Disclosure: I am/we are long PETX. 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.
This week's small cap focus stock is a concern that is developing compounds to address the growing market for pet therapeutics.
The space has less competition than more traditional biopharma development, and drugs are also less costly to develop.
The company has had recent positive catalysts, a developing pipeline and looks well positioned for the future.
Our small cap focus stock of this week is Aratana Therapeutics (NASDAQ:PETX), a company in the rapidly growing field of pet medicine. The stock has rallied nicely recently on positive trial results with one of its main drug candidates.
The company came public just less than two years ago and sports a market capitalization of approximately $625 million. The stock had an offering price of $25.00 a share but now can be had for just over $18.00 now that the "IPO hype" has run its course. The promise and prospects of the company remain as good as or better than when Aratana debuted on the public markets in late July 2013.
The biotech landscape is full of companies tackling diseases and medical issues that plague humans. Aratana is taking a different approach to the pharmaceutical market by developing products to treat animals. U.S. pet owners spent nearly $60 billion on their animal companions in 2014, and that number will only rise as effective pet therapeutics hit the market.
Approximately two thirds of households in the U.S. own a cat or a dog. As the owner of a six year old Golden Retriever named Cooper, I can tell you that American society increasingly views its pets as members of the family, and as a result, pet owners are more willing to spend money on veterinarian care and just about anything else to make our "children" happy and healthy. Let's take a look at Aratana's development platform and how the firm leverages the human biopharmaceutical industry to create new therapeutics for animals.
Aratana's business model centers on finding treatments that work for humans and retooling those therapies to address the needs of pets. Focused on cats and dogs, the company looks for human therapeutics that can demonstrate safety and effectiveness when reformulated for animals. Management also seeks to identify products already in development for pets so it can potentially license or acquire them.
The firm tries to de-risk its investment in products by only targeting those drugs for which toxicology data is readily available, manufacturing is scaled-up, and effectiveness is displayed in clinical trials. The medical issues Aratana aims to treat typically have an unmet medical need or high incidence rate in the pet market.
The process for achieving regulatory approval of pharmaceutical products for pets is less rigorous than the same process for human products. Where it can easily cost a company over one billion dollars to formulate, test and receive FDA approval of a new drug for humans, it costs approximately $10 million for Aratana to develop a new drug candidate. In addition, timeline for developing a drug candidate for pets is shorter by about five years.
Aratana owns over 15 novel therapeutic candidates in development that target cancer, pain, lack of appetite, viral diseases and allergy. Six of these treatments are approaching commercialization and have important approval milestones in the near future.
The firm's AT-003 is an extended-release injectable candidate designed to help relieve post-operative pain in both dogs and cats. The compound that comprises AT-003 is the key component of a product launched by Pacira in 2012 to help relieve pain in humans. A 2014 pilot study brought positive results regarding the candidate's effectiveness with animals, and topline results of an ongoing pivotal trial should be available in July.
Current pain relief products on the market for cats and dogs cause significant side effects and can damage an animal's liver or gastrointestinal system. So far AT-003 has demonstrated a favorable safety profile with a lower risk of toxicity. Veterinarians perform approximately 19 million dog surgeries and 14 million cat surgeries per year, so the size of the market for this product is large. Aratana anticipates receiving FDA approval of AT-003 in 2016.
AT-002 is another candidate moving through the late stages of Aratana's pipeline. This product mimics a naturally occurring hormone to help stimulate appetite in cats and dogs. No currently approved products exist on the market to help tackle this problem, which is commonly seen in pets when they age or suffer from chronic illness. Animals typically must suffer through feeding tubes or face euthanasia if they struggle to eat and maintain muscle mass.
AT-002 could be used daily at home by pet owners to safely stimulate appetite. The candidate demonstrated significant results on eating habits and weight gain in a pilot study, and more data will be presented over the coming month with an expected approval date some time in 2016. I think the potential market for a product like this will be large because nearly every pet owner is familiar with the struggle to get an aging or sick animal to maintain a healthy diet. Positive news regarding AT-002's ongoing study or regulatory approval process could act as a catalyst for share price appreciation in the future.
Aratana possesses two therapies in the oncology market for canines that represent first-in-class products. AT-004 targets B-cell lymphoma and has been granted full licensing rights by the USDA, while AT-005 treats T-cell lymphoma and received a conditional license from the USDA. The firm intends to conduct more scientific studies to help place the products in cancer treatment protocols and expects to report on the results over the next 18 to 24 months.
Aratana holds over $80 million in cash, about 15% of its market cap, which should last the firm about two years into the future given its current burn rate. If AT-004 and AT-005 are commercialized in the near future, then they will provide a nice revenue stream and help the firm get closer to turning a profit. I see AT-002 and AT-003 as the heavier hitting products in the company's arsenal. Both candidates tackle a large market and could greatly improve the length and quality of life experienced by pets.
Commentary surrounding Aratana's future is bullish, and seven analysts have a mean price target of ~$27.50 per share on the company's stock. Piper Jaffray recently affirmed its "Overweight" rating on PETX, with a price target of $25.00 per share. The analyst at Piper Jaffray cited the upcoming AT-002 and AT-003 clinical data as a possible driver of share price appreciation in the near future.
I am long Aratana and I think the company presents a unique play on an underserved pharmaceutical market. The firm's deep pipeline and upcoming milestones represent a good mixture of near- to long-term opportunities, and the pet therapeutics market will not fall off because Americans will always bring their pets to the veterinarian and get them the help they need.