Aratana Therapeutics' (PETX) CEO Steven St. Peter on Q3 2017 Results - Earnings Call Transcript

Aratana Therapeutics (NASDAQ:PETX) Q3 2017 Earnings Conference Call November 3, 2017 8:30 AM ET

Executives

Rachel Reiff - Corporate Communications

Steven St. Peter - President and CEO

Craig Tooman - CFO

Analysts

Tim Lugo - William Blair

Bruce Jackson - Lake Street Capital Markets

Swayampakula Ramakanth - H.C. Wainwright

David Gu - Jefferies

Operator

Good morning and welcome to the Aratana Therapeutics Third Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Rachel Reiff, Corporate Communications. Please go ahead.

Rachel Reiff

Thanks and good morning, this is Rachel Reiff, Corporate Communications for Aratana Therapeutics. In a few moments, Dr. Steven St. Peter, President and CEO of Aratana Therapeutics will make some opening comments; and Craig Tooman, our Chief Financial Officer, will then review the third quarter 2017 financial results and then we will open it up for Q&A.

Before we begin, I’d like to let you know that we will be making some forward-looking statements today. These statements involve uncertainties and risks and therefore should not be relied upon as predictions of future events. Actual events and circumstances, which may be beyond our control, may differ from today’s forward-looking statements, including, but not limited to, as a result of the risks, uncertainties and other important factors set forth in our filings with the SEC. Steven?

Steven St. Peter

Thank you Rachel. Good morning, this is Steven St. Peter, President and CEO of Aratana Therapeutics. I'm pleased to review the highlights from third quarter of 2017 and the weeks thereafter. Let me begin by saying that Aratana is very excited to be in the market with our third FDA regulated pet therapeutic ENTYCE for appetite stimulation in dogs. In October, we completed the regulatory interactions required to make ENTYCE commercially available. And I'm pleased to note that earlier this week; ENTYCE began shipping to veterinarians across the US who have been early awaiting its arrival. This is Aratana’s third launch of an FDA approved therapeutic in the past year.

NOCITA and GALLIPRANT were launched in late 2016 and early 2017 respectively. With NOCITA our focus has been on surgeons practicing in mobile specialty clinics performing canine cranial cruciate ligament surgery, a common type of new surgery. We called on more than 90% of the target we've identified as perspective customers for NOCITA. Approximately half of those clinics have used NOCITA and our data shows what we believe is a significant percentage of accounts from new ordering.

Our objective in the remainder of 2017 and into 2018 will be to deeply penetrate these accounts and continue to work to establish NOCITA as the standard of care. From a lifecycle management perspective, we anticipate expanding the NOCITA label in 2018 to include caps and we will continue to look at other indications in dogs beyond CCL repairs.

With GALLIPRANT, we've been working very closely with our marketing collaborator, Elanco Animal Health, a division of Eli Lilly and Company. Well, Aratana developed GALLIPRANT from a clinical proof of concept through FDA approval; we signed a landmark collaboration with Elanco in 2016. That collaboration puts our emerging sales force alongside Elanco’s factor of 10 larger sales force and a comprehensive network of distributors as we entered the competitive multi-100 million dollar canine osteoarthritis pain market in the United States.

That market is a market that Elanco knows very well given their other products in the pain category. Yet, we Aratana believe that GALLIPRANT could become Elanco’s largest therapeutic in the pain category, which is quite remarkable actually. Other aspects of the GALLIPRANT collaboration have included Aratana’s manufacturing and supplying therapeutic. Our objective has been to transfer that responsibility to Elanco in 2017. And today we are pleased to report that Elanco has assumed that responsibility.

Separately we’ve working on a technology transfer to a second ATI vendor and Aratana’s role in the transfer has also been handed off to Elanco. These manufacturing related handoffs will have some financial implications including several residual matters in the fourth quarter of 2017 which Craig will discuss in a few moments.

The final aspect of the GALLIPRANT collaboration that I'll mention is Aratana’s responsibility with respect to certain regulatory matters, one, during the third quarter Aratana requested that the FDA see the transfer of the NADA to Elanco. And two, during the third quarter, Aratana has completed the regulatory interactions in Europe, where Aratana anticipates will result in a positive opinion by EMA this year and a marketing authorization in the first half of 2018.

Upon marketing authorization Aratana intends to hand off the remaining GALLIPRANT regulatory responsibilities in Europe. Craig will also discuss the financial implications of this regulatory piece. We believe that between NOCITA and GALLIPRANT, Aratana has quickly established itself in the companion animal segment of the animal health market over the past year.

In addition, because ENTYCE was approved last year, but not available until we received CVB approval of our manufacturing transfer, we have been able to spend the last several quarters preparing the market for ENTYCE. So now comes ENTYCE and we intend to leverage the experience that we've gained over the past year to further demonstrate our pet therapeutics commercial model.

We continue to believe that we can strategically balance our direct sales organization with distributors to optimize our commercial efforts. We are also working directly with several national and regional corporate customers, which we believe constitute approximately 10% of all veterinary clinics in the US. Hence we believe that ENTYCE is well represented and the competitive issues will be manageable because ENTYCE is the only FDA approved appetite stimulant in dogs.

With ENTYCE, Aratana is defining a new pet therapeutics category in appetent and ENTYCE is a tool very well suited to the task. ENTYCE mimics ghrelin, the naturally occurring hunger hormone. It’s administered daily as an oral solution. And the product profile resonates with veterinarians and we believe that ENTYCE is being very well received in these early days. We look forward to providing more details on the rollout of ENTYCE as it enters the market.

We believe that success as a leader in pet therapeutics will require a portfolio of compelling general practice therapeutics complemented with specialty therapeutics. And we're very proud of our initial portfolio. With respect to the FDA regulated products, Aratana is primarily focused on new chemical entities that have not been previously approved in animals or pets excluding parasiticides, what we call pet NCEs.

To put our initial FDA regulated therapeutics in perspective, we're proud of the fact that Aratana has developed both of the fully approved pet NCEs in the past four years. And more perspective, Aratana estimates that the entire industry has only had seven pet NCEs approved in the prior decade. Aratana believes that GALLIPRANT and ENTYCE could become two of the three largest revenue producing pet NCEs launched in the US in the past decade.

In addition, while not meeting our definition of a pet NCE, NOCITA which was also approved by the FDA in 2016 is indeed innovative, given its unique formulation and the fact that it the first [indiscernible] approved in pets. So we consider our progress to-date a good start. Immediately behind the commercially available therapeutics that I just discussed, Aratana is working to advance and identify additional therapeutic candidates.

First, AT-014 for dogs, AT-014 is a novel canine immunotherapy for the treatment of canine osteosarcoma. We continue to anticipate conditional licensure from the USDA this year. And if we’re granted conditional licensure we anticipate making AT-014 available to a limited group of veterinary oncologist as we complete the additional work required by the USDA for full licensure.

Second, I will discuss AT-002 capromorelin for cats. Aratana continues to enroll pivotal field effectiveness study evaluating capromorelin for weight management in cats with chronic kidney disease. If capromorelin is approved in cats, it would be approved under a separate NADA and marketed as a distinct brand.

Third and finally, AT-016, allogeneic adipose-derived stem cells for dogs. AT-016 is a therapeutic candidate for the treatment of osteoarthritis pain in dogs. We in-licensed the therapeutic candidate from VetStem Biopharma, exclusively in the United States for dogs. And VetStem is responsible for the development pursuant to our license agreement.

VetStem is conducting a pivotal target animal safety study and separately a pivotal field effectiveness study. And we expect results from both studies this year. Recently, VetStem submitted the CMC technical section for AT-016 to the FDA. Hence we believe that we are making good progress on AT-016.

And that concludes my update on individual and therapeutic candidates. I'll now turn it over to Craig, who will present the financial results. Craig?

Craig Tooman

Thank Steven and good morning everyone. Let me echo how pleased we are to be launching ENTYCE. This will impact our financials beginning in the fourth quarter and we believe really sets the stage for the long-term growth of Aratana. Now let me turn to the third quarter financial performance. As reported in our earnings release issued last evening, our total net revenues for the third quarter ended September 30, 2017 was $6.2 million. The $6.2 million is comprised of product sales and our licensing and collaboration revenues.

Our product sales include $3.2 million in GALLIPRANT product sales to Elanco for finished goods supply. You may recall that we previously announced that we anticipated the manufacturing transfer to Elanco would occur by the end of 2017. During the third quarter as noted we agreed to terms and timing of the official transfer of manufacturing and US regulatory responsibilities to Elanco.

We anticipate the final inventory accounts and payments for residual inventory of GALLIPRANT to be completed in the fourth quarter of this year, which will result in product sales of approximately $6 million. Beyond the fourth quarter, we do not anticipate further product sales of GALLIPRANT inventory. Just as a reminder, the GALLIPRANT product sales also result in cost of products sold with a small manufacturing margin.

Therefore we believe the overall financial impact from the finalization of this transfer is not significant. We are pleased to see sequential growth and continued market adoption in NOCITA. Our NOCITA net product sales were $717,000 compared to $637,000 in the second quarter of 2017. We continue to be encouraged by the continued growth in NOCITA, which correlates with a positive feedback we are receiving from those veterinaries using NOCITA in their surgeries.

Our licensing and collaboration revenues from our agreement with Elanco increased to $2.2 million this quarter. The $2.2 million includes $1.2 million from the co-promotion for Aratana sales efforts and royalty revenue which compares to 804,000 for the second quarter of 2017 plus an additional $1 million payment as part of the agreed upon manufacturing transfer. This $1 million payment is not related to the contractual milestone associated with the manufacturing technology transfer and the collaboration agreement with Elanco.

As previously mentioned, the contractual milestone is achieved once the GALLIPRANT manufacturing technology is transferred to an additional third-party provider. For the nine months ended September 30, 2017, our licensing and collaboration revenue was $4 million versus $38.3 million for the same period ended September 30, 2016. In 2016, the licensing and collaboration revenue included $38 million for the collaboration agreement with Elanco.

The $6.2 million in total revenues for the third quarter of 2017 compares to approximately $40,000 in revenues in the third quarter of 2016. For the first nine months of 2017, total revenues were $15.1 million versus $38.3 million for the first nine months of 2016, with a difference largely resulting from a revenue associated with the upfront payment from Elanco.

I would like to take a minute to describe the revenue cycle for ENTYCE, which we are very pleased it was made available to veterinarians beginning in late October. We will be utilizing national and regional distributors to help sell this product. Therefore, Aratana will record revenue upon the sale to distributors. Aratana will also record revenue to any accounts that choose to buy direct from us. Distribution is responsible for selling the inventory purchase from Aratana to veterinaries. We believe this go-to market strategy will build a strong awareness for the product and allow for quicker adoption.

Now let me turn to our expenses. Our cost to product sales totaled $3.7 million in the third quarter of 2017 versus approximately $300,000 for the same period in 2016. This increase includes cost of GALLIPRANT supply which is sold to Elanco and cost of NOCITA sold to the market. As mentioned, we anticipate all residual matters related to the assumption of manufacturing and responsibility and the still remaining GALLIPRANT inventories will be completed in the fourth quarter of 2017. We do not anticipate any further cost for GALLIPRANT inventory beyond the fourth quarter of 2017.

For the nine month period ended September 30, 2017 costs of product sales were $10.5 million compared to $2 million for the same 2016 period. The 2017 costs are largely associated with the inventory sold to Elanco for GALLIPRANT. In 2016 and nine months included a write-off of inventory. Of our research and development expenses this quarter totaled $3.2 million compared to $5.3 million for the third quarter in 2016.

For the first nine months of 2017, R&D expenses were $11.6 million versus $21.4 million for the first nine months of 2016. Although we continue to fund several pivotal programs, the decrease in R&D expenses was primarily due to milestone payments which were achieved in 2016. Additionally, SG&A expenses in the quarter ended September 30, totaled $6.9 million compared to the same amount for the third quarter of 2016. SG&A includes commercial activities to support our available products in the market.

For the nine months September 30, 2017, SG&A expenses were $21.3 million compared to $19.6 million for the same period ended September, 30 2016. We believe that the SG&A expenses will remain relatively consistent through 2017 as we have the commercial and corporate infrastructure largely in place to support our commercial efforts.

Overall, Aratana reported a net loss of $8.9 million or $0.2 diluted loss per share in the third quarter of 2017, which compares to a net loss $13.4 million or $0.38 diluted net loss per share reported for the third quarter of 2016. For the first nine months of 2017, Aratana reported a net loss of $31.9 million or $0.80 diluted net loss per share compared $10.2 million and net loss of $0.29 diluted net loss per share for the same period of 2016. The 2016 financial results were largely impacted by the revenue associated with the upfront payment from a collaboration agreement with Elanco.

Turning to our cash and liquidity, as of September 30, we had approximately $70.7 million in cash, cash equivalents, restricted cash and short-term investments. We believe that our current cash position will allow us to fund our current operating plan and our debt obligations through at least 2018. We believe our future cash runway is largely dependent upon a successful launch of ENTYCE, continued growth in NOCITA and GALLIPRANT along with the achievement of certain Elanco collaboration agreement milestones.

As a reminder, we have previously stated that we are eligible to receive $4 million milestone payment related to the transfer of GALLIPRANT manufacturing to a third part supplier, which under certain circumstances we anticipate in 2018. Again that milestone is not related to the transfer of manufacturing responsibility to Elanco, which has been completed.

We are also eligible for $4 million milestone payment upon European marketing authorization for the treatment of OA pain and inflammation in dogs. We continue to anticipate that the EMA will issue a positive opinion for GALLIPRANT in dogs in EU in late 2017 and marketing authorization in the first half of 2018. However, Aratana anticipates Elanco and Aratana mainly to make additional EMA regulatory filings to achieve the specific indication needed to achieve the $4 million milestone payment. The implication of the additional filings may delay the achievement of the milestone into 2019.

Finally, based on achievement of certain annual GALLIPRANT net sales thresholds we are also eligible for sales milestone payments. The first of these milestones would be a $15 million payment which we believe we could earn as early as 2018. In summary, we are very pleased to be able to add ENTYCE to our portfolio of marketing pet therapeutics, we continue to remain focused on investments that will grow available therapeutics in the market and developing further innovative products to meet the therapeutic needs of companion animals.

Now we’ll pleased to open it up for Q&A. operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Erin Wright with Credit Suisse.

Unidentified Analyst

This is actually [indiscernible] on for Erin. And congrats on your launch and taking our question, thanks for taking our question. Can you seek to say just the initial traction of ENTYCE in the field, any initial feedback that you’ve been getting thus far. I know it’s been pretty relatively soon.

Steven St. Peter

As I mentioned we were really getting ENTYCE into the hands of veterinarian this week, which is very exciting for us, but we have had a lot of ability to talk to veterinarians over the course of last several quarters about the product and the interest is very strong. I think we've said in the past our market research shows 81% of veterinarians are looking for solutions to deal with an appetent and we get that. We have been taking preorders. We've now converted those into orders and hopefully those veterinarians are starting to get the product in their hands.

There is from our perspective, from our market research more than 10 million dogs a year that show up at the clinic with a complaint of inappetent. And it's a mixture of acute inappetent and inappetent mad currently there's really no approved therapy. So you can imagine in that market to walk in with a product that FDA approved it's been shown to be safe and effective in stimulating the appetite that mimics the naturally occurring hunger hormone growing and it's orally administered that is a sale that our reps can make and to the extend people want to get in the underlying biology on that and we can. In fact there's a micro-site up on the product, there's an animated video that demonstrates the science.

The human medical doctor, we didn’t learn about growing, when I was in medical school, and I don't consider myself that old, but it’s a emerging shield and for people to science on that is very exciting. So based on all of those things there is lots of enthusiasm for the product and that's why we really took the time to scale up the manufacturing and be where we are to be able to launch the product. And working with distribution, we've trained distributors, there are out talking to their customers, they're excited to have a new therapeutic to launch. As I mentioned previously there is really not a lot of pet therapeutics that get launched. They had I think a really good experience with GALLIPRANT which they attribute in part to Aratana as well as Elanco. So I think distribution is excited and we see that. So for the first few days actually in the market we're very excited.

Unidentified Analyst

And how we think about sort of the ramp up of ENTYCE sales given the sort of distributor stocking and sort of moving forward into 2018.

Steven St. Peter

So, the way that works is we are working with distribution and the vast majority of clinics prefer the order through distribution. So they prepare order in and it shows up with their other products from their preferred vendor. So, our revenue cycle is, we ship to distribution and then distribution ships the clinics. But revenue as Craig mentioned that we book is as we ship into distribution. So obviously there is an inventory load in that first quarter. I think people saw that with GALLIPRANT as well because Elanco also uses distribution.

And then as that product flows out into the clinics and dispensed, we are replenishing distribution. So, over the months and quarters post launch, you begin to see a normalization of that re-supply into distribution which gives kind of the revenue ramp and that's what we'll be reporting. So that's the way it works. And hopefully that’s insightful.

Operator

The next question comes from Tim Lugo with William Blair.

Tim Lugo

So following up on the distribution, should we expect a bullish revenue recognized in Q4. And then also should we not get nervous if in Q1 2018 there was a sequentially down quarter. Can you just speak to how things will sequence out over the next few quarters.

Steven St. Peter

So the way that that works is, distribution is very sophisticated in their ability to move products. They actually - they keep a pretty thin inventory, so they would look at maintaining inventory for a month or two basically. So it's not like they bring in inventory based on our revenue forecast that we kind of help them understand that is going to be sitting around for month and month and months. But there is the possibility that you have depending on the inventory load and how that goes, there could be some imbalance in those first couple of quarters. But in the long run as I mentioned earlier you see that pull through relatively quick.

And again you have the advantage of you know we’re working with all three national distributors, we’re working with a full complement of regional distributors, so any abnormality in one distributor typically across the distributors kind of works out. And the other thing that I’ll mention is we see data from the distributors, they give an EDIP that we take because we want to see the pull through into the accounts because that's important for our sales force incentive comp. So it doesn't exactly tie to the net revenue that we book as we sell the distribution, but we are very focused on understanding where that product is going because a distributor may ship from a regional or national hub and you want to know which of your reps are generating sales.

And fortunately over the course of the last year, with Elanco we have been receiving data from Elanco on where revenues are going and that's how we've been compensating our sales force as well. So we've been with GALLIPRANT sort of working on this, understanding this and obviously we have a very senior group of professionals at Aratana. But as we go into the ENTYCE launch, there will be that kind of early lumpiness, but on the other hand, I think over time it works out and that will be a good ability to read-through revenues based on how we’re reporting them.

Tim Lugo

Can you talk to maybe some of the marking synergies between NOCITA and ENTYCE? Should there be a positive halo with the two products, I mean should we expect maybe a ramping of NOCITA as well as ENTYCE gains traction.

Steven St. Peter

There are synergies across the portfolio of pet therapeutics. And I think we definitely have talked about that. And I will get to your question about NOCITA and ENTYCE, but let me comment first on GALLIPRANT and ENTYCE. I mean there are a lot of similar targets. Our reps have been using this opportunity to understand where the ENTYCE business is given that ENTYCE is FDA approved and we can talk about it, we have them, we just haven’t been able to take orders. So ENTYCE is the product that like GALLIPRANT is relevant to the general practice veterinarian because as I mentioned earlier ten million dogs are showing up with an appetent. That is seen across the veterinarian industry.

But in addition, ENTYCE is relevant in the setting where NOCITA is sold. Because NOCITA which is a surgical specialty product currently labeled for cranial cruciate ligament in dogs, those hospital across the country that do orthopedics they tend to also have oncology and cardiology and internal medicine. And those doctors are very interested in ENTYCE because it helps them gain control of the symptom, while they diagnose and treat the underlying condition. So there is actually a nice overlap with ENTYCE with NOCITA, but also with GALLIPRANT. So NOCITA is as we've talked about a really nice product that fits into the market that is both relevant to generalist and specialist.

Now having said that, your question about a ramp up in expectations on NOCITA, I mean clearly we do expect to continue to get NOCITA accepted as a standard of care. We obviously will focus more on ENTYCE over the next few quarters. But I totally expect NOCITA to drop off in terms of over the next several quarters, it’s really, you know, there definitely is seasonality in surgical procedures and we're getting into that. So you may see some of that, but we think the additional brace around ENTYCE and the presence that we is a great opportunity to reinforce the NOCITA message and that's exactly what we've given our reps the marching orders to do.

Operator

The next question comes from Bruce Jackson with Lake Street Capital Markets..

Bruce Jackson

First question on the gross margins, when you're selling through a distributor, what do you anticipate the impact might be on the gross margin profile?

Steven St. Peter

Well, Craig will give you more detail on that, let me give you my kind of view of that. So we are selling to distribution what we're booking is revenue already taken into account the discount because we – that’s the way that that works. So it doesn't impact gross margins from that perspective. And we do distribution deals at a kind of industry normal discount. We have a one price policy at Aratana so no one, you know, a price to a vet is a price of vet and then we maintain that. But distributors depending on how much of their margin they want to give up, they can I guess sell to customers at a slightly different price and you see that in other products. So distribution, to answer your question doesn't hit the gross margin, it's above gross margin. And I don't know, Craig if you want to provide more sort of…

Craig Tooman

Let me just take it up one notch, I know you’re asking more specifically about ENTYCE and gross and adds, but also if you look at our gross margin profile over the next couple of quarters, I think it's worth noting, we do expect product margins to improve slightly in the fourth quarter as we sell more ENTYCE, which have very, very minimal costs. As you recall, we wrote off the commercial supply previously. So that actually is going to be a good situation. Starting with the completion of the inventory transfer to Elanco, and over that longer period of time and remember that inventory had a very low manufacturing margin, we also believe the margins will improve.

So those two factors will have an impact, because the GALLIPRANT situation obviously as Craig just mentioned is impacting overall company gross margins, but of course the ENTYCE gross margins are impacted by, it should be appropriate we wrote off that inventory, while we're waiting for the approval of the transfers, now, we sell that inventory. So, the gross margins on ENTYCE look good in that short term. But the product margin for ENTYCE over time, we're targeting kind of industry normal gross margins for ENTYCE over time and like many companies, you have to get there over time on volumes and continue to make improvements to your supply chain. Hopefully, that's helpful context.

Bruce Jackson

It is. Thank you. And then you mentioned seasonality in the surgeries, can you just elucidate upon that in terms of like the quarterly impact, which quarters are higher or lower due to seasonality?

Steven St. Peter

Yes. The seasonality exists in the animal health industry. So, like the spring is the flea, tick season and so that's when the companies put flea, tick products into their rotation and that’s what they focus on. Typically, as you go into the holidays between Thanksgiving and Christmas, you don't see as much scheduled surgeries, which you will appreciate surgeries or scheduled surgeries. Now obviously, you're going to still see surgeries, but like a lot of businesses, we may not see as many of these in other quarters. I think that frankly I'm not really aware, I'm not really aware of other seasonality, other than kind of the holidays are not a great season for surgeries. Having said that, as I said, we continue to expect to see NOCITA used during the holidays.

Bruce Jackson

Okay. And then last question on NOCITA, you’ve talked about maybe giving a licensing deal in Europe or finding a partner, any update on that?

Steven St. Peter

Yeah. So thanks. So it’s worth noting that the only product that we have encumbered outside of the US really is GALLIPRANT. And Elanco has the global rights for that product and we’re excited about that. We participate in both royalties and achieving milestones, so we're very excited to see Europe come on board and begin to collect those royalties and have that counts towards certain of the milestones. But we do continue to work on ENTYCE and NOCITA and other products in Europe, but those are the products that come after 2018. So really no urgency to focus on partnering those products.

We do anticipate that ultimately we will partner with those products in Europe, but that comes at some point later. We think the validation of NOCITA and ENTYCE commercially in the US is going to help us drive the partnering terms. So that's why we decided to take 2018 to focus on really growing ENTYCE and NOCITA and then turning to partner as we enter ’19 and beyond.

Operator

The next question comes from Jon Block with Stifel.

Unidentified Analyst

This is actually [indiscernible]. So I had two for you. I guess with ENTYCE and just kind of the rollout process, maybe as a diagnostic player have a distributor. I was wondering if Aratana has anything like that in place and if not, can you just talk about how your direct reps kind of work with the distributors on that and how that relationship is.

Steven St. Peter

Yeah. So let me talk about that. So the way that Aratana has approached this, as you look at the veterinary clinics across the US, of which there is approximately 25,000, if you look by metropolitan service area and you try to figure out how many veterinarians you can reach by calling in certain MSAs, we estimate that with the approximate size of our Salesforce, i.e., we can actually reach about 40% of the clinics because those MSAs that we call on with those reps, that's where the population centers are and that's where the hospitals are. So your first strategy is to definitely cover with direct and make that happen.

So, our Salesforce is organized so that each of our regional sales leaders has approximately 4 to 5, what we call Aratana therapeutic specialists are sales reps. So the regional sales leader is definitely coordinating the territory managers if you will. But in addition, the regional sales leaders are also calling on other customers who might be in their region that aren't necessarily covered by a rep. So the regional sales leaders not always support and lead the organization, but also have important calling responsibilities in other high value areas.

And then we also do inside sales, so we have a group of folks that we’ve contracted that do telephonic sales into, let’s say, another dozen or so metropolitan areas and that gives us coverage that approaches, we think, more than 50% of where the hospitals are. So how do you get the other 50? Well, that's where the distribution really comes into play. So, you do want to work with distributors in your territories and that really is a multiplier in the territories, but in addition, the distributors, we train our regional sales leaders to work with the distributors.

We have a couple of national account managers whose job it is to train and work with distribution and make sure we're in their system, we know how to support distribution because picking up presence in that other part of the country is obviously important. But we don't think, at this point, it justifies us growing this direct sales organization when we have the ability to work with distribution. So, really the sizing of our sales forces was really set up to deal with what we see is a reasonable return on capital for building the Salesforce, but then engaging distribution elsewhere to really help drive it.

And then the other piece of course is corporate accounts, our national count managers do cover the large chains of hospitals that we have agreements with them, even cover up to 800, 900 hospitals with one corporate relationship and those folks have the ability to train in their network, to support the product, make the product available. So that’s the way, it was very different than human medicine, but there is multiple channels you work on and depending on what you're seeing, you focus your effort where you're seeing it.

The presence that you’re building at national conferences, I mean, we believe Aratana is, we’ve recently seen market research where even ENTYCE at launch is a known brand in a one market survey, up to half veterinarians. I mean, that’s pretty remarkable and it's being at trade shows, talking to KOLs, we call on vet schools, and then the final element is we have a vet services organization which are veterinarians that are aligned with each territories, so each of our territories has a regional sales leader and a veterinarian that can answer questions that may have and kind of on the medical side, it’s medical selling. So you have a bunch of ways that you're executing and we’ve been executing on that with respect to GALLIPRANT, working with Elanco, but also NOCITA, now ENTYCE, it kind of adds to that.

So hopefully that is some color. I will also mention that we actually have hired some of our Aratana Therapeutic specialists and regional sales leaders came from distribution. So, we are partnering with distribution and really trying to understand how that works and making this therapeutic model work by engaging distribution.

Unidentified Analyst

And then just the second one, Eli Lilly talked about on their call, maybe the potential the spinoff of Elanco, just wanted to know if this has any implications to your agreement and just how you’re thinking about that? Thank you.

Steven St. Peter

So, we’re always pleased to see that animal health division with a large pharmaceutical company is getting more and more attention. It’s not just Elanco, but also Merck Animal Health recently was in the news for their solid performance, obviously Zoetis having come out of Pfizer. So we love the animal health industry, which was a footnote for a lot of the pharma companies is really coming into fruition.

We think that Elanco has been very good partners on GALLIPRANT. I think we've said that, we've delivered, I think, both sides. So we're very excited. I think change always creates anxiety and we've got to manage that, but in change comes opportunity and there's lots of ways that we see that potentially working very nicely for us. But we obviously are watching it. But we're kind of excited to see the industry continue to evolve and try to figure out how our model of pet therapeutics and our focus on companion animals is a model that sits in the larger landscape.

Operator

The next question comes from Swayampakula Ramakanth with H.C. Wainwright.

Swayampakula Ramakanth

Steve and Craig, congratulations on another quarter and also thanks for taking my question. So to start off, after commercializing GALLIPRANG and NOCITA for a bit of time now, what are some of the learnings that you're using from that into commercializing ENTYCE?

Steven St. Peter

As I alluded to earlier, GALLIPRANT was a really nice proxy for dealing with the general practitioner who does therapeutics because we’re selling a novel mechanism of action in an established market that's been around for decades and we're trying to change behavior around a new mechanism of action. Unfortunately, I think working with distribution, obviously Elanco is very helpful. The reason we did that deal is to have enough share of voice to really have the veterinarian understand why a non-concentrated product or the product, why that science matters and selling that and we believe, based on some third-party data that GALLIPRANT is now the second most commonly stocked oral tablet in veterinary clinics within like a couple of quarters.

So that it remarkable. And so, the learning there is selling a new mechanism of action and being able to do that is going to be relevant for ENTYCE. I think the other thing that we've learned is, don't make it hard. Like if they're ready, they want the tool, you can provide it, you can take the order and you don't need, but we may want to get in and talk about the science. We're able to do that or we're able to mobilize our veterinary medical liaisons to come in and do that. So I think a leading general practitioner who wants to do therapeutics and knowing what their information need is going to be and then having the tools that you make available, so you don't overwhelm them, but as they want to learn more, there's information. So our reps have digital sales aids on their computers.

We have microsite on the products. We have medical literature, we have E&Ls, but we also have the ability just to take the order. So that's I think important for ENTYCE. The other one is NOCITA as I mentioned really, you sell at a specialty hospital. So you walk in the door and you're trying to get the time of a surgeon or a ER doctor or an oncologist or an internist, again, most of the reps in the industry, they’re selling to those customers, they're looking at the inventory manager, they're looking for free space for the vaccines.

Our reps have to be able to get in and establish the relationships and really deal with the specialist veterinarian and understand how to create new markets and work with the specialists. So I think that ENTYCE really fits between the two competencies, general practitioners and specialists and knowing how to navigate that is I think the key learning. And the other key learning which our average reps have more than a dozen years of experience in -- they know the territory they are in by and large. So, this wasn’t a key learning for them, but knowing how to work with distribution is a key thing and our reps have embraced that because distribution is a multiplier. And, that's the way that it works.

Swayampakula Ramakanth

This actually helps me lead into the next question. So when your folks are commercializing NOCITA, are they at the same time starting to indirectly collecting some markups as such for how that option could look like in cats and can you highlight anything, if they’re doing that at all?

Steven St. Peter

Yeah. So in fact, the first email that I had this morning was from our senior director of marketing and we were talking about what we're doing to collect feedback from the field and making sure that I'm with everyone in the organization on top of it, because interacting with customers is a great opportunity to gain insights and I believe your question was in selling NOCITA for dogs, are we learning about the cat opportunity and yes, I didn’t mention it, but we have made the regulatory filings to help on the safety and the effectiveness and CMC has done, so eventually as I’ve said once we get those responses, we will be moving forward for a label expansion in cats.

So yes, you can imagine that we're out there understanding that opportunity in cats. I think our reps, they do it as a regulated industry, our reps need to be very professional, only talk about things that are on label, but if there is interest, our debt services folks can certainly talk about some of the additional work that we're doing, but having reps in the field is a great opportunity to do market research every day and we do that.

Swayampakula Ramakanth

Kind of switching to OpEx and collaboration, especially with Elanco, what do you think has been working well, what needs to be sneaked out a little bit and from your -- from what I understand, it looks like the variable interest rate is, what is your appetite for additional collaboration, this large cap animal health companies for other folks?

Steven St. Peter

Yeah. So one of the things that I think is working very well with Elanco is, one of the other interesting stats related to an earlier question is, after we signed the GALLIPRANT collaboration with Elanco, Elanco bought the several hundred million dollar vaccine business from Boehringer Ingelheim, which they closed earlier this year. So literally, at the same time, we're launching GALLIPRANT, they're now selling a vaccine line, which wasn’t on the table when we did our collaboration. That actually worked out pretty well because selling vaccines is a pretty intense effort. So to have the ability to have been bringing Aratana rep to talk about GALLIPRANT, I think that was a nice working relationship and the Elanco reps and the Aratana reps worked very well together in the territories. I literally don’t -- it continues to be very positive.

I don’t know of any negative examples and that was for a variety of reasons, but the idea that they can cooperate to build a market and share it is a -- it's a pretty compelling one. And I think that worked very well. I think that people need to focus on that, but selling vaccines in Flea, Tick and Heartworm is not the same as selling to therapeutic and we’ve consistently tried to articulate the commercial model for pet therapeutics has depreciated and the one that we’re trying to develop that expertise. So you can be sure that that's a message that we will be carrying to the larger companies. They have their own challenges as they continue to consolidate and focus on these GT practices where they're selling the other types of products. We think there is a real role for Aratana to collaborate and work well there.

To answer your question, our intent is not to partner ENTYCE with a large company, we think because there is nothing in that category, we can work with distribution directly on that, but we think there is an opportunity for us to potentially get involved in other brands that other companies have and ultimately that allows us to get to critical mass. We're committed to innovation. We continue to bring technologies forward to develop new products.

That’s our core, but that doesn't mean that we can't get involved with other end market products and help better approach this therapeutic opportunity and this experience with Elanco I think is one that will be very interesting to other folks in the industry. And so over the -- that's not our focus in 2017. Our focus in 2017 is ENTYCE, NOCITA, GALLIPRANT, but as the model moves forward, I think it becomes interesting.

Swayampakula Ramakanth

So the last question for me, if the USDA approves the conditional licensure, how quickly do you think your folks are ready to start commercializing the product?

Steven St. Peter

So the way that that works with USDA is you get the approval, you’re going to have to obviously go get the individual manufacturing lot, approve that takes a few months perhaps, but you’re able to quickly get in in the market and we do have the commercial supply plan obviously that’s fit along with this idea of after conditional licensure in a couple of months, be in the market. But more than a work a smaller subset of veterinarians, it is a conditional licensure. Make sure that there is an additional safety study as part of getting a full license that we just talked about needing to. So we’ll be working immediately within months. We have a number of those oncologists.

I think last week or, but in the last couple of weeks, we’ve actually had the investigation meeting with those several sites that are going to be bringing that product into the market. So we’re ready though. We’re waiting on conditional licensure, unlike the FDA, there is no statutory kind of timeline. The USDA works through and ultimately you get your conditional licensure by snail mail. They literally mail it to you. So we literally check the mail to see if we have the conditional licensure and as of this morning, we did not.

So, but we're ready to go, but again, it’s not -- to your point, it's not going to be a big product that's promoted with amongst all of the therapeutic specialists. It will be a lot of our VMLs working on it, working with the oncologists to clearly know. But I'll tell you oncologists see an appetence and on Saturday, there was a breakfast we hosted at the Veterinary Cancer Society meeting and the room was packed, 100s of oncologists in the room learning about ENTYCE. So I think those products work well together, but to your point, what we’re going to be doing with 014 is a lot smaller commercial effort, appropriate for where that drug is and the specialty nature of it.

Operator

The next question comes from David Gu with Jefferies.

David Gu

Yes. So just a few questions on ENTYCE. The first question is, in terms of the pricing, can you just talk a little bit about the pricing for this product and how it compares to what’s available on the market right now? Question number two is with regard to the inappetence population, are there any specific groups of patients that you think may be more of the low hanging fruit that you can penetrate more quickly and your thoughts on the sizes and the treatment duration for those populations? And then the third question is the timeline for ENTYCE over in Europe.

Steven St. Peter

David, you may have to repeat a couple of those questions, but let me just start with a one on ENTYCE pricing and where we are. We have a one price policy to that and that price is, the product comes in three formats, a 10ml, a 15ml and a 30ml. So depending on the weight of your dog, you use your appropriate volume to dose the dog and veterinarians are very familiar with weight based dosing. It’s a bit like pediatrics, but the price of those vials are $22 for the 10ml, $26 for 15ml, and $48 to the vet on the 30ml. And so based on the concentration, 30mgs/ml and based on the dose of the drug, 3mgs/kg, you basically get to for a medium sized dog, about $2.50 a day to the vet for the product.

And it’s more expensive for a larger dog and it’s less expensive for a smaller dog and that’s normal with same GALLIPRANT, depending on large small. .That’s how that works. What’s available today? Nothing is available today for inappetence. It’s FDA approved. Veterinarians will use a compounded drug called mirtazapine that’s available as a gel that a couple of generic houses make that available. They also make that available as a tablet and it’s atypical antidepressant that has one of the off-label effects that it believes that it causes weight gain, but again not FDA approved. There is more hope for that product frankly in cats and dogs, but with respect to dogs, I think pretty frustrated with their current options and including mirtazapine, the one that I mentioned, 81% of the vets are not satisfied with their current options. So that hopefully gives you some insight.

In terms of the low hanging fruit for inappetence, I think literally it’s the dogs that, the vets have been waiting for us to bring this product to market. And it’s across both acute setting and chronic settings and so obviously to one of the earlier questions, we will definitely be paying attention to where that early uptake is and definitely have a sense of where we want to go in terms of low hanging fruit. We also know where we want to avoid. I mean, [indiscernible].

Monitoring appetite is the number one thing that a pet owner uses to assess their dog's health. So what we don't want to do is get a dog to, it’s really crashing and they try ENTYCE. The other dog that earlier in that disease, so educating vets, don't wait till the end to use ENTYCE, use it sooner, use it often. We have a safety study in lab dogs where we go over 15 times the dose for a year and it was very well tolerated and it was well tolerated in the field play. So it's a safe therapeutic. We want that to use earlier and as opposed to the low hanging fruit, we definitely want to avoid the situations where the dog is just too far gone.

In terms of ENTYCE in Europe, we haven't given guidance on that other than what I already said, which is we don't expect in 2018 and so that's not on the near term. But we are working to continue to look at how to bring [indiscernible] forward in Europe, cats, dogs, there is a variety of considerations that we're considering how to move that forward. So I don't know if there were others that you wanted me to answer or Craig to answer, but hopefully we’ve got your list.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Steven St. Peter for any closing remarks.

Steven St. Peter

So thank you, operator and thank you everyone for your time today. Here at Aratana, we’re actually approaching our seventh anniversary, which will come next month and just taking a moment to reflect. I mean, we really have been building this company with a concept that the veterinary industry continues to evolve and that the medicalization of that market is one that continues and the need for therapeutic support, the medicalization of that market is, we think, a great opportunity and a real need. And it's also very clear that the segment we picked that’s contained in animal market, company after company after company, you talked about animal health.

It’s the companion market which is where the growth is and where the margins are and we think that not only companion, but the therapeutic part of the companion market is where you want to be. And in the time since we started this company, we started the company, Apoquel had never been launched, but I think that did a really nice job of demonstrating the potential of a pet therapeutic and now GALLIPRANT is off to a very good start and ENTYCE is out of the gate. In addition, people are making good progress with NOCITA, which is more specialty focused. So we continue to believe in the innovation model and both the need and the opportunity for the model and we're simply very excited to continue executing this exciting pet therapeutics market. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.