Aratana Therapeutics Fourth-Quarter Analysis

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Aratana Therapeutics reported positive net income of $7.1 million in the fourth quarter due to a one-time $15.5 million tax benefit related to the Vet Therapeutics acquisition. Excluding the income tax benefit, the normalized result would have been a net loss of $8.3 million.

Relative to the consensus, fourth-quarter operating losses were $3.2 million and $2.9 million more than expected, respectively, driven by increased costs associated with the Vet Therapeutics deal. Aratana also generated $123,000 of revenue related to an AT-004 royalty payment from Novartis (NVS $81.66). There were no significant changes in the clinical status of the company’s portfolio, but management provided cash burn guidance for 2014 of $35 million-$40 million, which is a few million above our $32.3 million operating loss target.

This may have led to yesterday’s selloff in a weak tape; however, given the breadth of pipeline with two pivotal studies reporting out during the year (AT-002 and AT- 006 in Europe); further development of Aratana’s T-cell lymphoma product, which received conditional approval in late January; and over 10 additional product candidates, the additional R&D spending is understandable. Because we do not expect Aratana to have significant revenues (or earnings) for a few years, we believe investors will focus primarily on the clinical progress of the existing product portfolio over the coming year, along with the associated cash burn from those clinical programs. While we view Aratana as higher risk than other vet industry peers, we believe the $512 million market cap and unique business model offer a compelling opportunity for small-cap investors.

Aratana ended the fourth quarter with cash, cash equivalents, and marketable securities of $46 million. Adjusting for the company’s Okapi acquisition and recent offering in the first quarter, we estimate the current cash balance at roughly $90 million. Management noted that it expects the current cash to last through the end of 2015.

Management anticipates spending between $35 million and $40 million in 2014, with roughly $27 million going toward clinical development and post-licensure studies. Before the release, we estimated total operating expenses would be roughly $32.2 million, evenly split between SG&A and R&D. We believe the higher-than-anticipated R&D guidance may have contributed to Thursday’s 9% correction. Although 2014 spending guidance was modestly higher than consensus, we do not believe this signals a fundamental shift in Aratana’s low risk/low cost business model of developing in-licensed compounds. Rather, the company has been aggressive in expanding its portfolio in the last six months. The company now has over 15 product candidates across oncology, pain, inappetence, and virology. We now forecast 2014 R&D expense of $27.3 million.

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