Saving Man’s Best Friend

Matthew Liu

The rise of Pet Pharmaceuticals

Pomona College; March 30, 2014

Main Proposal

• Creating our “ETF” or bucket of “pure” Pet Pharma

• Zoetis (ZTS) Pfizer spin off

• Aratana Therapeutics (PETX)

• Kindred Biosciences (KIN)

Summary

• Reduced Costs to making “pet” drugs

• Technology advances

• Pet Market has consistent growth

• Pet Costs exhibit market resilience (ie recession)

• Humans and dogs exhibit similar problems

• Cancer, diabetes, high blood pressure, infections etc.

• Always has been a large market but without resources to capitalize

In Essence: Pets are like people too

Fact: pets are following “human” population trends

• Dogs are living longer 50% of all cats and dogs in the US are 6 years or older

• Pets are also becoming more obese with close to, unsurprisingly 50% being overweight

• Arthritis, cancer, asthma up

• This is a good thing: Human drugs that work=headstart

• Estimated 60% of human drugs have a similar effect

• Furthermore, due to FDA process, data already exists

Why Now?

1. Consistent growth in the industry

• Past five years % growth (5.3,6.4,5.4,3.7,4.0) Source: www.americanpetproducts.org

2. However Veterinary Costs growth have gone down

• Past 5 years (8.1, 8.3, 3.1, 1.5, exp 5.0) Source: www.americanpetproducts.org

• Pet services up

3. Insurance Cost are up though

• % growth-(11,12,18,10,14,12) Source: Embrace Pet Insurance

Food, supplies, OTC medication growth-( 4.0, 5.8, 7.6, 6.7, 7.0)

Source: www.americanpetproducts.org

Con: Some cities may outlaw selling pets ie LA

Pet Statistics: according to the 2013-2014 APPA National Pet Owners Survey

Number of U.S. Households that Own a Pet (millions)

Bird 6.9 Cat 45.3 Dog 56.7 Horse 2.8 Freshwater Fish 14.3 Saltwater Fish 1.8 Reptile 5.6 Small Animal 6.9

Total Number of Pets Owned in the U.S. (millions)

Bird 20.6

Cat 95.6

Dog 83.3 Horse 8.3 Freshwater Fish 145.0

Saltwater Fish 13.6

Reptile 11.5

Small Animal 18.1

Pet Expenditures Consolidated

Total U.S. Pet Industry Expenditures

Year Billion

2014 $58.51 Estimated 2013 $55.72 Actual

2012 $53.33

2011 $50.96

2010 $48.35 2009 $45.5

2008 $43.2

2007 $41.2 2006 $38.5 2005 $36.3 2004 $34.4 2003 $32.4 2002 $29.5 2001 $28.5 1998 $23 1996 $21 1994 $17

Dogs Cats Surgical Vet Visits $621 $382 Routine Vet $231 $193 Food $239 $203 Food Treats $65 $36 Kennel Boarding $327 $337 Vitamins $64 $77 Groomer/Grooming Aids $61 $20 Toys $41 $23

Charting “Human” Approval Process

Pre-C

• Pre Clinical Phase

• Animal Testing etc

Phase I • IND Filed, Safety in Humans

Phase II

• Safety, Dosage, Efficacy double blind testing

Phase III • Safety, Long Term Efficacy, Expanded Patient Pool

NDA

• Submit to Review

• Standard-10 Months + 60 days Priority-6 Months + 60 days

FDA • Time to market-Standard 10+ years

Chances of Success for FDA According to The Center for Information & Study on Clinical Research Participation (CISCRP)

Chances of Success

• 70% of drugs that start clinical testing make it through Phase I

• About 50% of the drugs that make it out of Phase I will make it through Phase II= 1/3 of drugs that enter clinical testing make it through Phase II.

• About 80% of the one-third that make it through Phase II will pass Phase III=1/4 of drugs making it from the IND to the NDA.

• The FDA approves approximately 60% of the NDAs it processes, allowing 16% of drugs that begin clinical testing to come to market. This process takes an average of 12 years and costs an average of $500 million to $800 million.

According to The Center for Information & Study on Clinical Research Participation (CISCRP)

What does this Mean?

• After discovery= 0.02% chance of making it big

• After Pre-C=0.4% chance of picking a winner.

Good news, your chances significantly increase once clinical trials begin.

• If you invest at the beginning of Phases I or II, you have a 20% and 25% chance respectively.

• Phase III begins=50% chance of their drug getting approved.

• Phase III trials have been completed successfully, you have a 60% chance of seeing your shares jump on FDA approval news.

Best time to invest in FDA drugs

Short Story: gambling= invest in biotech

Pre-C • Directly into Animals

Phase I • One Small Pilot/ dosage selection

Phase II/III • 1 large field study 350-500 animals

NADA • Review-180 days

Approval • Standard-2.5-5 years

However Pet Pharma is different. CVM/CVB (FDA for pets) process is highlighted below

Post Approval: Differences

Pros:

• No 3rd party payers= direct payment

• Market to Veterinarians

• =slower generic pressure

• Speed of treatment

• Lifespan/recruitment

Cons:

• Blockbuster drug=250 mil + vs. 1 bil +

• Speed of treament

Differences: 3 yers/3 mil vs 10 yrs/1.5 bil

Favors Pet Pharma

Introduction to ZTS (20% weight)

• Largest independent pet company

• Dedicated to the discovery, development, manufacture and commercialization of animal health medicines and vaccines for livestock and companion animals around the world.

• Safest Investment eps=1.01 and dividend of .29

• Currently have solid revenue and market approved drugs

• Also most diverse with vaccines and medication for farm animals as well

Price: $29.01 Volume: 6,398,897 Market Cap: 14.53 B

Introduction to PETX (40% weight)

• No current Revenue- feb 3rd publing offering=90.5 million

• Eps: -.39

• Aratana is currently developing several compounds for the large and growing pet health market

• A non-COXIB analgesic for treating pain,

• An appetite-stimulating molecule for inappetence

• A recently licensed non-opioid local anesthetic for treating post-operative pain.

• These compounds are being developed individually for both cats and dogs

• best- or first-in-class products in the animal health industry.

• 6 analysts (barclays)

Price: $18.87 Volume: 222,282 Market Cap: 553.58 Mil

Introduction to Kin (40% weight)

• IPO December 31, 2013- $7 received about 52.5 Million

• Company focuses on converting approved Human Medications to Animal “friendly” dosages and medications.

• Focus on dogs, cats, horses

They have 3 products all currently in field testing stage-with eye of 2015 market introduction. 7 drugs are in pipeline

Lead product candidates CereKin for the treatment of osteoarthritis pain and inflammation in dogs

AtoKin for the treatment of atopic dermatitis in dogs

SentiKin for the treatment of post-operative pain in dogs.

All of these product candidates, if approved, would be first-in-class drugs in the pet therapeutic market.

Bonus: Good management (Dr. Richard Chin)

Con: potential dilution/no current revenue

Price: 18.91 Volume: 102,373 Market Cap: 306.85 Mil

Hard to Assess Value

New industry makes “value” complicated

Example of potential

Human data- according to the CDC and 2003 data

128 B spent on arthritic conditions

Number crunching- 83.3 M dogs in US, 50% are over 6 yrs, 50% are obese. Let’s assume 10% of those dogs have arthritis

=2.1 mil dogs with arthritis Assuming arthritis drugs are 1 dollars a month$12 a year

=revenue of 24 mil for 1 drug assuming that all dogs are treated.

Why invest in Pet Pharma

• Cheaper, faster, and easier to develop

• Veterinarians are incentivized to help

• Growing market with current need

• Current owners buy “walmart/target” drugs or use human substitutes. Having a “brand” will change that-wipe out generics

• High insurance rates are due to low penetration (estimated 5% with 1% being of quality). Leads to less hassle and cash

• Easier to get product on market because no current drugs available. “critical desination, new drug, MUMS”