Aratana Therapeutics: A Pure-Play Investment Idea In Veterinary Biopharmaceuticals

| About: Aratana Therapeutics (PETX)

Summary

Aratana is a largely derisked small veterinary medicines company.

It has 3 approved products and a long pipeline.

Despite some risks, this looks like a good investment idea to keep on your watchlist.

Aratana Therapeutics (NASDAQ:PETX) is a pure play animal healthcare company founded in 2013 with a $250mn seed funding. Its motto is to study drugs in development in humans, and create comparable drugs for animal use. It has a long and deep pipeline in pain, cancer, viral diseases and allergies. It already has 3 FDA approved products, Galliprant, Entyce and Nocita, for osteoarthritis pain, appetite stimulation in dogs, and an injectable treatment for local post-operative analgesia for cranial cruciate ligament surgery in dogs, respectively. Nocita is already launched last year, while the other two will be launched this quarter, forming upcoming catalysts.

I like a small biotech with approved products and a developing pipeline; that's both stability and buoyancy in a company. Aratana will earn $128 million from Galliprant in various milestones, and double digit royalties which may hopefully amount to between $2 and $10 million dollars per year over its lifetime. Nocita is a human medicine based pain reliever currently approved for one indication for animals, but expect a lot of off-label use for what appears to be a good medicine. Entyce, its appetite stimulating product, will probably find use off-species as well - that is to say, for all those other animals that develop an eating disorder as they grow older or suffer through an illness. So, by end-2017, this $200+ million company will have a steady stream of revenue to the tune of several 10s of millions of dollars, making it a company with a strong price to earnings ratio, perhaps the key investment decision maker if you ask me. The company does have a cash burn rate of about $50mn to support that long-tailed pipeline, so until we see a couple more dollar earning products off the pipeline and into the market, we probably won't be seeing cash flow positive status for PETX. That's just my very conservative assessment of what is otherwise looking like an excellent investment in animal medicine.

Animal medicine is an altogether different "animal" than human biopharma. Investors new to the field need to have a good understanding of the differences. Broadly, I would divide these into three classes - clinical, regulatory, and commercial. In the clinical phase, the principle difference between animal and human medicine is that the former needs a single species trial, while the latter usually goes through multiple species. So if you are developing meds for us humans you need to pass it through cats, dogs, monkeys, or the ubiquitous guinea pigs. If you are developing meds for dogs, you just test it on a dog - you don't need to test it on a cat. This reduces time, and costs. By some calculations, this reduces cost by a factor of 10, and time to market by half. So, broadly, while the average cost for a complete set of human medicine trial costs $1bn, a veterinary medicine trial will cost you $10mn. Time taken, on the other hand, is 5 years for veterinary and 10 years for humans. There's one saving grace here for our little furry friends - they get their medicines much faster than us.

In the regulatory setting, there are two things that make this work faster. One, I would imagine a panel of animal experts will have a much lower threshold for approval compared to human medicine experts - animals are, after all, much sturdier than your average human and probably have a much tougher constitution. These are not scientific statements, true, but alas, much of our decision-making comes from perception than from "hard science." On top of that, the number of human meds NDAs filed in any given year is much higher than animal NDAs - in 2016, the numbers were 45 against 9 - so that reduces the FDAs work in the animal department, reducing time to approval by a good margin, I would imagine.

These are advantages. However, when it comes to the commercial stage, animal medicine is a distinct disadvantage. There's no Soliris-style orphan drugs that make half a million dollar per year per patient. There's hardly any insurance cover either, and while most pet owners I know - including myself - will do anything to relieve the mute pain of our pets, most pet owners haven't started adopting insurance in a big way. Basically, these two factors, price and the lack of insurance, make for a smaller market size for veterinary drugs. Perhaps this is the major reason there's not too many pure play and/or independent animal medicines companies out there. Most of the large ones, like Elanco, Zoetis, Vetmedica etc, are either parts of larger companies, or originated from one.

All this is directly applicable to how we look at Aratana as an investment. 3 approved products in one year and a 10-drug pipeline is big deal in human medicine; but most investors will be hard put to place Aratana geographically because it is not that big a deal despite such success.

Risks - The company did have a few setback last year. One was the cancellation of its trial for Tactress, (which it acquired through the purchase of Vet Therapeutics), because of its poor show in progression free survival results in canine T-cell lymphoma. Another was long-time partner Elanco returning it the rights to AT-006, an anti-viral for the treatment of feline herpes virus induced ophthalmic conditions. As a result, the company also decided to discontinue its AT-007 program for feline immunodeficiency virus. Before these events last year, the company was trading in the $20s range, but afterwards, it had a freefall and ended up in the $6 zone.

The company also has to make milestone and royalty payments to Raqualia and Pacira Pharma for its products Entyce and Nocita respectively. However, Entyce has had some recent troubles in the form of a press release from PETX that they will not be able to make the product commercially available until late 2017. The delay is because of regulatory hurdles in switching manufacturers for the product. While I think this is a short term issue, stock was down 18% yesterday on large volume.

Bottomline - Despite the risks I mentioned, Aratana is a pure play veterinary medicines company with good news all around, a good cash position of some $170mn against a market cap of $260mn, and a number of shots on goal besides the ones already scored. This one is a definite addition to my watchlist especially after the drop yesterday.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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