -- Stifel Financial Corp. -- Analyst

Hi. This is Tom on for John. Maybe to start off, is there any more color you can provide on the use of the manufacturing site in Kansas for contract manufacturing?

Richard Chin -- Chief Executive Officer

Sure. So as you know, we've been looking into doing contract manufacturing, and we have actually hired a business development person. So there is quite a bit of interest actually in the manufacturing capabilities because, as you probably know, there is shortage of biologics manufacturing. Having said that, there is a bit of a lead time for those types of contracts.

So we are in active discussions, but currently, we don't have any contracts yet.

Tom Stephan -- Stifel Financial Corp. -- Analyst

Got it. OK. And so more broadly speaking, with all the uncertainty in the last two months or so just as a result of COVID, when we think about your ongoing partnership conversations with some of these larger players in animal health. At a high level, has the time of those conversations changed at all? Or are there any changes in these companies' mindsets over the next, call it, three to six months? Thanks.

Richard Chin -- Chief Executive Officer

This is the beauty of the veterinary space. The answer is no. They seem just as enthusiastic. Before the last economic downturn, 2008 downturn, it was thought that the veterinary industry would be more vulnerable than other industries to an economic downturn because it was thought that it was not a necessity.

But it turned out that veterinary industry is actually one of the most resistant industry when it comes to recession. So far, the tenor of our conversations has not been affected.

Tom Stephan -- Stifel Financial Corp. -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Brandon Folkes with Cantor Fitzgerald.

Carvey Leung -- Cantor Fitzgerald -- Analyst

Hi. Good afternoon. This is Carvey in for Brandon. Just a couple of questions here.

Now that you have switched more of the partnership model, do you expect to present more detailed data readouts on your pipeline programs going forward? Or could we see this data showcased at animal health conferences? At the same time, how has the switch changed your pipeline prioritization? Do you expect to shift focus on to specific narrowed down therapeutic areas? Or are you looking to leverage the bandwidth to explore more of your pipeline? Thank you.

Richard Chin -- Chief Executive Officer

Sure. So with regard to the -- let me start with the second first. So in terms of prioritization, we are focusing more on the larger markets. Previously, we were also looking at smaller markets because for us, smaller markets are worthwhile.

But going forward, since we'll be partnering our molecules, we expect that we'll spend less time on some of the smaller areas. However, we do expect that once we have the partnerships that it will allow us to pursue multiple indications. So more partnerships we have, more opportunities we'll be able to pursue. I'm sorry, can you repeat the first question again?

Carvey Leung -- Cantor Fitzgerald -- Analyst

Yeah. So basically, now that you are switching to a partnership model, should we expect more data readouts from your pipeline products?

Richard Chin -- Chief Executive Officer

Yes, sorry. Yes. So most likely, no. We have been disclosing what we need to -- because we're a public company, and for us, those types of data are material.

I'm sure that our larger partners would much rather prefer that we disclose less. The larger companies generally like to keep things under wrap for as long as possible. So most likely, we won't change what we're disclosing. What we're disclosing so far and -- what we have disclosed so far generally has been material information that we need to get out to the market.

Carvey Leung -- Cantor Fitzgerald -- Analyst

That makes sense. Thank you so much.

Operator

Your next question comes from the line of Sean Lee with H.C. Wainwright.

Sean Lee -- H.C. Wainwright -- Analyst

Hey, guys. Thanks for taking my question. I just have a higher-level question on the partnership discussion. As you mentioned there's been fruitful discussions ongoing for the IL-31 and also for the other atopic dermatitis programs.

I was just wondering, considering that the clinical costs in the veterinary space are a lot lower than in the human space, what are some of the advantages for you to partner now? And what would be some of the advantages for partnering later?

Richard Chin -- Chief Executive Officer

Yeah. So those are exactly the questions that we're grappling with right now. The advantage of partnering earlier is that we get the upfront in earlier. And that's a source of non-dilutive capital, so it means that we won't have to raise as much money.

The advantage of partnering later is that the value goes up exponentially as you derisk the molecule, and we learned that from Mirataz. So it's really weighing the pros and cons of cost of capital versus the economics that we can derive from the various molecules in our pipeline.

Sean Lee -- H.C. Wainwright -- Analyst

I see. And in terms of the prioritizations, is that more driven based on the talks that are going on or more based on the results that you're seeing in the studies? Thanks.

Richard Chin -- Chief Executive Officer

Sure. So it depends on the specific molecules. In some cases, there are targets that our partners are really interested in. So obviously, we would prioritize those.

In other cases, where we have multiple molecules, and we have to pick among them, one of the first things we do look at is the clinical data and the cost of goods. So it's molecule by molecule, and we decide each one on its own merit.

Sean Lee -- H.C. Wainwright -- Analyst

Thanks for the additional color.

Operator

[Operator instructions] Your next question comes from the line of Nathan Weinstein with Aegis Capital.

Nathan Weinstein -- Aegis Capital -- Analyst

Hi, guys. Thanks so much for taking my questions. Just on the IL-31 pivotal effectiveness trial, could you just remind us what would the anticipated duration of such a trial be?

Richard Chin -- Chief Executive Officer

Why don't I hand that over to Denise? We're all in different locations, so you'll hear me hand questions. Off to Denise.

Denise Bevers -- President and Chief Operating Officer

Yes. We're social distancing appropriately. Yes. So we haven't given any specifics around the exact protocol for competitive reasons, as you can appreciate.

What we have said is that most of our pivotal trials will take 12 to 18 months. We expect that the atopic dermatitis pivotal trials will be closer to that 12-month range to recruit and complete, but we'll certainly keep you posted if there are challenges associated with COVID-19 that persist. But at this point, we're expecting around 12 months.

Nathan Weinstein -- Aegis Capital -- Analyst

Thank you. And then in another area on the equine assets, I understand that there may be some resolution as to your path forward there by July. But would you look to move those assets altogether as a whole to a potential partner? Or what could that look like?

Richard Chin -- Chief Executive Officer

I think Denise can answer that one as well.

Denise Bevers -- President and Chief Operating Officer

Great. Yes. So we have many different potential acquirers at the table or partners at the table. And some want all.

Some want parts. So we'll certainly make that analysis as we look at what the offers turn out to be. At the same time, we have still been considering a spin-out of the equine assets, but that will depend on what the offers look like and where the value can best be derived.

Nathan Weinstein -- Aegis Capital -- Analyst

Understood. Thanks. And I guess just one more from me. I've asked this in the past, but I've seen some movement on the diagnostics front with regards to canine cancer.

And I understand as a biologics player, that could be an area you could look at in the future. Can you make any comments on what you're seeing in canine cancer?

Richard Chin -- Chief Executive Officer

So canine cancer is an area we've been interested in for a while. Diagnostics, we have decided to stay away from because it doesn't fit into our core competency. And there are strong players in that space right now. There are a few types of diagnostics that could make sense for us eventually, such as companion diagnostics, so diagnostics that guide the use of our therapeutics.

So I wouldn't rule it out completely, but our plan is to stick to areas where we have a competitive advantage, such as biologics, monoclonal antibodies.

Nathan Weinstein -- Aegis Capital -- Analyst

OK. So from the therapeutic side, it could be a monoclonal antibody approach in the future?

Richard Chin -- Chief Executive Officer

Well, we'll certainly look at diagnostics in conjunction with monoclonal antibodies for diseases where the diagnostic can improve the utilization of our drugs, much like what is happening on the human side. Street diagnostics, I think it's not an area where we have a reason to believe that we can offer an advantage compared to the current incumbents.

Nathan Weinstein -- Aegis Capital -- Analyst

Sure. OK. Thanks so much, Richard. Appreciate your time.

Operator

And at this time, there are no further questions. Richard, do you have any closing remarks?

Richard Chin -- Chief Executive Officer

Thank you, operator. I'd like to thank our listeners for continued support, and we look forward to advancing the pipeline and executing on our business strategy.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Richard Chin -- Chief Executive Officer

Denise Bevers -- President and Chief Operating Officer

Wendy Wee -- Chief Financial Officer

Tom Stephan -- Stifel Financial Corp. -- Analyst

Carvey Leung -- Cantor Fitzgerald -- Analyst

Sean Lee -- H.C. Wainwright -- Analyst

Nathan Weinstein -- Aegis Capital -- Analyst

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