Parnell Pharmaceuticals Holdings' (PARN) CEO Robert Joseph on Q2 2016 Results - Earnings Call Transcript

| About: Parnell Pharmaceuticals (PARN)

Parnell Pharmaceuticals Holdings Ltd. (NASDAQ:PARN)

Q2 2016 Earnings Conference Call

August 04, 2016, 08:00 AM ET

Executives

Robert Joseph - President and CEO

Brad McCarthy - CFO

Analysts

Kevin DeGeeter - Ladenburg Thalmann

David Bautz - Zacks Investment

Sherry Grisewood - Dawson James Securities

Operator

Good morning, ladies and gentlemen, and welcome to Parnell’s Investors Conference Call for the Six Month Period Finishing June 30, 2016.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Joseph, Parnell's President and Chief Executive Officer. Mr. Joseph, you may begin.

Robert Joseph

Thank you and good morning. Today, we announced financial results for the six month period ending 30 June 2016. The press release covering this period is now available on the Investor page of our website at parnell.com.

Joining me today is Brad McCarthy, our Chief Financial Officer. I'll review key aspects of Parnell's commercial business and product development programs, and Brad will discuss our financial results, we’ll then open up for questions.

During the course of today's call, we may make a number of forward-looking statements, which involve various risks and uncertainties about future market conditions and our company's projected performance. Although our statements reflect our current beliefs and expectations, we cannot make any guarantees about actual future events. You can read about these risks and uncertainties in our press release and other SEC filings. As a foreign private issuer, we also denominate our financial performance in Australian dollars unless otherwise specified.

The strong start to 2016 we announced in the first quarter has accelerated as of 30 June, 2016. Our revenues have grown to $8.2 million, a 67% increase over the same period in 2015. We had notable above-planned performance for our U.S. Production Animal business, the Australian Companion Animal business and the commencement of contract manufacturing operations.

Based on the strength of our revenue growth year-to-date, we're increasing full year guidance for 2016 from our original estimate of $14 million to $16 million to now a $17 million to $18 million. A large part of the increase in guidance is attributable to the strong performance of our U.S. Production Animal business.

Sales grew 40% to $4.1 million for the first half of the year compared to the same period in 2015. We anticipate this growth rate will continue throughout 2016. We continue to increase customer acquisition through the roll-out of mySYNCH from the strength of our clinical science leadership.

Sales for the Companion Animal business grew 158% to $1.5 million for the first half of the year. Much of this growth is attributable to the progress we're making, establishing our U.S. Companion Animal presence.

Our U.S. sales and marketing team are deploying our digital platform FETCH in veterinary clinics and we now have over 7,000 pet parents who have used the FETCH app with many going on to use Glyde, our unique nutraceutical product for osteoarthritis in dogs.

This strategy of establishing a strong footprint in the U.S. Companion Animal market prior to the launch of Zydax is proving successful and we anticipate we could have as many as 50,000 pet parents in days with Parnell using FETCH and Glyde by the time of Zydax's approval.

As we've consistently stated, our strategy of using digital technology to engage directly with pet parents is a proven an effective market expansion strategy. This model continues to be successful in Australia five years as evidenced by the 37% growth of the Australian Companion Animal business year-to-date.

The second quarter of 2016 marked a momentous occasion for Parnell with the commencement of contract manufacturing operations. As we previously announced, we entered into a long-term contract with Merial and successfully delivered their first order in rapid time.

This multimillion dollar contract is the first of what we anticipate could be many contracts further announcements anticipated this quarter. In the coming months, we expect to launch Reviderm, a unique antimicrobial spray on liquid bandage that supports rapid wound healing.

Our preliminary market testing of this product across a large number of veterinary clinics has generated very positive feedback and interest. Based on our success of expanding from pharmaceutical into nutraceuticals with Glyde, we're certainly expecting to launch Luminous, a nutraceutical product for dermatological conditions and those will be based of the same natural anti-inflammatory we're using Glyde with the addition of active ingredients known to support skin healing and hair growth.

The addition of these two new products will add the revenue generating capacity of our sales team leading up to the launch of Zydax.

Last quarter, we updated the market on the status of our Zydax filings communicating that we had received responses from the FDA to our chemistry and manufacturing control section and the efficacy section. Our scientific affairs and manufacturing teams have worked hard this quarter to progress the refilling and we're now in a position where we expect to meet with the agency to review and seek alignment on our intended responses. We expect to have those meetings in September and could expect to re-file shortly after that.

On that basis, we would expect the potential in Q2 2017 and we would expect to launch immediately thereafter. Since there is a slight delay, we're very pleased with the strong revenue growth of the company to the extent that even before we launched Zydax, we expect to return to profitability in 2017.

This provides a very strong platform on which to launch Zydax and we remain confident of the strong positioning that Zydax will have relative to competitive products.

We had multiple discussions with potential marketing partners for Zydax in Europe and we're enthusiastic about the prospects for its sales in this market and expect the approval time for it to close to that of the FDA.

Unlike some other companies, we do not need to sign a deal for Zydax on a net substantial basis, and our experience over many years is that the right deal structure and most importantly the right deal partner is imperative.

Zydax is a valuable asset and we will ensure that the deal we negotiate will provide long-term value for Parnell and the partner who can commit the appropriate focus and capabilities to make it a success. We also anticipate Canadian approval in the second half 2017 for Zydax in dogs.

Our R&D team has been very busy in the first half of the year successfully completing a pilot safety study using Zydax to treat osteoarthritis in cats. We've also commenced the pilot efficacy study for Zydax in cats and if successful we would aim to commence pivotal safety and efficacy studies for Zydax in cats in early 2017.

In addition, we're excited about the progress we're making on the development programs for PAR 121 our investigational compound for bone healing, and PAR 122 our investigational compound for skin healing. We commence manufacturing process development works for both compounds in the first half of the year and as a result we now have commence various characterization studies as well as in-vivo and in-vitro pilot efficacy studies.

We anticipate that all the studies we'll report in the second half of this year's and if successful, we could enter pivotal studies in 2017. We're particularly pleased with the efficiency with which our R&D team operates, so the cost of R&D program of Parnell is typically a fraction of many other companies.

I'd like to now turn the call over to Brad McCarthy, our CFO, who will review the financial performance for the first six months of 2016.

Brad McCarthy

Thank you, Robert. For the financial information that I will present unless otherwise stated all amounts are in Australian Dollars and also the six months period ended 30 June, 2016 as compared to the same period in 2015.

As Robert mentioned we’ve seen continued and strong sales growth across the group with total sales growing 67% to AUD8.2 million for the first six months of 2016 compared to AUD4.9 million for the corresponding period in 2015, and we continue to experience accelerated growth in both our Production Animal and Companion Animal business and now in contract manufacturing.

Once again this was an exceptionally strong sales result for us and demonstrated our go-to-market strategy in conjunction with our digital applications especially in the U.S. continue to be very effective.

Our U.S. Production Animal segment grew a further 40% over the same period in 2015, driven by strong acquisition of new customers including many from the continued roll-out of Zydax; our innovative digital technology that assist dairy producers to improve the profitability of their operations, and we expect full year 2016 revenue growth to be similar.

Our Production Animal Rest of World revenue for the period decreased 68% to AUD0.4 million compared to the same period in 2015 primarily driven by year-over-year differences in the timing of orders from our distribution partners in these markets. We expect full year 2016 revenue to this segment to show single-digit revenue growth over 2015.

In our Companion Animal segment, we saw 158% revenue growth across the U.S. and Australia over the prior period in 2015 and the continued roll-out of Glyde and FETCH in the U.S. market complimented the strong first half of the year in Australia where Companion Animal revenue grew 37% over the first half of 2015. We expect full year 2016 revenue growth to be of a similar magnitude for the remainder of the year for this business unit.

Our Contract Manufacturing segment generated its first revenues through the previously announced CMO agreement with Merial, taking advantage of excess capacity in our FDA-approved injectables manufacturing facility. This is a significant milestone for the company and we anticipate potentially adding further contract manufacturing deals in 2016. Since executing the Merial agreement in late May 2016, $2.2 million of CMO revenue was generated as of 30 June.

The company did not generate any Contract Manufacturing revenues in 2015. We expect continued growth for the remainder of the year from our existing contract and by potentially adding further contract in the second half.

As Robert explained based on our strong sales performance in the first half of 2016 we now increase our full-year 2016 guidance to AUD23 million to AUD24 million. For our current business operations we expect 2017 revenues to grow to approximately $34 million which we estimate will make the company profitable in the second half of 2017.

This guidance excludes the impact of launching Zydax in the U.S., Canada, and Europe which we estimate if approve would add substantially to the revenue and earnings for 2017.

Now moving to our operating expenditure. Cost of sales for the six months ended 30 June was $3.6 million, compared to $3.1 million in the same period of 2015. This increase was driven by sales growth of 67% on a year-over-year basis. Gross margin as a percentage of revenue, using a cost of goods sold product basis remained consistent with the first half 2015, at 84%. We expect this high gross margin level to continue for the full year 2016.

Selling and marketing expenses increased by $4.3 million to $7.8 million for the first half of 2016. This increase was driven by the establishment of our U.S. Companion Animal business to launch our nutraceutical product Glyde and FETCH, our digital technology that has now been used by over 7,000 pet parents as Rob explained, and we expect pet parent users of FETCH to increase to over 20,000 by year end. Having established this new team and our digital presence, we expect growth in sales and marketing expenditure to flatten in the remainder of 2016.

Regulatory and R&D expenses increased by $0.2 million to $0.8 million for the first six months of 2016 due to costs associated with the initiation of several preclinical and target animal studies aimed at developing our product pipeline, including PAR 121 and PAR 122 and Zydax in three lines.

Administration expenses increased by $2.1 million to $7.3 million for the six months ended June 30, 2016. This increase was driven by higher staffing and external costs to support a substantially larger commercial and R&D organization in the U.S.; increased compliance, regulatory and legal costs associated with being a public company; and shared-based compensation related to a larger base of U.S. and Australian employees. Having fully established our fully-integrated pharmaceutical operations we expect Administration costs to now remain flat for the remainder of 2016.

Finance costs increased by $0.7 million to $1.1 million for the first six months ended 30 June, 2016 due to interest cost on our current debt facility that was established in June, 2015.

Other Income and expense for the six-month period ended 30 June, 2015 we reported other income of $4.7 million for the same period and for the same period in 2016 this declined by $4.9 million to be an expense of $0.1 million.

This was primarily driven by non-recurring income that occurred in 2015 including management's reassessment of a contingent provision associated with supplier obligations which resulted in a one-time, non-cash release of $2.6 million being recorded in other income in 2015.

Also, foreign exchange movements, primarily between the Australian dollar and the U.S. dollar, resulted in an unrealized foreign exchange expense of $0.7 million in the first six months of 2016, compared to an unrealized foreign exchange gain of $1.5 million in the same period of 2015.

In addition, in the first six months of 2015, $0.4 million in government grants were received from the Kansas Department of Commerce compared to $0.1 million in 2016. In the first six months of 2016, we also recorded $0.4 million in other income as part of R&D incentives received in Australia, compared to $0.3 million in 2015.

As a result, net loss after tax for the six months ended 30 June, 2016 increased to $12.5 million compared to $3 million in 2015. Net loss per weighted-average share was $0.85 per share for the six-months ended 30 June, 2016 compared to a $0.22 per share loss for the same period in 2015.

As of 30 June, 2016, Parnell had cash and cash equivalents of $4.1 million compared to $5.7 million as at 31 December, 2015.

As we have previously communicated as a commercial stage company we continue to generate increasing cash flows from our business operations to partially fund our investments in developing our pipeline products and digital technology assets, and establishing our commercial operations in the anticipation of the approval of Zydax in the U.S in particular.

Early in the quarter one 2016, we established a facility with Lincoln Park Capital with the objective of allowing us to address the lack of liquidity in our stock. Parnell use this facility in small volumes from late March until mid May and appears to have subsequently translated into considerable increase in our share trading volume with a solid increase in our average daily volume experienced in 2016 compared to 2015, and thereby meeting the principle objective of entering into this agreement.

Furthermore is part of our capital management strategy communicated earlier in the year. In May we completed the follow-on equity raise led by Ladenburg Thalmann generating gross proceeds of $4.8 million and thereby allowing a number of additional strategic investors to join our share register.

Additionally we continue discussions for a new senior debt facility of approximately $30 million that we expect to announce subject to the completion of the agreement before the end of the year. We believe the combination of cash being generated by our commercial operations debt and equity funding that Parnell is in a strong position to judiciously manage and balance growth opportunities with shareholder interest.

We are proud of our strong track record we have in this area and we remain optimistic about our future growth prospects.

I'll now turn the call back over to Robert.

Robert Joseph

Thank you, Brad. Operator, we'd now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Joseph. [Operator Instructions] Our first question comes from the line of [Kirk Cameron]. Your line is now open.

Unidentified Analyst

Good morning, guys. Question for you on the Zydax or cats, is it true that there is really not much available for cats as far as arthritis?

Robert Joseph

Good morning, Kirk. Thanks for the question. In term of osteoarthritis in cats, we really believe that this is significantly underappreciated segment and I think one of the reasons it's undervalued and underappreciated as you describe there is very little in fact probably nothing available in pharmaceutical sense for treating osteoarthritis in cats.

Prof Duncan Lascelles, he is probably the leading -- sole leader in pain management and osteoarthritis in cats indulged in a country. He is very bullish on this sector. Nonsteroidal anti-inflammatory drugs which are very commonly used to treat osteoarthritis in dogs typically can't be used in cat because of their toxicity effects.

And this is one of the reasons why our first undertaking in developing Zydax for cat for those who want to take a pilot safety study, which performed very well. We also know that Zydax have been used for many years in a large number in cats in Australia and we have a very, very safe product.

We've a very low incidence of adverse drug experience report in Australia. So we certainly believe that Zydax could be the first - one of the first products to market to effectively treat osteoarthritis in cats.

Up to 90% of the cats suffer mostly from osteoarthritis. It is a much higher incidence rate than in fact is in dogs. And just as with dogs pet parents of cat have a great propensity to spend money to optimize quality of life and health for their animals.

So we think that it's probably not as bigger sector as Zydax for dogs. But we certainly thinks it's very large and we are very excited to be able to take one asset in Zydax that we developed and spend a lot of money on obviously developing it for dogs, and so relatively small investment to be able to add a significant additional opportunity to that asset.

Unidentified Analyst

Great. And what is your confidence of getting Zydax for dogs in Q3?

Robert Joseph

The guidance we give at the moment we are expecting approval on launching Q2 2017. That's a little bit later than we previously communicated to the market. I think having had many, many years of experience in developing drugs and in particular dealing and working with the FDA.

I think because you have 180 day review time clock on each time we submit a section, we believe it was prudent to take a little longer to prepare our responses, more comprehensive information and data and then meet with the agency to review those answers, we had conversations with them along the way.

So our expectation is to potentially take it little longer, but provide ourselves a greater degree of uncertainty that this would be the final reviewed by the FDA. So we remain very confident on the prospectus of Zydax that it's approved by the FDA.

We worked with the FDA for a number of years on drug approval from generics side and on the innovative drugs side. Zydax is a new quality drug and as a result we'll always going to get more questions then potentially - to simply bringing yet another non-steroidal anti-inflammatory drug to market.

So we are not overly surprised by the progress and the path that we've been going through with the FDA that certainly we remain confident that as when we file our Chemistry and Manufacturing Controls from efficacy section in the coming quarter and that could lead to potential proven Q2 2017.

Unidentified Analyst

Okay. Great. And how do you feel about your U.S. sales team, now it's been - I don’t know if it's been quarter or two, how are they performing up to what you'd expected?

Robert Joseph

So we have obviously both the U.S. production Animal team and U.S. Companion Animal team. Our Production Animal team had a really fantastic, very strong start to the year. And as just described that's why we're underpinning the increase in revenue guidance that we've given.

And the reason why I answer your question that first of all with the Production Animal came into we believe that's one of the strengths of our business model is that we have a proven business model from Australia where we would be very dominant in our share in both Production and Companion Animal.

We brought that model to the U.S actually with our Production Animal products; that's been very successful. So we have a fairly broad understanding of typically the ramp up if you like. Our U.S. Companion Animal team is doing very well.

Obviously they are focusing on a new paradigm maybe going to veterinary clinics, and they are introducing in digital technology platform actually designed to expand the market for osteoarthritis treatment in dogs and of course that's a new paradigm so they want to introduce.

Those clinics have placed have been performed extremely well. As we mentioned in our filings we have over 7,000 pet parents that use the FETCH platform and our objective is to continue to wrap that up as well as small delay with Zydax, frankly shouldn’t matter because that gives us a additional time to identify those dogs that they are on the Glyde now and then Zydax wanted to approve. So we're expecting now we had that an approval that potentially we could still achieve very similar revenue in 2017 because we have this large dialogue with our clientele what we've identified to our U.S. Companion Animal team

Unidentified Analyst

Great. Thanks for taking the questions.

Robert Joseph

My pleasure.

Operator

Thank you. Our next question comes from the line of Kevin DeGeeter of Ladenburg Thalmann. Your line is now open.

Kevin DeGeeter

Hey, good morning, guys. Congratulations on the solid results. I want to talk a little bit more about some of the comments you made both in your prepared script and in the press release regarding your better understanding of your increased appreciation of the market dynamic for the U.S., K90A market. Can you talk a little bit more about what you're learning from having your field sales force out talking to that and how you are applying that to potential dogs in 2017 in Zydax?

Robert Joseph

Thanks for the question, Kevin. I think what we have observed is that there has been discussion in the investment community about the osteoarthritis market for dogs and it potentially would get crowded as obviously several incumbent nonsteroidal anti-inflammatory drugs marketed by large pharmaceutical companies and that's been the standard of care for number of years. There is several products in development including Zydax in Parnell develop reporting to add value - have a differenced position in the market.

I think what we observed having actually sell product in these market for 10 years in Australia and now getting on for a year in the U.S. is that there is frankly an antipathy or - sorry, there is a degree of apathy to act adequately managing osteoarthritis in dogs We often quite with this statistics that well over 20% more likely 40% of dogs have osteoarthritis at any point in time yet typically less than 5% have been treated.

One of the reasons for that is low - ideal right of diagnosis. And we developed FETCH platform to find dogs that were younger, that were high risk of developing osteoarthritis not proactively treat and manage those dogs.

That's a pretty unique positioning the Parnell has taken. No one else is really doing that. Number one they don’t have the digital technology assets to do that. But secondly, their products don’t really lend themselves to that because they are symptom-modifying drug. And we've seen the label that's been approved by the FDA for a recently approved drug coming into this space and that frankly gave us some confidence that this product is probably going to be much similar to what's already on the market, where Zydax will likely have a very unique positioning.

We even look at one of the MABs that they developed and lot of data has been presented recently around that, and while we think it's a great product to bring value to the market. We see this is an end-stage product. It's nerve growth factor inhibitor.

So Zydax is the only product that stimulates the growth of new cartilages, stimulates proteoglycan synthesis. It inhibits the Aggrecanase 1 enzyme, which breaks cartilage down. And just as we were successful in Australia in creating this new class of drugs and creating significant appreciation by veterinarians for around how to use Zydax, how to use it earlier in the development of the disease much bigger market segment.

So we are quietly confident like not unquietly I suspect we are largely confident that Zydax has a significant opportunity in this market. We've invested well in advance of its launch to establish obtain. We know that that takes time from our experience in Production Animal. I think for U.S. Companion Animal our claim is doing fine job in establishing our presence here and we are really pleased with that progress.

Kevin DeGeeter

Okay, great. That's very helpful. And secondly, we've seen a fair amount of really ongoing consolidation at animal health industry among some of the larger players. Has that had any impact on either your discussions with potential contract manufacturers in terms of time line to potentially close new arrangement, or any of your existing contract customers?

Robert Joseph

In terms of the consolidation and how that applies to contract manufacturing, look it doesn't change things a great deal. I mean these companies are who don't have available sterile manufacturing capabilities. And what we're seeing in many cases is that the assets that exist around the world are legacy assets. They are increasingly finding it difficult, it's not impossible to keep up with the increasing regulatory bar. Our facility, of course, is very new.

It's a very well regarded by contract manufacturing or biopharmaceutical companies who we had discussions with about contract manufacturing when they come to visit that without exceptional as extremely impressed. We bring that recent inspection by the EMA, by the FDA and continue to be very successful operations. I don't think the consolidation has a significant impact and I'm going to ask Brad to add some further comment to that.

Brad McCarthy

Thank you Kevin and Robert. One area Kevin where consolidation potentially has increased the opportunity for CMRE is the Pfizer acquisition of Hospira, I think that is an acquisition where that brought Hospira info for the manufacturing capabilities.

And we are saying some approach is now for some of the fall out from obviously some contract manufacturing that Hospira currently conducts. So actually taking that into consideration it creates a stronger opportunity for Parnell. As Robert mentioned within the animal health consolidation they typically have capability ongoing and so that hasn’t impacted any of our discussion today.

Kevin DeGeeter

Okay. And then just lastly from my perspective, with regard to with your FETCH, you do some customization of that product anticipation of your introduction into the U.S. market, give us your sense that is it current configuration of FETCH is optimal for the U.S. market to essentially fully prepare the market for Zydax, or should we think of an opportunity for additional upgrades to the IT platform perhaps prior to Zydax launch?

Robert Joseph

Thanks, Kevin. We can give you the scoop on that I guess. We are about to launch FETCH 2.0, which we'll launch later this month. So things coming in next week to have the regular cycle, maybe we'll roll that after then. But we have as you know large internal team in our digital technology division and the investment we made in that was quite specifically so that we could be it as and remain at the cutting-edge of digital technology development and mobile approximately development. So we will continue to roll out new upgrades, new versions of FETCH, at least a couple of times a year. That was some really exciting functionality including e-commerce capabilities that we'll launch later this year.

So, yes, most certainly we will continue to invest in that digital technology assets. We appreciated that's been something that's the investment community have asked questions and that's a different model traditional pharmaceutical companies operate. We would like to think that people are now starting to see the merits of our investments and the success that it brings. It is a different paradigm.

It does take a little longer to establish, but our experience in Australia is it creates genuine annuity strength, very strong brand equity. It turned us into B2C Company. We now have a direct communication inline with the consumer and that is never been done before in the animal pharmaceutical industry.

Brad McCarthy

And I think importantly it creates question custom styles model. We have been U.S. Production Animal business now, we have market share well above 12% yet our sales force is probably somewhere in the lines at 5% in comparison to other large multinationals. So it's a significant enhancer of custom styles and improved efficient go-to- market model.

Kevin DeGeeter

Perfect. That's very helpful. I'll get back in the queue.

Robert Joseph

Thanks, Kevin.

Brad McCarthy

Thanks, Kevin.

Operator

Thank you. And our next question comes from the line of David Bautz of Zacks Investment. Your line is now open.

David Bautz

Hey, good morning, guys. I also wondered if you can talk a little bit about the market opportunity for Zydax in Europe, or maybe how it compares to the U.S. and also will FETCH be launched in Europe.

Robert Joseph

Good morning David. Thanks for the question. Look, Zydax the U.S. is the most certainly the bigger or biggest pharmaceutical market we clearly know than on the human side and it's no different on the animal side. There are some - certainly some market dynamics that are very different in Europe. We intend to have small veterinary practices.

We intend to have a lot more or lot more that show the rich strategy intend to be little more important. But our expectation is that paid ownership and the psychology of that if you like is very analogous to what it is in the U.S.

We've recently experienced very little difference in that regard between Australia and the U.S. since we launch here. So we don’t see that to be a significant amount of customization of the positioning in the value proposition between Europe and the U.S. there will be some of course. And indeed that's why we would seek to appoint a marketing partner. There really is 27 countries and when we talk about the EU, but let's be frank it's 27 countries and then it was even within that, UK, France, Germany, probably accounts for the big chunk of the opportunity.

So one of the reasons we have been judicious in our assessment of the appropriate marketing partners for Europe is that some companies have a great strength in continental Europe and others have a great strength in the U.K. et cetera. So there's a number of partners over there.

There's more pharmaceutical companies in Europe than they are in the U.S. and so there is a number of opportunities for us to look at that. We do you think - but I think the reality that is we have to give our margin to that marketing partners, so our revenues will inherently be less coming from Europe and also in the U.S.

So you had second part of your question and FETCH yes. So the expectation is yes, we would give FETCH to the European marketing partner, we'd customize the language elements of FETCH, it's relatively easy to do. We already do that for example with mySYNCH, we have Spanish version and the English version and that is one of the appeal that we believe that enable us to negotiate a much stronger deal in terms of that flavor in the sense that we have not only the product to give them but an ability the way to sell it and the ability to sell it.

David Bautz

Okay Thanks for that. And I was wondering we could go over the developmental timeline for getting the Zydax approval in cat?

Robert Joseph

Yes, so we expect that the Zydax approval process for cats will be much simpler than the dogs in particular because the chemistry in manufacturing control section is really just a duplication of what we already have for dogs slightly different dose and concentration, so little bit of data. But that's a big part of the workload that goes into an approval and that would really - that already exist. The safety study we know from our experience with the Zydax for dogs is a pretty simple and quick or some quick. It takes about nine months, but a relatively simple study. The pilot safety study we've already done gives us great conference on that.

The efficacy study it just as dog in the course in the past that the metrology instruments that we used to measure changes in osteoarthritis with changes in activity impairment are inherently subjective. It's is not a easy, dog can't talk, cat can't talk, so it doesn’t make that harder. We've experienced that with everyone all companies experience that with the dogs. And yes recently there's been a significant increase in expectation around these metrology instruments and their application to cat to see some tool which is what we just used in your studies in dog and we will use the same in cats.

So we are right now running a pilot efficacy study. So it's a small version of what we would run for our pivotal study, we expect that to report later this year. And if that's the case we would immediately commence pivotal safety and efficacy probably simultaneously, because we've got confidence on the safety study from the pilot work we've already done.

So that could lead to - that's been ready to file and probably maybe sometime in the middle of the year to the third-quarter of 2017, which would get an approval probably in the first quarter of 2018. I mean it could be sooner than that, but I think the way we are thinking about is that we would launch Zydax for cats pretty quickly in 2018.

David Bautz

Okay. Great. Thanks for taking questions.

Robert Joseph

My pleasure, David.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Sherry Grisewood of Dawson James Securities. Your line is now open.

Sherry Grisewood

Hi. Good morning, guys. Great first half. I was wondering if you could give us a little bit more color as to how the revenue mix is going to evolve with the time between contract manufacturing and the animal health products or let's say the second half of this year and then into 2017 how that revenue mix be skewed in order for you to reach that upgraded guidance of $34 million Australian and essential profitability?

Robert Joseph

Yes, thanks Sherry for the question. At the moment our revenue mix is being dominated if you like by our Production Animal which makes sense given that was the first product we launched in the U.S. I think at the moment, though we're typically when we think of revenue mix we think of two things; one is the impact on profitability and the other is what's the potential in terms of life and life cycle. The good thing for Parnell is that all of our trade business units, Production Animal, Companion Animal and contract manufacturing is very high margin.

At the moment our blended margin sitting at around about 84%, Companion Animal is bit higher than that Production Animal sitting typically around that level. Contract manufacturing is not much less quite frankly, which is one of the big benefits of having the sterile injectable manufacturing facilities, high margin. So from that perspective we are less worried if you like about what's driving the mix because there is no diminution of margin from one or the other typically.

If we then think of lifecycle our Production Animal products are clearly more progressed in that lifecycle and we will further communicate it. The total opportunity for production animal is probably somewhere in a $25 million to $30 million unless U.S. dollars was sitting somewhere around about - yes, they are sitting somewhere in the kind of the low teens at the moment in terms of that. So if you like we are probably half way to rest of the peak sale in Production Animal.

So we expect rapid growth to continue there in 2016 and clearly that's what driving a big part of our uplifting guidance. Contract manufacturing not only did it commence, but in fact the volume of contract manufacturing we are doing on that is higher than we anticipated.

And as both Brad and I mentioned we expect in fact the potential for additional contracts this year which would have immediate commencement of revenues. So contract manufacturing is probably going to drive, you know, I would have thoughts of the singe digit to low double digit in terms of its total potential, whereas then we transfer over to Companion Animal that's not bigger opportunity.

So I would expect over the next two years that Companion Animal starts to dominate and we kind of estimate in time that probably 60 plus our revenues will come from Companion and the rest of a mixture between Production Animal and contract manufacturing.

Sherry Grisewood

Thank you.

Operator

Thank you. [Operator Instructions] I' m showing no questions at this time. That will conclude the Q&A portion of the call. At this time I'd like to turn the call conference back over to Mr. Joseph for closing remarks.

Robert Joseph

Thank you for the questions. And we are certainly happy to follow-up with any callers who have additional questions. I'd like to close by again thanking our investors for their support. And I couldn’t be more pleased with the success that our team has generated in our major growth opportunities. And I look forward to continuing to provide updates in our future successes. Thank you, and have a good morning.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect your lines.

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