Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

Introduction

People really love their pets, and this is being reflected in the growth of animal health expenditures. The following data is taken from the Animal Health Institute (AHI) (link). The AHI splits animal health spending into three categories - Pharmaceuticals, Biologics and Feed Additives (aka nutrients).

Year

Total Spending

Pharma Growth

Biologics Growth

Total Growth (yoy)

2010

$6.9 Billion

9%

5%

8%

2011

$7.1 Billion

--

--

2%

2012

$ 7.4 Billion

5%

4%

5%

I also believe that these are among the most conservative estimates out there in terms of animal health spending. Numbers in the 10s of billions have been reported by other data collectors.

Kindred Bio (KIN) is a newly IPO-ed animal health company that focuses on therapies for companion animals. Currently, the company's top three products are being developed for dogs, although there are a number of other drugs and biologics under development for other indications/animals.

The company is traded on the ticker "KIN" and it began its debut on the Nasdaq on December 12th, 2013. The initial public offering price was $7.00 per share. The stock is already up to $12.37 per share (+ 77%), and the enthusiasm for this company seems to be quite strong. The value of the company has already jumped to $186 M.

The company's pipeline contains three products that are currently undergoing trials for three separate indications that affect dogs.

CereKin

Osteoarthritis

An interleukin-1 inhibitor used to treat osteoarthritis, backed by previously collected data

AtoKin

Atopic Dermatitis

A 2nd gen histamine blocker that has efficacy comparable to steroids

SentiKin

Post-op Pain

A rapid-acting non-NSAID, non-opioid analgesic

Animal Health Industry

"America's love for their companion animals also fueled growth in the animal healthcare sector. "Pet health is - and should be - important to pet owners. Companion animals face many of the same health challenges we do, from diabetes to cancer. New innovations in medicine help provide longer, healthier lives for our pets," said Mathews."

-CEO of AHI, Alexander Mathews (link)

We're estimating that the Animal Health industry will hit $8 B in 2014, and we are expecting a lot of it to be driven by pet health. Kindred is positioning itself nicely in this space with three late-stage products for dogs.

While pharmaceuticals and biologics don't sell for a large premium in this space, animal health companies enjoy low manufacturing costs as well as low product development time/cost. The product development costs in particular make this sector viable (from an investment standpoint) when compared to the human pharmaceutical industry. Apparently, the cost of developing a drug for a human versus an animal is 100x more - plus a longer time to market. With human drug development costs pushing the $750-900 M range, this is something Wall Street will pay more attention to.

There are also a number of advantages for animal health companies once they reach the commercial stage. For one, they are subject to fewer restrictions by the government and other large entities. Patients are paid for out of pocket, and manufacturing processes are less stringent. Vets also do most of the selling themselves, since they make a substantial portion of their income from markups on pet medications. This eliminates the need for animal pharmaceutical reps.

It is also the case that if the drug actually kills an animal after approval, it will not be pulled from the market. Instead, it would carry a warning on its label (in a worst case scenario). After a number of pharma blowups this year (Affymax, Ariad, etc.) caused by patient deaths, this is a big plus.

From an investment standpoint, this makes animal health companies a lower risk to your overall portfolio than the majority of small to mid-sized pharma companies. While a blockbuster drug in the animal health industry may only have $100 M in annual revenues, investors should consider the significantly reduced risks that come along with a smaller and safer market.

Financials

The company's financial information can be found in its prospectus (link), which provides information going up to September 30, 2013. The balance sheet at that time showed $11 M in cash, although it doesn't factor in cash generated from the IPO and other things.

The financial flow variables (9 months ended Sept 30, 2013) are much more interesting right now because they are showing the incredibly low cash burn rate of Kindred.

Research & Dev

$ 1.4 M

General & Admin

$.4 M

Total OpEx

$1.8 M

Net Loss

$1.8 M

To the best of my knowledge, there are no active pharmaceutical developers with a $186 M valuation burning cash this slowly. I've seen pharmaceutical companies that pay their CEOs as much money per year as Kindred does in three quarters. Because of this, I don't think investors will have to worry about ATM offerings.

Comparable Company Analysis

There are two other big companies in this space that have to be mentioned here:

Aratana Therapeutics (PEXT) - Another pet med company that staged an IPO earlier this year, market cap of ~$400 M. They license their compounds from pharma companies and develop them as treatments for dogs and cats. There are three main programs in trials: AT-001 (EP4 antagonist for osteoarthritis), AT-002 (ghrelin agonist for stimulation of appetite), AT-003 (bupivacaine liposome injectable for post-op pain).

Zoetis (NYSE: ZTS) - The animal health spinoff that originated from Pfizer. After a very successful IPO and transition, the company has a market cap of ~$16 B. They have a huge portfolio of animal pharmaceuticals and biologics, and they also fulfill many retail pet needs as well. I view them as a "mini Pfizer" that may start making acquisitions in the animal health space

I believe that Kindred is very similar to Aratana (both companies have three products in trials with 2/3 identical indications), and that it should move closer to the $400 M valuation of this rival company in the next few years.

Source: Kindred Bio: New, Hot Play On Animal Health