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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this Annual Report on Form 10-K contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:
In addition, you should refer to the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report on Form 10-K will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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BUSINESS
Overview
We are a development stage veterinary diagnostic and pharmaceutical company creating products for companion animals (canine, feline, and equine) by focusing on the unmet needs of clinical veterinarians. We believe that we have identified and are developing diagnostics and therapeutics that have the potential to significantly improve the diagnosis and treatment of various diseases affecting companion animals. We believe that there are significant unmet medical needs for pets, and that the pet diagnostic and therapeutic segments of the animal health industry are likely to grow substantially as new diagnostic tools and treatments are identified, developed, and marketed specifically for companion animals.
Together with our strategic partner, we are developing liquid biopsy assays and related consumables for the detection of cancer in companion animals. The regulatory pathway to obtain pre-market regulatory approval of companion animal diagnostics is significantly shorter than for similar diagnostic products intended for human use. In certain cases, pre-market regulatory approval may be unnecessary, depending on the intended use of the diagnostic.
We also have identified a number of drugs that have proven safe and effective in humans that we are developing for use in companion animals. We believe this development approach enables us to reduce the risks associated with obtaining regulatory approval for unproven product candidates and shortens the development timeline necessary to bring our product candidates to market. We have four drug product candidates in early development and have identified several other potential product candidates for further investigation.
In addition, we are investigating the development of alternative drug delivery technologies for our drug product candidates. Many of the human-approved therapeutics used in companion animals are only available in pill or injectable form. However, it can be difficult to give a companion animal an injection or to assure that the animal has swallowed a pill. As a result, we believe that compliance with treatment regimens is a significant problem for veterinarians and pet owners. The challenges associated with medicating pets are unique, and we believe that developing product candidates that can be easily taken by the pet or easily administered by pet owners will help increase compliance.
Market Opportunity
U.S. consumers spent an estimated $69.4 billion on their pets in 2017, according to the American Pet Products Association, or APPA, an increase of 4% from 2016. The veterinary care segment has been among the fastest growing segments of the overall U.S. pet market. This segment accounted for an estimated $16.6 billion in revenue in 2017, an increase of 4% from 2016. According to dvm360 Magazine’s State of the Profession survey for 2015, diagnostics comprise 18%, and vaccinations, pharmaceuticals and biologicals comprise 25% of gross revenue at the veterinary practice level.
The dvm360 Magazine survey also states that 61% of respondents indicated that they were providing more diagnostic services than the prior year. Similarly, a 2016 Credit Suisse survey of veterinarians found that 73% of respondents expected their diagnostic testing to increase over the next 12 months. According to MarketsandMarkets™, the veterinary diagnostics market is expected to grow at a CAGR of 9.3% between 2017 and 2022, reaching $3.62 billion in sales by 2022, with North America accounting for the largest market share in 2016. The companion animal segment is expected to register the highest growth during the forecast period.
Packaged Facts’ Pet Medications, in its U.S. report for 2017, estimated the size of the U.S. pet medication market, the largest companion animal market worldwide, at $8.6 billion in 2017, up from $7 billion in 2015. Future Market Insights estimates that the global companion animal drug market is expected to grow at a compounded annual growth rate of 4.9% from 2015 - 2025.
We believe that several factors have contributed and will continue to contribute to an increase in spending on pet therapeutics. Companion animals are generally living longer, with the average lifespan for dogs increasing by half a year to 11 years between 2002 and 2012, according to a study by Banfield Pet Hospital. As a result, companion animals increasingly require medical treatment. In 2015, the American Animal Hospital Association estimated that the average dog will account for approximately $3,600 in veterinary bills over its lifespan. According to Pet Supplies Plus, baby boomers are adopting pets in record numbers. In its December 2015 issue, Pet Business magazine predicted that the millennial generation would continue the trend of the baby boomers in their enthusiasm for and interest in their pets and pet products and services. This, we believe, along with the increasing awareness of, as the U.S. Public Health Service states, “the mental and emotional benefits of companion animals” and our use of companion animals to address or assist in a range of health and wellness issues including post-traumatic stress disorder and autism, will bolster the growth and development of the pet therapeutics market.
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Pet owners in the United States generally pay for diagnostics and therapeutics for their companion animals out-of-pocket. According to statistics from the North American Pet Health Insurance Association, only about 1.8 million dogs and cats were covered by an insurance plan in 2016. This represents less than 1% of the nearly 184 million dogs and cats that the American Pet Products Association estimates are owned in the United States. We believe that this results in less pricing pressure than in human health care, although the limited adoption of insurance may also reduce pet owners ability to pay for diagnostics and therapeutics recommended by their veterinarians.
Development of Companion Animal Diagnostics
The development of companion animal diagnostics continues to evolve with the addition of new technologies to diagnostic portfolios. We believe that these new technologies may allow for the following:
Compared to human diagnostic development, the development of companion animal diagnostics is generally faster and less expensive since it typically requires smaller clinical studies, with fewer subjects. We believe that the lower cost of developing companion animal diagnostics enables us to pursue multiple diagnostic candidates simultaneously and to spread the risk of failure across a number of candidates, rather than concentrating all of our resources on one diagnostic candidate that may ultimately fail to achieve regulatory approval or market acceptance.
Development of Companion Animal Therapeutics
Compared to human drug development, the development of companion animal therapeutics is generally faster, more predictable, and less expensive, since it requires fewer clinical studies involving fewer subjects and can be conducted directly in the target species. Based on our progress since commencing business in May 2015, we believe that we will be able to develop a product candidate, from the initial opening of an INAD with the FDA-CVM through to marketing approval, in approximately three to five years at a cost of approximately $3 million to $5 million per product candidate. According to the Tufts Center for the Study of Drug Development, the successful development of a new drug for use in humans can take more than 10 years and requires an average out-of-pocket expenditure of approximately $1.4 billion. The lower cost associated with the development of companion animal therapeutics permits us to pursue multiple product candidates simultaneously and to spread the risk of failure across a number of product candidates, rather than concentrating all of our resources on one novel candidate that may ultimately fail to achieve regulatory approval or market acceptance.
Because we are developing product candidates based on drugs that have been successfully developed and approved for human use—as opposed to drugs based on new active pharmaceutical ingredients (APIs)—we believe that we will be able to avoid or minimize the expenses associated with the human drug development process and more rapidly advance our development programs, while continuing to comply with current good manufacturing practices, or cGMP, for our product candidates. Since we are not pursuing entirely new chemical entities with our drug product candidates, we believe the risk of failure of a specific drug product candidate is significantly lower compared to developing a novel compound.
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The respective businesses of developing and commercializing therapeutics for companion animals and humans share a number of characteristics, including the need to:
However, despite these similarities, there are a number of important differences between the companion animal therapeutics and human therapeutics businesses, including:
Unmet Medical Needs
We believe that there is a significant unmet medical need for cost-effective and accurate disease/condition detection solutions for veterinarians. We believe that we have identified potential diagnostic assays that have the potential to satisfy unmet needs or improve upon existing diagnostic processes frequently used by companion animal veterinarians.
For example, cancer is a prevalent disease in canines that can be difficult and costly to diagnose using existing diagnostic testing. According to the Veterinary Cancer Society, 50% of all dogs over the age of 10 will develop cancer and one in four dogs will develop cancer at some stage in their life. Diagnosing certain cancers in canines is difficult because the location of the tumor may make it difficult or risky to obtain cell material through a biopsy. In addition, the overall health of a canine may increase the risk of performing a biopsy. Other diagnostic technologies, such as advanced imaging, are expensive while others, such as histopathologic examination, may take several days or more to provide a definitive diagnosis. Many more canine cancer cases may go undetected due to cost constraints and other factors. To address these shortcomings, we are developing a circulating tumor cell detection assay for use in the detection of certain cancers in companion animals.