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Edited Transcript of KIN earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Kindred Biosciences Inc Earnings Call

BURLINGAME Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Kindred Biosciences Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denise M. Bevers

Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director

* Richard Chin

Kindred Biosciences, Inc. - Co-Founder, CEO & Director

* Wendy K. Wee

Kindred Biosciences, Inc. - CFO

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Conference Call Participants

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* Balaji V. Prasad

Barclays Bank PLC, Research Division - Director

* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Nathan S. Weinstein

Aegis Capital Corporation, Research Division - Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Thomas M. Stephan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Operator [1]

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Welcome to the Third Quarter 2019 Financial Results Conference Call and Webcast for Kindred Biosciences. (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 Kindred Bio's CEO, Richard Chin. Dr. Chin, please proceed.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [2]

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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 in that it 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 sales in the U.S. and uptake could be swifter because in the EU veterinarians are usually prohibited from using human generics if there is 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 U.S. 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 into 2020. The good news is that we have found some potential enhancements that we can make that may substantially lower the cost of goods, and we're exploring those changes as well. I should also note that we are in active negotiations with multiple companies for commercial rights to IL-31 antibody and the interest in the asset continues to be strong. Our SINK study in atopic dermatitis is also coming along well, and we expect to read out that study in the first quarter of next year.

We're making excellent progress on our parvovirus antibody program and continue to expect approval by end of 2020 or early 2021. There are 2 segments of this market: the treatment and the prophylactic market. Based on Banfield's published data, there are at least 250,000 dogs infected with parvovirus each year. We believe the actual number could be higher because the Banfield data doesn't include shelters, emergency rooms and dogs that are not seen by veterinarians. Also, based on our market research, about half the dogs that are infected by parvovirus expose other dogs, which means that the number of does that need prophylactic -- prophylaxis is likely to be greater than the number of dogs that are infected.

Now we've had some investors ask us about the unmet medical need for this drug versus the vaccine so I'd like to spend a few minutes going through the science. While there are vaccines available for parvo, they have to be administered multiple times and many puppies don't receive the vaccine at all or don't get the complete series. Our market research suggests that only 7 out of 10 puppies are fully vaccinated. More importantly, what happens is that the puppies start off their lives with protective antibodies from their mothers. The maternal antibody levels slowly drop until they are no longer protective, but at that point, while the antibody level is not high enough to protect the puppy from parvovirus, there's still enough maternal antibody to block the vaccine. You have to wait until the maternal antibody levels drop further before the vaccine will work.

So there is always a window of vulnerability. Also, parvovirus is very hearty and infectious. The virus can survive for a long time on surfaces, and that's why when you go to a pet store, you shouldn't put the puppy down on the ground lest they catch parvo from the floor. At some shelters, they're forced to put down every dog in the facility if even one comes down with the virus. With success across multiple promising biologics, we are taking a leadership position in this sector. In addition, as Denise will detail, we now have enviable manufacturing capacity.

Also, we have been building a very strong IP portfolio in biologics. Most of what we're doing we do not disclose, but let me give you a couple of examples. We have, for example, developed ways of modifying the antibody that, we believe, will increase the half-life of the molecule substantially. Obviously, this can have a profound effect on clinical profile and cost of goods. As another example, we have solved the difficult problem in manufacturing canine antibodies. Unlike human antibodies, many dog antibodies can't be purified using conventional methods by using something called protein A. And if you can't use protein A purification, cost of goods become untenable. We have discovered a way of purifying these antibodies with conventional methods, which is very important from a cost of goods standpoint, and we have filed for IP on the technology. I won't go into other technologies that our scientists have created, but we are on our way towards building a very strong IP portfolio.

Turning to our financial position. We continue to be judicious with our spending, and we expect OpEx and cash burn to decrease in 2020. We anticipate a convergence of multiple key approvals and launches between 2020 and 2022, which will further transform the company. The recent debt facility gives us potential to extend our runway until we see the maturation of our pipeline. We intend to supplement this financing with other sources of non-dilutive capital. We recently announced that NCI has awarded us a contract for manufacturing human drugs, and this is great validation of our capabilities. We are also in discussions on partnering, as I mentioned earlier.

The progress on our deep pipeline and our extended runway position are strongly for the future. With that, I will turn the call over to Denise.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [3]

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Thank you, Richard. On today's call, I will detail Mirataz's quarterly performance and provide some key pipeline updates. Our third quarter sales of 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've liked to have seen 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 oral human generic mirtazapine pills. Based on the data we track, not only have we taken market share from the human generic pill used 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 5 to 6 years.

I'm pleased to report that over half of all veterinary clinics in the U.S. 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 in market penetration, this figure understates the reorder rate among early adopters. Average order size has also increased consistently quarter-over-quarter since Mirataz became commercially available. We have not received any returns to date, and customer testimonials, which are a key driver for changing practice habits in animal health marketing have been exceptional.

Now turning to the European market. Mirataz EU is on the cusp of approval after European regulators adopted a positive opinion recommending marketing authorization. This is a major achievement for our regulatory and clinical teams who successfully negotiated for the product's approval without the need to generate any additional data. A marketing authorization decision from the European Commission is anticipated by mid-December. If approved, Mirataz would be the first medication in the EU for poor appetite and weight loss resulting from chronic medical conditions. The authorization would be valid in all 28 member states of the European Union as well as Iceland, Liechtenstein and Norway.

We are also pleased to have filed for regulatory approval of Mirataz in Canada. Validation of the Canadian submission will be complete in the coming days, and once accepted for review, the review timeline is approximately 1 year. Alongside Mirataz EU, we continue to expect imminent approval of dipyrone IV, with a decision expected by the end of this month. Equine is a very appealing market for us given the high unmet medical needs and willingness to pay, little FDA-approved competition and low commercial and marketing spend. There are more than 8 million horses in the U.S. and over 1 million are seen by a veterinarian for fever annually. Dipyrone IV would be the first and only FDA-approved medication for the control of fever in horses. Existing off-label treatments, not only don't target the fever but they can have serious side effects.

Assuming approval later this month, dipyrone IV will have been developed for approximately $5 million in 5 years, consistent with our business model. Preparations for the commercial launch remain on track. We are ready to launch and take orders at the American Association of Equine Practitioners Annual Convention, which is the key yearly equine conference in early December. Shipments will then commence by year-end. Given that there are a little over 4,000 equine-only veterinarians in the U.S., we plan to commercialize with a specialized direct sales force in conjunction with distribution.

Looking to the rest of our pipeline, we are pleased to have initiated the pivotal efficacy study of our feline recombinant erythropoietin, having completed cGMP fill and finish at our Kansas manufacturing facility in the third quarter. This program really highlights the talent we have on our team. It is no simple task to get to the pivotal trial stage for a large molecule. From cell line development to process development, through manufacturing and then quality release, this team has done an outstanding job. And then of course there is clinical development, regulatory and our clinical operations teams. All of these teams have worked seamlessly to bring this first-in-class protein to the pivotal trial stage.

As Richard mentioned, the pivotal efficacy study for our IL-31 antibody is now expected to start in 2020 given the changes and enhancements to the manufacturing process during scale up. With regard to our SINK program, we anticipate this study to be fully enrolled by year-end with results expected in the first quarter of 2020. As a reminder, we are taking a multi-pronged approach toward atopic dermatitis with a portfolio of promising biologics.

Completion of our pilot study of anti-TNF for inflammatory bowel disease is now expected in the first half of 2020 due to competing priorities for drug supply manufacturing. The pivotal field study for our KIND-014 for the treatment of gastric ulcers in horses is scheduled to start in the fourth quarter. Finally, the advancement of our biologics pipeline times with the completion of construction of our Kansas biologics manufacturing facility. As of the third quarter, the bioreactors are installed and the commissioning is being completed. This marks the final step and will provide us with end-to-end capabilities and an enduring competitive advantage. With that, I will now turn the call over to Wendy for a review of our third quarter financials.

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [4]

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Thanks, Denise. I will begin with an overview of our financial performance for the third quarter and the first 9 months of 2019 before providing an update on our capital position and expectations moving forward.

For the quarter ended September 30, 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 9 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 totaled $2.9 million in the first 9 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 9 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 head count and related expenses as we advance our biologics programs.

For the 3 and 9 months ended September 30, 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 3- and the 9-month periods, 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 of our Kansas manufacturing facility, which I'm pleased to say was completed on schedule and on budget. SG&A totaled $9.4 million and $28.3 million for the 3 and 9 months ended September 30 compared to $6.6 million and $17.3 million for the same periods in 2018. In addition, higher corporate infrastructure costs and stock-based compensation expense also contributed to the increase in expenses.

Stock-based compensation expense included in SG&A expense was $1.4 million and $4.2 million for the 3- and 9-month periods, as compared to $1.2 million and $3.3 million for the same periods in 2018. As of September 30, we have $87.6 million in cash, cash equivalents and investments compared with $73.9 million as of December 31, 2018. Net cash used in operating activities for the first 9 months of 2019 was approximately $42.6 million, offset by $43.1 million of net cash proceeds from an underwritten public offering of common stock in the first quarter of 2019 and $19.2 million from a debt financing in the third quarter of 2019, net of closing fees and expenses. We also invested approximately $7.3 million in capital expenditures for the remaining portion of the build-out of our Elwood, Kansas manufacturing facility and the purchase of associated lab and manufacturing equipment for the facility.

On October 2, 2019, we announced the closing of a $50 million senior secured debt facility with Solar Capital Partners. The non-dilutive financing agreement provides us with up to $50 million of borrowing capacity available in 3 tranches, each bearing interest at a 1-month LIBOR plus 6.75% with a floor of 2.17%. The entire debt facility will mature on September 30, 2024.

Given the strong credit market and high demand among lenders, this was a great opportunity to bring in some non-dilutive financing at attractive terms. Now that we are revenue generating and have assets at the plant, it makes sense to take on debt and extend our runway through 2021, at which point we expect a number of approvals and launches under our belt.

We intend to supplement this financing with other sources of nondilutive capital. We recently announced the -- announced that the NCI awarded us a contract for manufacturing of human drug from our Burlingame facility, and this is an important validation. So while we will prioritize our pipeline, we simply have the ability to do contract manufacturing campaigns, which could be an attractive source of revenue. As Richard mentioned, we could also see some non-dilutive capital from partnering our IL-31 asset.

With respect to spending in 2019, we continue to expect operating expenses of between $57 million and $59 million, excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. In addition, we are on track with an $8 million to $10 million investment in capital expenditures for the year. 2019 has been a period of heightened clinical activity. And with the capital expenditures of the Kansas plant largely behind us, we plan to reduce both operating expenses and capital expenditures in 2020. We believe our existing cash, cash equivalents, investments and additional drawdown of $30 million from our debt facility, contingent upon the achievement of certain milestones, will be sufficient to fund our current operating plan through 2021.

I will now turn the call back over to Richard.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Brandon Folkes from Cantor Fitzgerald.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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Congratulations on the progress during the quarter. Firstly, can you provide some color on the growth that you saw in the quarter driven by your partnership with Chewy and other eRetailers? And then secondly, on the parvo product, in the data readout on the pivotal, will we -- will this include prophylactically treated dogs as well as those treated after contracting the infection? And if it does include prophylactically treated, can you help us think how this becomes something that is given as standard of care to a lot of dogs prophylactically?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [3]

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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 and 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 1 dog in a litter, let's say, comes down with parvovirus, then that puppy infects all the littermates. So ideally, what would happen is that the littermates would get our antibody before they come down with the infection. Similarly, if a dog in a shelter comes down with parvovirus, 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.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [4]

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Okay. And then regarding Chewy and eRetailers, I mean, we are seeing orders come in consistently. And so I think similar to what we're seeing on the clinic side, we'll start to see that growth really take hold, but we are pleased with what we're seeing and where it's headed.

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Operator [5]

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Our next question comes from Jon Block with Stifel.

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Thomas M. Stephan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [6]

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This is Tom on for John. I guess a couple on Mirataz to start off. Can you talk specifically about how your initiatives are going in getting the hospitals off the generic mirtazapine over to Mirataz? And then do you know approximately what percent of accounts that are using Mirataz are still using the generic?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [7]

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So -- yes. So we -- the initiatives are definitely working. I mean part of the challenge for us is manpower, womanpower, quite frankly. So the more we're able to get into a clinic, touch a clinic, the more change 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 the clinic multiple times, we see the average dollar per order increasing and as well as the dollar order 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 generic -- mirtazapine, rather, the human generic off-label, but we definitely believe we've made some significant strides in conversion.

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Thomas M. Stephan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [8]

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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?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [9]

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

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Operator [10]

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Our next question comes from Balaji Prasad from Barclays.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [11]

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I had a couple of questions both on the small molecule side and the biologics. On Mirataz, could I have a sense of the -- what the reordering rate was? And you had reached out around -- covered 46% of 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?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [12]

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Yes. I mean, I think, that ramp is -- I mean given the size of our sales force, I think it's an appropriate ramp. I mean we're pleased -- we -- in the first 4 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 of 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 5 to 6 years.

And as far as penetration and reorder rate, I mean we looked at our cohort intentionally, some of our investors had said, "Well, what about the cohort of people who are 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 purchased the product in 2018. So that's telling us that those who are trying it early are still using it and 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.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [13]

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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 EMEA approval and also [Traction Canada]. So if -- and couple of different rates with move-in and move-outs, so combining all of these and then your online campaigns, how should we think about Mirataz for next year? Some numbers would help here.

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [14]

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So while 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 builds in a little bit more of a hockey stick trajectory. So it might not be straight ramp but -- so 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.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [15]

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Okay. So moving on to the biologics side. I think in the past conversations, we gathered that the atopic dermatitis product is the first one that you'd want -- you'd likely to get onto the market. Is that still the case now with the delay to the parvo pivotal study?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [16]

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Even previously, I think in the last call, we talked about parvovirus 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 whether there's a delay to IL-31 or not, I think parvo is likely to be the first.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [17]

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Okay. That's helpful. And next one will be epoCat?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [18]

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Really it 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 is, we'll have multiple approvals between -- at the end of 2020 and 2022. So a lot of products launching in a few years.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [19]

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Got it. Final quick question for me, and then I'll join back in the queue. On the biologics (inaudible) have you had any developments towards newer contracts and when will you start reporting revenues from the NCI contract?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [20]

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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.

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Balaji V. Prasad, Barclays Bank PLC, Research Division - Director [21]

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

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [22]

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For both.

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Operator [23]

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Our next question comes from Nathan Weinstein with Aegis Capital.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [24]

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If I could just start with asking about sales through the eRetailers, that distribution channel versus going through a veterinary. Is there a margin differential between those channels from your perspective?

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [25]

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The margins to eRetailers will be slightly higher than margins to distributors.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [26]

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Okay. And then...

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [27]

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Does that answer your question?

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [28]

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Yes. 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 don't know if you mentioned this already but what are those competing drugs that are taking priority?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [29]

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Sure. The 2 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 projects. So that's what we've done with that program.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [30]

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Okay. I actually just have one more question, and there was 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, would any of these timeline shifts change your perspective about what the peak could be for each of these indications?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [31]

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

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Operator [32]

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Our next question comes from our RK from H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [33]

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So 32% of the -- 32% of the distributors that are not -- have not done reorders that you'd hoped. 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 -- are the factors there? I'm just trying to understand what additional things would you 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?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [34]

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Sure. Yes. So 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. Sorry, I just got flagged from across the room. I wish it 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 veterinarian's hands because we've had 0 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 (sic) [American Association of Feline Practitioners] last week, we did a sampling program. So we find that once we sampled them on a tube and they get it in their hands and they try it as opposed to using the human generic peel 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 5- to 6-year animal health ramp, it's still a very attractive product.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [35]

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Okay. And so I know you stated that it's a 20% increase in outflow of drug to the vets compared to the second quarter, and that certainly looks encouraging but walking -- what's making them, and when I say them, additionally, there's not the pull-in more growth from you, if they are actually selling more drug to the veterinary clinics?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [36]

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Sure. 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 the 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 distributor-to-distributor. But move outs, 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 a first time. Then when we see those numbers grow, that makes us encouraged about the future upside opportunity for the brand.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [37]

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

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [38]

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Absolutely. That's how we book our revenue. 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, that I think what we're seeing in this industry is, again, some lumpiness.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [39]

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Okay. And in general, what is it that you'll learn running the commercial structure here in the U.S.? For almost a year now, 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 U.S. I'm not sure if there any -- anything different there, but if there are none, what are the things that you'll learn that you want to make sure your counterpart on the other side will do the right job?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [40]

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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.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [41]

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Okay. Regarding the biologics -- sorry, regarding the -- I think it's the NCI relationship that came up recently, is there anything, more color you can give us to like when you would know whether, 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?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [42]

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

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Operator [43]

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Our next question comes from Brooks O'Neil with Lake Street Capital.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [44]

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I have a few, too. So I guess I'd start with -- it sounded like 10% of peak sales in year 1 for Mirataz potentially going to 20% of peak next year. I assume that means you think the product could conceivably grow 100% year-over-year in 2020. Am I thinking about the way you guys are thinking about that?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [45]

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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 to -- I just wanted to provide some context of kind of where we were after 4 full quarters for a feline product. And again, I mean we're pleased and we believe that the peak sales potential for this product is still very attractive.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [46]

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Great. Great. So second question I had is 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?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [47]

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Sure. So for Mirataz, we're looking at a fairly simple structure, some sort of an upfront and royalties. It's a drug that's almost approved, and we have data in United States in terms of sales. So I think that'll be a fairly straightforward discussion. For IL-31, there are several different options that we're looking at. But most likely, it'll consist of some upfront and milestone payments along with royalties along the way. There are a few things that we're negotiating on such as copromotion rights and a few other things. But ultimately, for both of these, what's going to drive the decision is really the value, the economics. So those 2 structures I outlined is the most likely scenario. But yes, if something else makes more sense economically, then we'll certainly consider it.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [48]

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Sure. All that makes sense. I know it's probably a very indefinite situation but any sense of timelines 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?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [49]

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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.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [50]

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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's about to get approved. What would you anticipate? How would you think the sales of that product might progress throughout the year?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [51]

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Sure. So I think one thing that we can expect -- I mean we're anticipating approval at the end of this year. We know that with AAEP, the American Association of Equine Practitioners coming up, that is probably -- it's certainly the biggest conference in the U.S., 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 6 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'll 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.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [52]

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Makes sense. And I think if I recall correctly, you were thinking of sales force in the 5, 6, 7 professionals range. Is that still what you think will be optimal for maximizing revenue from that product?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [53]

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We do. We -- yes, we had said 3 to 5 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 discrete equine sales forces will support the launch as well.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [54]

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

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [55]

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No. The Kansas facility was built to meet the requirements of USDA, FDA and EMA. So it's fully compliant for all 3 regulatory agencies and fully compliant with all human regulations.

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Operator [56]

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(Operator Instructions) And our next question comes from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [57]

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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, and whether you're going to do it piecemeal or all-to-one potential partner? It seems obviously with Zoetis reporting 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 ways and seeing the market get bigger and bigger as time goes on?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [58]

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Yes. 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? So that's something that we're discussing internally.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [59]

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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 orders, smaller initial orders? Is that guys who only -- and girls 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 inappetence or anything common that you've seen there?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO, Secretary & Director [60]

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I was just going to just say yes to all of your -- but I mean one of the things that stands out is a lot of times for our 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's 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.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [61]

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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?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [62]

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So the safety 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.

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Operator [63]

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

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [64]

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

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Operator [65]

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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.