S-1/A 1 d599715ds1a.htm AMENDMENT NO.1 TO FORM S-1 Amendment No.1 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 22, 2014

Registration No. 333-193324

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ARATANA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   38-3826477
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

1901 Olathe Boulevard

Kansas City, KS 66103

(913) 951-2132

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Steven St. Peter, M.D.

President and Chief Executive Officer

Aratana Therapeutics, Inc.

1901 Olathe Boulevard

Kansas City, KS 66103

(913) 951-2132

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Peter N. Handrinos, Esq.

B. Shayne Kennedy, Esq.

Latham & Watkins LLP

John Hancock Tower, 20th Floor

200 Clarendon Street

Boston, MA 02116

(617) 948-6060

 

Donald J. Murray, Esq.

Eric W. Blanchard, Esq.

Covington & Burling LLP

The New York Times Building

620 Eighth Avenue

New York, NY 10018

(212) 841-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per share(2)

 

Proposed

maximum

aggregate

offering price(2)

 

Amount of

registration fee(3)(4)

Common Stock, $0.001 par value per share

  6,325,000   $18.91   $119,605,750   $15,406

 

 

(1) Includes an additional 825,000 shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of computing the registration fee upon the basis of fluctuating market prices pursuant to Rule 457(c) under the Securities Act of 1933, as amended. The proposed maximum offering price per share and the proposed maximum aggregate offering price are determined by averaging the high and low prices of the registrant’s shares of common stock, as reported on the NASDAQ on January 21, 2014.
(3) Calculated pursuant to Rule 457(c) based on an estimate of the proposed maximum aggregate offering price.
(4) Previously paid $15,080.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION DATED JANUARY 22, 2014

PRELIMINARY PROSPECTUS

5,500,000 Shares

 

LOGO

Common Stock

We are offering 4,500,000 shares of our common stock and certain selling stockholders are offering 1,000,000 shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by any selling stockholders. Our common stock is listed on The NASDAQ Global Market under the symbol “PETX.” On January 21, 2014, the last reported sale price of our common stock was $18.96 per share.

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 13 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions(1)

     

Proceeds to Aratana Therapeutics, Inc. before expenses

     

Proceeds to selling stockholders

     

 

 

(1) We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”

Delivery of the shares of common stock is expected to be made on or about                     , 2014. A selling stockholder has granted the underwriters an option for a period of 30 days to purchase an additional 825,000 shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholder if the underwriters exercise this option.

Joint Book-Running Managers

 

Jefferies   Barclays     William Blair   

Co-Managers

 

JMP Securities     Craig-Hallum Capital Group   

Prospectus dated                     , 2014.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     37   

Use of Proceeds

     38   

Price Range of Common Stock

     39   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Historical Financial Data

     44   

Unaudited Pro Forma Consolidated Financial Information

     46   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     64   

Industry

     82   

Business

     86   

Management

     115   

Executive and Director Compensation

     122   

Certain Relationships and Related Person Transactions

     136   

Principal and Selling Stockholders

     139   

Description of Capital Stock

     141   

Shares Eligible for Future Sale

     144   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     146   

Underwriting

     150   

Notice to Investors

     155   

Legal Matters

     158   

Experts

     158   

Where You Can Find More Information

     158   

Index to Financial Statements

     F-1   

 

 

Neither we, nor any of the selling stockholders nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Special Note Regarding Forward-Looking Statements.”


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ARATANA THERAPEUTICS and our logo are two of our trademarks that are used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the section in this prospectus entitled “Risk Factors” beginning on page 13 and our financial statements and the related notes thereto appearing at the end of this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “our company” and “Aratana” refer to Aratana Therapeutics, Inc. and its subsidiaries.

Overview

Our Company

We are a pet therapeutics company focused on the licensing or acquisition, development and commercialization of innovative biopharmaceutical products for cats, dogs and other companion animals. We operate at the intersection of the more than $50 billion annual U.S. pet market and the more than $20 billion annual worldwide animal health market. Our current product portfolio includes over 15 product candidates consisting of small molecule pharmaceuticals and large molecule biologics that target large opportunities in serious medical conditions in pets. Our most advanced products, AT-004 and AT-005, are monoclonal antibodies for treating lymphoma in dogs. AT-004, which treats B-cell lymphoma, received a conditional license from the U.S. Department of Agriculture, or USDA, and is currently marketed by Novartis Animal Health Inc., or Novartis Animal Health. We expect to receive a conditional license for AT-005, which is being developed to treat T-cell lymphoma, and to commence marketing in 2014. Our other lead products include small molecules directed at treating osteoarthritis pain and inflammation, loss of appetite and post-operative pain in dogs and cats. Our product candidates are designed to enable veterinarians and pet owners to manage pets’ medical needs safely and effectively, potentially resulting in longer and improved quality of life for pets.

Since our initial public offering in June 2013, we have focused on executing our clinical development plan and continuing to expand our product pipeline and further augment our development capabilities. Recently, we acquired Vet Therapeutics, Inc., which provided us with a proprietary antibody-based biologics platform focused on the treatment of lymphoma, and Okapi Sciences N.V., which provided us with a pipeline of antiviral drugs, including product candidates focused on the treatment of herpes and immunodeficiency in cats. As part of these acquisitions, we also obtained two facilities that we are using to develop additional species-specific monoclonal antibodies, antivirals and other small molecules for use as pet therapeutics. In addition, we now have a commercial product and an additional product candidate that we expect to commercialize in 2014, we have more than doubled the size of our product pipeline since June 2013, and we have significantly increased our technology and development infrastructure. We are focused on advancing our product candidates to regulatory approval and believe that we have significantly accelerated our pathway toward becoming a commercial stage company.

We believe that the role of pets in the family has significantly evolved over the last two decades. Many pet owners consider pets important members of their families, and they have been increasingly willing to spend money to maintain the health of their pets. Consequently, pets are living longer and, as they do, are exhibiting many of the same signs and symptoms of disease as humans, such as arthritis, cancer, obesity, diabetes and heart disease. Today veterinarians have comparatively few drugs at their disposal that have been specifically approved for use in pets. As a result, veterinarians often must resort to using products approved for use in humans, but not approved, or even formally studied, in pets, relying on key opinion leaders and literature, rather than regulatory review and approval.

We believe that pets deserve therapeutics that have been specifically studied and approved by regulatory authorities for each species, and that veterinarians and pet owners will increasingly demand that therapeutics are demonstrated to be safe and effective in pets before using them. We also believe there is an opportunity to leverage the investment in the human biopharmaceutical industry to bring therapeutics to pets in a capital and

 

 

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time efficient manner. For example, advances in human medicines have created new therapeutics for managing chronic diseases associated with aging, such as cancer, osteoarthritis, diabetes and cardiovascular diseases. However, these advances have not yet been translated into innovative therapies for pets, notwithstanding the fact that pets are living longer and manifesting many of these same diseases of aging. Moreover, while developing and commercializing therapeutics for humans and pets share a number of characteristics, there are also significant differences that we believe facilitate the development of pet therapeutics and make the market attractive. These differences include the role and economics of veterinary practices and the private pay nature of the veterinary market. Additionally, because the development of pet therapeutics requires fewer clinical studies, involves fewer subjects and trials are conducted directly in the target species, the development of drugs for pets is generally faster, less expensive and more predictable than for human therapeutics.

Our Products and Product Candidates

We have assembled a portfolio of more than 15 product candidates that are in various stages of development in either cats or dogs, and frequently in both. Our AT-004 monoclonal antibody product for B-cell lymphoma in dogs has received a conditional license from the USDA, the regulatory agency that oversees biologics in animals, and this product is currently being commercialized in the United States and Canada by Novartis Animal Health. The following table identifies the primary molecules in our current product portfolio:

 

 

 

COMPOUND

 

SPECIES

 

INDICATION

 

DEVELOPMENT STATUS

 

EXPECTED NEXT STEP

AT-001

  Dog   Pain and inflammation associated with osteoarthritis   Dose selected  

n      Initiate pivotal field effectiveness study in first quarter of 2014

n      Expect U.S. marketing approval in 2016

 

Cat

  Pain and inflammation associated with osteoarthritis   Pilot studies  

n      Dose confirmation study

AT-002

  Dog   Stimulation of appetite   Pivotal field effectiveness study  

n      Submission for approval

n      Expect U.S. marketing approval in 2016

 

Cat

  Stimulation of appetite   Pilot studies  

n      Dose confirmation study

AT-003

  Dog   Post-operative pain management   Proof of concept study  

n      Dose confirmation study

n      Initiate pivotal field effectiveness study in second quarter 2014

n      Expect U.S. marketing approval in 2016

 

Cat

  Post-operative pain management   Proof of concept study  

n      Dose confirmation study

AT-004

  Dog   B-cell lymphoma   Submitted pivotal field effectiveness study  

n      Currently sold by Novartis Animal Health

n      Full license expected in 2015

AT-005

  Dog   T-cell lymphoma   Completing pivotal field effectiveness study  

n      Conditional license expected in 2014

n      Full license expected in 2015

AT-006

  Cat   Ocular herpes infection   Pivotal field study in Europe  

n      File for EU review in 2014

n      Expect U.S. marketing approval in 2017 or 2018

 

 

 

 

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COMPOUND

 

SPECIES

 

INDICATION

 

DEVELOPMENT STATUS

 

EXPECTED NEXT STEP

AT-007

  Cat   Feline immunodeficiency virus infection   Pilot study in Europe  

n      Initiate field effectiveness study in 2015

n      Expect U.S. marketing approval in 2017 or 2018

AT-008

  Dog   Lymphoma   Pivotal field effectiveness study  

n      Pivotal field effectiveness in the EU in 2014

AT-009

  Dog   Mast cell tumor   Lead selection  

n      Pilot studies

AT-010

  Dog   Atopic dermatitis   Lead selection  

n      Pilot studies

AT-011

 

Dog

  Parvovirus infections   Lead selection  

n      Proof of concept study

AT-012

  Cat   Calicivirus infections   Lead selection  

n      Proof of concept study

 

 

In addition to the above-listed product candidates, we are evaluating additional molecules for applications in other diseases including lymphoma in cats, seizures in dogs, atopic dermatitis in dogs and other cancers in cats and dogs, and we are researching new product concepts internally with our recently acquired antibody and antiviral research expertise. Furthermore, we have options with two parties for two additional molecules that we are considering licensing for further development. We aim to submit drug applications for U.S. approval for the majority of our existing product candidates and to make similar regulatory filings for European approval. Furthermore, where appropriate, we attempt to develop and submit regulatory filings for therapeutic indications in both cats and dogs, which will be separate products and require separate approval.

Our Development Strategy

Our strategy is to in-license proprietary compounds from human biopharmaceutical companies and academia or leverage existing insights in human biology applicable in pets and to develop therapeutics specifically for use in pets. We seek to identify human therapeutics that have demonstrated safety and effectiveness in at least two species and are in, or have completed, Phase I or Phase II clinical trials in humans, with well-developed active pharmaceutical ingredient, or API, process chemistry and a well-defined manufacturing process. We also seek to identify products already in development for pets and to license or acquire these products. To date, we have in-licensed and are further developing pharmaceutical compounds from Pacira Pharmaceuticals, Inc., RaQualia Pharma, Inc. and others, and we have acquired Vet Therapeutics and Okapi.

In order to successfully execute our plan, we have assembled an experienced management team consisting of veterinarians, physicians, scientists and other professionals that apply the core principles of drug development to the medical needs of pets. The members of our senior management team combined have over 100 years of experience in the animal health and human biopharmaceutical industries, as well as a strong track record of successfully developing and commercializing therapeutics for pets. Our Chief Scientific Officer and our Head of Drug Evaluation and Development have each been actively involved in the development and approval of over 20 animal health products. Our Chief Commercial Officer has been responsible for guiding the launch of 22 animal health products, including three of the most significant brands in companion animal health.

We expect to build a commercial organization to market our products in the United States and to leverage distributors in other important geographies. We anticipate building a small sales force targeting pet oncology centers to market AT-005 assuming we receive conditional approval in 2014. In addition, we expect to use the time preceding the full commercialization of our product candidates to build veterinarian and pet owner awareness of our company and our products. We believe that our product candidates, if approved, will enable veterinarians to deliver a higher level of medical care to pets while providing an important revenue stream to veterinarians’ practices.

 

 

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Pet Therapeutics Industry

According to the American Pet Products Association, or APPA, U.S. consumers spent an estimated $56 billion on their pets in 2013, up approximately 44% over 2006, representing a compound annual growth rate, or CAGR, of approximately 5.4% over that period. Cats and dogs are the most popular pet species in the United States and Europe: there are approximately 96 million cats and 83 million dogs in the United States and 90 million cats and 75 million dogs in Europe. An estimated 68% of U.S. households have at least one pet. The U.S. pet market has grown by rates far exceeding inflation, driven by increases in average spending per pet each year since 2006. The U.S. veterinary care segment has been among the fastest growing segments of the overall U.S. pet market, increasing from $9.2 billion in 2006 to $13.6 billion in 2012, representing a CAGR of 6.7%. We estimate that of this $13.6 billion, approximately $6.3 billion was related to consumer spending in pet medicines, which included approximately $4.7 billion for parasiticides and vaccines with approximately $1.6 billion for pet therapeutics. This $1.6 billion estimate excludes amounts spent on human drugs to treat pets. We derived these estimates using data from Vetnosis Limited, a research and consulting firm specializing in animal health and veterinary medicine, for sales of pet therapeutics directly to veterinarians and then adjusted the number to reflect a typical industry mark-up charged to the pet owners by the veterinarian. The $1.6 billion U.S. pet therapeutics market represents less than $10 per year per pet.

We believe that the pet market, driven in part by expansion of the veterinary care segment, will continue to grow and that the introduction of novel pet therapeutics offering significant safety and efficacy benefits over existing products will result in pet therapeutics garnering a larger share of total consumer spending on pets.

Differences Between Human and Pet Therapeutics

While the business of developing and commercializing therapeutics for pets shares a number of characteristics with the business of developing and commercializing therapeutics for humans, there are also significant differences between the pet therapeutics and human therapeutics businesses that we believe make the pet therapeutics market attractive, including:

Faster, less expensive and more predictable development

Development of pet therapeutics is generally faster and less expensive than for human therapeutics because it requires fewer clinical studies, involves fewer subjects and is conducted directly in the target species. Because there is no need to bridge from pre-clinical investigations in one species to the final target species, decisions on the potential efficacy and safety of products often can be made more quickly, and the likelihood of success often can be established earlier. This contributes to the enhanced process and greater capital efficiency of pet versus human drug development.

Role and economics of veterinary practices

In addition to the primary goal of improving the health of pets, veterinary practices can generate additional value and revenue growth by prescribing pet therapeutics. Unlike in the human pharmaceutical market, veterinarians often serve the dual roles of doctor and pharmacist as pet owners typically purchase medicines directly from veterinarians. As a result, the sale of pet therapeutics directly to pet owners is a meaningful contributor to veterinary practice economics. According to industry sources, approximately one-third of companion animal practice revenue comes from prescription drug sales, parasiticides, vaccinations and non-prescription medicines. We believe that this revenue stream could be increased significantly with the introduction of novel therapeutics that have been specifically developed for pets.

Partnership relationships with, and better access to, veterinarian decision-makers

The pet therapeutics industry typically uses a combination of sales representatives to inform veterinarians about the attributes of products, and technical and veterinary operations specialists to provide advice regarding local, regional and global trends. In many cases, a pet therapeutics sales representative is viewed by the veterinarian as both an educator and a business partner. These direct relationships allow pet therapeutics sales representatives to understand the needs of the veterinarians and ultimately pet owners and to develop products to better meet those needs.

 

 

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Primarily private-pay nature of veterinary market

Pet owners generally pay for pet healthcare, including pet therapeutics, out-of-pocket. Third-party insurance covers less than 5% of U.S. pet owners. Pet owners make decisions primarily on the advice of their veterinarian, without the influence of insurance companies or government payors that are often involved in product and pricing decisions in human healthcare. We believe the lack of pricing intervention of third-party payors in veterinary medicine results in less pricing pressure than in human health. Furthermore, this enables pet therapeutics companies to directly market to pet owners to encourage them to consult with their veterinarians.

Our Strategy

Our goal is to become a leading provider of therapeutics developed and approved specifically for the treatment of unmet medical needs in pets. We are a pet-focused company and we intend to help shape and define the pet therapeutics market. We plan to accomplish this by:

 

  n  

Advancing our existing compounds to regulatory approval;

 

  n  

Leveraging our management team’s established experience in the human biopharmaceutical and animal health industries;

 

  n  

Using a direct sales organization and distributors to commercialize our products in the United States and Europe;

 

  n  

Engaging active partners to build a commercial presence; and

 

  n  

Continuing to expand our product pipeline by in-licensing additional compounds.

Recent Developments

Acquisition of Okapi Sciences N.V.

On January 6, 2014, we acquired Okapi Sciences N.V., a Belgium-based company with a proprietary pet therapeutics antiviral platform and five clinical/development stage product candidates designed to treat important viral diseases. We plan to continue to advance the current Okapi pipeline of high value antiviral drugs, including its feline herpes and feline immunodeficiency virus products, which currently comprise our AT-006 and AT-007 product candidates, respectively. We are developing AT-006 as a treatment for ocular herpes in cats. If approved, AT-006 could become the first antiviral small molecule therapeutic developed specifically for veterinary use. AT-006, if approved, will be commercialized by Novartis Animal Health pursuant to an existing development and commercialization agreement. The Okapi product pipeline also includes additional antiviral and oncology products for both cats and dogs.

To acquire Okapi, we paid its equity holders approximately 10.3 million (equivalent to $13.9 million) in cash and issued a promissory note for 11.0 million ($14.9 million). The promissory note bears interest at 7% per annum payable quarterly in arrears and matures on December 31, 2014, subject to mandatory prepayment in the event of an equity financing, which would include this offering. We also agreed to pay up to an additional $16.3 million in cash or shares of common stock calculated in the manner specified in the purchase agreement within 90 days of the closing, subject to mandatory prepayment in cash in the event of an equity financing, which also includes this offering. We believe the strategic acquisition of Okapi further enhances our leadership position in pet therapeutics by providing us with a European base of operations that we believe enables better coordination of clinical and regulatory activities, enhances our business development and in-licensing capabilities and provides flexibility with respect to European commercialization. The acquisition also provides us with the technology for de novo product generation, diversifies our product pipeline and demonstrates our continued focus on innovation.

Acquisition of Vet Therapeutics, Inc.

On October 15, 2013, we acquired Vet Therapeutics, Inc., a Del Mar, California-based company with a proprietary antibody-based biologics platform. We plan to continue to advance this pipeline of biologic drugs, including the lymphoma franchise, which currently comprises our AT-004, AT-005, AT-009 and AT-010 products. Beyond these products, the Vet Therapeutics’ pipeline includes biologics for the treatment of other cancers, atopic dermatitis and other immune conditions. We acquired Vet Therapeutics for a combination of $30.0 million in cash, 625,000 shares of our common stock, and a $3.0 million promissory note maturing on

 

 

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December 31, 2014 at an interest rate of 7% per year. The promissory note is subject to repayment in the event of specified equity financings, which include this offering. We also agreed to pay up to $5.0 million in contingent cash consideration in connection with the achievement of certain regulatory and manufacturing milestones for our AT-004. We believe this acquisition may significantly accelerate our pathway toward becoming a commercial-stage pet therapeutics company.

October 2013 Private Placement

On October 13, 2013, we entered into a stock purchase agreement with various accredited investors, pursuant to which we sold an aggregate of 1,234,375 shares of our common stock for an aggregate purchase price of approximately $19.8 million or $16.00 per share.

Risks Related to Our Business

Our ability to implement our business strategy is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

  n  

We have a limited operating history and have incurred significant losses since our inception.

 

 

  n  

Although we have one conditionally approved product, we are substantially dependent on the success of our current product candidates.

 

  n  

If we are not successful in identifying, licensing, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

 

  n  

We may not realize all of the anticipated benefits of our acquisitions of Vet Therapeutics and Okapi or those benefits may take longer to realize than expected.

 

  n  

We may not be able to obtain regulatory approval for our existing or future product candidates under applicable regulatory requirements.

 

  n  

Even if our current or future product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success.

 

  n  

Development of pet therapeutics involves an expensive and lengthy process with uncertain outcome, and results of earlier studies may not be predictive of future study results.

 

  n  

We rely completely on third-party manufacturers to manufacture the supplies for the development of our small molecule product candidates and we intend to rely on third-party manufacturers to produce commercial quantities of any approved drug candidates.

 

  n  

We currently own two issued patents and license patents covering our biologics, small molecule and antiviral product candidates, and have limited rights to prosecute and enforce those licensed patents.

 

  n  

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are essential to our business.

 

  n  

The regulatory approval process is uncertain, requires us to utilize significant resources, and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.

Corporate Information

Our principal executive offices are located at 1901 Olathe Boulevard, Kansas City, Kansas 66103, and our telephone number is (913) 951-2132. We also maintain business locations in Boston, Massachusetts, Del Mar, California, and Leuven, Belgium. Our website address is www.aratana.com. The information contained in, or accessible through, our website should not be considered a part of this prospectus.

 

 

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Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

  n  

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations in this prospectus;

 

  n  

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

  n  

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

  n  

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until December 31, 2018. However, if certain events occur prior to December 31, 2018, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to December 31, 2018.

We have elected to take advantage of certain of the reduced disclosure obligations regarding executive compensation in this registration statement and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than the information you might receive from other public reporting companies in which you hold equity interests.

 

 

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THE OFFERING

 

Common stock offered by us

4,500,000 shares

 

Common stock offered by the selling stockholders

1,000,000 shares (or 1,825,000 shares if the underwriters exercise their option to purchase additional shares from a selling stockholder in full)

 

Common stock to be outstanding after this offering

28,597,738 shares

 

Use of proceeds

We intend to use the net proceeds of this offering to satisfy our remaining purchase price obligation to the former stockholders of Okapi; to repay the outstanding principal amounts under our promissory notes held by the former stockholders of Okapi and the former stockholders of Vet Therapeutics; and the balance for the further development of our product candidates, expansion of our commercial infrastructure in anticipation of future product launches and for other general corporate and working capital purposes. We may also use a portion of our net proceeds to in-license or acquire additional product candidates, technologies or businesses; however, other than our existing option agreements for licenses, we currently have no agreements or commitments to complete any such transaction. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 13 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

 

NASDAQ Global Market Symbol

“PETX”

 

 

The number of shares of our common stock to be outstanding after this offering is based on 24,097,738 shares of our common stock outstanding as of December 31, 2013 (including 670,374 shares of restricted common stock that are subject to vesting restrictions as of December 31, 2013 and are not considered outstanding for accounting purposes) and excludes:

 

  n  

949,401 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2013, at a weighted average exercise price of $11.41 per share; and

 

  n  

206,217 shares of common stock reserved for issuance under our 2013 incentive award plan as of December 31, 2013 as well as shares that become available pursuant to provisions in our 2013 incentive award plan that automatically increase the share reserve under the plan on January 1 of each calendar year as more fully described in “Executive and Director Compensation—2013 Incentive Award Plan.”

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

  n  

no exercise of the outstanding options described above; and

 

  n  

no exercise by the underwriters of their option to purchase additional shares of our common stock.

 

 

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SUMMARY HISTORICAL FINANCIAL DATA

The following tables set forth a summary of our historical financial data as of, and for the period ended on, the dates indicated. We have derived the statement of operations data for the years ended December 31, 2011 and 2012 from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the nine months ended September 30, 2012 and 2013 and for the period from our inception (December 1, 2010) to September 30, 2013 and the balance sheet data as of September 30, 2013 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. This unaudited interim financial information has been prepared on the same basis as our audited financial statements and, in our opinion, reflects all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position as of September 30, 2013 and operating results for the nine months ended September 30, 2012 and 2013. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the sections in this prospectus entitled “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The historical results are not necessarily indicative of the results to be expected for any future periods and the results for the nine months ended September 30, 2013 should not be considered indicative of results expected for the fiscal year 2013.

 

 

 

 

     YEAR ENDED
DECEMBER 31,
    NINE MONTHS
ENDED SEPTEMBER 30,
    CUMULATIVE
PERIOD FROM
INCEPTION
(DECEMBER 1,

2010) TO
SEPTEMBER 30,

2013
 
     2011     2012     2012     2013    
                 (unaudited)     (unaudited)     (unaudited)  
     (in thousands, except share and per share data)  

Statement of Operations Data:

          

Revenue

   $      $      $      $      $   

Operating expenses:

          

Research and development

     2,196        7,291        5,338        7,817        17,304   

General and administrative

     1,274        2,987        2,186        3,911        8,481   

In-process research and development

            1,500                      8,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,470        11,778        7,524        11,728        33,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,470     (11,778     (7,524     (11,728     (33,810

Other income (expense):

          

Interest income

     6        21        12        51        78   

Interest expense

                          (182     (182

Other income

            121        81        455        576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     6        142        93        324        472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,464     (11,636     (7,431     (11,404   $ (33,338
          

 

 

 

Modification of Series A convertible preferred stock

     (276                       

Unaccreted dividends on convertible preferred stock

     (902     (2,035     (1,493         
  

 

 

   

 

 

   

 

 

   

 

 

   

Net loss attributable to common stockholders

   $ (4,642   $ (13,671   $ (8,924   $ (11,404  
  

 

 

   

 

 

   

 

 

   

 

 

   

Net loss per share attributable to common stockholders, basic and diluted(1)

   $ (15.43   $ (34.53   $ (28.79   $ (1.50  
  

 

 

   

 

 

   

 

 

   

 

 

   

Weighted average shares outstanding, basic and diluted(1)

     300,841        395,918        309,994        7,601,388     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)   

See Note 16 to our annual financial statements and Note 11 to our interim financial statements included elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

 

 

 

     AS OF SEPTEMBER 30, 2013  
     ACTUAL      PRO FORMA(1)      PRO FORMA
AS  ADJUSTED(2)(3)
 
     (in thousands)  

Balance Sheet Data:

        

Cash, cash equivalents and short-term investments

   $ 52,306       $ 41,030       $ 87,089   

Working capital(4)

     47,557         16,770         77,995   

Total assets

     52,668         155,613         201,672   

Contingent consideration payable

             18,976         3,810   

Total long-term debt, net of discount

     4,941         32,817         14,928   

Total stockholders’ equity

     43,836         86,731         165,845   

 

 

(1)   

Pro forma balance sheet data give effect to our October 2013 private placement and the acquisitions of Vet Therapeutics and Okapi, as described in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information,” prior to giving effect to the pro forma adjustments for this offering.

(2)   

Pro forma as adjusted balance sheet data give further effect to (i) the issuance and sale by us of 4,500,000 shares of common stock in this offering at an assumed public offering price of $18.96 per share, the last reported sale price on January 21, 2014, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of net proceeds received by us in this offering as described in the section of this prospectus entitled “Use of Proceeds.”

(3)   

A $1.00 increase (decrease) in the assumed public offering price of $18.96 per share, the last reported sale price on January 21, 2014, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $4.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1.0 million in the number of shares offered by us at the assumed public offering price would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $17.9 million. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

(4)   

We define working capital as current assets less current liabilities.

 

 

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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following summary unaudited pro forma consolidated financial information has been prepared to give effect to our completed acquisitions of Vet Therapeutics and Okapi and the shares issued and net proceeds received by us in this offering, which will be used to pay purchase consideration and repay debt issued in connection with the acquisitions, as required upon the completion of this offering by the terms of the acquisition agreements and as described in the section of this prospectus entitled “Use of Proceeds.” The summary unaudited pro forma consolidated balance sheet data as of September 30, 2013 gives effect to the acquisitions of Vet Therapeutics and Okapi, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments as if each occurred on September 30, 2013. The summary unaudited pro forma consolidated statement of operations data for the year ended December 31, 2012 and nine months ended September 30, 2013 give effect to the acquisitions of Vet Therapeutics and Okapi, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments as if each occurred on January 1, 2012.

The summary unaudited pro forma consolidated financial information is derived from our, Vet Therapeutics’ and Okapi’s audited historical financial statements as of and for the year ended December 31, 2012, from Vet Therapeutics’ audited historical financial statements of as of and for the nine months ended September 30, 2013, and from our and Okapi’s unaudited historical financial statements of as of and for the nine months ended September 30, 2013.

The summary unaudited pro forma consolidated financial information is based on assumptions and preliminary information available and management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed as described in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information.” The summary unaudited pro forma consolidated financial information was prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and should not be considered indicative of the consolidated financial position or results of operations that would have occurred if the transactions described above had occurred on the dates indicated, nor are they indicative of the future consolidated financial position or results of operations of Aratana, Vet Therapeutics and Okapi following completion of the transactions described above. You should read this unaudited pro forma consolidated financial information together with our, Vet Therapeutics’ and Okapi’s financial statements and related notes appearing elsewhere in this prospectus.

For additional information regarding our summary unaudited pro forma consolidated financial information, see the section of the prospectus entitled “Unaudited Pro Forma Consolidated Financial Information.”

 

 

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     YEAR ENDED
DECEMBER 31, 2012
    NINE MONTHS ENDED
SEPTEMBER 30, 2013
 
     (in thousands, except share and per share data)  

Unaudited Pro Forma Consolidated Statement of Operations Data:

    

Revenues:

    

Licensing revenue

   $ 173      $ 1,440   

Product sales

            157   
  

 

 

   

 

 

 

Total revenues

     173        1,597   
  

 

 

   

 

 

 

Costs and expenses:

    

Cost of product sales

     10        137   

Royalty expense

            70   

Research and development

     10,728        10,421   

General and administrative

     3,841        4,656   

In-process research and development

     1,500          

Amortization of acquired intangible assets

     1,822        1,367   
  

 

 

   

 

 

 

Total operating expenses

     17,901        16,651   
  

 

 

   

 

 

 

Loss from operations

     (17,728     (15,054

Other income (expense):

    

Interest income

     32        56   

Interest expense

     (550     (594

Other income

     167        472   

Other expenses

     (8     (7
  

 

 

   

 

 

 

Total other income (expense)

     (359     (73
  

 

 

   

 

 

 

Loss before income taxes

     (18,087     (15,127

Income tax benefit

     6,750        5,671   
  

 

 

   

 

 

 

Net loss

     (11,337     (9,456

Unaccreted dividends on convertible preferred stock

     (2,035       
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (13,372   $ (9,456
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (3.23   $ (0.83
  

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

     4,135,555        11,341,025   
  

 

 

   

 

 

 

 

 

 

 

 

     AS OF SEPTEMBER 30, 2013  
     (in thousands)  

Unaudited Pro Forma Consolidated Balance Sheet Data(1):

  

Cash, cash equivalents and short-term investments

   $ 87,089   

Working capital(2)

     77,995   

Total assets

     201,672   

Contingent consideration payable

     3,810   

Total long-term debt, net of discount

     14,928   

Total stockholders’ equity

     165,845   

 

 

(1)   

The unaudited pro forma consolidated balance sheet data gives effect to this offering as described in Note 7 to the Unaudited Pro Forma Consolidated Financial Information.

(2)   

We define working capital as current assets less current liabilities.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Business

We have a limited operating history and have incurred significant losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, and our limited operating history makes it difficult to assess our future viability.

We are a development-stage biopharmaceutical company in the pet therapeutics industry with a limited operating history. Biopharmaceutical product development in the pet therapeutics industry is a highly speculative undertaking and involves a substantial degree of risk. We currently have a product pipeline with over 15 products under development including one biologic, AT-004, that is currently marketed by Novartis Animal Health, Inc., or Novartis Animal Health, under a conditional license. We are not profitable and have incurred losses in each year since our inception in December 2010. We have a limited operating history upon which you can evaluate our business and prospects. In addition, as an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. We have not generated any revenue from product sales to date, other than a small amount of royalties from the sales generated by Novartis Animal Health. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the nine months ended September 30, 2013 was $11.4 million and for the year ended December 31, 2012 was $11.6 million. As of September 30, 2013, we had a deficit accumulated during development stage of $33.6 million and we had $52.3 million in cash, cash equivalents and short-term investments. Taking into account our October 2013 private placement and our recent acquisitions of Vet Therapeutics and Okapi, our pro forma net loss for the nine months ended September 30, 2013 was $9.9 million and for the year ended December 31, 2012 was $12.1 million, and as of September 30, 2013, we had a pro forma deficit accumulated during development stage of $25.2 million and we had pro forma cash, cash equivalents and short-term investments of $41.0 million. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize them if they are approved by the U.S. Food and Drug Administration’s Center for Veterinary Medicine, or CVM, or for our biologic products, the U.S. Department of Agriculture, or the USDA. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We may require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product portfolio expansion, product development, other operations or commercialization efforts.

Since our inception, nearly all of our resources have been dedicated to the in-licensing, acquisition and research and development of our current product candidates. Completing the development and obtaining regulatory approval of our product candidates will require substantial funds. We also have an active in-licensing effort focused on identifying human therapeutics for development and commercialization as pet therapeutics. We believe that we will continue to expend substantial resources for the foreseeable future for the development of our current product candidates and any future product candidates we may choose to pursue. These expenditures will include costs associated with identifying potential product candidates, licensing or acquisition payments, conducting target animal studies, completing other research and development, obtaining regulatory approvals and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any target animal study is uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any of our current or future product candidates.

 

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We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and existing credit facility will allow us to fund our operations and our debt obligations through at least December 31, 2015. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Our future capital requirements depend on many factors, including, but not limited to:

 

  n  

the results of our target animal studies for our current and future product candidates;

 

  n  

the amount and timing of any milestone payments or royalties we must pay pursuant to our current or future license agreements or collaboration agreements;

 

  n  

the timing of, and the costs involved in, obtaining regulatory approvals for any of our current or future product candidates;

 

  n  

the upfront and other payments, and associated costs, related to identifying, acquiring and in-licensing new product candidates;

 

  n  

the number and characteristics of the product candidates we pursue;

 

  n  

the scope, progress, results and costs of researching and developing any of our current or future product candidates and conducting target animal studies;

 

  n  

whether we acquire any other companies, assets, intellectual property or technologies in the future;

 

  n  

our ability to partner with companies with an established commercial presence in Europe to provide our products in that market;

 

  n  

the cost of commercialization activities, if any of our current or future product candidates are approved for sale, including marketing, sales and distribution costs;

 

  n  

the cost of manufacturing our current and future product candidates and any products we successfully commercialize;

 

  n  

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

 

  n  

whether we are required to repay amounts that we received from the Kansas Bioscience Authority, or the KBA, repurchase the shares of our capital stock owned by the KBA or repay Kansas income tax credits allocated to some of our investors (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Kansas Programs”);

 

  n  

the expenses needed to attract and retain skilled personnel;

 

  n  

the costs associated with being a public company; and

 

  n  

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation.

Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate:

 

  n  

our target animal studies or other development activities for our current or future product candidates;

 

  n  

our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize any of our current or future product candidates; or

 

  n  

our in-licensing and acquisition efforts and expansion of our product portfolio.

 

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Although we have one conditionally approved product, we are substantially dependent on the success of our current product candidates.

We currently have no products approved for commercial distribution, except AT-004 which has received a conditional license from the USDA. To date, we have invested nearly all of our efforts and financial resources in the in-licensing, research and development of AT-001, AT-002 and AT-003, which, prior to our acquisition of Vet Therapeutics and Okapi, were our only product candidates and are still in development.

Our near-term prospects, including our ability to finance our company and to enter into strategic collaborations and generate revenue, will depend heavily on the successful development and commercialization of our current product candidates. The development and commercial success of our current product candidates will depend on a number of factors, including the following:

 

  n  

timely initiation and completion of our target animal studies for our current product candidates, which may be significantly slower than we currently anticipate and will depend substantially upon the satisfactory performance of third-party contractors;

 

  n  

our ability to demonstrate to the satisfaction of the CVM, the USDA and the European Medicines Agency, or EMA, or the applicable EU Member State national competent authorities, the safety and efficacy of our product candidates and to obtain regulatory approval in the United States and Europe;

 

  n  

our success in educating veterinarians and pet owners about the benefits, administration and use of our product candidates;

 

  n  

the prevalence and severity of adverse side effects, including a continued acceptable safety profile of the product following approval;

 

  n  

achieving and maintaining compliance with all regulatory requirements applicable to our product candidates;

 

  n  

the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

  n  

the effectiveness of our marketing, sales and distribution strategy and operations;

 

  n  

the ability of our third-party manufacturers to manufacture supplies of any of our current or future product candidates and to develop, validate and maintain commercially viable manufacturing processes that are compliant with current Good Manufacturing Practices, or cGMP;

 

  n  

our ability to successfully launch commercial sales of our current product candidates, assuming CVM, USDA or EMA approval is obtained, whether alone or in collaboration with others;

 

  n  

our ability to enforce our intellectual property rights in and to our product candidates and avoid third-party patent interference, third-party initiated and U.S. PTO-initiated administrative patent proceedings or patent infringement claims; and

 

  n  

acceptance of our product candidates as safe and effective by veterinarians, pet owners and the animal health community.

Many of these factors are beyond our control. Accordingly, we cannot assure you that we will ever be able to generate revenue through the sale of our product candidates. If we are not successful in commercializing one or more of our product candidates, or are significantly delayed in doing so, our business will be materially harmed and the value of your investment could substantially decline.

The development of our biologic product candidates is dependent upon relatively novel technologies and uncertain regulatory pathways.

As a result of our acquisition of Vet Therapeutics, we are developing biologics, including animal antibodies, for pets. Identification, optimization and manufacturing of therapeutic animal biologics is a relatively new field in which unanticipated difficulties or challenges could arise. While many biologics have been approved for use in humans, very few have been approved for use in animals, except for vaccines. There are unique risks and uncertainties with biologics, the development, manufacturing and sale of which are subject to regulations that are often as complex and extensive as the regulations applicable to other small molecule products. We anticipate that our animal biologics may be regulated by the USDA, rather than CVM, and the regulatory standards that the USDA may require for novel biologics may be more difficult to satisfy than we anticipate.

 

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We may be unable to obtain regulatory approval for our existing or future product candidates under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization efforts and adversely impact our potential to generate revenue, our business and our results of operations.

Our product candidates are in various stages of development, and our business currently depends entirely on their successful development, regulatory approval and commercialization. With the exception of AT-004, we currently have no products approved for sale, and we may never obtain regulatory approval to commercialize any of our other current or future product candidates. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of pet therapeutics products are subject to extensive regulation by the CVM, the USDA, the EMA and other regulatory authorities in the United States and other countries, whose regulations differ from country to country. We are not permitted to market our products in the United States until we receive approval of a New Animal Drug Application, or NADA, from the CVM or a full product license from the USDA with respect to our biologic products, or in Europe until we receive approval from the European Commission or applicable EU State national competent authorities.

Even if we receive approval of an NADA, USDA product license or foreign regulatory filing for our product candidates, the CVM, the USDA or the applicable foreign regulatory body may approve our product candidates for a more limited indication than we originally requested, and the CVM or the USDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects.

Even if our current or future product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success.

Even if we obtain CVM, USDA, EMA or other regulatory approvals, our current or future product candidates may not achieve market acceptance among veterinarians and pet owners, and may not be commercially successful. Market acceptance of any of our current or future product candidates for which we receive approval depends on a number of factors, including:

 

  n  

the safety of our products as demonstrated in our target animal studies;

 

  n  

the indications for which our products are approved;

 

  n  

the acceptance by veterinarians and pet owners of the product as a safe and effective treatment;

 

  n  

the proper training and administration of our products by veterinarians;

 

  n  

the potential and perceived advantages of our product candidates over alternative treatments, including generic medicines and products approved for use by humans that are used off label;

 

  n  

the cost of treatment in relation to alternative treatments and willingness to pay for our products, if approved, on the part of veterinarians and pet owners;

 

  n  

the willingness of pet owners to pay for our treatments, relative to other discretionary items, especially during economically challenging times;

 

  n  

the relative convenience and ease of administration;

 

  n  

the prevalence and severity of adverse side effects; and

 

  n  

the effectiveness of our sales and marketing efforts.

Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would adversely affect our financial results.

We may not realize all of the anticipated benefits of our acquisitions of Vet Therapeutics or Okapi, or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating three businesses.

Our ability to realize the anticipated benefits of our acquisitions of Vet Therapeutics and Okapi will depend in part on our ability to integrate their businesses with ours. The combination of three independent businesses is a complex, costly and time-consuming process. As a result, we will be required to devote significant management attention and resources to integrating the business practices and operations of Vet Therapeutics and Okapi. The integration process may disrupt the businesses and, if implemented ineffectively, would preclude realization of the full benefits

 

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expected by us. Our failure to meet the challenges involved in integrating the businesses to realize the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

In addition, the overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, and diversion of management’s attention. The difficulties of combining the operations of the companies include, among others:

 

  n  

the diversion of management’s attention to integration matters;

 

  n  

difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from combining the business of Vet Therapeutics and Okapi with our company;

 

  n  

difficulties in the integration of operations and systems;

 

  n  

difficulties in the assimilation of employees;

 

  n  

challenges in attracting and retaining key personnel; and

 

  n  

challenges in maintaining previously-established relationships with licensors and licensees.

Many of these factors will be outside of our control and any one of them could result in increased costs and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of the businesses are integrated successfully, we may not realize the full benefits of the transaction, including the synergies or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

Development of pet therapeutics involves an expensive and lengthy process with an uncertain outcome, and results of earlier studies may not be predictive of future study results.

Development of pet therapeutics is expensive and can take many years to complete, and its outcome is inherently uncertain. To gain approval to market a pet therapeutic for a particular species of pet, we must provide the CVM, the USDA or foreign regulatory authorities, as applicable, with data from animal safety and effectiveness studies that adequately demonstrate the safety and efficacy of that product in the target animal for the intended indication applied for in the NADA, product license or other regulatory filing. We rely on contract research organizations, or CROs, and other third parties to ensure the proper and timely conduct of our studies and development efforts and, while we have agreements governing their committed activities, we have limited influence over their actual performance. Failure can occur at any time during the development process. Success in prior target animal studies or in the treatment of human beings with a product candidate does not ensure that our target animal studies will be successful and the results of development efforts by other parties may not be indicative of the results of our target animal studies and other development efforts. Product candidates in our studies may fail to show the desired safety and efficacy despite showing such results in initial data or previous human or animal studies conducted by other parties. Even if our studies and other development efforts are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

Once our target animal studies commence, we may experience delays in such studies and other development efforts and we do not know whether planned studies will begin on time, need to be redesigned or be completed on schedule, if at all. Pet therapeutics studies can be delayed or discontinued for a variety of reasons, including delay or failure to:

 

  n  

reach agreement on acceptable terms with prospective CROs and study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

  n  

complete target animal studies due to deviations from study protocol;

 

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address any safety concerns that arise during the course of testing;

 

  n  

address any conflicts with new or existing laws or regulations;

 

  n  

add new study sites; or

 

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manufacture sufficient quantities of formulated drug for use in studies.

If we experience delays in the completion or termination of any development efforts for our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from

 

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any of these product candidates will be delayed. In addition, any delays in completing our development efforts will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of our development efforts may also ultimately lead to the denial of regulatory approval of our product candidates.

Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The development and commercialization of pet therapeutics is highly competitive, and we expect considerable competition from major pharmaceutical, biotechnology and specialty animal health medicines companies. As a result, there are and will likely continue to be extensive research and substantial financial resources invested in the discovery and development of new pet therapeutics. Our potential competitors include large animal health companies, such as Zoetis, Inc.; Merck Animal Health, the animal health division of Merck & Co., Inc.; Merial, the animal health division of Sanofi S.A.; Elanco, the animal health division of Eli Lilly and Company; Bayer Animal Health, the animal health division of Bayer AG; Boehringer Ingelheim Animal Health, the animal health division of Boehringer Ingelheim GmbH; Novartis Animal Health, the animal health division of Novartis AG; Virbac Group; Ceva Animal Health; Vetoquinol and Dechra Pharmaceuticals PLC. We are also aware of several smaller early stage companies that are developing products for use in the pet therapeutics market.

If approved, we expect AT-001 will face competition from Rimadyl and generic Carprofen, Deramaxx, Previcox and Metacam and generic Meloxicam. At the product level, we are currently not aware of any direct competitor for AT-002. However, we are aware that veterinarians utilize mirtazapine, a human generic antidepressant to attempt to treat inappetance in pets. We expect AT-003 will compete primarily with the non-steroidal anti-inflammatory drugs from the class of cyclooxygenase inhibitors and injectable anesthetics, such as bupivacaine, which is not approved for non-human use but is widely used by veterinarians. We are also unaware of any approved products for the treatment of lymphoma in dogs. We expect that AT-004 and AT-005 will face competition from human generic chemotherapies. We are aware of biotechnology companies that are developing products for the treatment of lymphoma in pets, including some that have received a minor use minor species, or MUMS, designation. We know of no direct competitor for AT-006 or AT-007, but we may face competition from generic human antivirals.

We are an early-stage company with a limited history of operations and many of our competitors have substantially more resources than we do, including both financial and technical. In addition, many of our competitors have more experience than we have in the development, manufacture, regulation and worldwide commercialization of animal health medicines, including pet therapeutics. We are also competing with academic institutions, governmental agencies and private organizations that are conducting research in the field of animal health medicines.

If we are not successful in identifying, licensing or acquiring, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our effort will focus on the continued development and potential approval of our current product candidates, a key element of our strategy is to identify, license or acquire, develop and commercialize a portfolio of products to serve the pet therapeutics market. We derive potential pet therapeutic product candidates from molecules and compounds discovered or developed as part of human biopharmaceutical research. We expect to enter into license arrangements with third parties to provide us with rights to human health compounds for purposes of our business. Such agreements are typically complex and require time to negotiate and implement. If we enter into these arrangements, we may not be able to maintain these relationships or establish new ones in the future on acceptable terms or at all. If we are unable to access human health-generated molecules and compounds to conduct research and development on cost-effective terms, our ability to develop new products could be limited. In some instances, human biopharmaceutical companies may be unwilling to license us their products or compounds for development as pet therapeutics because of perceived regulatory and commercial risks, including the risk that the FDA could delay or halt an ongoing human development trial if the same compound, when studied in animals, produces an unexplained adverse event or death, and the risk that, if the same compound is developed for humans and pets, and the human version is priced significantly higher than the pet version, which is usually the case, human patients would attempt to use the cheaper animal version of the drug. Even if we successfully identify and license potential product candidates, we may still fail to yield product candidates for development and commercialization for many reasons, including the following:

 

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  n  

competitors may develop alternatives that render our product candidates obsolete;

 

  n  

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

  n  

a product candidate may on further study be shown to have harmful side effects in pets or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

  n  

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

 

  n  

a product candidate may not be accepted as safe and effective by veterinarians, pet owners and the pet therapeutic community.

If we fail to develop and successfully commercialize other product candidates, our business and future prospects may be harmed and our business will be more vulnerable to any problems that we encounter in developing and commercializing our current and future product candidates.

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop any of our current or future product candidates, conduct our in-licensing and development efforts and commercialize any of our current or future product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We are highly dependent upon our senior management, as well as our senior scientists and other members of our senior management team. The loss of services of any of these individuals could delay or prevent the successful development of our current or future product pipeline, completion of our planned development efforts or the commercialization of our product candidates.

Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the animal health fields is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

We rely completely on third-party manufacturers to manufacture the supplies for the development of our small molecule and antiviral product candidates and we intend to rely on third-party manufacturers to produce commercial quantities of any approved drug candidate.

With respect to our small molecules and antiviral programs, we do not currently have, nor do we plan to acquire, the infrastructure or capability internally to manufacture the formulated drug for use in the conduct of our target animal studies. We also lack the resources and the capability to manufacture any of our product candidates on a scale necessary for commercialization. We will need to identify contract manufacturers to provide commercial supplies of the formulated drugs for all products except AT-003. For AT-003, we have entered into a commercial supply agreement with Pacira Pharmaceuticals, Inc., or Pacira. Under this agreement, Pacira will provide us with finished drug product in vials, without final labeling and packaging, for which we are responsible. Pacira may terminate this supply agreement if we fail to make an undisputed payment, if we breach a material provision of the agreement, or if Pacira ceases manufacture of the product. Pacira also has the unilateral right to change its manufacturing process for the product, and if we cannot reach agreement on the terms of continued supply of AT-003 meeting current specifications and Pacira decides that it is no longer commercially reasonable to supply us with product meeting such specifications, then Pacira may terminate this supply agreement. If this supply agreement terminates for any reason, we may be unable to arrange for alternative supply of AT-003. We cannot assure you that we will be able to identify an alternate contract manufacturer for AT-003 in a timely manner on commercially reasonable terms, or at all. Additionally, we may be unable to identify and reach agreement with a contract manufacturer for our product candidates in a timely manner on commercially reasonable terms, or at all. Any delay in our ability to identify and contract with these third-party contract manufacturers on commercially reasonable terms, or at all, would have an adverse impact upon our business.

 

 

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In July 2012, we entered into an API development agreement with RaQualia Pharma Inc., or RaQualia, pursuant to which we agreed to develop a manufacturing process for AT-001 that is cGMP compliant. We intend to fulfill this obligation through a contract manufacturer, Cambridge Major Laboratories, Inc., or CML, whom we engaged in August 2011 to develop the manufacturing process for AT-001. If our arrangement with CML terminates for any reason, we may not be able to identify an alternate contract manufacturer to develop a cGMP compliant manufacturing process for AT-001 in a timely manner, on commercially reasonable terms, or at all. Any delay in our ability to identify and contract with such an alternate contract manufacturer in a timely manner, on commercially reasonable terms, or at all, would have an adverse impact upon our business, including our relationship with RaQualia.

Although we acquired a USDA-licensed manufacturing facility in connection with the Vet Therapeutics acquisition, we expect to transition manufacturing of our biologic products to a third party in the future, which will subject the manufacture of our biologic products to the same risks associated with the third-party manufacture of our small molecule product candidates.

The facilities used by our contract manufacturers to manufacture the active pharmaceutical ingredients and formulated drugs may be subject to inspections by the CVM, the USDA or the EMA that will be conducted after we submit our NADA to the CVM, and approval by the CVM, or during the USDA licensing process for our biologics or the EMA approval process for the Okapi products. We do not control the manufacturing processes used by, and we are completely dependent on, our contract manufacturers to comply with cGMP for the manufacture of both active pharmaceutical ingredients and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and is made in compliance with the strict regulatory requirements of the CVM, the USDA or other regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control and quality assurance practices and to engage qualified personnel. If the CVM, the USDA or the EMA does not approve our contract manufacturers’ facilities used for the manufacture of our product candidates, or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

Furthermore, we and our third-party contractors are continuing to refine and improve the manufacturing process for our product candidates, certain aspects of which are complex and unique. We may encounter difficulties with new or existing manufacturing processes, particularly if we seek to increase our manufacturing capacity significantly to support commercialization of our product candidates, if approved. Our reliance on contract manufacturers also requires us to provide trade secrets or other proprietary information to others engaged to make our drug products, increasing the possibility that our trade secrets or other proprietary information may be disclosed or misappropriated.

Biologics manufacturing is difficult and costly, and may not be commercially viable.

We acquired a USDA-licensed manufacturing facility for our biologic products as part of our acquisition of Vet Therapeutics. Manufacturing of our pet biologics is a relatively new field in which unanticipated difficulties or challenges could arise. Manufacturing biologics, especially in large quantities, is complex and may require the use of technologies that we may need to develop. Such manufacturing requires facilities specifically designed and validated for this purpose as well as sophisticated quality assurance and quality control procedures. Biologics can also be costly to manufacture. Manufacturing biologics may be more technically challenging, time-consuming and expensive than we anticipate. There is no assurance that we will be able to manufacture biologics at full commercial scale and at an economical cost.

The commercialization of any of our product candidates could be stopped, delayed or made less profitable if third-party manufacturers fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices and in a timely manner.

To manufacture our product candidates in the quantities that we believe would be required to meet anticipated market demand, our third-party manufacturers may need to increase manufacturing capacity, which could involve significant challenges and may require additional regulatory approvals. In addition, the development of commercial-scale manufacturing capabilities may require us and our third-party manufacturers to invest substantial additional funds and hire and retain technical personnel who have the necessary manufacturing experience. Neither we nor our

 

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third-party manufacturers may successfully complete any manufacturing scale-up activities required to increase existing manufacturing capabilities in a timely manner, or at all. Under our exclusive supply agreement for AT-003, Pacira has the obligation to provide only a mid-to-high double-digit percentage of our requested commercial quantity of bulk finished drug product during the first six calendar quarters following commercial launch of AT-003.

The raw materials used to manufacture our products are generally readily available and can be obtained from multiple suppliers in commercial quantities. However, we rely on our contract manufacturers to obtain any raw materials necessary to manufacture our products, and we do not have any control over the process or timing of the acquisition of these materials. Furthermore, if there is a disruption to our or our third-party manufacturers’ relevant operations, we will have no other means of producing our product candidates until they restore the affected facilities or we or they procure alternative manufacturing facilities or raw materials. Additionally, any damage to or destruction of our third-party manufacturers’ facilities or equipment may significantly impair our ability to manufacture product candidates on a timely basis.

We currently rely on third parties to conduct all of our target animal studies and certain other development efforts. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current or future product candidates.

We currently do not conduct our target animal studies, and we rely on CROs to conduct these studies. The third parties with whom we contract for the execution of our studies play a significant role in the conduct of these studies and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our studies, we remain responsible for ensuring that each of our studies is conducted in accordance with the development plan and protocol. Moreover, the CVM, the USDA and EMA require us to comply with regulations and standards, commonly referred to as current good clinical practices, or cGCPs, or good laboratory practices, or GLPs, for conducting, monitoring, recording and reporting the results of our studies to ensure that the data and results are scientifically credible and accurate.

In addition, the execution of target animal studies and the subsequent compilation and analysis of the data produced requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. Many of our agreements with these third parties may be terminated by these third parties upon as little as 30 days’ prior written notice of a material breach by us that is not cured within 30 days. Many of these agreements may also be terminated by such third parties under certain other circumstances, including our insolvency or our failure to comply with applicable laws. In general, these agreements require such third parties to reasonably cooperate with us at our expense for an orderly winding down of services of such third parties under the agreements. If the third parties conducting our target animal studies do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our development protocols or cGCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties, which could be difficult and costly, and our target animal studies may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, the regulatory approval for and commercialization of the product candidate being tested in such studies may be delayed or require us to utilize additional resources.

Our ability to market our product candidates, if approved, will be limited to use for the treatment of the indications for which they are approved, and if we want to expand the indications for which we may market our product candidates, we will need to obtain additional CVM, USDA or EMA approvals, which may not be granted.

We expect to seek CVM approval in the United States for AT-001 for the treatment of pain and inflammation associated with osteoarthritis in dogs and cats, AT-002 for the treatment of inappetence in cats and dogs, and AT-003 for the treatment of post-operative pain in cats and dogs. In addition, we have received a conditional license from the USDA for AT-004 as an aid for the treatment of B-cell lymphoma in dogs, and we have submitted to the USDA an application for a conditional license for AT-005 as an aid for the treatment of T-cell lymphoma in dogs. If our product candidates are approved, we may only market or advertise them for the treatment of indications for which they are approved, which could limit their adoption by veterinarians and pet owners. We may attempt to develop, promote and commercialize new treatment indications and protocols for our product candidates in the future, but we

 

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cannot predict when or if we will receive the approvals required to do so. In addition, we would be required to conduct additional target animal studies to support our applications, which would utilize additional resources and may produce results that do not result in CVM, USDA or EMA approvals. If we do not obtain additional CVM, USDA or EMA approvals, our ability to expand our business will be limited.

Our Vet Therapeutics subsidiary is party to a license agreement with Novartis Animal Health, pursuant to which we have granted to Novartis Animal Health an exclusive right to commercialize AT-004 in the United States and Canada. In the event that Novartis Animal Health fails to successfully commercialize this product candidate, our ability to receive royalties under the license agreement would be adversely affected. Novartis Animal Health may terminate this agreement due to a breach by us upon 60 days’ notice, upon our bankruptcy or without cause on each anniversary of the execution of the agreement upon 90 days’ notice. In the event that this agreement terminates, we would no longer be eligible to receive royalties under the agreement and we would need to expand our internal capabilities or enter into another agreement for the commercialization of AT-004, which could cause significant delays and could have a material adverse effect on our business.

We currently have no sales organization. If we are unable to establish sales capabilities on our own or through third parties, we may not be able to market and sell our current or future product candidates, if approved, or generate product revenue.

We currently do not have a sales organization and we rely on a third-party to market our one conditionally-licensed product. In order to commercialize any of our current or future product candidates in the United States and any jurisdictions outside the United States, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If our current or any future product candidates receive regulatory approval, we expect to establish a direct sales organization in the United States, complemented by distributors, to commercialize our product candidates, which will be expensive and time-consuming. Outside of the United States we intend to partner with companies with an established commercial presence to market our products in those locations. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our current product candidates or any future product candidates that receive regulatory approval. We have no prior experience in the marketing, sale and distribution of pet therapeutics and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain and motivate qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively oversee a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. If we are not successful in commercializing any of our current or future product candidates, either on our own or through collaborations with one or more distributors, our future product revenue will suffer and we would incur significant additional losses.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

Since our initial public offering in June 2013, we have grown from 16 full-time employees to 40 full-time employees as of January 10, 2014. We will need to continue to expand our managerial, operational, financial and other resources in order to manage our operations and target animal studies, continue our development activities and commercialize any of our current or future product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

  n  

manage our target animal studies and other development efforts effectively;

 

  n  

identify, recruit, maintain, motivate and integrate additional employees;

 

  n  

manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and

 

  n  

continue to improve our operational, financial and management controls, reporting systems and procedures.

 

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We are incurring significant costs as a result of operating as a public company, and our management is expected to devote substantial time to new compliance initiatives.

As a privately-held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly-traded company. As a publicly-traded company, we have incurred and will continue to incur significant legal, accounting and other expenses that we were not required to incur in the recent past, particularly after we are no longer an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act, the JOBS Act, and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC, and The NASDAQ Global Market, have created uncertainty for public companies and increased our costs and time that our board of directors and management must devote to complying with these rules and regulations. We expect these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and attention from revenue-generating activities.

Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a publicly-traded company. However, the measures we take may not be sufficient to satisfy our obligations as a publicly-traded company.

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We may remain an “emerging growth company” for up to five years. See “Prospectus Summary—Implications of Being an Emerging Growth Company.” To the extent we are no longer eligible to use exemptions from various reporting requirements under the JOBS Act, we may be unable to realize our anticipated cost savings from those exemptions.

We are not currently required to evaluate our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, when applicable, could have a material adverse effect on our business and share price.

As an emerging growth company, we are not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly-traded companies required by Section 404 of the Sarbanes-Oxley Act, or Section 404. We anticipate being required to meet these standards in the course of preparing our financial statements as of and for the year ended December 31, 2014, and our management will be required to report on the effectiveness of our internal control over financial reporting for such year. Additionally, under the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.” The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.

A material weakness in internal control was identified in connection with the preparation of our financial statements and the audit of our financial results for 2011. We determined that we had a material weakness relating to accounting for complex transactions and cut-off of expenses. During 2012, we added personnel to our accounting staff with appropriate levels of experience to remediate the aforementioned material weakness. As of December 31, 2012, we determined the material weakness had been remediated as a result of the actions taken above and the resulting improvements in our internal controls.

 

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In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation in connection with the attestation provided by our independent registered public accounting firm. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we are not in compliance with Section 404. Furthermore, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and share price and could limit our ability to report our financial results accurately and timely.

Changes in distribution channels for pet therapeutics could negatively impact our market share, margins and distribution of our products.

In most markets, pet owners typically purchase their pet therapeutics directly from veterinarians. Pet owners increasingly could purchase pet therapeutics from sources other than veterinarians, such as Internet-based retailers, “big-box” retail stores or other over-the-counter distribution channels. This trend has been demonstrated by the significant shift away from the veterinarian distribution channel in the sale of parasiticides and vaccines in recent years. Pet owners also could decrease their reliance on, and visits to, veterinarians as they rely more on Internet-based animal health information. Because we expect to market our pet prescription products through the veterinarian distribution channel, any decrease in visits to veterinarians by pet owners could reduce our market share for such products and materially adversely affect our operating results and financial condition. In addition, pet owners may substitute human health products for pet therapeutics if human health products are deemed to be lower-cost alternatives.

Legislation has also been proposed in the United States, and may be proposed in the United States or abroad in the future, that could impact the distribution channels for our pet products. For example, such legislation may require veterinarians to provide pet owners with written prescriptions and disclosure that the pet owner may fill prescriptions through a third party, which may further reduce the number of pet owners who purchase their pet therapeutics directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our products with other pet therapeutics or human health products if such other products are deemed to be lower-cost alternatives. Many states already have regulations requiring veterinarians to provide prescriptions to pet owners upon request and the American Veterinary Medical Association has long-standing policies in place to encourage this practice.

Over time, these and other competitive conditions may increase our reliance on Internet-based retailers, “big-box” retail stores or other over-the-counter distribution channels to sell our pet products. Any of these events could materially adversely affect our operating results and financial condition.

Consolidation of our customers could negatively affect the pricing of our products.

Veterinarians are our primary customers. In recent years, there has been a trend towards the concentration of veterinarians in large clinics and hospitals. If this trend towards consolidation continues, these customers could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The resulting decrease in our prices could have a material adverse effect on our operating results and financial condition.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

As of December 31, 2012, we had net operating loss carryforwards, or NOLs, for federal and state income tax purposes of $1.1 million and $1.0 million, respectively, which may be available to offset our future taxable income, if any. Our federal NOLs begin to expire in 2031, and our state NOLs begin to expire in 2021. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to use its pre-change net operating loss carryforwards to offset future taxable income. If the Internal Revenue Service challenges our analysis that our existing NOLs will not expire before utilization due to previous ownership changes, or if we undergo an ownership change in connection with or after this public offering, our ability to use our NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to use NOLs of companies that we may acquire in the future may

 

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be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

Generic products may be viewed as more cost-effective than our products.

We may face competition from products produced by other companies, including generic alternatives to any of our products. We will depend on patents to provide us with exclusive marketing rights for some of our products. As of December 31, 2013, we had licensed approximately 27 issued patents or pending patent applications relating to our AT-001, AT-002 and AT-003 products covering various composition of matter claims as well as methods of treatment and methods of manufacturing our products. Our patent protection for these products extends for varying periods in accordance with the dates of filing or grant, the legal life of patents in countries in which patents are granted and the various terms and conditions of the respective agreement under which such patents are licensed. The key patent that we believe covers the crystalline form of the AT-001 compound expires on February 21, 2027, and the key patent that we believe covers certain methods of producing the AT-002 compound expires on February 1, 2020. Each of these patents may be eligible for an award of up to five years of patent term extension upon FDA approval of a commercial use of the corresponding product. The key patents that we believe cover certain compositions and methods of producing the AT-003 compound expire on September 18, 2018. The remainder of the patents in our current patent portfolio relating to our AT-001, AT-002 and AT-003 products expire at various times between 2015 and 2031, with a pending provisional application that upon issuance of a patent would expire in 2033. The protection afforded, which varies from country to country, is limited by the scope and applicable terms of our patents and the availability of legal remedies in the applicable country. As a result, we may face competition from lower-priced generic alternatives to many of our products. Generic competitors are becoming more aggressive in terms of pricing, and generic products are an increasing percentage of overall animal health sales in certain regions. In addition, private label products may compete with our products. If pet therapeutics customers increase their use of new or existing generic or private label products, our operating results and financial condition could be materially adversely affected.

As part of our Vet Therapeutics acquisition, we acquired a patent family related to the speciesization of antibodies that covers all Vet Therapeutics products with an issued patent expiring in 2029. We also acquired a patent family related to antibody constant domain regions and uses thereof, which also covers all Vet Therapeutics products and has an issued U.S. patent expiring in 2032. Finally, we acquired pending patent applications that cover specific canine monoclonal antibodies directed to various targets, including an allowed U.S. patent application directed to the canine CD 52 development antibody, which, upon issuance of a patent, will expire in 2029.

As part of our acquisition of Okapi, we acquired two patent applications that cover formulations of AT-006 and commercially-viable methods of making the active ingredient of AT-006. These applications, if granted into patents, would expire in 2032 and 2031, respectively. We also have a license to an issued U.S. patent that covers the active ingredient of AT-007. This patent expires in 2020, although we do not have rights to enforce this patent. We also have patent applications in the United States, Europe and other countries that cover therapeutic uses of AT-007. If any of these applications issue into a patent the expiration date would be 2031. Finally, we have in-licensed a patent portfolio for AT-008 that covers the composition and use of AT-008 through 2024 and 2027, respectively.

Our pet therapeutics are subject to unanticipated safety or efficacy concerns, which may harm our reputation.

Unanticipated safety or efficacy concerns can arise with respect to pet therapeutics, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as well as product liability, and other claims. In addition, we depend on positive perceptions of the safety and quality of our products, and pet therapeutics generally, by our customers, veterinarians and end-users, and such concerns may harm our reputation. These concerns and the related harm to our reputation could materially adversely affect our operating results and financial condition, regardless of whether such reports are accurate.

Risks Related to Intellectual Property

We currently own two issued patents and several patent applications, license the issued patents covering our small molecule product candidates and have limited rights to prosecute and enforce those licensed patents.

We currently own one issued patent related to the speciesization of antibodies that covers all Vet Therapeutics products, an issued patent related to antibody constant domain regions and uses thereof, which also covers all Vet Therapeutics products, a patent application related to canine monoclonal antibodies directed to canine CD 52 for

 

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which the USPTO has issued a notice of allowance, and a filed patent application that covers canine monoclonal antibodies directed to canine CD 20.

We also own one U.S. patent application, one international Patent Cooperation Treaty patent application, one direct-entry patent application in Argentina and one direct-entry patent application in Taiwan relating to our AT-002 product candidate that covers a method of treating inappetence using AT-002. We cannot assure you that a patent based on any of these patent applications will ever be issued. We do not own any patents or patent applications relating to AT-001 or AT-003. We have exclusive license agreements in the field of animal health with RaQualia, pursuant to which we license key intellectual property relating to AT-001 and AT-002, and with Pacira pursuant to which we license key intellectual property relating to AT-003. The patents and patent applications that we license relating to our AT-001, AT-002 and AT-003 product candidates cover various composition of matter claims as well as methods of treatment relating to our licensed patents. These patents are expected to expire at various times between 2015 and 2031.

Under each of the license agreements, RaQualia and Pacira retain ownership over the licensed patents and patent applications and retain control over the maintenance and prosecution of the licensed patents and patent applications. In the case of AT-003, we have no control over the manner in which Pacira chooses to maintain or prosecute its patent and patent applications and have no right to continue to prosecute any patents or patent applications that Pacira elects to abandon.

Although we have the right to enforce patents licensed from RaQualia against third-party infringement in the animal health field, we do not have the right to enforce patents licensed from Pacira against any third-party infringement, although we have certain limited rights to request our licensor to enforce such patents against infringement.

If we cannot obtain ownership of issued patents covering our product candidates or we cannot prosecute or enforce licensed patents, our business, results of operations, financial condition and prospects would be adversely affected.

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are essential to our business.

We are party to license agreements for our product candidates that are essential to our business. These license agreements impose various payment and performance obligations on us. If we fail to comply with these obligations, RaQualia or Pacira, as applicable, may have the right to terminate the relevant license agreement, in which event we would not be able to develop or commercialize AT-001, AT-002 and/or AT-003, as the case may be.

If we lose such license rights, our business, results of operations, financial condition and prospects would be adversely affected. We may enter into additional licenses in the future and if we fail to comply with obligations under those agreements, we could suffer adverse consequences.

We may not own any intellectual property rights we develop with respect to AT-003 or be able to share our licensed patent rights to AT-003 with future collaborators.

Our license agreement with Pacira contains certain obligations and restrictions on our ability to develop and commercialize AT-003. All of the intellectual property rights that we develop with respect to AT-003 will be owned by Pacira upon termination of this license agreement. If we wish to enter into any collaboration agreements relating to AT-003, Pacira has the right to approve all of our sublicenses. Furthermore, Pacira has a right of first negotiation for shared commercialization rights to AT-003 in the United States. These restrictions may impair or delay our ability to engage third parties to commercialize AT-003.

We may become subject to third parties’ claims alleging infringement of patents and proprietary rights or seeking to invalidate our patents or proprietary rights, which would be costly, time-consuming and, if successfully asserted against us, delay or prevent the development and commercialization of our current or future product candidates.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the field of pet therapeutics, as well as patent challenge proceedings, including interference and administrative law proceedings before the United States Patent and Trademark Office, or the U.S. PTO, and oppositions and other comparable proceedings in foreign jurisdictions. Recently, under U.S. patent reform laws, new procedures including inter partes review and post grant review have been implemented. As stated below, the novel implementation of such reform laws presents uncertainty regarding the outcome of challenges to our patents in the future.

 

 

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We cannot assure you that any of our current or future product candidates will not infringe existing or future patents. Because we have not conducted a formal freedom to operate analysis for patents related to our products, we may not be aware of patents that have already issued that a third party might assert are infringed by one of our current or future product candidates. Nevertheless, we are not aware of any issued patents that will prevent us from marketing our product candidates. Because patent applications can take many years to issue and may be confidential for eighteen months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing any of our current or future product candidates. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Moreover, we may face claims from non-practicing entities, which have no relevant product revenue and against whom our own patent portfolio may thus have no deterrent effect.

We may be subject to third-party claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing a third party’s patents. If a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to redesign it, or to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. Even if we are successful in defending such claims, infringement and other intellectual property litigation can be expensive and time-consuming to litigate and divert management’s attention from our core business. Any of these events could harm our business significantly.

In addition to infringement claims against us, if third parties have prepared and filed patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the U.S. PTO to determine the priority of invention. Third parties may also attempt to initiate reexamination, post grant review or inter partes review of our patents in the U.S. PTO. We may also become involved in similar opposition proceedings in the European Patent Office or similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology.

If our efforts to protect the proprietary nature of the intellectual property related to any of our current or future product candidates are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection, confidentiality and license agreements to protect the intellectual property related to our current product candidates and our development programs.

Composition-of-matter patents on the active pharmaceutical ingredient are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, including pet therapeutics, as such patents provide protection without regard to any particular method of use or manufacture. Method-of-use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, veterinarians may recommend that pet owners use these products off label, or pet owners may do so themselves. Although off-label use may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute. Method of manufacturing patents protect a specific way to make a product and do not prevent a third party from making the product by a different method and then using the product for our uses. We cannot be certain that the claims in our patent applications will be considered patentable by the U.S. PTO and courts in the United States, or by the patent offices and courts in foreign countries.

The strength of patents in the field of pet therapeutics involves complex legal and scientific questions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity,

 

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enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our products or our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents and patent applications we own, in-license or pursue with respect to any of our current or future product candidates is threatened, it could threaten our ability to commercialize any of our current or future product candidates. Further, if we encounter delays in our development efforts, the period of time during which we could market any of our current or future product candidates under patent protection would be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. Furthermore, for patent applications in which claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the U.S. PTO to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For patent applications containing a claim not entitled to a priority date before March 16, 2013, there is a greater level of uncertainty in the patent law with the passage of the America Invents Act, which brings into effect significant changes to the U.S. patent laws that have yet to be well defined, and which introduces new procedures for challenging pending patent applications and issued patents. A primary change under this reform is creating a “first to file” system in the United States, which requires us to minimize the time from invention to filing of a patent application.

Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and some of our competitors have substantially greater intellectual property portfolios than we have.

We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or had access to our proprietary information, nor that our agreements will not be breached. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our patents, or patents that may issue to us in the future, or the patents of our licensors that are licensed to us. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, if we or one of our future collaborators were to initiate legal proceedings against a third party to enforce a patent covering our current product candidates, or one of our future products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that

 

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someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar claims before the U.S. PTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our current or future product candidates. Such a loss of patent protection could have a material adverse impact on our business.

Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be unsuccessful, it could have an adverse effect on the price of our common stock. Finally, we may not be able to prevent, alone or with the support of our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing owned or licensed patents and patents that we might obtain in the future.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The U.S. PTO, the European Patent Office and various other foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case, which would have an adverse effect on our business.

We have filed trademark applications for our company name in the United States and certain other countries, and we have filed trademark applications for certain current product candidates in the United States; however, registration is not yet complete for these filings, and failure to finally secure these registrations could adversely affect our business.

We have filed two trademark applications for our company name and design mark in the United States, and nine foreign trademark applications for our company name and design mark (in Brazil, Canada, the European Community, Australia, China and Japan), although we cannot make assurances that the trademarks will become registered. We have filed three trademark applications for commercial trade names for our current product candidates in the United States, although we have not yet filed such applications in any other countries. During trademark registration proceedings, we have in the past and may in the future receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the U.S. PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be

 

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filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the United States must be approved by the CVM, the USDA or the EMA, regardless of whether we have registered it, or applied to register it, as a trademark. The CVM typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the CVM, the USDA or the EMA object to any of our proposed proprietary product names (which they have in the past done and may in the future do), we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the CVM, the USDA or the EMA.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions, including in Europe where our Okapi facilities are located. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology, pharmaceutical or animal health companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Risks Related to Government Regulation

The regulatory approval process is uncertain, requires us to utilize significant resources, and may prevent us from obtaining approvals for the commercialization of some or all of our product candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of pet therapeutics are subject to extensive regulation by the CVM, the USDA or the EMA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market any of our current or future product candidates in the United States until we receive approval of an NADA from the CVM or a product license from the USDA. We have not submitted an application for or received marketing approval for our current small molecule product candidates, although we have received a conditional product license from the USDA for AT-004 that we obtained through the Vet Therapeutics acquisition and we have submitted a product license application to the USDA for AT-005. Obtaining approval of an NADA from CVM or a product license from the USDA can be an uncertain process that requires us to utilize significant resources. The CVM, the USDA or any foreign regulatory bodies can delay, limit or deny approval of any of our product candidates for many reasons, including:

 

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we are unable to demonstrate to the satisfaction of the CVM, the USDA, the EMA or the applicable foreign regulatory body that the product candidate is safe and effective for the requested indication;

 

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the CVM, the USDA or the applicable foreign regulatory body may disagree with our interpretation of data from our target animal studies and other development efforts;

 

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we may be unable to demonstrate that the product candidate’s benefits outweigh any safety or other perceived risks;

 

 

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  n  

the CVM, the USDA or the applicable foreign regulatory body may require additional studies;

 

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the CVM, the USDA or the applicable foreign regulatory body may not approve of the formulation, labeling and/or the specifications of our current and future product candidates;

 

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the CVM, the USDA or the applicable foreign regulatory body may fail to approve our manufacturing processes or facilities, or the manufacturing processes or facilities of third-party manufacturers with which we contract; and

 

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the approval policies or regulations of the CVM, USDA or the applicable foreign regulatory body may significantly change in a manner rendering the data from our studies insufficient for approval.

Moreover, there is no assurance that the USDA will issue a final product license for AT-004 to us or that it will approve our license application for our AT-005. We have received only a conditional license for AT-004 that expires in October 2014. If we are unable to obtain a full license prior to the expiration of the conditional license or to otherwise extend the conditional license, we may have to halt marketing of the product until such can be accomplished.

In addition, failure to comply with CVM and other applicable United States and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including: warning letters, civil and criminal penalties, injunctions, withdrawal of approved products from the market, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NADAs or product licenses or supplements to approved NADAs or product licenses.

Regulatory approval of an NADA or supplement NADA, or of a product license, is not guaranteed, and the approval process requires us to utilize significant resources, may take several years, and is subject to the substantial discretion of the CVM, the USDA or the EMA. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat studies, or perform additional studies. If any of our current or future product candidates fails to demonstrate safety and efficacy in our studies, or for any other reason does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.

Even if we receive regulatory approval for any of our current or future product candidates, we will be subject to ongoing CVM, USDA or EMA obligations and continued regulatory review, which may result in significant additional expense. Additionally, any product candidates, if approved, will be subject to labeling and manufacturing requirements and could be subject to other restrictions. Failure to comply with these regulatory requirements or the occurrence of unanticipated problems with our products could result in significant penalties.

Any regulatory approvals that we or any of our collaborators receive for any of our current or future product candidates may be subject to conditions of approval or limitations on the approved indicated uses for which the product may be marketed, or may contain requirements for potentially costly surveillance to monitor the safety and efficacy of the product candidate. In addition, if the CVM, the USDA or the EMA approves any of our current or future product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP, GLP and good clinical practices, or GCP, for any studies that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

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restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

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fines, warning letters or holds on target animal studies;

 

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refusal by the CVM, the USDA or the EMA to approve pending applications or supplements to approved applications filed by us or our strategic collaborators, or suspension or revocation of product license approvals;

 

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product seizure or detention, or refusal to permit the import or export of products; and

 

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injunctions or the imposition of civil or criminal penalties.

 

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The CVM’s, USDA’s or the EMA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business.

Failure to obtain regulatory approvals in foreign jurisdictions for our product candidates would prevent us from marketing our products internationally.

In order to market any product outside of the United States, including in the EEA (which is comprised of the 28 member states of the European Union plus Norway, Iceland and Liechtenstein) and many other foreign jurisdictions, separate regulatory approvals are required. More concretely, in the EEA, pet therapeutics can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting the MA, the EMA or the competent national authorities of the member states of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

The approval procedures vary among countries and can involve additional studies and testing, and the time required to obtain approval may differ from that required to obtain CVM or USDA approval. Animal studies conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the CVM or USDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the CVM or the USDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining CVM or USDA approval. We may not be able to file for regulatory approvals or to do so on a timely basis and, even if we do file them, we may not receive necessary approvals to commercialize our products in any market.

If approved, any of our current or future products may cause or contribute to adverse medical events that we are required to report to the CVM, USDA and regulatory authorities in other countries and, if we fail to do so, we could be subject to sanctions that would materially harm our business.

If we are successful in commercializing any of our current or future products, regulations of the CVM, the USDA and of the regulatory authorities in other countries require that we report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the CVM, USDA and regulatory authorities in other countries could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.

Legislative or regulatory reforms with respect to pet therapeutics may make it more difficult and costly for us to obtain regulatory clearance or approval of any of our current or future product candidates and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions governing the testing, regulatory clearance or approval, manufacture, and marketing of regulated products. In addition, CVM and USDA regulations and guidance are often revised or reinterpreted by the CVM and USDA in ways that may significantly affect our business and our products. Similar changes in laws or regulations can occur in other countries. Any new regulations or revisions or reinterpretations of existing regulations in the United States or in other countries may impose additional costs or lengthen review times of any of our current or future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

 

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changes to manufacturing methods;

 

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recall, replacement, or discontinuance of certain products; and

 

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additional record keeping.

 

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Each of these would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition, and results of operations.

Our research and development relies on evaluations in animals, which may become subject to bans or additional regulations.

As a biopharmaceutical company with a focus on pet therapeutics, the evaluation of our existing and new products in animals is required to register our products. Animal testing in certain industries has been the subject of controversy and adverse publicity. Some organizations and individuals have attempted to ban animal testing or encourage the adoption of additional regulations applicable to animal testing. To the extent that the activities of such organizations and individuals are successful, our research and development, and by extension our operating results and financial condition, could be materially adversely affected. In addition, negative publicity about us or our industry could harm our reputation.

Risks Related to Our Common Stock and this Offering

Our stock price may be volatile and you may not be able to resell shares of our common stock at or above the price you paid.

The trading price of our common stock is volatile with trading prices ranging from $6.56 per share to $29.32 per share since our initial public offering in June 2013, and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this prospectus and others, such as:

 

  n  

results from, and any delays in, our current and future target animal studies;

 

  n  

announcements of regulatory approval or disapproval of any of our current or future product candidates;

 

  n  

failure or discontinuation of any of our research programs;

 

  n  

the termination of any of our existing license agreements;

 

  n  

announcements relating to future licensing or development agreements;

 

  n  

delays in the commercialization of our current or future product candidates;

 

  n  

acquisitions and sales of new product candidates, technologies or businesses;

 

  n  

manufacturing and supply issues related to our current or future product candidates for our development programs and commercialization;

 

  n  

quarterly variations in our results of operations or those of our future competitors;

 

  n  

changes in earnings estimates or recommendations by securities analysts;

 

  n  

announcements by us or our competitors of new product candidates, significant contracts, commercial relationships, acquisitions or capital commitments;

 

  n  

developments with respect to intellectual property rights;

 

  n  

our commencement of, or involvement in, litigation;

 

  n  

any major changes in our board of directors or management;

 

  n  

new legislation in the United States relating to the sale or pricing of pet therapeutics;

 

  n  

CVM or USDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

  n  

product liability claims, other litigation or public concern about the safety of our product candidates or future products;

 

  n  

market conditions in the animal health sector and in the pet therapeutics market; and

 

  n  

general economic conditions in the United States and abroad.

In addition, the stock market in general, or the market for stocks in our industry or industries related to our industry, may experience extreme volatility unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

 

 

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We are an “emerging growth company,” as defined in the JOBS Act, and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) of 2018, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock before giving effect to this offering. Accordingly, if you purchase our common stock in this offering, you will incur immediate substantial dilution of approximately $17.04 per share, representing the difference between the assumed public offering price of $18.96 per share and our pro forma as adjusted net tangible book value as of September 30, 2013. Furthermore, if outstanding options are exercised, you could experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section in this prospectus entitled “Dilution.”

If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.

We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our stockholders would experience immediate dilution upon the sale of any shares of our common stock at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.

Our principal stockholders and management own a significant percentage of our stock and will be able to influence matters subject to stockholder approval.

Upon the closing of this offering and based on shares outstanding as of December 31, 2013, our executive officers and directors and their respective affiliates will beneficially own approximately 22.5% of our voting stock (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock and no exercise of outstanding options). These stockholders will have the ability to influence us through this ownership position. For example, these stockholders may be able to influence elections of directors, amendments of our organizational documents, or approvals of any merger, sale of assets or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2013, we had outstanding 24,097,738 shares of common stock. Each of our directors and executive officers, selling stockholders, and their affiliated entities (collectively representing a total of approximately 14 million shares) have agreed with us to a lock-up restriction through February 12, 2014. In addition, in connection with this offering, each of our directors and executive officers, together with their affiliated

 

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entities, and each of the selling stockholders have agreed to a lock-up restriction for a period of 90 days after the date of this prospectus. In addition, entities affiliated with MPM BioVentures V, L.P. have agreed to a lock-up restriction for a period of 30 days after the date of this prospectus. When the various lock-up restrictions expire, these shares will become eligible for public sale thereafter if they are registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act including under Rules 144 or 701.

We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. We intend to use the net proceeds of this offering to satisfy our remaining purchase price obligation to the former stockholders of Okapi, to repay the outstanding principal amount under our promissory note held by the former stockholders of Okapi, to repay the outstanding principal amount under our promissory note held by the former stockholders of Vet Therapeutics and the balance for the further development of our product candidates, expansion of our commercial infrastructure in anticipation of future product launches and for other general corporate and working capital purposes. We may also use a portion of our net proceeds to in-license or acquire additional product candidates, technologies or businesses; however, other than our existing option agreements for licenses, we currently have no agreements or commitments to complete any such transaction. However, our use of these proceeds may differ substantially from our current plans. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions include the following:

 

  n  

a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

  n  

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

  n  

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

  n  

the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

  n  

the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

  n  

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors;

 

  n  

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

  n  

the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

  n  

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

 

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In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction. For a description of our capital stock, see the section in this prospectus entitled “Description of Capital Stock.”

We do not currently intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future. Since we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, development milestones, research and development costs, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “aim,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common stock that we are offering will be approximately $79.1 million, assuming a public offering price of $18.96 per share, the last reported sale price of our common stock on January 21, 2014, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed public offering price of $18.96 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $17.9 million, assuming the assumed public offering price stays the same. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.

We intend to use the net proceeds we receive in this offering as follows:

 

  n  

approximately $33.1 million to satisfy our remaining purchase price obligation to the former stockholders of Okapi Sciences N.V., or Okapi, and to repay the outstanding principal amounts under our promissory notes held by the former stockholders of Okapi and the former stockholders of Vet Therapeutics, Inc., or Vet Therapeutics; and

 

  n  

the balance for the further development of our product candidates, expansion of our commercial infrastructure in anticipation of future product launches and for other general corporate and working capital purposes.

We may also use a portion of our net proceeds to in-license or acquire additional product candidates, technologies or businesses; however, other than our existing option agreements for licenses, we currently have no agreements or commitments to complete any such transaction. We have not determined the amounts we plan to spend in any of the areas identified in the last bullet above or the timing of these expenditures. As a result, our management will have broad discretion to allocate the net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering. We reserve the right to change the use of these proceeds as a result of certain contingencies such as competitive developments, the results of our commercialization efforts, acquisition and investment opportunities and other factors. Pending use of the proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities or certificates of deposit.

On January 6, 2014, we acquired Okapi in exchange for approximately 10.3 million (equivalent to $13.9 million) in cash and a promissory note for 11.0 million ($14.9 million). The promissory note bears interest at 7% per annum payable quarterly in arrears and matures on December 31, 2014, subject to mandatory prepayment in the event of an equity financing, which would include this offering. We also agreed to pay up to an additional $16.3 million in cash or shares of common stock calculated in the manner specified in the purchase agreement within 90 days of the closing of the acquisition, subject to mandatory prepayment in cash in the event of an equity financing, which also includes this offering.

On October 15, 2013, we acquired Vet Therapeutics for a combination of $30.0 million in cash, 625,000 shares of our common stock, and a $3.0 million promissory note maturing on December 31, 2014 at an interest rate of 7% per year. The promissory note is subject to repayment in the event of specified equity financings, which include this offering.

 

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PRICE RANGE OF COMMON STOCK

Our common stock has been publicly traded on The NASDAQ Global Market under the symbol “PETX” since our initial public offering on June 26, 2013. Prior to our initial public offering, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sale prices of our common stock as reported by The NASDAQ Global Market.

 

 

 

      HIGH      LOW  

2014

     

First Quarter (through January 21, 2014)

   $ 21.13       $ 17.75   

2013

     

Fourth Quarter

   $ 29.32       $ 15.55   

Third Quarter (from June 26, 2013)

   $ 20.58       $ 6.56   

 

 

On January 21, 2014, the last reported sale price of our common stock on The NASDAQ Global Market was $18.96. As of January 15, 2014, there were 24,322,738 shares of our common stock outstanding held by approximately 87 holders of record, which includes 876,458 shares of restricted common stock that were subject to vesting restrictions as of such date and were not considered outstanding for accounting purposes.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, unless waived, the terms of our credit facility with Square 1 Bank limit our ability to pay cash dividends. Any future determination related to dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in our current or future financing instruments.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of September 30, 2013:

 

  n  

on an actual basis;

 

  n  

on a pro forma basis to give effect to our October 2013 private placement and the acquisitions of Vet Therapeutics and Okapi, as described in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information,” but prior to giving effect to the pro forma adjustments for this offering; and

 

  n  

on a pro forma as adjusted basis to give further effect to (i) the issuance and sale by us of 4,500,000 shares of common stock in this offering at an assumed public offering price of $18.96 per share, the last reported sale price of our common stock on January 21, 2014, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of net proceeds received by us in this offering as described in the section of this prospectus entitled “Use of Proceeds.”

The pro forma and pro forma as adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our financial statements and the related notes appearing at the end of this prospectus and the sections in this prospectus entitled “Selected Historical Financial Data,” “Unaudited Pro Forma Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information contained in this prospectus.

 

 

 

     AS OF SEPTEMBER 30, 2013  
     ACTUAL     PRO
FORMA
    PRO FORMA
AS ADJUSTED(1)
 
     (in thousands, except share and per
share data)
 

Cash, cash equivalents and short-term investments

   $ 52,306      $ 41,030      $ 87,089   
  

 

 

   

 

 

   

 

 

 

Long-term liabilities, including current portions:

      

Liability for early exercise of stock options

   $ 153      $ 153      $ 153   

Loan payable

     4,941        14,928        14,928   

Notes payable(2)

            17,889          

Contingent consideration

            18,976        3,810   

Stockholders’ equity:

      

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 21,205,578 shares issued and outstanding, actual; 23,064,953 shares issued and outstanding, pro forma; 27,564,953 shares issued and outstanding, pro forma as adjusted

     21        23        28   

Additional paid-in capital

     77,429        111,877        190,986   

Deficit accumulated during the development stage

     (33,614     (25,169     (25,169
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     43,836        86,731        165,845   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 48,930      $ 138,677      $ 184,736   
  

 

 

   

 

 

   

 

 

 

 

 

(1)   

A $1.00 increase (decrease) in the assumed public offering price of $18.96 per share, the last reported sale price on January 21, 2014, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $4.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1.0 million in the number of shares offered by us at the assumed public offering price per share would increase (decrease) the pro forma as adjusted amounts of each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $17.9 million.

(2)   

The Euro-denominated promissory note of 11.0 million issued in connection with the acquisition of Okapi has been converted into U.S. dollars using an exchange rate of $1.3535 = 1.00, which represents the U.S. dollar to Euro exchange rate on September 30, 2013.

 

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The table above does not reflect:

 

  n  

858,879 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2013, at a weighted average exercise price of $2.73 per share;

 

  n  

690,602 shares of restricted common stock that are subject to vesting restrictions as of September 30, 2013 and are not considered outstanding for accounting purposes; and

 

  n  

638,925 shares of common stock reserved for issuance under our 2013 incentive award plan as of September 30, 2013 as well as shares that become available pursuant to provisions in our 2013 incentive award plan that automatically increase the share reserve under the plan on January 1 of each calendar year as more fully described in “Executive and Director Compensation—2013 Incentive Award Plan.”

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

As of September 30, 2013, we had a net tangible book value of $43.8 million, or $2.07 per share of common stock. Our net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding at September 30, 2013. After giving effect to our October 2013 private placement and the acquisitions of Vet Therapeutics and Okapi, as described in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information,” but prior to giving effect to the pro forma adjustments for this offering, we had a pro forma net tangible book value (deficit) of $(26.2) million, or $(1.13) per share of common stock.

After giving further effect to the issuance and sale by us of 4,500,000 shares of common stock in this offering at an assumed public offering price of $18.96 per share, the last reported sale price of our common stock on January 21, 2014, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been approximately $52.9 million, or approximately $1.92 per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $3.05 per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $17.04 per share to new investors purchasing shares of common stock in this offering.

Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

 

 

Assumed public offering price per share

     $ 18.96   

Historical net tangible book value per share as of September 30, 2013

   $ 2.07     

Decrease per share attributable to the acquisitions of Vet Therapeutics and Okapi

     (3.20  
  

 

 

   

Pro forma net tangible book value (deficit) per share as of September 30, 2013

     (1.13  

Increase in pro forma as adjusted net tangible book value per share attributable to this offering

     3.05     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       1.92   
    

 

 

 

Dilution per share to new investors

     $ 17.04   
    

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed public offering price of $18.96 per share would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $0.15 and dilution per share to new investors by approximately $0.85, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million in the number of shares offered by us would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $0.56 per share and decrease the dilution to new investors by approximately $0.56 per share, assuming that the assumed public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each decrease of 1.0 million in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value per share after this offering by approximately $0.60 per share and increase the dilution to new investors by approximately $0.60 per share, assuming that the assumed public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted net tangible book value after the offering will not be affected by any exercise of the underwriters’ option to purchase additional shares from a selling stockholder.

 

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The foregoing tables and calculations exclude:

 

  n  

858,879 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2013, at a weighted average exercise price of $2.73 per share;

 

  n  

690,602 shares of restricted common stock that are subject to vesting restrictions as of September 30, 2013 and are not considered outstanding for accounting purposes; and

 

  n  

638,925 shares of common stock reserved for issuance under our 2013 incentive award plan as of September 30, 2013 as well as shares that become available pursuant to provisions in our 2013 incentive award plan that automatically increase the share reserve under the plan on January 1 of each calendar year as more fully described in “Executive and Director Compensation—2013 Incentive Award Plan.”

To the extent any of these outstanding options is exercised, there will be further dilution to new investors. If all of such outstanding options had been exercised as of September 30, 2013, the pro forma as adjusted net tangible book value per share after this offering would be $1.94 and total dilution per share to new investors would be $17.02.

 

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SELECTED HISTORICAL FINANCIAL DATA

You should read the following selected historical financial data in conjunction with our financial statements and the related notes thereto appearing elsewhere in this prospectus and in the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have derived the statement of operations data for the years ended December 31, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the nine months ended September 30, 2012 and 2013 and for the period from our inception (December 1, 2010) to September 30, 2013 and the balance sheet data as of September 30, 2013 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. This unaudited interim financial information has been prepared on the same basis as our audited financial statements and, in our opinion, reflects all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position as of September 30, 2013 and operating results for the nine months ended September 30, 2012 and 2013. The historical results are not necessarily indicative of the results to be expected for any future periods and the results for the nine months ended September 30, 2013 should not be considered indicative of results expected for the fiscal year 2013.

 

 

 

    YEAR ENDED
DECEMBER 31,
   

 

NINE MONTHS
ENDED SEPTEMBER 30,

    CUMULATIVE
PERIOD FROM
INCEPTION
(DECEMBER 1,
2010) TO
SEPTEMBER 30,
2013
 
    2011     2012     2012     2013    
                (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except share and per share data)  

Statement of Operations Data:

         

Revenue

  $      $      $      $      $   

Operating expenses:

         

Research and development

    2,196        7,291        5,338        7,817        17,304   

General and administrative

    1,274        2,987        2,186        3,911        8,481   

In-process research and development

           1,500                      8,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,470        11,778        7,524        11,728        33,810   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,470     (11,778     (7,524     (11,728     (33,810

Other income (expense):

         

Interest income

    6        21        12        51        78   

Interest expense

                         (182     (182

Other income

           121        81        455        576   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    6        142        93        324        472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (3,464     (11,636     (7,431     (11,404   $ (33,338
         

 

 

 

Modification of Series A convertible preferred stock

    (276                       

Unaccreted dividends on convertible preferred stock

    (902     (2,035     (1,493         
 

 

 

   

 

 

   

 

 

   

 

 

   

Net loss attributable to common stockholders

  $ (4,642   $ (13,671   $ (8,924   $ (11,404  
 

 

 

   

 

 

   

 

 

   

 

 

   

Net loss per share attributable to common stockholders, basic and diluted(1)

  $ (15.43   $ (34.53   $ (28.79   $ (1.50  
 

 

 

   

 

 

   

 

 

   

 

 

   

Weighted average shares outstanding, basic and diluted(1)

    300,841        395,918        309,994        7,601,388     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(1)   

See Note 16 to our annual financial statements and Note 12 to our interim financial statements included elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

 

 

 

    

 

AS OF DECEMBER 31,

    AS OF
SEPTEMBER 30,
2013
 
     2011     2012    
                 (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash, cash equivalents and short-term investments

   $ 12,384      $ 20,355      $ 52,306   

Working capital(1)

     11,720        17,546        47,557   

Total assets

     12,573        21,222        52,668   

Total long-term debt, net of discount

                   4,941   

Total convertible preferred stock(2)

     22,155        39,197          

Total stockholders’ equity (deficit)

     (10,271     (21,555     43,836   

 

 

(1)   

We define working capital as current assets less current liabilities.

(2)   

Consists of our Series A, A-1, B and C convertible preferred stock, which were converted into common stock upon the closing of our initial public offering on July 2, 2013. See Note 9 to our annual financial statements included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information was prepared to give effect to the completed Vet Merger, the completed Okapi Acquisition and the shares issued and net proceeds received by us in this offering, which will be used to pay purchase consideration and repay debt issued in connection with the acquisitions, as required upon the completion of this offering by the terms of the acquisition agreements and as described in the section of this prospectus entitled “Use of Proceeds.” The unaudited pro forma consolidated balance sheet as of September 30, 2013 gives effect to the Vet Merger, the Okapi Acquisition, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments as if each occurred on September 30, 2013. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and nine months ended September 30, 2013 give effect to the Vet Merger, the Okapi Acquisition, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments as if each occurred on January 1, 2012. The unaudited pro forma consolidated financial statements are derived from the audited historical financial statements of Aratana, Vet Therapeutics and Okapi as of and for the year ended December 31, 2012, the audited historical financial statements of Vet Therapeutics as of and for the nine months ended September 30, 2013, and the unaudited historical financial statements of Aratana and Okapi as of and for the nine months ended September 30, 2013.

The unaudited pro forma consolidated financial information was prepared in accordance with the rules and regulations of the SEC and should not be considered indicative of the consolidated financial position or results of operations that would have occurred if the Vet Merger, Okapi Acquisition, issuance and sale by us of shares in this offering, and required purchase consideration payments and debt repayments had occurred on the dates indicated, nor are they indicative of the future consolidated financial position or results of operations of Aratana, Vet Therapeutics and Okapi following completion of the Vet Merger, Okapi Acquisition, issuance and sale by us of shares in this offering, and required purchase consideration payments and debt repayments. The unaudited pro forma consolidated financial information does not reflect the potential realization of cost savings, restructuring or other costs relating to the integration of Vet Therapeutics and Okapi. The historical consolidated financial statements of each of Aratana, Vet Therapeutics and Okapi have been adjusted in the unaudited pro forma consolidated financial information to give effect to pro forma events that are (1) directly attributable to the Vet Merger, the Okapi Acquisition, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments in connection with this offering, (2) factually supportable, and (3) with respect to the unaudited pro forma statements of operations, expected to have a continuing impact on the consolidated results.

The unaudited pro forma consolidated financial information is based on the preliminary information available and management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. The finalization of Aratana’s purchase accounting assessments may result in changes to the valuation of assets acquired and liabilities assumed, particularly in regards to indefinite and definite-lived intangible assets and deferred tax assets and liabilities, as well as the estimated fair value of purchase consideration transferred to the sellers of Vet Therapeutics or Okapi, which could be material. We will finalize the purchase price allocations as soon as practicable within the measurement period in accordance with Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”), but in no event later than one year from October 15, 2013, the Vet Merger date, with respect to the Vet Merger, and January 6, 2014, the Okapi Acquisition date, with respect to the Okapi Acquisition.

The unaudited pro forma consolidated financial information should be read in conjunction with the accompanying notes hereto. In addition, the unaudited pro forma consolidated financial information was based on and should be read in conjunction with the following, which appear elsewhere in this prospectus:

 

  n  

Aratana’s historical audited financial statements and related notes thereto as of and for the year ended December 31, 2012;

 

  n  

Aratana’s historical unaudited financial statements and related notes thereto as of and for the nine months ended September 30, 2013;

 

  n  

Vet Therapeutics’ historical audited financial statements and related notes thereto as of and for the year ended December 31, 2012 and as of and for the nine months ended September 30, 3013;

 

  n  

Okapi’s historical audited financial statements and related notes thereto as of and for the year ended December 31, 2012; and

 

  n  

Okapi’s historical unaudited financial statements and related notes thereto as of and for the nine months ended September 30, 2013.

 

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ARATANA THERAPEUTICS, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of September 30, 2013

(In thousands, except share and per share amounts)

 

 

 

    HISTORICAL     VET THERAPEUTICS
PRO FORMA
ADJUSTMENTS
    NOTE
5
  OKAPI PRO
FORMA
ADJUSTMENTS
    NOTE
6
  OFFERING
PRO FORMA
ADJUSTMENTS
    NOTE
7
  PRO FORMA
CONSOLIDATED
 
    ARATANA     VET
THERAPEUTICS
    OKAPI                

Assets

                   

Current assets:

                   

Cash and cash equivalents

  $ 46,169      $ 2,170      $ 727      $ (263   (A)   $ (13,910   (A)   $ 46,059      (A)   $ 80,952   

Short-term marketable securities

    6,137                                                 6,137   

Accounts receivable

           92        72                                   164   

Inventory

           141               32      (B)                       173   

Prepaid expenses and other current assets

    305        6        666                                   977   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current assets

    52,611        2,409        1,465        (231       (13,910       46,059          88,403   

Property and equipment, net

    21        76        233                                   330   

Other long-term assets

    36        3        18                                   57   

Intangible assets, net

                  625        46,520      (C)     28,775      (B)              75,920   

Goodwill

                         19,055      (D)     17,907      (C)              36,962   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total assets

  $ 52,668      $ 2,488      $ 2,341      $ 65,344        $ 32,772        $ 46,059        $ 201,672   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

                   

Current liabilities:

                   

Accounts payable

  $ 816      $ 22      $ 244      $        $        $        $ 1,082   

Accrued expenses

    1,658        804        248        361      (E)     909      (D)              3,980   

Current portion loan payable

    1,250                      2,500      (F)                       3,750   

Convertible notes payable

           2,300        2,714        (2,300   (G)     (2,714   (E)                

Deferred income

    800                                                 800   

Current portion deferred licensing revenue

           1,920        211        (1,865   (H)                       266   

Current portion contingent consideration

                                  15,166      (F)     (15,166   (B)       

Other current liabilities

    530                                                 530   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current liabilities

    5,054        5,046        3,417        (1,304       13,361          (15,166       10,408   

Loan payable

    3,691                      7,487      (F)                       11,178   

Notes payable

                         3,000      (J)     14,889      (G)     (17,889   (C)       

Deferred licensing revenue

           480        542        (480   (H)                       542   

Contingent consideration

                         3,810      (K)                       3,810   

Deferred tax liabilities, net

                         5,989      (I)     3,813      (H)              9,802   

Other long-term liabilities

    87                                                 87   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

    8,832        5,526        3,959        18,502          32,063          (33,055       35,827   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Stockholders’ equity (deficit):

                   

Common stock

    21               84        2      (L)     (84   (I)     5          28   

Preferred stock

                  517                 (517   (I)                

Additional paid-in capital

    77,429        565        12,946        33,883      (L)     (12,946   (I)     79,109      (D)     190,986   

Deficit accumulated during the development stage

    (33,614     (3,603     (15,165     12,957      (L)     14,256      (I)              (25,169
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total stockholders’ equity (deficit)

    43,836        (3,038     (1,618     46,842          709          79,114          165,845   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities and stockholders’ equity

  $ 52,668      $ 2,488      $ 2,341      $ 65,344        $ 32,772        $ 46,059        $ 201,672   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

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ARATANA THERAPEUTICS, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2013

(In thousands, except share and per share amounts)

 

 

 

    HISTORICAL     VET THERAPEUTICS
PRO FORMA
ADJUSTMENTS
    NOTE
5
    OKAPI PRO
FORMA
ADJUSTMENTS
    NOTE
6
    OFFERING
PRO FORMA
ADJUSTMENTS
    NOTE
7
    PRO FORMA
CONSOLIDATED
 
    ARATANA     VET
THERAPEUTICS
    OKAPI                

Revenues:

                   

Licensing revenue

  $      $ 1,440      $      $        $        $        $ 1,440   

Product sales

           157                                          157   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total revenues

           1,597                                          1,597   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Costs and expenses:

                   

Cost of product sales

           137                                          137   

Royalty expense

           70                                          70   

Research and development

    7,817        1,350        1,200                 54        (J              10,421   

General and administrative

    3,911        360        618        (257     (M     24        (J              4,656   

Depreciation of property and equipment

                  78                 (78     (J                

Amortization of acquired intangible assets

                  117        1,367        (N     (117     (K              1,367   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total costs and expenses

    11,728        1,917        2,013        1,110          (117                16,651   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Loss from operations

    (11,728     (320     (2,013     (1,110       117                   (15,054

Other income (expense):

                   

Interest income

    51        4        1                                   56   

Interest expense

    (182     (87     (116     (483     (O     (368     (L     642        (E     (594

Other income

    455               17                                   472   

Other expense

                  (7                                (7
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total other income (expense)

    324        (83     (105     (483       (368       642          (73
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Loss before income taxes

    (11,404     (403     (2,118     (1,593       (251       642          (15,127

Income tax benefit

                         5,092        (P)        804        (M     (225     (F     5,671   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net loss

  $ (11,404   $ (403   $ (2,118   $ 3,499        $ 553        $ 417        $ (9,456
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net loss per share, basic and diluted

  $ (1.50                   $ (0.83
 

 

 

                   

 

 

 

Weighted average shares outstanding, basic and diluted

    7,601,388            1,859,375        (Q         1,880,262        (G     11,341,025   
 

 

 

       

 

 

         

 

 

     

 

 

 

 

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

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ARATANA THERAPEUTICS, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2012

(In thousands, except share and per share amounts)

 

 

 

    HISTORICAL     VET THERAPEUTICS
PRO FORMA
ADJUSTMENTS
    NOTE
5
    OKAPI PRO
FORMA
ADJUSTMENTS
    NOTE
6
    OFFERING
PRO FORMA
ADJUSTMENTS
    NOTE
7
    PRO FORMA
CONSOLIDATED
 
    ARATANA     VET
THERAPEUTICS
    OKAPI                

Revenues:

                   

Licensing revenue

  $      $ 160      $ 13      $        $        $        $ 173   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Costs and expenses:

                   

Cost of product sales

                  10                                   10   

Research and development

    7,291        993        2,368                 76        (J              10,728   

General and administrative

    2,987        167        658                 29        (J              3,841   

In-process research and development

    1,500                                                 1,500   

Depreciation of property and equipment

                  105                 (105     (J                

Amortization of acquired intangible assets

                  179        1,822        (N     (179     (K              1,822   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expenses

    11,778        1,160        3,320        1,822          (179                17,901   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Loss from operations

    (11,778     (1,000     (3,307     (1,822       179                   (17,728

Other income (expense):

                   

Interest income

    21        1        10                                   32   

Interest expense

           (115     (8     (645     (O     (982     (L     1,200        (E     (550

Other income

    121               46                                   167   

Other expense

                  (8                                (8
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total other income (expense)

    142        (114     40        (645       (982       1,200          (359
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Loss before income taxes

    (11,636     (1,114     (3,267     (2,467       (803       1,200          (18,087

Income tax benefit

                         5,782        (P     1,384        (M     (416     (F     6,750   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net loss

    (11,636     (1,114     (3,267     3,315          581          784          (11,337

Unaccreted dividends on convertible preferred stock

    (2,035                                              (2,035
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net loss attributable to common stockholders

  $ (13,671   $ (1,114   $ (3,267   $ 3,315        $ 581        $ 784        $ (13,372
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (34.53                   $ (3.23
 

 

 

                   

 

 

 

Weighted average shares outstanding, basic and diluted

    395,918            1,859,375        (Q         1,880,262        (G     4,135,555   
 

 

 

       

 

 

         

 

 

     

 

 

 

 

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

49


Table of Contents

ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information

(In thousands, except per share amounts)

1. Description of Transactions

Acquisition of Vet Therapeutics, Inc.

On October 15, 2013, Aratana (the “Company”) acquired Vet Therapeutics, Inc. (“Vet Therapeutics”) pursuant to the terms of an Agreement and Plan of Merger (the “Merger Agreement”), dated October 13, 2013, by and among Vet Therapeutics, Aratana, Jayhawk Acquisition Corporation, a wholly owned subsidiary of Aratana (“Merger Sub”), and Jeffrey Miles, as the stockholders’ representative. In connection with the consummation of the transactions contemplated by the Merger Agreement, Merger Sub merged with and into Vet Therapeutics, and Vet Therapeutics survived as a wholly owned subsidiary of Aratana (the “Vet Merger”).

Under the terms of the Merger Agreement, Aratana agreed to pay to the former stockholders of Vet Therapeutics aggregate merger consideration, subject to post-closing working capital adjustments, of (i) $30,000 in cash (the “Vet Cash Consideration”), (ii) 625,000 shares (the “the Merger Shares”) of Aratana’s common stock, which had a fair value of $14,700, and (iii) a promissory note in the principal amount of $3,000 with a maturity date of December 31, 2014. The Company funded cash consideration with the proceeds from a $19,750 private placement of its common stock, $10,000 in borrowings from its amended credit facility and available cash on hand. The promissory note bears interest at a rate of 7% per annum, payable quarterly in arrears, and is subject to prepayment in the event of specified equity financings by Aratana. Aratana also agreed to pay up to $5,000 in contingent cash consideration in connection with the achievement of certain regulatory and manufacturing milestones for Vet Therapeutics’ B-cell lymphoma product.

The Vet Merger has been accounted for under the purchase method of accounting in accordance with applicable accounting guidance on business combinations. The total estimated purchase price, calculated as described below, was allocated to the net tangible assets and intangible assets of Vet Therapeutics acquired in connection with the Vet Merger based on their estimated fair values as of the completion of the Vet Merger, and the excess was allocated to goodwill. The process for measuring the fair value of Vet Therapeutics identifiable intangible assets, liabilities and certain tangible assets requires the use of significant assumptions, including estimates of future cash flows and appropriate discount rates.

The fair value of Vet Therapeutics assets acquired and liabilities assumed, as reflected in the unaudited pro forma consolidated financial information, was measured in accordance with Accounting Standards Codification Topic 820 “Fair Value Measurement and Disclosure” (“ASC 820”), which establishes the framework for measuring fair values. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, under ASC 820, fair value measurements for an asset assume the highest and best use of that asset by market participants.

Acquisition of Okapi Sciences N.V.

On January 6, 2014, Aratana acquired all of the outstanding shares of capital stock of Okapi Sciences N.V. (“Okapi”) pursuant to the terms of a Stock Purchase Agreement (the “Purchase Agreement”), dated January 6, 2014, by and among Aratana, Wildcat Acquisition BVBA, a wholly owned subsidiary of Aratana, the holders of all of the outstanding capital stock of Okapi (collectively, the “Sellers”) and Thuja Capital Healthcare Fund BV, as the Sellers’ representative (the “Okapi Acquisition”).

Under the terms of the Purchase Agreement, in consideration for all of the outstanding capital stock of Okapi, Aratana (i) paid 10,277 in cash (the “Okapi Cash Consideration”) at the closing, subject to a post-closing working capital adjustment, (ii) issued a promissory note, which was guaranteed by Aratana, in the principal amount of 11,000, which bears interest at a rate of 7% per annum, payable quarterly in arrears, with a maturity date of December 31, 2014, subject to mandatory prepayment in the event of a specified future equity financing by Aratana, and (iii) agreed to pay up to an additional $16,308 on or prior to April 7, 2014, subject to mandatory prepayment in cash in the event of a specified future equity financing, provided that if not paid in cash by April 7,

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except per share amounts)

1. Description of Transactions (continued)

Acquisition of Okapi Sciences N.V. (continued)

 

2014, payment shall be made in the form of shares of Aratana common stock based on the average closing price of Aratana’s common stock during the 10-trading day period ending April 4, 2014, subject to a maximum of 1,060,740 shares and a minimum of 707,160 shares. Pursuant to the terms of the Purchase Agreement, Aratana agreed to file a registration statement with the SEC to register for resale any shares of common stock issued as described in (iii) above.

The Okapi Acquisition has been accounted for under the purchase method of accounting in accordance with applicable accounting guidance on business combinations. The total estimated purchase price, calculated as described below, was allocated to the net tangible assets and intangible assets of Okapi acquired in connection with the Okapi Acquisition based on their estimated fair values as of the completion of the Okapi Acquisition, and the excess was allocated to goodwill. The process for measuring the fair value of Okapi’s identifiable intangible assets, liabilities and certain tangible assets requires the use of significant assumptions, including estimates of future cash flows and appropriate discount rates.

The fair value of Okapi’s assets acquired and liabilities assumed, as reflected in the unaudited pro forma consolidated financial information, was measured in accordance with ASC 820, which establishes the framework for measuring fair values. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, under ASC 820, fair value measurements for an asset assume the highest and best use of that asset by market participants.

The Offering and Use of Proceeds

The offering comprises the issuance and sale by us of 4,500,000 shares of common stock at an assumed public offering price of $18.96 per share, the last reported sale price of our common stock on January 21, 2014, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Upon the completion of this offering and as further described in the section of this prospectus entitled “Use of Proceeds,” Aratana is required under the Vet Therapeutics Merger Agreement to repay the outstanding promissory note in the principal amount of $3,000 to the former stockholders of Vet Therapeutics and is required under the Okapi Purchase Agreement to repay the outstanding promissory note in the principal amount of 11,000 and to pay up to $16,308 of additional purchase consideration to the former stockholders of Okapi.

2. Basis of Unaudited Pro Forma Presentation

The unaudited pro forma consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC, and present the pro forma results of operations of the combined companies based upon the historical financial statements of Aratana, Vet Therapeutics and Okapi. The unaudited pro forma consolidated balance sheet as of September 30, 2013 gives effect to the Vet Merger, Okapi Acquisition, issuance and sale by us of shares in this offering, and required purchase consideration payments and debt repayments as if each occurred on September 30, 2013. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and nine months ended September 30, 2013 give effect to the Vet Merger, Okapi Acquisition, issuance and sale by us of shares in this offering, and required purchase consideration payments and debt repayments as if each occurred on January 1, 2012. The historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the Vet Merger, Okapi Acquisition, issuance and sale by us of shares in this offering, and required purchase consideration payments and debt repayments in connection with this offering, (2) factually supportable, and (3) with respect to the unaudited pro forma statements of operations, expected to have a continuing impact on the consolidated results.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except per share amounts)

2. Basis of Unaudited Pro Forma Presentation (continued)

 

The Euro-denominated historical statements of operations of Okapi for the nine months ended September 30, 2013 and for the year ended December 31, 2012 have been converted into U.S. dollars using exchange rates of $1.3170 = 1.00 and $1.2857 = 1.00, respectively, which represent the average U.S. dollar to Euro exchange rate for each of the respective periods. The Euro-denominated historical balance sheet of Okapi as of September 30, 2013 has been converted into U.S. dollars using an exchange rate of $1.3535 = 1.00, which represents the U.S. dollar to Euro exchange rate on September 30, 2013.

The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have been achieved had the Vet Merger, the Okapi Acquisition, the issuance and sale by us of shares in this offering, and the required purchase consideration payments and debt repayments occurred as of the dates indicated above or the results that may be attained in the future.

3. Preliminary Purchase Prices

Vet Merger

The Vet Merger-date fair value of the consideration transferred to the sellers of Vet Therapeutics, less cash acquired, was $49,340, which consisted of the following:

 

 

 

Fair value of consideration transferred:

  

Vet Cash Consideration

   $ 30,000   

Fair value of Merger Shares

     14,700   

Fair value of promissory note

     3,000   

Fair value of contingent consideration

     3,810   
  

 

 

 

Fair value of total consideration

     51,510   

Less cash acquired

     (2,170
  

 

 

 

Total consideration transferred, net of cash acquired

   $ 49,340   
  

 

 

 

 

 

Vet Cash Consideration: The Company partially funded the Vet Cash Consideration from the proceeds from a $19,750 private placement of its common stock and from $10,000 in borrowings from its amended credit facility, both of which are described more fully below.

Private Placement: On October 13, 2013, the Company entered into a stock purchase agreement with various accredited investors, pursuant to which Aratana agreed to sell an aggregate of 1,234,375 shares (the “Private Placement Shares”) of its common stock for an aggregate purchase price of $19,750, or $16.00 per share (the “Private Placement”). Under the terms of the share purchase agreement, as amended October 22, 2013, the Private Placement Shares are not required to be registered for resale.

Amendment to Loan and Security Agreement: In March 2013, the Company entered into a loan and security agreement (the “Credit Facility”) with Square 1 Bank as lender. On October 11, 2013, Aratana entered into an amendment to the Credit Facility, which, among other things, increased the amount that remains available for Aratana to draw by an additional $5,000, to a total of $10,000. Simultaneously with the closing of the Credit Facility amendment on October 11, 2013, Aratana borrowed an additional $10,000 available under the amended Credit Facility. Pursuant to the terms of the Credit Facility amendment, upon consummation of the Vet Merger, Vet Therapeutics became a co-borrower under the credit facility and granted a security interest in substantially all of its assets to Square 1 Bank.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except per share amounts)

3. Preliminary Purchase Prices (continued)

Vet Merger (continued)

 

Fair Value of Merger Shares: Under the terms of the Merger Agreement, the Company agreed to issue 625,000 shares of its common stock without registration rights to the stockholders of Vet Therapeutics. On October 15, 2013, the closing date of the Vet Merger, the fair market value of Aratana’s publicly traded common stock was $27.67 per share. In order to determine the fair value of consideration transferred to Vet Therapeutics shareholders related to the Merger Shares, the Company applied a discount for the lack of marketability of 15% to the Company’s closing stock price on the closing date of the Vet Merger to account for the lack of access to an active public market for these shares. The analysis resulted in aggregate purchase consideration related to the Merger Shares of $14,700.

Fair Value of Contingent Consideration: Under the terms of the Merger Agreement, the Company agreed to pay up to $5,000 in contingent cash consideration in connection with the achievement of certain regulatory and manufacturing milestones for Vet Therapeutics’ B-cell lymphoma product. This contingent consideration is recorded as a liability and measured at fair value using a discounted cash flow model utilizing significant unobservable inputs, including the probability of achieving each of the potential milestones and an estimated discount rate commensurate with the risks of the expected cash flows attributable to the milestones. The analysis resulted in aggregate contingent purchase consideration of $3,810. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value, respectively, and commensurate changes to this liability. The fair value of contingent consideration and the associated liability will be adjusted to fair value at each reporting date until actual settlement occurs, with the changes in fair value reflected in earnings.

Okapi Acquisition

The Okapi Acquisition-date fair value of the consideration transferred to the stockholders of Okapi, less cash acquired, was $43,238, which consisted of the following:

 

 

 

Fair value of consideration transferred:

  

Okapi Cash Consideration

   $ 13,910   

Fair value of promissory note

     14,889   

Fair value of contingent consideration

     15,166   
  

 

 

 

Fair value of total consideration

     43,965   

Less cash acquired

     (727
  

 

 

 

Total consideration transferred, net of cash acquired

   $ 43,238   
  

 

 

 

 

 

Okapi Cash Consideration: The Company funded the Okapi Cash Consideration from cash on hand.

Fair Value of Contingent Consideration: Under the terms of the Purchase Agreement, Aratana agreed to pay up to $16,308 on or prior to April 7, 2014, subject to mandatory prepayment in cash in the event of a specified future equity financing, provided that if not paid in cash by April 7, 2014, payment shall be made in the form of shares of Aratana common stock based on the average closing price of Aratana’s common stock during the 10-trading day period ending April 4, 2014, subject to a maximum of 1,060,740 shares and a minimum of 707,160 shares. Contingent consideration is recorded as a liability and measured at fair value using a probability-weighted model utilizing significant observable and unobservable inputs, including the volatility in the market price of the Company’s common stock, the expected probability of settling the contingent consideration in either cash or shares, and an estimated discount rate commensurate with the risks of these outcomes. This analysis resulted in a preliminary estimated fair value of contingent consideration of $15,166. This estimate is preliminary, subject to finalization of the Company’s determination of the fair value of the contingent consideration liability as of the closing date. Significant increases or decreases in any of the probabilities of the method of settlement or estimated stock price

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except per share amounts)

3. Preliminary Purchase Prices (continued)

Okapi Acquisition (continued)

 

volatility would result in a significantly higher or lower fair value, respectively, and commensurate changes to this liability. The fair value of contingent consideration and the associated liability will be adjusted to fair value at each reporting date until actual settlement occurs, with the changes in fair value reflected in earnings.

4. Preliminary Purchase Price Allocations

Vet Therapeutics

The following table summarizes the preliminary estimated fair values of tangible and intangible assets acquired and liabilities assumed as of the date of Vet Merger:

 

 

 

Accounts receivable

   $ 92   

Inventory

     173   

Other current assets

     6   

Property, plant and equipment

     76   

Other long-term assets

     3   

Identifiable intangible assets

     46,520   

Accounts payable and accrued expenses

     (441

Deferred revenue

     (55

Deferred tax liabilities, net

     (16,089
  

 

 

 

Total identifiable net assets

     30,285   
  

Goodwill

     19,055   
  

 

 

 

Total net assets acquired

   $ 49,340   
  

 

 

 

 

 

The following table sets forth the components of the identifiable intangible assets acquired by drug program and their estimated useful lives as of the date of Vet Merger:

 

 

 

     FAIR VALUE      USEFUL LIFE  

Antibody for B-cell lymphoma (now referred to as AT-004)

   $ 36,440         20 years   

Antibody for T-cell lymphoma (now referred to as AT-005)

     10,080         20 years   
  

 

 

    

Total intangible assets subject to amortization

   $ 46,520      
  

 

 

    

 

 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed and of the deferred tax assets and liabilities. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from October 15, 2013, the Vet Merger date. With the exception of inventory and deferred revenue, the fair values of tangible assets acquired and liabilities assumed of Vet Therapeutics approximate their carrying value as of the Vet Merger date.

The identifiable intangible assets recognized by the Company as a result of the Vet Merger relate to Vet Therapeutics’ technology and consist primarily of its intellectual property related to Vet Therapeutics’ B-cell and T-cell antibodies and the estimated net present value of future cash flows from commercial agreements related to the B-cell technology.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

4. Preliminary Purchase Price Allocations (continued)

Vet Therapeutics (continued)

 

The Vet Therapeutics B-cell technology, which is now referred to as AT-004, was valued using the discounted cash flow method, a form of the income approach, which incorporates the estimated royalty income and milestone payments to be generated from this technology. The estimated cash flows are then discounted to present value. Accordingly, the primary components of this method consist of the determination of cash flows, the probability of achieving and the anticipated timing of the milestone payments, and an appropriate rate of return.

The Vet Therapeutics T-cell technology, which was considered in-process research and development (“IPR&D”) as of the acquisition date and is now referred to as AT-005, was valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from this technology. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible assets, and intangible assets. The excess earnings are thereby calculated for each year of a multi-year projection period and discounted to present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.

For the B-cell technology, the Company will recognize straight-line amortization expense over the estimated useful life of the asset. The Company will not amortize the asset related to the T-cell technology until commercialization has been achieved.

Preliminary estimated amortization expense related to the B-cell technology, based upon the Company’s acquired intangible asset as of September 30, 2013, is as follows:

 

 

 

YEAR ENDING DECEMBER 31,

      

Remaining 2013

   $ 456   

2014

     1,822   

2015

     1,822   

2016

     1,822   

2017

     1,822   

Thereafter

     28,696   
  

 

 

 

Total

   $ 36,440   
  

 

 

 

 

 

The preliminary valuation analysis conducted by Aratana determined that the aggregate fair value of identifiable assets acquired less the aggregate fair value of identifiable liabilities assumed by the Company was less than the purchase price. As the purchase price exceeded the fair value of assets and liabilities acquired or assumed, goodwill was recognized. Goodwill is calculated as the difference between the Vet Merger-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

4. Preliminary Purchase Price Allocations (continued)

 

Okapi

The following table summarizes the preliminary estimated fair values of tangible and intangible assets acquired and liabilities assumed as of the date of the Okapi Acquisition:

 

 

 

Accounts receivable

   $ 72   

Prepaid expenses and other current assets

     666   

Property and equipment

     233   

Other long-term assets

     18   

Identifiable intangible assets

     29,400   

Accounts payable and accrued expenses

     (492)   

Deferred revenue

     (753)   

Deferred tax liabilities, net

     (3,813)   
  

 

 

 

Total identifiable net assets

     25,331   
  

Goodwill

     17,907   
  

 

 

 

Total net assets acquired

   $ 43,238   
  

 

 

 

 

 

The following table sets forth the components of the identifiable intangible assets acquired by drug program and their estimated useful lives as of the date of the Okapi Acquisition:

 

 

 

         FAIR VALUE              USEFUL LIFE    

Oftalvir (now referred to as AT-006)

   $ 3,400       13 years

Felivir (now referred to as AT-007)

     13,500       15 years

Canilox (now referred to as AT-008)

     5,300       13 years

Parvo (now referred to as AT-011)

     7,200       14 years
  

 

 

    

Total intangible assets subject to amortization

   $ 29,400      
  

 

 

    

 

 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed and of the deferred tax assets and liabilities. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from January 6, 2014, the Okapi Acquisition date. With the exception of intangible assets, the fair values of assets acquired and liabilities assumed of Okapi approximate their carrying value as of the Okapi Acquisition date.

The identifiable intangible assets recognized by the Company as a result of the Okapi Acquisition relate to Okapi’s technology and consist primarily of its intellectual property related to Okapi’s Oftalvir (AT-006), Felivir (AT-007), Canilox (AT-008) and Parvo (AT-011) programs and the estimated net present value of future cash flows from commercial agreements related to the Oftalvir program.

All Okapi programs, which were considered IPR&D as of the acquisition date, were valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from this technology. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible, and intangible assets. The excess earnings are thereby calculated for each year of a multi-year projection period and discounted to present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

4. Preliminary Purchase Price Allocations (continued)

Okapi (continued)

 

The Company will not amortize the intangible assets related to the Okapi programs until commercialization of each program has been achieved.

The preliminary valuation analysis conducted by Aratana determined that the aggregate fair value of identifiable assets acquired less the aggregate fair value of identifiable liabilities assumed by the Company was less than the purchase price. As the purchase price exceeds the fair value of assets and liabilities acquired or assumed, goodwill was recognized. Goodwill is calculated as the difference between the Okapi Acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

5. Vet Therapeutics Pro Forma Adjustments

The following pro forma adjustments are included in the Company’s unaudited pro forma consolidated financial information related to the Vet Merger:

Unaudited Pro Forma Consolidated Balance Sheet

Adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2013 were as follows:

 

(A) Cash—The Company recorded adjustments related to (i) $19,750 received from the Private Placement, (ii) $9,987 received from additional borrowing under the amended Credit Facility, excluding fees paid to the lender of $13, and (iii) Cash Consideration of $30,000 paid to former Vet Therapeutics shareholders.

 

(B) Inventory—The Company recorded an adjustment to reflect a net increase of $32 to record acquired inventory at fair market value.

 

(C) Intangible assets, net—The Company recorded an adjustment to reflect acquired identifiable intangible assets of $46,520, which consist primarily of intellectual property related to Vet Therapeutics’ B-cell and T-cell antibodies.

 

(D) Goodwill—The Company recorded $19,055 of goodwill, representing the excess of the aggregate purchase consideration transferred as of the acquisition date over the preliminary fair values of recorded tangible and intangible asset acquired and liabilities assumed in the Vet Merger. The amount of goodwill actually to be recorded in connection with the acquisition is subject to change once the Company’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed is completed.

 

(E) Accrued expenses—The Company recorded an adjustment to reflect a $746 liability for transaction costs, including advisory, legal and accounting expenses, incurred as a result of the Vet Merger.

The Company recorded an adjustment to reflect a reduction of $385 related to the forgiveness of the accrued interest payable on the convertible notes outstanding prior to the close of the Vet Merger, which was recorded as a capital contribution in the financial statements of Vet Therapeutics as it was a transaction among Vet Therapeutics shareholders.

 

(F) Current portion loan payable and Loan payable—The Company recorded an adjustment to reflect a current debt liability of $2,500 related to payments due over the next twelve months under the amended Credit Facility entered into concurrently with the Merger Agreement. The remaining $7,500 outstanding principal balance of the Credit Facility was reduced to $7,487 by $13 of debt discount and was recorded as a long-term debt liability.

 

(G) Convertible notes payable—The Company recorded an adjustment to reflect a reduction of $2,300 in convertible notes payable in the financial statements of Vet Therapeutics related to the conversion of the convertible notes payable into Vet Therapeutics Series A preferred stock prior to close of the Vet Merger.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

5. Vet Therapeutics Pro Forma Adjustments (continued)

Unaudited Pro Forma Consolidated Balance Sheet (continued)

 

(H) Current portion deferred licensing revenue and Deferred licensing revenue—The Company recorded an adjustment to adjust the carrying value of the deferred licensing revenue to its fair value of $55, which represents the estimated cost of the remaining effort.

 

(I) Deferred taxes—The Company recorded an adjustment to reflect a net deferred tax liability of $16,089 due to the book and tax basis differences of the assets acquired and liabilities assumed using an estimated blended U.S. federal and state tax rate of 38.0%.

The basis differences in acquired assets and liabilities result in positive sources of income in the future. As such, the Vet Merger impacted the Company’s assessment of its valuation allowance against deferred tax assets, resulting in the release of its valuation allowance of $10,100 as of the Vet Merger date. As a result, the Company recorded an adjustment of $10,100 to deferred tax assets and accumulated deficit. The deferred tax liability of $16,089 is offset by deferred tax assets of $10,100 being recognized as a result of the release of the valuation allowance.

 

(J) Notes payable—The Company recorded an adjustment to reflect a $3,000 liability related to the promissory note given to former Vet Therapeutics shareholders. The Company determined that the fair value of the note approximated carrying value.

 

(K) Contingent consideration—The Company recorded an adjustment to reflect a $3,810 liability related to the fair value of the contingent consideration at the acquisition date tied to the achievement of certain regulatory and manufacturing milestones for Vet Therapeutics’ B-cell lymphoma product.

 

(L) Common stock, Additional paid-in capital, Deficit accumulated during the development stage—The Company recorded an adjustment of $353 to eliminate Vet Therapeutics’ historical shareholders equity, which included the adjustments to Vet Therapeutics historical equity related to (i) the conversion of outstanding convertible notes and (ii) the forgiveness of accrued interest on the convertible notes, as follows:

 

 

 

Adjustment to eliminate Vet Therapeutics additional paid-in capital:

  

Historical Vet Therapeutics additional paid-in capital

   $ 565   

Adjustment related to conversion of Vet Therapeutics convertible notes prior to the Vet Merger

     2,300   

Adjustment related to forgiveness of interest on Vet Therapeutics convertible notes

     385   
  

 

 

 

Total Vet Therapeutics additional paid-in capital before elimination

     3,250   

Pro forma adjustment to eliminate Vet Therapeutics additional paid-in capital

     (3,250
  

 

 

 

Total Vet Therapeutics additional paid-in capital after elimination

   $   
  

 

 

 

Adjustment to eliminate Vet Therapeutics accumulated deficit:

  

Historical Vet Therapeutics accumulated deficit

   $ (3,603

Pro forma adjustment to eliminate Vet Therapeutics accumulated deficit

     3,603   
  

 

 

 

Total Vet Therapeutics accumulated deficit after elimination

   $   
  

 

 

 

Total pro forma adjustments to eliminate Vet Therapeutics stockholders’ deficit

   $ 353   
  

 

 

 

 

 

The Company recorded an adjustment to reflect a $746 increase in accumulated deficit for transaction costs, including advisory, legal and accounting expenses, incurred as a result of the Vet Merger.

The Company recorded an adjustment to reflect a $10,100 decrease to accumulated deficit related to the release of its deferred tax asset valuation allowance as a result of the book and tax basis differences in the assets acquired and liabilities assumed in connection with the Vet Merger.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

5. Vet Therapeutics Pro Forma Adjustments (continued)

Unaudited Pro Forma Consolidated Balance Sheet (continued)

 

The Company recorded adjustments to reflect the issuance of 625,000 shares of common stock, $.001 par value per share, issued in conjunction with the Vet Merger and the issuance of 1,234,375 shares of common stock, $.001 par value per share, issued in the Private Placement that occurred concurrently with the Vet Merger. The Company recorded adjustments of $14,699 and $19,749, respectively, to additional paid-in capital related to these issuances.

Unaudited Pro Forma Consolidated Statements of Operations

Adjustments to the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2013 and year ended December 31, 2012 were as follows:

 

(M) General and administrative—The Company recorded an adjustment to reflect a reduction of $257 to general and administrative expense for the nine months ended September 30, 2013 to eliminate the advisory, legal and accounting expenses incurred as a result of the Vet Merger, which are not expected to have a continuing impact on results of operations.

 

(N) Amortization of acquired intangible assets—The Company recorded adjustments of $1,367 and $1,822 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the amortization of intangible assets acquired in the Vet Merger.

 

(O) Interest expense—The Company recorded adjustments of $412 and $550 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the interest expense on the outstanding principal balance under the Credit Facility and the amortization of the debt discount associated with the Credit Facility. The Credit Facility bears interest at a rate of the greater of (i) 2.25% plus the prime rate or (ii) 5.5%. To calculate the interest expense above, the Company assumed an interest rate of 5.5%, which was the interest rate applicable to the Credit Facility on the Vet Merger date. A 1/8th percent increase in this rate would result in an increase to the above noted interest expense by approximately $9 and $13 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively.

The Company recorded adjustments of $158 and $210 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the interest expense associated with the promissory note issued to former Vet Therapeutics shareholders in conjunction with the Vet Merger. The promissory note bears interest at a rate of 7%, which the Company used to calculate the interest expense above.

The Company recorded adjustments to reflect reductions of expense of $87 and $115 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to eliminate interest expense related to outstanding Vet Therapeutics convertible notes payable that were converted into Vet Therapeutics Series A preferred stock prior to close of the Vet Merger.

 

(P) Income tax benefit—The Company recorded adjustments of $605 and $937 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the tax impact of the pro forma adjustments above using an estimated blended U.S. federal and state tax rate of 38.0%.

The basis differences in acquired assets and liabilities result in positive sources of income in the future for Vet Therapeutics. As a result, the Company recorded adjustments of $153 and $423 to reflect the income tax benefit resulting from Vet Therapeutics’ historical pre-tax losses for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, using an estimated blended U.S. federal and state tax rate of 38.0%.

As a result of Aratana’s release of the valuation allowance recorded against its deferred tax assets, the Company recorded adjustments of $4,334 and $4,422 to reflect the income tax benefit resulting from Aratana’s historical pre-tax losses for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, using an estimated blended U.S. federal and state tax rate of 38.0%.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

5. Vet Therapeutics Pro Forma Adjustments (continued)

Unaudited Pro Forma Consolidated Statements of Operations (continued)

 

(Q) Weighted average shares outstanding basic and diluted—The weighted average shares outstanding used to compute basic and diluted net loss per share for the nine months ended September 30, 2013 and the year ended December 31, 2012 have been adjusted to give effect to the issuance of 625,000 Merger Shares and 1,234,375 Private Placement Shares as if such issuances had occurred on January 1, 2012.

The above pro forma consolidated statements of operations for the nine months ended September 30, 2013 and for the year ended December 31, 2012 do not include adjustments related to (i) $746 of transaction costs incurred by the Company subsequent to September 30, 2013, (ii) an increase to costs of goods sold of $32 related to the fair value adjustment to Vet Therapeutics’ inventory acquired as part of the Vet Merger, or (iii) the release of Aratana’s valuation allowance of $3,812 as of January 1, 2012, as a result of the Vet Merger. These adjustments are considered non-recurring in nature and have been excluded from the adjustments above.

6. Okapi Pro Forma Adjustments

The following pro forma adjustments are included in the Company’s unaudited pro forma consolidated financial information related to the Okapi Acquisition:

Unaudited Pro Forma Consolidated Balance Sheet

Adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2013 were as follows:

 

(A) Cash—The Company recorded an adjustment related to Okapi Cash Consideration of $13,910 paid to former Okapi shareholders. The Euro-denominated Okapi Cash Consideration payment of 10,277 has been converted into U.S. dollars using an exchange rate of $1.3535 = 1.00, which represents the U.S. dollar to Euro exchange rate on September 30, 2013.

 

(B) Intangible assets, net—The Company recorded an adjustment to reflect acquired identifiable intangible assets of $29,400, which consist primarily of intellectual property related to Okapi’s Oftalvir (AT-006), Felivir (AT-007), Canilox (AT-008) and Parvo (AT-011) programs.

The Company recorded an adjustment of $625 to eliminate the historical carrying value of Okapi’s intangible assets.

 

(C) Goodwill––The Company recorded $17,907 of goodwill, representing the excess of the aggregate purchase consideration transferred as of the acquisition date over the preliminary fair values of recorded tangible and intangible asset acquired and liabilities assumed in the Okapi Acquisition. The amount of goodwill actually to be recorded in connection with the acquisition is subject to change once the Company’s valuation of the fair values of contingent purchase consideration and of tangible and intangible assets acquired and liabilities assumed is completed.

 

(D) Accrued expenses—The Company recorded an adjustment to reflect a $909 liability for transaction costs, including advisory, legal and accounting expenses, incurred as a result of the Okapi Acquisition.

 

(E) Convertible notes payable—The Company recorded an adjustment to reflect a reduction of $2,714 in convertible notes payable in the financial statements of Okapi related to the conversion of the convertible notes payable into Okapi Series A preferred stock prior to close of the Okapi Acquisition.

 

(F) Contingent consideration—The Company recorded an adjustment to reflect a $15,166 liability related to the preliminary fair value of the contingent consideration agreed to by Aratana in connection with the Okapi Acquisition.

 

(G) Notes payable—The Company recorded an adjustment to reflect a $14,889 liability related to the promissory note given to former Okapi shareholders. The Company determined that the fair value of the note approximated its carrying value. The Euro-denominated promissory note of 11,000 has been converted into U.S. dollars using an exchange rate of $1.3535 = 1.00, which represents the U.S. dollar to Euro exchange rate on September 30, 2013.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

6. Okapi Pro Forma Adjustments (continued)

Unaudited Pro Forma Consolidated Balance Sheet (continued)

 

(H) Deferred taxes—The Company recorded an adjustment to reflect a net deferred tax liability of $3,813 due to the book and tax basis differences of the assets acquired and liabilities assumed using the Belgian statutory federal tax rate of 33.99%.

 

(I) Common stock, Preferred stock, Additional paid-in capital, Deficit accumulated during the development stage—The Company recorded an adjustment of $1,096 to eliminate Okapi’s historical shareholders’ deficit, which included the adjustments to Okapi historical equity related to the conversion of outstanding convertible notes into shares of Okapi Series A preferred stock immediately prior to the Okapi Acquisition as follows:

 

 

 

Adjustment to eliminate Okapi preferred stock:

  

Historical Okapi preferred stock

   $ 517   

Adjustment related to conversion of Okapi convertible notes payable

     2,714   
  

 

 

 
     3,231   

Pro forma adjustment to eliminate Okapi preferred stock

     (3,231

Adjustments to eliminate remaining Okapi stockholders’ deficit:

  

Pro forma adjustment to eliminate Okapi common stock

     (84

Pro forma adjustment to eliminate Okapi additional paid-in capital

     (12,946

Pro forma adjustment to eliminate Okapi deficit accumulated during the development stage

     15,165   
  

 

 

 

Total pro forma adjustments to eliminate Okapi stockholders’ deficit

   $ (1,096
  

 

 

 

 

 

The Company recorded an adjustment to reflect a $909 increase in accumulated deficit for transaction costs, including advisory, legal and accounting expenses, incurred as a result of the Okapi Acquisition.

Unaudited Pro Forma Consolidated Statements of Operations

Adjustments to the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2013 and year ended December 31, 2012, respectively, were as follows:

 

(J) Conforming adjustments—The Company recorded a decrease of $78 to depreciation expense and increases of $54 and $24 to research and development expense and general and administrative expense, respectively, during the nine months ended September 30, 2013 to conform the presentation of depreciation expense in the unaudited pro forma statement to be consistent with the Company’s presentation, which allocates depreciation expense to its functional areas.

The Company recorded a decrease of $105 to depreciation expense and increases of $76 and $29 to research and development expense and general and administrative expense, respectively, during the year ended December 31, 2012 to conform the presentation of depreciation expense in the unaudited pro forma statement to be consistent with the Company’s presentation, which allocates depreciation expense to its functional areas.

 

(K) Amortization of acquired intangible assets—The Company recorded adjustments of $117 and $179 to reduce amortization expense for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to eliminate the historical amortization of Okapi’s intangible assets, which were recorded at fair value by the Company as a result of the Okapi Acquisition. The Company will not amortize the intangible assets until commercialization of each program has been achieved.

 

(L)

Interest expense—The Company recorded adjustments of $484 and $990 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the interest expense associated with the promissory note issued to former Okapi shareholders in conjunction with the Okapi Acquisition. The promissory note bears interest at a rate of 7%, which the Company used to calculate the

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

6. Okapi Pro Forma Adjustments (continued)

Unaudited Pro Forma Consolidated Statements of Operations (continued)

 

  interest expense above. The Euro-denominated interest expense during the nine months ended September 30, 2013 and for the year ended December 31, 2012 has been converted into U.S. dollars using exchange rates of $1.3170 = 1.00 and $1.2857 = 1.00, respectively, which represent the average U.S. dollar to Euro exchange rate for each of the respective periods.

The Company recorded adjustments to reflect reductions of expense of $116 and $8 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to eliminate interest expense related to outstanding Okapi loans payable that were converted into Okapi Series A preferred stock prior to close of the Okapi Acquisition.

 

(M) Income tax benefit—The Company recorded adjustments of $85 and $273 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the tax impact of the pro forma adjustments above using the Belgian statutory tax rate of 33.99%.

The basis differences in acquired assets and liabilities result in positive sources of income in the future for Okapi. As a result, the Company recorded adjustments of $719 and $1,111 to reflect the income tax benefit resulting from Okapi’s historical pre-tax losses for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, using the Belgian statutory tax rate of 33.99%.

The above pro forma consolidated statements of operations for the nine months ended September 30, 2013 and the year ended December 31, 2012 do not include an adjustment related to $909 of transaction costs related to the Vet Merger and Okapi Acquisition incurred by the Company subsequent to September 30, 2013. This adjustment is considered non-recurring in nature and has been excluded from the adjustments above.

7. Offering Pro Forma Adjustments

The following pro forma adjustments are included in the Company’s unaudited pro forma consolidated financial information related to this offering:

Unaudited Pro Forma Consolidated Balance Sheet

Adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2013 were as follows:

 

(A) Cash—The Company recorded an adjustment to increase cash by $79,114 to reflect the net proceeds received by the Company in this offering.

The Company recorded an adjustment to decrease cash by $33,055 to reflect the mandatory repayment of promissory notes issued by the Company in the Vet Merger and Okapi Acquisition and payment of contingent consideration payable by the Company in connection with the Okapi Acquisition upon the closing of this offering.

 

(B) Current portion of contingent consideration—The Company recorded an adjustment to decrease the current portion of contingent consideration by $15,166 to reflect the settlement of the outstanding contingent consideration payable by the Company in the Okapi Acquisition, as this contingent consideration is subject to mandatory prepayment in cash upon the closing of this offering.

 

(C) Notes payable—The Company recorded an adjustment to decrease notes payable by $14,889 and $3,000 to reflect the settlement of the outstanding promissory notes issued by the Company in the Okapi Acquisition and Vet Merger, respectively, as both promissory notes are subject to mandatory repayment upon the closing of this offering.

 

(D) Common stock and Additional paid-in capital—The Company recorded adjustments to common stock and additional paid-in capital of $5 and $79,109, respectively, to reflect shares issued and proceeds received by the Company in this offering.

 

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ARATANA THERAPEUTICS, INC.

Notes to Unaudited Pro Forma Consolidated Financial Information (Continued)

(In thousands, except share and per share amounts)

7. Offering Pro Forma Adjustments (continued)

 

Unaudited Pro Forma Consolidated Statements of Operations

Adjustments to the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2013 and year ended December 31, 2012, respectively, were as follows:

 

(E) Interest expense—The Company recorded adjustments of $642 and $1,200 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to eliminate interest expense associated with the promissory notes issued to the former Okapi shareholders and the former Vet Therapeutics shareholders, as the pro forma financial statements of operations assume repayment of these promissory notes using proceeds from the offering as if they had occurred on January 1, 2012.

 

(F) Income tax benefit—The Company recorded adjustments of $60 and $80 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the tax impact of the elimination of interest expense on the promissory notes issued to the former Vet Therapeutics shareholders upon the repayment of the promissory notes, using an estimated blended U.S. federal and state tax rate of 38.0%.

The Company recorded $165 and $336 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, to reflect the tax impact of the elimination of interest expense on the promissory notes issued to the former Okapi shareholders upon the repayment of the promissory notes, using the Belgian statutory tax rate of 33.99%.

 

(G) Weighted average shares outstanding basic and diluted—The weighted average shares outstanding used to compute basic and diluted net loss per share for the nine months ended September 30, 2013 and the year ended December 31, 2012 have been adjusted to give effect to the issuance of 1,880,262 shares sold in this offering whose proceeds will be used to settle the promissory notes issued in the Vet Merger and Okapi Acquisition and the contingent consideration related to the Okapi Acquisition as if such issuances had occurred on January 1, 2012.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a pet therapeutics company focused on the licensing or acquisition, development and commercialization of innovative biopharmaceutical products for cats, dogs and other companion animals. We operate at the intersection of the more than $50 billion annual U.S. pet market and the more than $20 billion annual worldwide animal health market. Our current product portfolio includes over 15 product candidates consisting of small molecule pharmaceuticals and large molecule biologics that target large opportunities in serious medical conditions in pets. Our most advanced products, AT-004 and AT-005, are monoclonal antibodies for treating lymphoma in dogs. AT-004, which treats B-cell lymphoma, received a conditional license from the U.S. Department of Agriculture, or USDA, and is currently marketed by Novartis Animal Health Inc., or Novartis Animal Health. We expect to receive a conditional license for AT-005, which is being developed to treat T-cell lymphoma, and to commence marketing in 2014. Our other lead products include small molecules directed at treating osteoarthritis pain and inflammation, loss of appetite and post-operative pain in dogs and cats. Our product candidates are designed to enable veterinarians and pet owners to manage pets’ medical needs safely and effectively, potentially resulting in longer and improved quality of life for pets.

Since our initial public offering in June 2013, we have focused on executing our clinical development plan and continuing to expand our product pipeline and further augment our development capabilities. Recently, we acquired Vet Therapeutics, Inc., or Vet Therapeutics, which provided us with a proprietary antibody-based biologics platform focused on the treatment of lymphoma, and Okapi Sciences N.V., or Okapi, which provided us with a pipeline of antiviral drugs, including product candidates focused on the treatment of herpes and immunodeficiency in cats. As part of these acquisitions, we also obtained two facilities that we are using to develop additional species-specific monoclonal antibodies, antivirals and other small molecules for use as pet therapeutics. In addition, we now have a commercial product and an additional product candidate that we expect to commercialize in 2014, we have more than doubled the size of our product pipeline since June 2013, and we have significantly increased our technology and development infrastructure. We are focused on advancing our product candidates to regulatory approval and believe that we have significantly accelerated our pathway toward becoming a commercial stage company.

We have assembled a portfolio of more than 15 product candidates that are in various stages of development in either cats or dogs, and frequently in both. Our AT-004 monoclonal antibody product for B-cell lymphoma in dogs has received a conditional license from the USDA, the regulatory agency that oversees biologics in animals, and this product is currently being commercialized in the United States and Canada by Novartis Animal Health. The following table identifies the primary molecules in our current product portfolio:

 

 

 

COMPOUND

 

SPECIES

 

INDICATION

 

DEVELOPMENT STATUS

 

EXPECTED NEXT STEP

AT-001

  Dog   Pain and inflammation associated with osteoarthritis   Dose selected  

n      Initiate pivotal field effectiveness study in first quarter of 2014

n      Expect U.S. marketing approval in 2016

 

Cat

  Pain and inflammation associated with osteoarthritis   Pilot studies  

n      Dose confirmation study

 

 

 

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COMPOUND

 

SPECIES

 

INDICATION

 

DEVELOPMENT STATUS

 

EXPECTED NEXT STEP

AT-002

  Dog   Stimulation of appetite   Pivotal field effectiveness study  

n      Submission for approval

n      Expect U.S. marketing approval in 2016

 

Cat

  Stimulation of appetite   Pilot studies  

n      Dose confirmation study

AT-003

  Dog   Post-operative pain management   Proof of concept study  

n      Dose confirmation study

n      Initiate pivotal field effectiveness study in second quarter 2014

n      Expect U.S. marketing approval in 2016

 

Cat

  Post-operative pain management   Proof of concept study  

n      Dose confirmation study

AT-004

  Dog   B-cell lymphoma   Submitted pivotal field effectiveness study  

n      Currently sold by Novartis Animal Health

n      Full license expected in 2015

AT-005

  Dog   T-cell lymphoma   Completing pivotal field effectiveness study  

n      Conditional license expected in 2014

n      Full license expected in 2015

AT-006

  Cat   Ocular herpes infection   Pivotal field study in Europe  

n      File for EU review in 2014

n      Expect U.S. marketing approval in 2017 or 2018

AT-007

  Cat   Feline immunodeficiency virus infection   Pilot study in Europe  

n      Initiate field effectiveness study in 2015

n      Expect U.S. marketing approval in 2017 or 2018

AT-008

  Dog   Lymphoma   Pivotal field effectiveness study  

n      Pivotal field effectiveness in the EU in 2014

AT-009

  Dog   Mast cell tumor   Lead selection  

n      Pilot studies

AT-010

  Dog   Atopic dermatitis   Lead selection  

n      Pilot studies

AT-011

 

Dog

  Parvovirus infections   Lead selection  

n      Proof of concept study

AT-012

  Cat   Calicivirus infections   Lead selection  

n      Proof of concept study

 

 

In addition to the above-listed product candidates, we are evaluating additional molecules for applications in other diseases including lymphoma in cats, seizures in dogs, atopic dermatitis in dogs and other cancers in cats and dogs, and we are researching new product concepts internally with our recently acquired antibody and antiviral research expertise. Furthermore, we have options with two parties for two additional molecules that we are considering licensing for further development. We aim to submit drug applications for U.S. approval for the majority of our existing product candidates and to make similar regulatory filings for European approval. Furthermore, where appropriate, we attempt to develop and submit regulatory filings for therapeutic indications in both cats and dogs, which will be separate products and require separate approval.

Our strategy is to in-license proprietary compounds from human biopharmaceutical companies and academia or leverage existing insights in human biology applicable in pets and to develop therapeutics specifically for use in pets. We seek to identify human therapeutics that have demonstrated safety and effectiveness in at least two species and are in, or have completed, Phase I or Phase II clinical trials in humans, with well-developed active pharmaceutical ingredient, or API, process chemistry and a well-defined manufacturing process. We also seek to identify products already in development for pets and to license or acquire these products. To date, we have in-licensed and are further developing pharmaceutical compounds from Pacira Pharmaceuticals, Inc., RaQualia Pharma, Inc. and others, and we have acquired Vet Therapeutics and Okapi.

 

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We expect to use the time preceding the full commercialization of our product candidates to build veterinarian and pet owner awareness of our company and our products. We believe that our product candidates, if approved, will enable veterinarians to deliver a higher level of medical care to pets while providing an important revenue stream to veterinarians’ practices.

We have incurred significant net losses since our inception. We incurred net losses of $3.5 million and $11.6 million for the years ended December 31, 2011 and 2012, respectively, and $11.4 million during the nine months ended September 30, 2013. These losses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and development activities and general and administrative costs associated with our operations. As of September 30, 2013, we had a deficit accumulated during development stage of $33.6 million and cash, cash equivalents and short-term investments of $52.3 million. After giving effect to our October 2013 private placement and our recent acquisitions of Vet Therapeutics and Okapi, our pro forma net loss for the nine months ended September 30, 2013 was $9.9 million and for the year ended December 31, 2012 was $12.1 million, and as of September 30, 2013, we had a pro forma deficit accumulated during development stage of $25.2 million and pro forma cash, cash equivalents and short-term investments of $41.0 million.

We expect to continue to incur operating losses for the next several years as we work to develop and commercialize our product candidates. As a result, we will seek to fund our operations through public or private equity offerings, debt financings, corporate collaborations and licensing arrangements. We cannot assure you that such funds will be available on terms favorable to us, if at all. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations, and we may be unable to continue as a going concern. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and existing credit facility will allow us to fund our operations through at least December 31, 2015.

Recent Developments

Acquisition of Okapi Sciences N.V.

On January 6, 2014, we acquired Okapi Sciences N.V., a Belgium-based company with a proprietary pet therapeutics antiviral platform and five clinical/development stage product candidates designed to treat important viral diseases. We plan to continue to advance the current Okapi pipeline of high value antiviral drugs, including its feline herpes and feline immunodeficiency virus products, which currently comprise our AT-006 and AT-007 product candidates, respectively. We are developing AT-006 as a treatment for ocular herpes in cats. AT-006, if approved, could become the first antiviral small molecule therapeutic developed specifically for veterinary use. If approved, AT-006 will be commercialized by Novartis Animal Health pursuant to an existing development and commercialization agreement. The Okapi product pipeline also includes additional antiviral and oncology products for both cats and dogs.

To acquire Okapi, we paid its equity holders approximately 10.3 million (equivalent to $13.9 million) in cash and issued a promissory note for 11.0 million ($14.9 million). The promissory note bears interest at 7% per annum payable quarterly in arrears and matures on December 31, 2014, subject to mandatory prepayment in the event of an equity financing, which would include this offering. We also agreed to pay up to an additional $16.3 million in cash or shares of common stock calculated in the manner specified in the purchase agreement within 90 days of the closing, subject to mandatory prepayment in cash in the event of an equity financing, which also includes this offering. We believe the strategic acquisition of Okapi further enhances our leadership position in pet therapeutics by providing us with a European base of operations that we believe enables better coordination of clinical and regulatory activities, enhances our business development and in-licensing capabilities and provides flexibility with respect to European commercialization. The acquisition also provides us with the technology for de novo product generation, diversifies our product pipeline and demonstrates our continued focus on innovation.

Acquisition of Vet Therapeutics, Inc.

On October 15, 2013, we acquired Vet Therapeutics, Inc., a Del Mar, California-based company with a proprietary antibody-based biologics platform. We plan to continue to advance this pipeline of biologic drugs, including the

lymphoma franchise, which currently comprises our AT-004, AT-005, AT-009 and AT-010 products. Beyond these

 

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