Aratana Therapeutics Inc (PETX) Q4 2018 Earnings Conference Call Transcript


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Aratana Therapeutics Inc  (NASDAQ:PETX)Q4 2018 Earnings Conference CallMarch 12, 2019, 4:30 p.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Good afternoon and welcome to the Aratana Therapeutics’ Fourth Quarter and Full-Year 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Rachel Reiff, Corporate Communications for Aratana Therapeutics. Please go ahead.


Rachel Reiff — Corporate Communications`

Thank you, Gary, and good afternoon. Thank you for joining Aratana Therapeutics’ fourth quarter and full-year 2018 financial results call. On today’s call, Craig Tooman, our President and Chief Executive Officer will provide key highlights from 2018 and our strategy for 2019. Rhonda Hellums, our Chief Financial Officer will review our financial results. After our prepared remarks, we’ll be happy to take your questions and we’ll have Dr. Ernst Heinen, our Chief Development Officer; and Chris Ready, our Vice President of Sales and Marketing available for the Q&A portion of the call. John Ayres, Vice President of Corporate Development and Administration, and our General Counsel is also joining for our call.


As a reminder, our press release outlining the fourth quarter and full-year 2018 financial results is available on aratana.com. Tomorrow, we plan to file our annual report on Form 10-K. Additionally, tomorrow and Thursday, we plan to present at two investment conferences. The webcast links for those presentations are also available on our website.

Lastly, during this conference call we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those outlined in our most recent SEC filings. The information we provide about our therapeutics and pipeline is for the benefit of the investment community and it’s not sufficient for prescribing decisions.


Now I’ll turn the call over to Craig to provide our highlights and 2019 strategy.

Craig Tooman — President, Chief Executive Officer and Board Director

Hello, everyone. We are pleased to share our fourth quarter and full-year 2018 financial results, and I am particularly pleased that my management team is able to join me today. As many of you know, Ernst Heinen, our Chief Development Officer, has a long tenure at Aratana and many successful years in animal health. He has been a cornerstone for Aratana’s developement success. Rhonda Hellums, our recently appointed CFO, has many years of experience at human pharmaceutical companies and joined the Aratana team shortly after the IPO.


Chris Ready, our Vice President of Sales and Marketing, also has many years of experience in animal health. He came to us from Elanco a couple of years ago. John Ayres, our VP of Corporate Development and our GC, was previously an attorney at Amgen and, Latham & Watkins and has also been with Aratana over five years. Together, this team has been part of the incredible evolution of Aratana from an early development company to a fully commercial enterprise. I’m very excited to be leading this team in our next chapter.

Now let me turn to some year-end highlights. I’d like to start with GALLIPRANT. We believe GALLIPRANT has truly validated our development approach. Together with Elanco, we are delivering a highly differentiated therapeutic to veterinarians. GALLIPRANT continues to perform very well in the competitive OA market, exceeding our expectations and we believe it will continue to be an important financial component of our business for many years to come. In 2018, we received our very first European marketing authorization with Elanco on GALLIPRANT and we are excited that Elanco has plans to make the therapeutic available in Europe in the coming months.


NOCITA has also been a key revenue driver in 2018. Thanks to the hard work of our team in the field, we have shown revenue growth every consecutive quarter since launch and more than doubled the previous year’s revenue. It should not surprise you that we believe NOCITA will continue to grow. Following the success with NOCITA’s (ph) product on the human side, we believe we have the ability to continue expanding the use of NOCITA. One lifecycle management strategy we have already completed in 2018 was our fourth FDA approval, expansion of the NOCITA label for cats.


In 2019, if approved, we anticipate introducing a smaller 10 milliliter vial size, which should allow us to expand into the general practitioner population. NOCITA is also exciting because it’s filling in a previous void in the pain management protocol for long lasting pain control. We are hearing that 72 hours of pain relief is truly a game changer for surgeons. Especially with the ongoing concerns about opioids, we believe NOCITA is creating a foothold within surgical practices and is improving the level of care provided to surgical patients. At the recent VMX and WVC veterinary conferences, many veterinarians expressed to us that they are excited to add NOCITA to their protocols because the level of cure it allows them to provide their patients. We are grateful that Pacira has entrusted us with a science upon which they built their company and as we deliver this innovation to veterinarians.


We also have the same level of excitement about the potential of ENTYCE. You’ve all heard about how innovative ENTYCE is, that it’s a first in class therapeutic that mimics the hunger hormone, it’s incredible that ENTYCE is available for dogs or pets even before it’s available in humans. The opportunity with ENTYCE is our ability to shape a market. Some veterinarians view inappetence as a side effect or a temporary issue. However, when a dog does not eat, it’s a quality of life concern for the dog that impacts both a veterinarian and the pet owner. Without proper food intake, a dog cannot recover quickly from an acute condition or maintain its strength and vitality as it ages or battles a chronic condition. ENTYCE is the solution that allows veterinarians to break the cycle, get the dog eating and even gain weight in as few as four days.


We are confident that over time, as with NOCITA, that our customers will increase their use and fully appreciate the unique value of ENTYCE. It is our primary focus to ensure the veterinarians who are already using ENTYCE reach for it more often. Based on the number of clinics ordering and strong reorder rates in its initial launch phase, partnered with our new strategies planned for 2019, we believe that veterinarians who have gained experience with ENTYCE will use it more frequently and for a longer period of time.

Well, it’s only mid-March, we believe our relationships built in 2018 and our hard work to-date this year are setting us up for potential growth in 2019. It takes time to shape this market, but Chris and his team are focused on implementing case studies about chronic conditions, peer to peer education and new targeted initiatives to reach veterinarians, technicians and pet owners. Again, it takes time to shape the market and we remain confident in our ability to do so and to increase ENTYCE revenues.


Regarding Capromorelin for cats, last year our research and development team made significant progress. Just over two weeks ago, we received a technical section complete letter for safety. In late last year we submitted the technical section for CMC to the FDA. We believe we are making great progress with enrollment in our pivotal field effectiveness study and we anticipate completing enrollment mid-year with a study read-out to follow. If approved, we are on track for an FDA approval for Capromorelin as a solution for cats with chronic kidney disease that are losing weight.


Also on the research and development front, we’re making progress with AT-019 and have already started transferring the manufacturing process for API and commence early formulation work. As you likely remember, in 2018 we strategically accessed this innovation for a next generation, potent EP4 receptor antagonist. We believe it has potential in pain, inflammation and other indications in both dogs and cats. Aratana has full worldwide rights to AT-019 and we are excited to be moving this program forward.

Before I hand it over to Rhonda to cover our financials, I want to let you know that the entire Aratana team is energized and excited about 2019. Our 10-year development team has demonstrated best-in-class results. They’ve proven time after time they can be successful in developing therapeutics quickly with therapeutic profiles superior to the standard of care. While early in our commercial lifespan, we’re already hearing market research from industry experts that our highly trained field force is distinguishing itself with veterinarians when compared to peers in the animal health industry.


I believe our ability to deliver innovation for pets at times a decade before the science is advanced in humans continues to be our key differentiator in our unique value proposition as a company. As we move into 2019 and beyond, we’ll be focused on successfully developing and delivering best-in-class therapeutics, providing comprehensive service to veterinarians and serving as a collaborator of choice within the dynamic human pharmaceutical and animal health industries.

We know our greatest opportunity for growth in 2019 is based on creating commercial momentum and ultimately increasing value for our customers, our employers — our employees and our stockholders. Now, Rhonda will cover our financial results for last year and discuss our financial guidance. Rhonda?


Rhonda Hellums — Chief Financial Officer and Treasurer

Thanks, Craig. Before I provide the full financial recap and our 2019 guidance, I want to share a few financial highlights from 2018. First, we are excited with the continued strong performance of GALLIPRANT. As reported by Elanco, the product achieved net sales of approximately $44 million in 2018. This resulted in an achievement of the first $15 million sales milestone under our collaboration agreement with Elanco. This milestone was paid in the fourth quarter, which leads us to our second highlight.


After receipt of the milestone in December, we paid off our outstanding debt balance. The pay off released us from all remaining obligations and encumbrances under the loan agreement. Therefore, we ended 2018 with an overall cash balance of $43 million and no residual debt. Third, our combined net product sales of NOCITA and ENTYCE nearly tripled in 2018 compared to their combined 2017 net product sales. These highly innovative products are gaining awareness and usage in veterinary practices, particularly in specialty clinics. Finally, our net loss decreased in 2018 compared to 2017 by $32.8 million. This is due not only to the continued top line growth of our products, but also the continued management of expenses throughout the Company.


Now I will go into more details regarding our financial performance. We reported a net loss of $8.6 million or $0.18 diluted loss per share in the fourth quarter of 2018. That compares to a net loss of $15.6 million or $0.37 diluted lost per share in the fourth quarter of 2017. For the full year of 2018, our net loss was $14.7 million or $0.32 diluted loss per share compared to a net loss of $47.5 million or $1.17 diluted loss per share for all of 2017. The 2017 net loss was impacted by an impairment of our intangible assets of $7.4 million. The Company has not had further impairments since 2017.


Turning to our revenues, for the fourth quarter ended December 31, 2018, total net revenues were $4.9 million. This includes $1.3 million of licensing and collaboration revenues, which is all associated with our GALLIPRANT collaboration agreement with Elanco. We also reported $3.6 million of net product sales in the fourth quarter of 2018. For the fourth quarter of 2017, we reported $10.5 million in net revenues, which consisted of $2 million of licensing and collaboration revenues and net product sales of $8.4 million. As you will recall, the net product sales in the fourth quarter of 2017 included $6 million of GALLIPRANT finished goods sold to Elanco prior to the transfer of the manufacturing responsibility.


For the full-year 2018, we recorded $35.4 million in net revenues, which included the $15 million GALLIPRANT sales milestone. In comparison, for 2017, our total revenues were $25.6 million. Total revenues included $15.5 million from GALLIPRANT finished goods sold to Elanco, approximately $4.2 million of combined NOCITA and ENTYCE sales, as well as $5.9 million in licensing and collaboration revenues, primarily from GALLIPRANT.

With regard to our product sales, we reported $7.5 million in NOCITA net product sales in 2018 compared to $2.8 million in 2017. NOCITA is showing nice growth with continuous quarter after quarter increases. For ENTYCE, we reported $4.6 million in net product sales in 2018. This compares to $1.3 million in 2017. As a reminder, we launched ENTYCE in the fourth quarter of 2017.


GALLIPRANT, as stated earlier, continues to exceed expectations. As a reminder, as part of the collaboration agreement with Elanco, we reported licensing and collaboration revenues from global GALLIPRANT sales which are reported by Elanco. In 2018, Aratana reported $23.3 million in licensing and collaboration revenue. As mentioned earlier, the $23.3 million also included the $15 million milestone payment for achieving sales threshold of at least $35 million in US net sales of GALLIPRANT, which occurred in the third quarter of 2018.

When comparing licensing and collaboration revenues, we recorded approximately $5.4 million in 2017 from GALLIPRANT, which included a one-time $1 million manufacturing payment. Elanco reported that in the fourth quarter of 2018 GALLIPRANT demand exceeded their available inventory levels. Therefore, there were back orders in the distribution centers. They also stated that they expect inventory to be fully replenished by the end of Q1 or early Q2 of 2019.


We continue to also be eligible for additional regulatory, manufacturing and commercial milestones under the collaboration agreement. These milestones include two future commercial milestones totaling up to $60 million if certain global sales thresholds are achieved, a $4 million milestone if a certain EU regulatory approval occurs and a $4 million milestone if our partner transfers the manufacturing to a new third party. However, we anticipate all of these potential milestones will occur beyond 2019.

Moving to our expenses, in the fourth quarter and full year of 2018 we continued to manage our expenses to fully align and prioritize our commercial and development objectives. Our cost of product sales totaled $2.8 million in the fourth quarter of 2018 versus $5.9 million for the same period in 2017. For the full-year 2018, cost of product sales totaled $6.8 million compared to $16.4 million in 2017. Cost of product goods in 2017 was largely due to the cost of finished goods of GALLIPRANT prior to the manufacturing transfer to Elanco.


During 2018, we incurred inventory valuation adjustment losses for ENTYCE of approximately $2.7 million. Due to our large batch sizes of ENTYCE, prior to launch, we made a considerable investment in ENTYCE inventory and while much of our inventory remains at API, we did write off some finished goods inventory related to certain SKUs. We do not anticipate significant finished good write offs in 2019.

Now, turning to our research and development expenses, you will notice that the 2018 expenses decreased considerably from 2017. In the fourth quarter of 2018, R&D expenses totaled $1.6 million compared to $3.6 million for the corresponding quarter of 2017. In 2018, our total R&D expenses totaled $6.9 million compared to $15.1 million in 2017. Year-over-year and quarter-over-quarter R&D expense decreases are mainly due to fewer ongoing pivotal studies and production of drug product. We do believe R&D expenses may increase slightly in 2019 as we turn our focus to developing AT-019, our next generation EP4 program and advancing our portfolio.


SG&A expenses in the quarter ended December 31, 2018 totaled $7.4 million compared to $7.6 million in the same period of 2017. For 2018, SG&A expenses totaled $28.8 million compared to $28.9 million in 2017. As you can tell, our SG&A expenses have remained relatively consistent and we anticipate in 2019 expenses will continue to be fairly constant as our corporate infrastructure is primarily in place and we continue to be prudent in our investment decisions to further support adoption and awareness of our therapeutics.

This leads us to our cash position. As of December 31, 2018, we had approximately $43 million in cash, cash equivalents, restricted cash and short-term investments after the receipt of our $15 million GALLIPRANT milestone and paying off our remaining loan balance. Therefore, our $43 million in cash is free and clear of any future debt payments.


Turning to our outlook for 2019, we expect a net decrease of cash of approximately $20 million used to support our current activities. We believe our cash, cash equivalents, restricted cash and short-term investments will be sufficient to fund our current operating plan through at least the first quarter of 2020.

In closing, we believe our results for the full-year 2018 demonstrates the continued performance and growth opportunities within our portfolio. In 2019, we continue to focus our driving revenues and managing our operating expenses to align with our commercial momentum and our pipeline priorities.


With that, I will turn it back to the operator to open up for Q&A. Operator?

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Erin Wright with Credit Suisse. Please go ahead.

Erin Wright — Credit Suisse — Analyst

Great. Thanks for taking my questions. I have a broader question here first. And just sort of, I guess, broadly speaking, about just under new management here, do you anticipate any sort of meaningful shift in strategy or reprioritization of the pipeline? And how surprised were you thinking about pipeline and partnership opportunities a little bit differently than maybe you did before. Thanks.


Craig Tooman — President, Chief Executive Officer and Board Director

Thanks, Erin. I am clearly focused on near-term value enhancement. The outset, I will be spending more time on our commercial activities, particularly on NOCITA and ENTYCE. I want to be sure we’re getting those right. NOCITA has clearly done very well and I want to be sure this continues through the cat approval and our 10 milliliter formulation. ENTYCE is very early in its launch and we are exploring new ways to extend our reach with a product that has a lot of support from the vet community. At the same time, we want to advance the key projects in our pipeline, and I’m particularly pleased that we are moving AT-019 forward, the EP4 receptor antagonist with some of the very same roots as GALLIPRANT and from the same source. So really pleased that that’s moving forward aggressively. And I really want to spend more time in areas where we’re clearly differentiated and can excel again in the nearer term. And that will also involve some of our partnering activities which you’ve asked about in business development, et cetera. We will be looking in a little more in the near-term than in the very long term.


Erin Wright — Credit Suisse — Analyst

Okay, great, that’s helpful. And then in 2019, how should we be thinking about the revenue contribution that’s embedded in your guidance here? Do initiatives like smaller dose NOCITA contribute more meaningfully?

Craig Tooman — President, Chief Executive Officer and Board Director

We will definitely be looking at those contributions than we are, that’s what I’m spending a lot of my time together with Chris and his team on. We haven’t and we won’t probably break out the contributions of those pieces until we have a run rate that’s more meaningful. Chris, I don’t know if you want to add anything at all on the break out of pieces as opposed to the whole,


Chris Ready — Vice President of Sales and Marketing

As we think about particularly with NOCITA and the revenue contributions therem we anticipate that with the 10 ml vial, that provides us an opportunity to expand into a broader audience with NOCITA. Currently we’re really focused on specialty accounts, and again, as we have this new SKU, it will allow us to expand into more of a general practicing account because that SKU will be a better fit for that customer base moving forward. And additionally, that will also help us to go out and promote our new cat indication to that customer base moving forward.


Craig Tooman — President, Chief Executive Officer and Board Director

Thank you, Chris.

Erin Wright — Credit Suisse — Analyst

Okay. Great, thank you.

Operator

The next question comes from David Westenberg with Guggenheim Securities. Please go ahead.

David Westenberg — Guggenheim Securities — Analyst

Yes, thanks for taking the question. So sorry if I missed this, I’ve been kind of jumping around here. On the NOCITA, I believe you got the approval for cats in August. Did you see that — that bump up we saw from Q3 to Q4, do you think there is any correlation with the cat opportunity or is that maybe still a leading opportunity that might be showing up in 2019?


Craig Tooman — President, Chief Executive Officer and Board Director

Definitely some impact, but on a smaller scale and certainly we have long legs on this one. Chris, any other comment?

Chris Ready — Vice President of Sales and Marketing

Yeah, the thing I would add to that is while we don’t have specific patient data to indicate the amount of sales that we have in relation to our cat usage, as well as indication, we do believe that the vast majority of our sales comes from our dog indication. As I stated previously, as we move into the general practitioner realm with a 10 ml SKU, it really provides us the opportunity to promote more heavily our cat indication because that indication is much more suited for a general practitioner versus a specialty hospital where there’s not a lot of the declawed surgeries being performed at this point in time.


David Westenberg — Guggenheim Securities — Analyst

Great. Thank you. And then in terms of what you’re seeing with ENTYCE, I believe you said you want to kind of educate your customer base about the benefits of using it in many cases where they wouldn’t use it before, maybe shorter term dog not eating, kind of cases. Can you maybe give a little bit of anecdotes to some of the customers that you’ve talked to about the effectiveness of using in that five day format and just kind of give a — I’m just trying to understand how real of — maybe of an uptake driving that would actually provide us.


Chris Ready — Vice President of Sales and Marketing

Yeah. As we’ve talked with our customers both anecdotally as well as conducting market research, what we have found and have been told is that our customers are satisfied and having good success with ENTYCE in those as you’re describing them, we call them the acute setting, those that shorter period, that three to five day window. And as we move into 2019, our focus is really going to be looking at areas where we can help veterinarians understand areas where they can use ENTYCE for more longer term use and help them understand some of the key comorbidities associated with inappetence that would lead to them having a — the need for a therapeutic for some of those longer term uses and indications moving forward.


Ernst Heinen — Chief Development Officer

And if I just can kind of add, we have an open labor with ENTYCE. So that means it can be used at a veterinarian’s discretion for how long or how often they want to use it according to the case they have.

Craig Tooman — President, Chief Executive Officer and Board Director

It’s a common misperception that we’re limited, the label is limited to four days and that was really the study. And the label is not limited, it is not restricted to any time period. So thank you, Ernst.


David Westenberg — Guggenheim Securities — Analyst

Got it. Thank you very much. And then finally on ENTYCE, can you maybe talk about the opportunities that you have in pricing, whether it could be increased pricing to maybe capture that acute case or lower pricing? I mean, is that a core part of maybe the strategy in terms of uplifting sales in that particular indication?

Craig Tooman — President, Chief Executive Officer and Board Director

We clearly have pricing flexibility with ENTYCE and to the extent we see use over time, we can make — we have at our discretion to make bigger moves in price. Today, we are not making a whole scale change in price that would shift it for longer term and recognizing where it’s used today, but we’ll continue to monitor that. Our price increases have typically been more TPI in their magnitude.


David Westenberg — Guggenheim Securities — Analyst

Got it. And actually I’m going to ask one more and I’ve asked this on prior calls, but just again on the cross-selling opportunities with NOCITA and ENTYCE . You know, these are both probably popular, more at specialty kinds of hospitals. Are you seeing a good amount of cross-selling or is there maybe some latent opportunity with increased cross-selling there? I’ll take a rest of my questions offline. Thank you.

Chris Ready — Vice President of Sales and Marketing


Yeah. That’s a very good question. And as you hypothesized or speculated, we are seeing good cross-selling opportunities between the two therapeutics. And as you’re aware, with NOCITA, we started up-selling in specialty accounts based on the profile of that particular therapeutic. And as we have moved and now have launched ENTYCE and what we’re seeing is that there — some of our biggest NOCITA accounts are also some of our largest ENTYCE accounts. So these are obviously places that they are seeing patients who could both benefit from ENTYCE and NOCITA, and the relationships that we’re establishing with those customers are having an impact across our entire portfolio.


Operator

(Operator Instructions) The next question comes from John Kreger with William Blair. Please go ahead.

Courtney Owens — William Blair — Analyst

Hi, this is Courtney Owens on for John Krieger. So my first question is just a quick question about a comment you made earlier in the call around ENTYCE, just about exploring new ways to extend that reach. When you referenced that, were you kind of talking about maybe expanding the sales force? Like what are these other potential strategic ways that you could kind of expand the reach of that product? Thanks.

Craig Tooman — President, Chief Executive Officer and Board Director

We are looking at a whole host of things, as you can imagine, to extend the reach in ENTYCE and improve revenues. Chris, maybe you want to highlight just a couple.

Chris Ready — Vice President of Sales and Marketing

Yeah. So, as — well, I have alluded to this previously, but obviously one way that we’re continuing to look to expand ENTYCE is through more days of therapy or longer duration of use. Additionally, we are also looking to, I’ll call it, expand audiences within the veterinary clinic as well as test additional audiences, specifically pet owners and looking at opportunities that we can have to increase demand through the pet owner asking their veterinarian about a pet who might be inappetent.

Courtney Owens — William Blair — Analyst

Got it. Thanks, that’s helpful. And then just secondly, on the R&D focus, I think there was another comment made earlier kind of potentially saying that you could see that ramping in 2019? Would that ramp just solely be around AT-019 or are there other potential things that we should or other potential major things that we should be aware of, kind of thinking about the model going forward? Thanks.

Rhonda Hellums — Chief Financial Officer and Treasurer

Yes, I think that reference was regarding — yes, it’s primarily AT-019 as far as R&D expenses. There are some progression of our pipeline that we would anticipate, but I would say the majority of that is coming from AT-019 which we will be focused on.

Craig Tooman — President, Chief Executive Officer and Board Director

That spending tends to increase, as you know, around pivotal programs. So I think if you look back several years, you’ll see high spending year in 2016, et cetera. So it really tracks the number of programs typically we have in pivotal status.

Courtney Owens — William Blair — Analyst

Okay, got it. Thanks, guys.

Craig Tooman — President, Chief Executive Officer and Board Director

Thank you.

Operator

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

Craig Tooman — President, Chief Executive Officer and Board Director

Thank you very much for your interest in Aratana today and please call us if you have any questions at all. I know our numbers are listed in the press release. We look forward to meeting many of you in the coming days and weeks here at the conferences and otherwise. So thank you again for your participation.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Duration: 32 minutes

Call participants:

Rachel Reiff — Corporate Communications`

Craig Tooman — President, Chief Executive Officer and Board Director

Rhonda Hellums — Chief Financial Officer and Treasurer

Erin Wright — Credit Suisse — Analyst

Chris Ready — Vice President of Sales and Marketing

David Westenberg — Guggenheim Securities — Analyst

Ernst Heinen — Chief Development Officer

Courtney Owens — William Blair — Analyst

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