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KIN > SEC Filings for KIN > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for KINDRED BIOSCIENCES, INC.

Form 10-Q for KINDRED BIOSCIENCES, INC.


14-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

In this section,"Kindred," "we," "our," "ours," "us," and the "Company" refer to Kindred Biosciences, Inc.
This management's discussion and analysis of financial condition as of March 31, 2014 and results of operations for the three months ended March 31, 2014 and 2013 should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 which was filed with the SEC on March 14, 2014,as amended March 18, 2014 and April 24, 2014, and our condensed financial statements and notes to condensed financial statements in this Form 10-Q. The discussion and analysis below includes certain forward-looking statements related to our research and development and commercialization of our products in the U.S., our future financial condition and results of operations and potential for profitability, the sufficiency of our cash resources, our ability to obtain additional equity or debt financing, if needed, possible partnering or other strategic opportunities for the development of our products, as well as other statements related to the progress and timing of product development, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, which are all forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying or judgments concerning the future financial performance and other matters discussed in this document. The words "may," "will," "should," "plan," "believe," "estimate," "intend," "anticipate," "project," and "expect" and similar expressions are intended to connote forward-looking statements. All forward-looking statements involve certain risks, uncertainties and other factors described in Part II. Item 1.A of this report and in our Annual Report on Form 10-K for the year ended December 31, 2013, that could cause our actual commercialization efforts, financial condition and results of operations, and business prospects and opportunities to differ materially from these expressed in, or implied by, those forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise forward-looking statements.
Overview
We are a development stage biopharmaceutical company focused on saving and improving the lives of pets. Our mission is to bring to our pets the same kinds of safe and effective medicines that our human family members enjoy. Our core strategy is to identify compounds and targets that have already demonstrated safety and efficacy in humans and to develop therapeutics based on these validated compounds and targets for pets, primarily dogs, cats and horses. We believe this approach will lead to shorter development times and higher approval rates than pursuing new, non-validated compounds and targets. We have three product candidates that are in pivotal field efficacy trials, or pivotal trials, and expect approval of one or more of these product candidates in 2015. In addition, we have multiple other product candidates, including several biologics, in various stages of development. We believe there are significant unmet medical needs for pets, and that the pet therapeutics segment of the animal health industry is likely to grow substantially as new therapeutics are identified, developed and marketed specifically for pets.
Our lead product candidates are CereKin™ (diacerein) for the treatment of osteoarthritis pain and inflammation in dogs, AtoKin™ (fexofenadine) for the treatment of atopic dermatitis in dogs and SentiKin™ (flupirtine) for the treatment of post-operative pain in dogs. All of these product candidates, if approved, would be first-in-class drugs in the pet therapeutic market. In August 2013, we initiated the pivotal trial for CereKin. In February 2014 we initiated the pivotal trial for AtoKin, and in March 2014 we initiated the pivotal trial for SentiKin. Assuming positive results from these trials, we intend to submit all the technical sections of New Animal Drug Applications, or NADAs, for marketing approval of CereKin, AtoKin, and SentiKin in the United States in 2014, and anticipate potential marketing approvals and product launches in the second half of 2015. If approved in the United States, we plan to make similar regulatory filings for these products with the European Medicines Agency, or EMA for marketing approval in the European Union, or EU. We are currently developing product candidates for multiple additional indications, with the potential to launch two or more products annually for several years starting in the second half of 2015. We plan to commercialize our


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products in the United States through a direct sales force complemented by selected distributor relationships, and in the EU through distributors and other third parties. Because we seek to identify product candidates that are not protected by third-party patents, we typically do not need to obtain licenses or make any upfront, milestone or royalty payments in connection with our product candidates.
We are a development stage company with no products approved for marketing and sale, and we have not generated any revenue. We have incurred significant net losses since our inception. We incurred net losses of $10,501,000 for the period from September 25, 2012 (inception) through March 31, 2014 and $6,168,000 for the three months ended March 31, 2014. These losses have resulted principally from costs incurred in connection with investigating and developing our product candidates, research and development activities and general and administrative costs associated with our operations. As of March 31, 2014, we had a deficit accumulated during the development stage of $10,501,000 and cash, cash equivalents and short-term investments of $60,528,000.
For the foreseeable future, we expect to continue to incur losses, which will increase significantly from historical levels as we expand our product development activities, seek regulatory approvals for our product candidates and begin to commercialize them if they are approved by the Center for Veterinary Medicine branch of the U.S. Food and Drug Administration, or FDA, the U.S. Department of Agriculture, or USDA, or the European Medicines Agency, or EMA. If we are required to further fund our operations, we expect to do so through public or private equity offerings, debt financings, corporate collaborations and licensing arrangements. We cannot assure you that such funds will be available on terms favorable to us, if at all. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of, obtain adequate patent protection for, obtain necessary regulatory approval, or achieve commercial viability for any product candidate. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations, and we may be unable to continue as a going concern.
Recent Developments
On April 8, 2014, we completed a public offering of 3,450,000 shares of our common stock at a price of $18.00 per share, for net proceeds of approximately $58,100,000, after deducting underwriting discounts, commissions and offering expenses.
Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of our condensed financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenue, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to our critical accounting policies since the beginning of our fiscal year. Our critical accounting policies are described in the "Management's Discussion and Analysis of Financial Condition and Result of Operations" section of our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with SEC on March 14, 2014, as amended.


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Results of Operations
The following table summarizes the results of our operations for the periods
indicated:
                                                               Three Months Ended March 31,
                                                               2014                   2013
                                                         (In thousands, except per share amounts)
Operating expenses:
Research and development                                $        4,498         $             141
General and administrative                                       1,679                        83
Total operating expenses                                         6,177                       224
Loss from operations                                            (6,177 )                    (224 )
Interest income                                                      9                         -
Net loss and comprehensive loss                         $       (6,168 )       $            (224 )
Net loss per share attributable to common stockholders,
basic and diluted                                       $        (0.38 )       $           (0.07 )
Weighted-average common shares outstanding, basic and
diluted                                                         16,222                     3,000

Revenue
We do not have any products approved for sale, have not generated any revenue since our inception and do not expect to generate any material revenue in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for any of our product candidates, we may generate revenue from those product candidates. Research and Development Expense

All costs of research and development are expensed in the period incurred. Research and development costs consist primarily of salaries and related expenses for personnel, stock-based compensation expense, fees paid to consultants, outside service providers, professional services, travel costs and materials used in clinical trials and research and development. We are currently pursuing multiple product candidates for over a dozen indications. We typically use our employee and infrastructure resources across multiple development programs. We track outsourced development costs by development compound, but do not allocate personnel or other internal costs related to development to specific programs or development compounds. Research and development expense was as follows for the periods indicated:

                                               Three Months Ended March 31,
                                                      2014                    2013
                                                      (In thousands)
Payroll and related                    $             623                     $  87
Consulting                                           498                         1
Field trial costs, including materials             2,634                        16
Stock-based compensation                             328                        33
Other                                                415                         4
                                       $           4,498                     $ 141


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During the three months ended March 31, 2014, research and development expense related primarily to advancing the development of our lead product candidates. During this period the CereKin field trial continued to meet its enrollment goals and we began a Target Animal Safety Study. We also initiated our field trials for Atokin and SentiKin and sourced the manufacture of material necessary for regulatory approval. During the quarter, we initiated additional manufacturing work in preparation for commercialization of our first product candidates. We also continue to advance additional product candidates in our small candidate programs as well as continue to advance our biologics program by building an in-house team to focus on setting-up a manufacturing process for our potential biologic candidates. Outsourced research and development expense related to our product development programs for CereKin, AtoKin and SentiKin for the three months ended March 31, 2014 were $1,140,000, $1,044,000, $908,000, respectively, and $534,000 for our other product development programs. Outsourced research and development expense consist primarily of costs related to manufacturing supplies, field trials, studies and consulting.
During the three months ended March 31, 2013, research and development expense primarily related to advancing the development of our lead product candidates. During this period we developed the protocols for CereKin and AtoKin, received Protocol Concurrences from the FDA for both compounds and increased our staffing to support the planning for initiation of the pivotal trials of CereKin and AtoKin. Outsourced research and development expense were $31,000 for the three months ended March 31, 2013 and related primarily to CereKin.
We expect research and development expense to increase for the foreseeable future as we continue to increase our headcount, commence pivotal studies and further develop our small molecule compounds and biologics development programs. Due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates.
General and Administrative Expense
General and administrative expense was as follows for the periods indicated:

                                   Three Months Ended March 31,
                                          2014                     2013
                                          (In thousands)
Payroll and related       $              368                      $  64
Consulting and legal fees                311                          7
Stock-based compensation                 749                          6
Other                                    251                          6
Total                     $            1,679                      $  83

During the three months ended March 31, 2014, general and administrative expense related primarily to additional financing activities, salaries, rent and other facilities costs, professional and consulting fees for legal, accounting and tax services, costs of being a public company and other general business services. We expect general and administrative expense to increase significantly as we continue to increase our headcount and build our corporate infrastructure. During the three months ended March 31, 2013, general and administrative expense related primarily to salaries and related expense. Income Taxes
We have historically incurred operating losses and maintain a full valuation allowance against our net deferred tax assets. Our management has evaluated the factors bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards and concluded that, due to the uncertainty of realizing any tax benefits as of March 31, 2014, a valuation allowance was necessary to fully offset our deferred tax assets.


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Liquidity and Capital Resources
We have incurred losses and negative cash flows from operations and have not generated any revenue since our inception in September 2012 through March 31, 2014. As of March 31, 2014, we had a deficit accumulated during the development stage of $10,501,000. During the year ended December 31, 2013, we raised a total of $65,959,000, net of offering costs, primarily in connection with our initial public offering and through the sale of preferred stock (subsequently converted to common stock at the time of our initial public offering). On April 8, 2014, we completed a public offering of common stock, resulting in net proceeds of approximately $58,100,000. We believe that our cash, cash equivalents and short-term investments balance as of March 31, 2014, together with the net proceeds from our April 2014 public offering, are sufficient to fund our planned operations for at least the next 24 months. Cash Flows
The following table summarizes our cash flows for the periods set forth below:

                                             Three Months Ended
                                                  March 31,
                                              2014          2013
                                               (In thousands)
Net cash used in operating activities     $    (4,793 )   $ (151 )
Net cash used in investing activities     $   (24,027 )   $    -
Net cash provided by financing activities $         4     $    -

Net cash used in operating activities
During the three months ended March 31, 2014, net cash used in operating activities was $4,793,000. Net cash used in operating activities resulted primarily from our net loss of $6,168,000 and changes in operating assets and liabilities of $294,000, which were partially offset by non-cash, stock-based compensation of $1,077,000.
During the three months ended March 31, 2013, net cash used in operating activities was $151,000. Net cash used in operating activities resulted primarily from our net loss of $224,000, which was partially offset by non-cash, stock-based compensation of $39,000 and changes in operating assets and liabilities of $34,000.
Net cash used investing activities
During the three months ended March 31, 2014, net cash used in investing activities was $24,027,000, of which $24,008,000 related to the purchase of marketable securities and $19,000 related to purchases of property and equipment.
During the three months ended March 31, 2013, no cash was used in investing activities.
Net cash provided by financing activities During the three months ended March 31, 2014, net cash provided by financing activities consisted of $4,000 resulting from the exercise of stock options. During the three months ended March 31, 2013, there was no net cash provided by financing activities.
Future Funding Requirements
We anticipate that we will continue to incur losses for the next several years due to expenses relating to:
• pivotal trials of our product candidates;

• toxicology studies for our product candidates;

• establishment of biologics manufacturing capability; and


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• commercialization of one or more of our product candidates, if approved.

We believe our existing cash, cash equivalents and short-term investments including the net proceeds from our April 2014 public offering, will be sufficient to fund our operating plan through at least the next 24 months and the anticipated approval and launch of one or more of our lead product candidates, CereKin, AtoKin and SentiKin. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital in connection with possible strategic acquisitions even if we believe we have sufficient funds for our current or future operating plans.
Our future capital requirements depend on many factors, including, but not limited to:

•            the scope, progress, results and costs of researching and developing
             our current or future product candidates;


•            the timing of, and the costs involved in, obtaining regulatory
             approvals for any of our current or future product candidates;

• the number and characteristics of the product candidates we pursue;

•            the cost of manufacturing our current and future product candidates
             and any products we successfully commercialize;


•            the cost of commercialization activities if any of our current or
             future product candidates are approved for sale, including
             marketing, sales and distribution costs;

• the expenses needed to attract and retain skilled personnel;

• the costs associated with being a public company;

•            our ability to establish and maintain strategic collaborations,
             licensing or other arrangements and the financial terms of such
             agreements; and


•            the costs involved in preparing, filing, prosecuting, maintaining,
             defending and enforcing possible patent claims, including litigation
             costs and the outcome of any such litigation.

Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.
Contractual Obligations
In March 2014 we entered into a license agreement under which we made an up-front payment and are obligated to make annual payments and, subject to certain terms and conditions, milestone payments upon achievement of development milestones and a royalty based on sales of products developed under the agreement.
In April 2014 we entered into a lease for laboratory space under which we are obligated to make lease payments of approximately $5,000 per month. The initial lease term is for a period of 36 months, and we have an option to renew the lease for one additional year at a market rate. Off-Balance Sheet Arrangements
As of March 31, 2014, we did not have any material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Recently Issued Accounting Pronouncements We believe the impact of recently issued standards that are not yet effective will not have a material impact on our financial statements when the standards become effective.


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