About: Kindred Biosciences (NASDAQ:KIN) is a biopharmaceutical company focused on saving and improving the lives of pets. The company's core strategy is to identify compounds and targets which have demonstrated safety and efficacy in humans and to develop therapeutics based on these compounds and targets for pets including dogs, cats and horses. KIN has two drugs that have successfully completed pivotal clinical studies (Mirataz for weight loss management in cats and Zimeta for the treatment of fever in horses) and are scheduled for launch in 2017. In addition, the company has more than 20 other drugs in its pipeline.
Background: KIN was formed by an impressive team of executives who have extensive experience bringing human drugs to market. Dr. Richard Chin, a founder and the company's CEO, has developed drugs with current annual sales of over $10 billion. The company's mission is to use its extensive human capital talent to bring innovative, breakthrough therapies to "animal family members".
Pet Market: The pet insurance market is in its infancy and largely ineffective. As a result, the vast majority of pet medical expense is paid for by pet owners. Without the insurance safety net to pay for enormously expensive drugs (as we have painfully witnessed on the human side), pet medications typically have a total market value of between $10 million and $100 million with more reasonable out of pocket costs - much smaller than comparable human drugs. However, that does not mean the pet market is unattractive. Increasingly, pet owners are treating their animals as part of the family. Today, we spend approximately $1.5 billion on pet knee surgeries annually and nearly half that on Valentine's day gifts for pets. Additionally, KIN believes the path to approval for pet medications should be 3-5 years (~12 years for humans), with a cost of $3 million-$5 million (varies widely but can be as much as $1 billion+ for humans) and a success rate that is 50%-70% (typically less than 10% for humans). While significantly smaller in total market size, the pet drug industry may offer more attractive returns on investment than the human market. In addition, there are fewer competitors and a very ineffective generic drug market.
Stock Background: KIN came public in December of 2013 at $7 per share. The stock ran to a high of $27 per share in March of 2014 as investors became increasingly excited about KIN's management team, strategy and pipeline potential. Unfortunately, the company's first two drugs targeting osteoarthritis pain and inflammation and post-operative pain in dogs both failed to meet the primary end point. Investors were understandably upset by these developments causing shares to fall below $7 by December 2014. The stock has traded between $3 and $7 for the past two years and has largely been left behind by both the buy and sell-side community. A strong argument can be made with approximately two years of cash burn on the balance sheet, two drugs expected to generate revenue in 2017 and several other potentially significant data readouts over the next 24 months that the company has never been in a stronger position.
Trial Failures: Failure of KIN's first drugs appear to be a major indictment of the strategy. A closer look reveals both of the drug trials had subjective endpoints - that is dog owners were asked to determine how their animals felt after receiving either KIN's drug or a placebo. A reasonable investor could understand how the placebo preformed much better than expected as owners wanted to believe their animals were feeling better. Management quickly pivoted and re-shuffled their pipeline priorities to focus exclusively on studies with objective endpoints. Management deserves a lot of credit for quickly realizing areas for improvement and positioning the company for future success. Since the first failures, KIN has successfully completed two pivotal trials - with expected launches in 2017 - and has a number of other potential data readouts next year and beyond.
Market for Approved Drugs: Current expectations have KIN's two drugs that have successfully met pivotal trial endpoints peaking in annual revenue at approximately $60 million. I believe these estimates could be extremely conservative. Weight loss and anorexia is estimated to affect approximately 9 million cats with no approved FDA treatment options (until Mirataz hits the mkt). If even 200k of the 9 million are chronically ill, treated every other day for $2 / day (200k*$2*365/2) the market for Mirataz alone would be more than $70 million annually. It is not difficult to make reasonable assumptions about the market size for Mirataz that would exceed peak annual revenue estimates for both of KIN's drugs expected to launch next year.
Valuation: KIN has a market cap of approximately $110 million and an enterprise value of approximately $50 million. With more than $60 million of cash on the balance sheeet, no debt and a burn rate of approximately $20-$30 million / year, the company has enough resources to fund development opportunities for at least the next two years. Assuming $60 million of estimated peak annual sales, KIN currently trades at .8x EV/sales on just the drugs which have already met their pivotal trial endpoints and are planned for launch in 2017. I am not aware of any animal drugs that have met their pivotol trial end point and weren't approved for launch by the FDA. At the current price, investors appear to be giving the company little value for the drugs it plans to launch next year or its pipeline (KIN has also made a meaningful investment in a state of the art manufacturing facility that will be approved for use by the FDA in 1H 2017 by the FDA).
Stock Opportunity: KIN appears to be an under followed and undervalued play on one of most interesting investable themes for 2017 and beyond - the humanization of pets. Investors appropriately punished KIN for the failure of its first drug candidates. However, it appears the significant progress management has made over the last two years has largely gone unnoticed. Comparable companies and acquisitions have typically traded between 5x - 10x sales (implying KIN EV heading towards $300 million -$600 million or pps ~$15-$30 as the drugs are launched). Based on the company's recent successful trials, it is also probable KIN delivers on one or more additional pipeline products in 2017 which would increase future sales estimates and likely drive additional stock upside. The company's EPO drug in particular could generate peak sales over $100 million on its own. Lastly, the recent VCA Inc (NASDAQ:WOOF) transaction (principally vet clinics) at 18.5x EBITDA provides another strog indication for the interest and value in the broader pet market place.
While KIN remains a risky development stage biopharmaceutical stock that is transitioning to a commercial stage company in 2017, the underappreciated progress the company has made over the past two years and potential for additional new drug approvals make this stock an attractive risk reward for the coming year and into the future.
According to recent filings, more than 11 million of the approximately 20 million shares outstanding are held by five influential holders, including Dr. Chin, making this a low float stock with potential for outsized stock price moves
- EPO pivotal trial (anemia in cats) - could be one of the largest drugs in the pipeline with potential to be greater than $100 million in annual sales.
- KIND-014 pivotal trial (equine gastric ulcers) - could read out in 2017 as well.
- KIND-015 (metabolic syndrome in horses) pilot study and potential pivotal study.
- Commission manufacturing facility.
- Pilot studies for cancer in dogs.
- Atopic dermatitis - pilot data and potential pivotal trial.
Richard Chin, MD, Founder and CEO, is a Harvard-trained physician and a former Rhodes Scholar with a track record of almost a dozen drug approvals and over 50 INDs. Drugs Richard developed, including Lucentis®, Xolair®, Tysabri®, and Rituxan® for immune diseases, have current aggregate sales of well over $10 billion per year.
Denise Bevers, Founder and COO, is an expert in clinical operations, medical affairs, and scientific communications. Denise has over 20 years of pharmaceutical and research experience, and has managed dozens of products and development programs from Phase I through Phase IV. She was previously at Elan Pharmaceuticals, Scripps Clinic and Research Foundation, Quintiles, and SkyePharma.
Stephen Sundlof DVM, PhD, CSO, and EVP of Regulatory Affairs, served as the Director of the Center for Veterinary Medicine at the FDA from 1994 to 2008 where he oversaw all veterinary products regulated by the FDA. He also served as the Director of Center for Food Safety and Applied Nutrition at the FDA from 2008 to 2010. Steve began his career in 1980 on the faculty of the University of Florida's College of Veterinary Medicine. In 1994, FDA Commissioner David Kessler named him the CVM director.
Disclosure: I am/we are long KIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.