Aratana Therapeutics (PETX), based in Kansas City, engages in the development and commercialization of novel drugs for the treatment of various diseases in pets, primarily cats and dogs. Aratana went public in June, and raised a total of $39.7 MM at $6 per share in its IPO, which was fully subscribed. Since then, the shares have traded as high as $10 per share, providing early investors a nice return. However, the IPO pricing of $6 per share was significantly below the originally planned range of $11-13 per share, signaling some hesitation on the part of investors to value the clinical stage company above the $200 MM market cap at the time. I believe this hesitation is unwarranted and stems from investor uncertainty around Aratana's novel business plan, which I discuss below.
Aratana's Business Model and Strategy - Aratana focuses on in-licensing compounds from pharma and biotech with established safety and efficacy data in both animals and people. The idea is to develop and commercialize these compounds for companion animals (primarily cats and dogs) via the FDA's Center for Veterinary Medicine (CVM), and take advantage of the fact that many companies do not bother with this pathway or develop drugs specifically designed and dosed with pets in mind. Most of the time, human drugs are simply used for pets under a trial and error procedure.
Aratana has begun development in cats and dogs on 3 clinical programs, called AT-001, AT-002, and AT-003. They have also recently introduced a new "Option Program," which allows Aratana to license compounds if they succeed in trials, complementing traditional licensing and product acquisition approaches. Under this new program, Aratana has signed 3 option agreements, of which one is in human phase 3 trials, another in phase 2, and the last in phase 1. Each of these fulfills an unmet need in pets, and Aratana paid less than $1 MM total for the rights to all three. Upon success in trials with animals, Aratana will presumably opt-in thereby increasing the clinical pipeline at minimal cost.
Aratana estimates it only costs roughly $10 MM and less than 5 years to move a drug through the CVM, which is far below the cost to develop the comparable drug in humans. This figure includes dose-ranging studies and pivotal trials in "client-owned" animals, as opposed to laboratory animals. Success under these "real-world" scenarios will give Aratana and the prescribing veterinarians confidence in these products. Furthermore, Aratana plans to build a portfolio of products and the requisite sales force to sell these drugs to veterinarians, thereby becoming a fully-integrated animal-health company.
In a vote of confidence, a few well-known venture capital firms currently back Aratana Therapeutics, including Avalon and MPM Capital. I believe these investments signal a vote of confidence in both the company's business model and its management team, which has significant experience developing and commercializing pet therapeutics.
Overall, the business model's advantages can be summed up below:
- Low asset acquisition cost
- Demonstrated safety and preliminary efficacy data
- Low development costs and a quick timeline
- Growing and increasingly lucrative companion animal markets
To help investors understand the business model, management is being proactive in engaging with the investment community. On September 11, management will be hosting an investor update focused on communicating the regulatory framework for pet therapeutics and provide additional updates on the clinical programs. I believe that as people become more comfortable, the stock will continue to move up.
Upcoming events: Various clinical data and progress is expected for the 3 lead compounds in cats and dogs in the next 6 months:
Dog: Results of dose-ranging field study expected in November 2013
Cat: Results of proof-of-concept study expected in November 2013
Dog: Initiate pivotal studies in 2013, results expected in Q4 2013 - Q1 2014
Cat: Continue pilot studies to establish proof-of-concept and pivotal study design; results expected 1H 2014
Dog: Initiated dose-ranging study in laboratory dogs; anticipate initiating discussions with the regulatory agency on the program in 2013
Cat: Initiate dose-ranging study in laboratory cats in 2H 2013
Animal and Companion Animal Market - As most people would guess, the market for Pet products is quite large. In total, it has been estimated by the APPA that consumers spent $53 BB on their pets in 2012, representing 5.5% CAGR since 2006, even through the recession. The majority was on cats and dogs. This has primarily been driven by increases in spending per animal. However, not all of this is for pet therapeutics. From Aratana's S-1:
The U.S. veterinary care segment has been among the fastest growing segments of the overall U.S. pet market, increasing from $9.2 billion in 2006 to $13.6 billion in 2012, representing a CAGR of 6.7%. We estimate that of this $13.6 billion, approximately $6.3 billion was related to consumer spending in pet medicines, which included approximately $4.7 billion for parasiticides and vaccines with approximately $1.6 billion for pet therapeutics. We derived these estimates using data from Vetnosis Limited, a research and consulting firm specializing in animal health and veterinary medicine, for sales of pet therapeutics directly to veterinarians and then adjusted the number to reflect a typical industry mark-up charged to the pet owners by the veterinarian. The $1.6 billion U.S. pet therapeutics market represents less than $10 per year per pet.
Aratana has the potential to both capture market share from existing therapies with limited efficacy and safety data in companion animals as well as increase spending overall, with new efficacious options designed specifically for companion animals. Aratana hopes to accomplish this by using the CVM procedure. From the S-1:
There have been relatively few approvals granted by the Food and Drug Administration's, or FDA's, Center for Veterinary Medicine, or CVM, and the European Medicines Agency, or EMA, in recent years despite a generally faster, less expensive and more predictable regulatory approval process for pet therapeutics than human therapeutics. For example, in 2012, 39 new human drugs were approved by the FDA, while only 11 new drugs were approved by the CVM, six of which were for use in cats or dogs. We believe that the pet market, driven in part by expansion of the veterinary care segment, will continue to grow and that the introduction of novel pet therapeutics offering significant safety and efficacy benefits over existing products will result in pet therapeutics garnering a larger share of total consumer spending on pets.
Even though Aratana currently does not have any revenue and will not for a few years it is important to look at the economics of the veterinary medicines market. Unlike drugs for people, vet practices generate a substantial amount of money by prescribing pet therapeutics, and serve as both doctor and pharmacist. Pet owners purchase the drugs directly from the vet. Aratana plans to capitalize on this dynamic.
Regulatory Process - While there are many similarities between the FDA's process for drugs targeting human diseases and the process for drugs for animals including establishing safety, efficacy, and manufacturing quality, there are major differences of note. In general, for drugs targeting animals, there is significantly more dialogue between the company and the regulator, and smaller and quicker trials, resulting in a more capital efficient and rapid process. To establish efficacy, Aratana will need to first establish dose ranges and then test the product in real world conditions. These pivotal trials are submitted for review and concurrence with the CVM, almost like an SPA for a human drug. Furthermore, these pivotal trials are randomized and controlled clinical trials that will enroll client-owned animals. From start to finish, Aratana only requires approximately $10 MM and less than 5 years time.
Background on Clinical Programs
AT-001 - is a selective EP4 antagonist in-licensed from RaQualia, a Pfizer spin-out, designed to treat osteoarthritis pain in both cats and dogs. Osteoarthritis is the most common inflammatory joint disease in pets, and prevalence increases with age. Aratana's research indicates that the number of pets diagnosed with arthritis has significantly increased over the past five years and an estimated 13% of all geriatric dogs, and 22% of geriatric large and giant breed dogs, are diagnosed with arthritis. Currently, analgesic and other anti-inflammatory drugs are used to treat the diseases, including NSAIDs (including COX inhibitors). Rimadyl (carprofen) is the most commonly prescribed drug in this setting, however, there are significant side effects seen with drugs in this class for a number of dogs. As a result, there is labeling language around blood testing. Furthermore, cats metabolize the drug differently and Rimadyl is not indicated for use in cats. Aratana is targeting this market which is estimated to be approximately $260 MM in annual sales for analgesics and with approximately $220 MM for the NSAID class specifically.
Aratana has already conducted 9 month long safety tests in dogs and 28 day safety tests in cats. In dogs, the profile looked clean, while in cats there were signs of potential liver toxicity. AT-001 has already gone through proof-of-concept studies in laboratory dogs with artificially induced osteoarthritis, demonstrating the compound is effective. Currently, another study to confirm the efficacy and select a dose is underway in client-owned animals enrolling over 300 dogs. Effectiveness in the study is being determined by using a validated pain scoring system referred to as the Canine Brief Pain Inventory, or CBPI, which is administered by the dog owners. The CVM has reviewed the study protocol and concurred with the design. The study should be completed in late 2013, and Aratana expects ultimate approval in dogs sometime in 2016.
In cats, Aratana expects to report the results of an additional proof-of-concept study by Thanksgiving to further explore the therapeutic window.
AT-002 - is a potent and selective ghrelin agonist also in-licensed from RaQualia, a Pfizer (PFE) spin-out, designed for the stimulation of appetite in both cats and dogs. In particular, loss of appetite is a major problem in dogs with cancer or chronic renal failure. While AT-002 will not treat these underlying causes of inappetence, it should help to improve overall treatment outcomes. There are no currently approved therapies, and lack of appetite and the resulting downward spiral of health often leads to euthanization.
Aratana plans on using the results from the 12 month dog toxicology study to support the application for regulatory approval. Overall, the drug was well tolerated. In addition, the data safety package will include a pharmacokinetic study that bridges the formulation used in this toxicity study to the final commercial formulation. Several studies in healthy dogs with various daily oral doses of AT-002 for four to ten days were completed prior to Aratana's licensing AT-002. These studies demonstrated increased food intake and weight gain. Furthermore, Aratana confirmed these results and conducted their own seven-day, placebo controlled, blinded dosing study in dogs to confirm these results. In cats, the situation is more complicated. While the safety profile in cats looks clean, establishing efficacy has proved more challenging. Management sums up the overall situation succinctly; from the most recent quarterly conference call (transcribed by Seeking Alpha):
With respect to our cat program, we are continuing to conduct pilot field studies to establish proof-of-concept and pivotal design, and we expect results in the first half of 2014.In our initial pilot study, the owner assessment instrument did not work as it had in dogs. Cats seem to fight themselves on masking their behavior, well, dogs are somewhat easier to assess. Hence we would like to extend the treatment period and measure weight gain. In laboratory cats we did see weight gain and increase food intake. So the task now is to replicate that effect in client-own cats with inappetence.
Currently, Aratana is working with the CVM to obtain concurrence on a pivotal design in dogs and expects to commence the trial before the end of the year. Anticipated approval is also sometime in 2016.
AT-003 - is a potent and selective bupivacaine liposome injectable suspension in-licensed from Pacira Pharmaceuticals designed to manage post-operative pain in cats and dogs following surgery. The drug has been approved for use in humans as a post-operative analgesic by the FDA. It has been selling quite well too, as evidenced by Pacira's stock price. The formulation has been shown to extend the duration of human post-operative analgesia from approximately six to eight hours, to as long as 72 hours in some instances, which can eliminate the need for follow-on post-operative administration of other pain drugs.
Bupivacaine is a local anesthetic with a history of use in the US of more than 30 years and its pharmacology, pharmacodynamics, and toxicology in laboratory animals and humans is well understood. Furthermore, b
Bupivacaine is widely used by veterinary surgeons. AT-003 is a 1.3% bupivacaine liposome injectable suspension consisting of microscopic, spherical multivesicular liposomes, which is Pacira's proprietary DepoFoam drug delivery system.
Currently, the only drugs approved for treatment of post-operative pain in cats and dogs are NSAIDs and fentanyl. In surgeries associated with the most severe post-operative pain, fentanyl is commonly used and requires the animal to be kept in the hospital. As with AT-001, the same group of NSAIDs approved to treat the pain and inflammation associated with osteoarthritis in dogs are used for post-operative pain. For cats, only two NSAIDs are approved by the CVM for use in post-operative pain and others are used off-label. Of the approved drugs, there is Onsior, which is given orally and is approved for no more than three days of use, and Metacam, which is approved for one injectable dose only. Consequently, there is a result for efficacious and safe drugs for the management of post-operative pain.
The safety of AT-003 has been demonstrated by Pacira during their clinical development. As a result, Aratana has seven studies that to support approval for AT-003 in dogs, including 60 dog studies. These studies demonstrated that the drug was well tolerated with only minor injection site reactions as side effects. Although efficacy has not been established in cats or dogs, the efficacy of the active ingredient bupivacaine is well-established in these species. A dose-ranging study in laboratory dogs has been initiated, and one in cats is set to begin later this year following successful completion of a pilot safety study recently. Aratana anticipates filing for regulatory approval in 2015 expects NADA approval in 2016 or 2017.
Risks Factors - As all investors in biotech and pharma know, the drug development process is time-consuming, expensive, and above all, uncertain. While Aratana's unique business model seeks to mitigate some of these risks, there is still significant uncertainty in the commercialization process. Manufacturing is one potential area that management has identified that may delay commercialization, although Aratana is taking steps to ensure a steady supply. Furthermore, as most pet owners know, measuring efficacy in cats is not-trivial, especially if it's based on owner's assessments. Also, building a sales force to sell these new drugs will require significant investment. While reimbursement is not nearly as big of an issue in the companion animal space (insurance is <5% of the companion animal market), that does not mean Aratana will be able to charge exorbitant prices. Revenue per animal is certain to be less than the comparable revenue per patient for the comparable drug. Furthermore, the animal health landscape is filled with big pharma competitors. Zoetis (the animal health spinoff from Pfizer), Merck (MRK), Sanofi (SNY), and Novartis (NVS) are such competitors. Any of these could turn their attention or use their size and scale to muscle into Aratana's niche.
Fundamentals and Financials - With the IPO providing $34.2 MM in net proceeds in July, 2013, cash and cash equivalents post-IPO totaled approximately $57.1 MM. According to management, PETX has enough resources to initiate the planned clinical trials this year without accessing the capital markets immediately for at least 24 months, and further anticipate having approximately $45 to $50 MM of cash on hand at the end of the year. In the most recent quarter, Aratana spent $3.7 MM in operating expenses, and spent $7.1 MM in operating expenses during 1H 2013, highlighting the capital efficiency of the business model. Aratana does not expect to generate meaningful revenue until the products are approved in 2016, so it is likely that future capital will be raised from the public markets. Furthermore, prior to any product launches, Aratana will need to recruit and train a sales force, which will increase expenses in the future.
Currently, Aratana runs a very lean operation with only 16 full-time employees supporting the deep pipeline. If Aratana is able to execute on their strategy and secure approval for 1-2 different drugs in the next 2-3 years, the company's current market cap of $178 MM (August 15, 2013) may seem cheap. I do not currently believe that any of Aratana's products will sell more than $200 MM annually, but a portfolio of 2-3 products in the future can reasonably be expected to sell $100 to $150 MM annually, easily supporting a 4x revenue multiple - or $400 to $600 MM market cap or 2-3x return.
Conclusion and Future Directions - Overall, Aratana Therapeutics offers biotech investors a unique opportunity and diversification away from the traditional biotech and pharmaceutical plays. With a unique business model focused on the commercialization of drugs with demonstrated efficacy in animals, Aratana is poised to capture the growing market for pet therapeutics. In particular, Aratana's in-licensing model allows Aratana to capitalize on the favorable trends in the sector while minimizing development costs. Given the strong cash position and multiple shots on goal, Aratana is poised to deliver outsized returns.