Pet Meds – Still Chugging Along

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Readers of PSW Chat know that I have long been a fan of pet companies, especially those with branded products that owners pay out of pocket to keep their animals healthy.  The industry continues to expand, whether it is food, supplies, medicines or purchasing animals themselves.  In fact, from 1994 to 2012, the industry has tripled from $17 to $53B.  For 2013, the growth estimates are a modest 4.1%.

Getting a foold suppliment or additive is not really that hard in the industry, but the branded medications/vaccines/antiboitics are much like the human path to the market.  Rigid clinical trials are done, and today over 300 products are approved for use in companion animals (dogs, cats and horses).  With most of the revenues coming from out-of-pocket funds, the market is ripe for smaller competitors to enter and be swallowed up by larger companies.

In the past few months, Pfizer (PFE) has spun off their animal health division Zoetis (ZTS), and a pet biotech Aratana Therapeutics (PETX) went public.  Merck, Eli Lilly, andSanofi have their pet divisions as well, and David Krempa (Morningstar) calls the animal health industry “a really attractive business to be in, more so than human pharma.”

It is time to look at a few of these public companies, and at PSW (in member chat), positions were intiated in ZTS and PETX.

Zoetis (ZTS) – is a global manufacturer of >300 medicines and vaccines products and currently has a market cap of about $15.3B (forward P/E is 33).  The company operates in two segments: livestock ($2.8B or 66% of revenue) and companion animal ($1.4B). 

There are a few good things to take out of the company, and one I want to hightlight in particular is their new drug to treat Atopic Dermatits (AD) in dogs.  This is an area that is growing, and the current treatment, Atropica is problematic (manufactured by Novartis (NVS)).  Zoetis has introduced Apoquel, a Janus kinase (JAK) inhibitor for AD, where an estimated 8.2M dogs suffer from this disease (~17% f the market!!).  Internal estimates indicate that this drug could bring in $50-200M, depending upon market acceptance and pricing.  Rimadyl is another drug that has been around for years, and works by inhibiting the COX-2 pathway (um, VIOXX – like).  While effective, it is not without its adverse events.  Regardless, it is a big seller (~$100M). 

Vaccines and antiboitics remain big portions of the business, with the major revenues coming from the livestock portion.  I think the company has room to grow, becoming a dominant factor in the animal health sector.

Aratana (PETX) – This Company has been on my radar for a while because 1. they are from my neck of the woods (Kansas City), and 2.  I wanted to use them for a valuation of a company I was interested in starting.  The company's lead drug is an EP4 antagonist (AT-001) for the treatment of pain and inflammation (it has shown efficacy in human clinical trials equal to that of NSAIDs).  AT-001 was in licensed from RaQualia, a Japanese pharmaceutical undergoing clinical trials for their own EP4 antagonists in humans.

In addition, the company has licensed in Exparel from Pacira (PCRX).  PCRX was discussed in member chat as an interesting play on any pullback, but for animal health, it is also a very good drug.  Exparel (AT-003) is a Depofoam release mechanism of the drug, bupivacaine (local ansethetic).  Exparel is injected in the surgical site either pre or post-surgically, and the DepoFoam increases the drugs life in the wound.  With the number of surgeries increasing…this should be a good revenue generator for PETX.

Lastly, the Company is pursuing a ghrelin agonist, AT-002, for the stimulation of appetite in cats and dogs.   It is presumed that the Company is looking at the cancer treatment angle fo ghrelin agonists, for the treatment of cachexia. 

Keeping this to a short write up so that we can focus our trading to chat…so stay tuned for more in this exciting space.

– Pharm