Aratana promises full transition to commercial entity after strong Q2

Aratana's recently approved products include a drug to treat arthritis pain in dogs.

Aratana ($PETX) CEO Steven St. Peter made an emphatic promise in a conference call with investors on Aug. 5, the morning after the company reported better-than-expected sales and earnings. “Between now and our next financial results call in November we believe we will transition from a development company to a development and commercial company.”

St. Peter was referring to Aratana’s three product approvals, and the expected launch of two of them this year: Galliprant (grapiprant) to treat osteoarthritis pain in dogs, which it will co-promote with Eli Lilly’s ($LLY) Elanco, and Nocita (bupivacaine) to treat post-surgical pain in dogs. Nocita is expected to be approved by the FDA later this month and launched in the fall. Aratana also won approval for Entyce (capromorelin), an appetite stimulator for dogs, but the company said it will hold off on that launch until early 2017.

“As we prepare for the commercial launches, it’s all becoming very tangible,” St. Peter said.

In the second quarter, Aratana recorded revenues of $38 million, all of which came from the Elanco agreement, and net income of $21.2 million, or 61 cents per share. It handily beat the average analyst estimate of $11 million in revenues and a loss of 10 cents per share, according to Zacks Investment Research. That was enough to push shares of Aratana up nearly 10% to $8.70 per share pre-market trading on Aug. 5.

Still, during the earnings call, analysts pressed St. Peter for details about the timing of the Galliprant introduction. St. Peter said he was leaving it up to Elanco to determine the proper strategy. “We’re very pleased with what we’re seeing in terms of them moving to bring it to the market, but we won’t comment on the timing,” he said. “We’re very pleased with the engagement and the resources that are going into the product.”

St. Peter also updated analysts on some of its research endeavors, including its plans to develop versions of Entyce and Nocita for cats. In July, the company started a pivotal trial of AT-003, the feline formulation of Nocita, for managing post-operative pain in cats. During the earnings call, one analyst suggested that because Entyce and Nocita would soon be available to veterinarians for dogs, there might be a big opportunity for Aratana to profit from off-label use of those drugs in cats. St. Peter said his sales reps wouldn’t in any way encourage off-label prescribing. “One of the fundamental principals at Aratana is we do drug development in individual species,” he said. “We don’t think that dogs are small humans and we don’t think that cats are small dogs.” Just how the dog products will be used once they hit the market “will be up to the veterinarians,” he added. “But we clearly wouldn’t be promoting that.”

Aratana’s transition to a commercial entity continues to put pressure on its bottom line. In the earnings release, Aratana reported that it has hired national and regional sales account managers and that it was in the process of adding two dozen sales reps. When asked to predict just how big the company will need to be to effectively promote the new products, St. Peter said he would add sales territories “where appropriate,” but also look at alternatives such as agency or distributor agreements.

The company’s sales, general and administrative costs grew from $4.9 million in the second quarter of last year to $6.1 million, and St. Peter told investors he expected those costs to continue growing. “We will evolve the selling [function] based on what we’re seeing and where we can make prudent investments,” he said. “We just have to find the right balance between the revenue they bring and the costs associated with that.”

- here’s the earnings release

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