Finding More Room To Run In Animal Medicine

By | November 8, 2018

Here is one little known fact: Animal medicine companies have rewarded investors with growing stock prices, as most dramatically reflected in the positive performance of the shares of Zoetis (ZOE). It was spun off by Pfizer (PFE) in February 2013, at $ 26 a share and which traded at an opening price of $ 31.50 a share. Five years later, the stock is trading around $ 95.

But past performance is no guarantee of future success, as most Wall Streeters know.  In fact, there is an argument that contends that due to the maturity of Zoetis’ business, 60% of which is derived from livestock-related sales, may preclude such robust future returns.

Nonetheless, some savvy investors expect greater stock price appreciation within animal medicine, a sector dominated by vaccines for livestock. One notable stock is Kindred Biosciences (KIN), which specializes in developing higher-margin pharmaceuticals and biologics for cats, dogs and horses, or what the company calls companion animals.  Since May 10, when this column last reported on the stocks comprising the animal medicine space, the price of KindredBio is up about 50% to 14.47, while Zoetis increased about 15% to 92.76.

The stock of KindredBio jumped about 15% last week, following news of a successful pilot study for atopic dermatitis in dogs.

Spending on house pets is big business and only increasing in scale and scope.  According to market research firm IbisWorld, the $ 63 billion pet industry has increased in size by 22% over the past five years.  And the spending behaviors of pet owners underscore a shift in attitude that treats cats and dogs more like family members, whose health needs are attended to virtually without cost consideration.

Piggybacking on this trend, the famed investor Mario Gabelli launched in June the Gabelli Pet Parents’ NextShares, a fund investing singularly in all aspects of the pet industry, including food, supplies, toys, equipment and pharmaceuticals.

And in 2012, Kindred Biosciences was launched as a pure play on the shift in consumer behavior towards companion animals.  Fast forward to July of this year, and the company launched Mirataz, its first drug; and established the goal of introducing an average of two new drugs annually.

Mirataz is the first and only FDA-approved gel medication to manage weight loss in cats, which affects nine-million felines each year.  Essentially, cats stop eating when stricken by serious illness, such as chronic kidney disease, cancer or diabetes.  Left untreated, the loss of appetite can be fatal.

Importantly, regaining appetite buys time for the veterinarian to treat the underlying medical condition.  The gel drug is easily applied topically to the ear and in clinical trials Mirataz proved to be very effective with predictable and high absorption of the drug, leading to the restoration of appetite.

Until the introduction of Mirataz, the only available solution was for the cat owner to obtain a prescription for the active ingredient mirtazapine, which was only available in pill form and human dosage.  The “pet parent” had to split the pill and wrestle the cat to ingest the medicine.  No easy feat, as any cat owner can attest.  As a result, strict medication adherence was made nearly impossible.

Sell-through to the U.S. veterinarian market is expanding and now the company has filed an application with the European Medicines Agency, as a step towards introducing Mirataz in the European Union.

Meanwhile, Brandon Folkes, an analyst with Cantor Fitzgerald, in a new report on KindredBio, raised his target price to $ 25.  According to Mr. Folkes, “Our target-price increase is driven by an increased conviction about KIN’s antibody pipeline.”

And that pipeline currently includes over 20 medications, including an array of complex biologics.  Yet, it is important to realize that the timeline to animal-drug commercialization is drastically shorter and dramatically less expensive than medicines designed for human consumption.   On average, it takes three to six years and $ 5 million to $ 8 million to bring a new animal drug to market.

Kevin DeGeeter, an equity analyst with Ladenburg Thalmann, expects Mirataz to produce peak sales of $ 70 million, and cut a clear path to profitability for Kindred Biosciences.  Moreover, he expects the company’s product pipeline, which is composed of both biologics and single molecule drugs, to provide even larger “potential upside to both sales and earnings.”

No wonder Kindred Biosciences is considered by some investing pros to be the cat’s meow.

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