UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

 

For the Fiscal Year Ended December 31, 2014

 

Commission file number: 001-35952

 

ARATANA THERAPEUTICS, INC.

 

 

1901 Olathe Boulevard

Kansas City, KS 66103

(913) 353-1000

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

Securities Registered Pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933     Yes:  ☐     No:  ☒

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes:  ☐     No:  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes:  ☒     No:  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes:  ☒     No:  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ☒

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. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes:  ◻     No:  ☒

The approximate aggregate market value of the common stock held by non-affiliates of the registrant based upon the closing price of the registrant’s common stock on The NASDAQ Global Market on June 30, 2014 was  $382,560,857.

As of March 9, 2015, there were 34,910,462 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s definitive proxy statement to be filed in connection with the registrant’s 2015 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

 

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ARATANA THERAPEUTICS, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2014

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Aratana Therapeutics and our logo are two of our trademarks that are used in this filing. This filing also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames referred to in this filing 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.

PART  I

Cautionary Note Regarding Forward-Looking Statements

Except for historical information, the matters discussed in this Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“Annual Report”) are forward looking statements that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. The Company makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of various important factors, including those set forth in Item 1A of this Annual Report under the heading “Risk Factors.” Readers should also carefully review the risk factors described in the other documents that we file from time to time with the SEC. In this Annual Report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. The forward-looking statements contained in this Annual Report include, but are not limited to, statements related to: industry trends; market conditions; management’s plans and objectives for product development and commercialization; anticipated timing of regulatory submissions and approvals; investments in research and development; business prospects and collaborations; anticipated financial performance; expected liquidity and capitalization; our ability to protect our intellectual property from third-party claims; changes in accounting principles; changes in actual or assumed tax liabilities; expectations regarding tax exposures; anticipated reinvestment of future earnings; ability to repay our indebtedness; and our intentions regarding the use of cash. All forward-looking statements included in this document are based on information available to us on the date hereof. We will not undertake and specifically decline any obligation to update any forward looking statements.

 

EXPLANATORY NOTE

Restatement of Consolidated Financial Results

On March 9, 2015, the Audit Committee of our Board of Directors concluded that our Consolidated Financial Statements for the year ended December 31, 2013 should no longer be relied upon. As a result, this Annual Report includes the restatement of our Consolidated Financial Statements and the related disclosures for the year ended December 31, 2013. The restatement principally relates to an error regarding the valuation of the intangible asset AT-004, which was acquired in connection with our October 2013 acquisition of Vet Therapeutics, Inc. Specifically, we incorrectly excluded certain royalty payments from the calculation of the purchase price accounting valuation, and thus overstated the value of AT-004. In addition, the following items of this Annual Report include restated financial data: (i) Part II, Item 6—Selected Financial Data; (ii) Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations; (iii) Part II, Item 8—Financial Statements and Supplementary Data and (iv) Part IV, Item 15—Exhibits and Financial Statement Schedules. Note 2 to our Consolidated Financial Statements sets forth, in a comparative presentation, the previously reported, restatement adjustments and restated amounts for those line items in the 2013 Consolidated Financial Statements affected by the restatement. This Annual Report also includes disclosure regarding the impact of the restatement on the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures in Part II, Item 9A.— Controls and Procedures.

 

We have not amended our previously-filed Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”), and the Consolidated Financial Statements for the year ended December 31, 2013 contained in the 2013 Annual Report should no longer be relied upon. Instead, such financial statements are superseded by the restated Consolidated Financial Statements for the year ended December 31, 2013 contained in this Annual Report.

Item 1:  BUSINESS

 

Overview

We are a pet therapeutics company focused on licensing, developing and commercializing innovative biopharmaceutical products for companion animals. We operate in one business segment, which sits 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.

 

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 households in the United States

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have at least one pet. The U.S. veterinary care segment was $13.6 billion in 2012. We estimate that of this $13.6 billion, approximately $6.3 billion related to consumer spending in pet medicines, which included approximately $1.6 billion for pet therapeutics. We believe that the pet market, driven in part by the 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.

 

Veterinary practice revenue as a percentage of the overall practice comes from a variety of products and services including annual exams, diagnostics, surgeries and therapeutics and certain other products such as pet food and hygiene. Traditionally, the sale of flea-tick and heartworm products and vaccinations were the cornerstone of veterinary practices and drove clinic traffic. In a recent DVM survey, vaccinations accounted for 15% of revenue while flea, tick and heartworm were another 12%. Up to one-third of the practice profit comes from sales of these high margin products prescribed and sold by the veterinarian. As those products have become generic, competition has intensified and manufacturers have shifted to large retailers such as Wal-Mart, Costco, Target and 1-800-Pet Meds. As a result veterinarians have lost practice revenue and drivers of overall practice visits. Aratana plans to offer innovative prescription products that we anticipate will be sold exclusively by veterinarians. These products have the ability to increase practice visits by pet owners and potentially replace some of the lost product income for veterinarians, while increasing the standard of care. As a result, we believe the commercial environment is attractive and the veterinary community will be receptive to these potentially innovative solutions.

 

We also 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 aging 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.

In addition, 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. Tufts Center for the Study of Drug Development estimates that the cost of developing a new human drug is approximately $1.3 billion and takes about ten years to move from the lab to patients. In contrast, based on our internal evaluation of the development and regulatory approval process, we estimate that developing a pet therapeutic for U.S. Food and Drug Administration (the “FDA”) approval costs approximately $10 million and takes about five years to accomplish. Review and approval of biologics to a conditional and full license is done by the U.S. Department of Agriculture (the “USDA”) with similar cost and time requirements.

 

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 be demonstrated 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 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.

 

Our strategy is to in-license proprietary technology from human biopharmaceutical companies and academia or leverage existing insights in human biology applicable to 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 ingredients (“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 companies such as Pacira Pharmaceuticals, Inc. (“Pacira”), RaQualia Pharma Inc. (“RaQualia”), Advaxis, Inc. (“Advaxis”), Vet-Stem, Inc. (“Vet-Stem”) and Atopix Therapeutics Ltd. (“Atopix”). 

 

Aratana Therapeutics, Inc. was incorporated on December 1, 2010 under the laws of the State of Delaware. 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 augmenting our development capabilities. In October 2013, we acquired Vet Therapeutics, Inc. (“Vet Therapeutics”), which provided us with a proprietary antibody-based biologics platform focused on the treatment of lymphoma, and in January 2014, we acquired Okapi Sciences NV (“Okapi Sciences”, which was renamed Aratana Therapeutics NV in April 2014 and is referred to as “Aratana NV” for all post-acquisition references), which provided us with a pipeline of antiviral drugs, including product candidates focused on the treatment of herpes virus and immunodeficiency virus infections in cats. As part of these acquisitions, we obtained two

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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 two full or conditionally licensed products, AT-004 and AT-005, which we expect to further commercialize in 2015, we have increased the size of our product pipeline, 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 company.

 

Our current portfolio includes over 18 therapeutic candidates in development consisting of small molecule pharmaceuticals and large molecule biologics that target what we believe to be large opportunities in serious medical conditions in pets. Our most advanced products from a development and commercialization perspective, AT-004 and AT-005, are monoclonal antibodies (“MAbs”) for treating lymphoma in dogs. AT-004, which aids in the treatment of B-cell lymphoma, received a full license from the USDA on January 2, 2015. AT-004 was previously out-licensed through an exclusive commercial agreement between Vet Therapeutics and Novartis Animal Health Inc. (“NAH”) (acquired by Elanco Animal Health Inc. (“Elanco”) in a transaction that was announced as closed on January 1, 2015), but on February 24, 2015 we regained the commercial rights to the product and we intend to commence post-approval studies and commercialize the product ourselves beginning in 2015. AT-005, which treats T-cell lymphoma, received a conditional license from the USDA in January 2014. We commenced limited marketing of AT-005 to our clinical investigator sites and certain other sites in the fourth quarter of 2014, as we complete the requirements to obtain a full license.

 

We have also filed for a product license from the USDA for AT-014, a novel her2/neu-directed cancer immunotherapy for the treatment of canine osteosarcoma which we have licensed from Advaxis. Our other lead products in development include small molecules directed at treating osteoarthritis pain and inflammation (AT-001), loss of appetite (AT-002) and post-operative pain in dogs and cats (AT-003). In December 2014, we reported the positive results of a pivotal field effectiveness study in dogs with osteoarthritis pain for AT-001 (grapiprant). We are currently conducting pivotal field effectiveness studies in dogs with inappetence for AT-002 (capromorelin) and in dogs with post-surgical pain for AT-003 (bupivacaine liposome injectable suspension).

 

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The following table identifies the most advanced molecules in our current therapeutic portfolio and their current status in development:

 

We are also developing other products that are at the pilot study stage or proof of concept stage.

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The following table identifies these other molecules in our current therapeutic portfolio and their current status in development:

 

 

 

Other product candidates and development activities 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. We can provide no assurance, however, that regulatory approval of our product candidates will be obtained.

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In addition to the above-listed product candidates, we are evaluating additional molecules for applications in other diseases and we are researching new product concepts internally through our recently acquired antibody and antiviral research expertise. We have one option with a third party for a molecule that we are considering licensing for further development for epilepsy in dogs.

 

We aim to submit drug applications for U.S. approval or licensure for the majority of these potential products and to make similar regulatory filings for European approval. Furthermore, where appropriate, we intend to develop and submit regulatory filings for therapeutic indications in both cats and dogs, which we expect will require approvals or licenses for separate products.

 

We expect to use the time between now and 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 the veterinarian’s practice.

Business 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:

 

 

 

 

 

 

 

 

 

Development Programs

AT-001

Overview

AT-001 (grapiprant) is a selective prostaglandin E receptor 4 (“EP4”) antagonist that we in-licensed from RaQualia and are developing to treat osteoarthritis pain in dogs and degenerative joint disease in cats.

Medical need

Osteoarthritis is the most common inflammatory joint disease in pets. The prevalence of osteoarthritis increases with age, usually occurring in cats and dogs aged nine years or older, but it can occur even in young animals. According to industry sources, the number of pets diagnosed with arthritis has significantly increased over the past five years and an estimated 13% of all geriatric dogs, and 22% of geriatric large and giant breed dogs, are diagnosed with arthritis. We believe many dogs with arthritis remain undiagnosed and the incidence is approximately 20% in dogs and slightly higher at approximately 23% in cats. Osteoarthritis is a progressive disease that can first manifest itself with periodic signs of stiffness or lameness and can progress to where the pet is experiencing constant joint pain and stiffness. Affected cats and dogs may show signs of irritability and reclusiveness.

Osteoarthritis is diagnosed in animals by the veterinarian using clinical signs and radiographs. The disease is incurable, but treatment can improve the cat’s or dog’s quality of life. Treatment includes a combination of rest, avoidance of overexertion, reduction in weight, proper exercise and a regimen of pain and anti-inflammatory drugs. In some cases, surgery to relieve the pain or correct deformities or instability might also be employed.

Currently available treatments and their limitations

Analgesic and anti-inflammatory drugs are often necessary to control pain in cats and dogs with osteoarthritis. The currently approved products for control of the pain and inflammation associated with osteoarthritis in dogs are NSAIDs from the class of cyclooxygenase (“COX”) inhibitors. The arachidonic acid pathway constitutes the main mechanism for the production of pain and inflammation in osteoarthritis. This pathway also controls other important body functions such as kidney regulation, gastrointestinal mucosal protection, thrombosis and blood flow through the enzymatic synthesis of mediators in multiple steps along the pathway. Three COX isoenzymes have been identified—COX-1, COX-2 and COX-3. COX-2 initiates the biosynthesis of prostaglandin-I 2 or PGI 2 and prostaglandin-E 2 or PGE 2. PGI 2 affects gastrointestinal mucosa, kidney function and blood flow. PGE 2 also affects gastrointestinal mucosa and is a key mediator of pain and inflammation. The inhibition of COX enzymes to provide relief from pain and inflammation is the mode of action of NSAIDs.

The first product approved for the control of pain and inflammation associated with dog osteoarthritis was Rimadyl (carprofen) in 1996. The introduction of this product created a product category around a previously unmet medical need and fundamentally changed the management of chronic pain in dogs. Rimadyl is a moderately selective inhibitor of COX-2 (Coxib) and has demonstrated selective inhibition of COX-2 versus COX-1 in dogs. While side effects in most dogs are generally mild and typical of the NSAID class, some dogs have an idiosyncratic sensitivity that results in hepatic and/or gastrointestinal toxicity and, in extreme cases, death. As a result, NSAID label language contains bolded warnings and specifies that baseline blood tests should be conducted, and pets should be periodically monitored using blood tests to check for any toxic effects. Additionally, cats appear to metabolize NSAIDs differently than dogs, resulting in more severe side effects. It is our understanding that Rimadyl is not approved for use in cats and that no other Coxibs are approved in the United States for more than three days of use in cats.

 

Market opportunity

According to the April 2014 Brakke Consulting Pain Management Products Survey, the U.S. cat and dog analgesic market was approximately $262 million in 2013 and consisted mostly of NSAIDs with sales of approximately $219 million. According to a survey of 206 veterinarians conducted by Brakke Consulting (“Brakke”) in March 2014, veterinarians recommended NSAID therapy for 82% of the dogs they treated with osteoarthritis, and they believe approximately 59% receive treatment. The Market Dynamic Inc. sales audit data shows that over 4 million dogs per year are receiving an average of 20 days of treatment with NSAID therapy. The NSAID segment is one of the fastest growing categories in pet therapeutics over the last fifteen years; it continued to expand with four

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additional NSAID Coxib approvals and the approval of the first of five generic carprofen products starting in 2005. Rimadyl remains the leading prescription treatment with 2014 U.S. sales of $85 million and 39% market share. According to Brakke, sales of generic carprofen were $26 million, or 10% market share in 2014.

Given the associated side effects and required monitoring with blood tests that are associated with NSAID therapy, there is a population of dogs that remains untreated or cannot be treated chronically. Additionally, while up to 30% of cats over the age of eight have degenerative joint disease (“DJD”) the currently available products in the United States cannot be used to treat cats for chronic pain associated with DJD. We believe there is a significant market opportunity for a therapeutic product that can manage the pain and inflammation associated with osteoarthritis and DJD in pets with an improved safety profile and that does not require regular blood monitoring.

Our Solution—AT-001

AT-001 is a selective EP4 receptor antagonist. EP4 is one of four G-protein coupled PGE 2 receptors (EP1, EP2, EP3 and EP4) located on the membrane of various cells in the mammalian body. The EP4 receptor predominantly mediates PGE 2-elicited pain. The specific effects of the binding of PGE 2 to the EP4 receptor include vasodilation, increased permeability, angiogenesis and production of pro-inflammatory mediators. The EP4 receptor mediates PGE 2-elicited sensitization of sensory neurons, and studies published in the Journal of Pharmacology and Experimental Therapeutics and in the British Journal of Pharmacology have demonstrated that EP4 is a major receptor in mediating pain associated with both rheumatoid arthritis and osteoarthritis and inflammation.

AT-001 binds selectively to the EP4 receptor with high affinity thus blocking it from PGE 2-mediated pain and inflammation. The human, rat, dog and cat EP4 receptor genes were cloned and showed similar binding affinity with AT-001.

 

AT-001 in dogs

Safety. In the toxicology program that was conducted by RaQualia to support human drug development, a series of studies investigated the effects of oral administration of AT-001 to male and female laboratory dogs. We use the results from a nine-month Good Laboratory Practice (“GLP”) toxicology study of oral AT-001 given daily to demonstrate target animal safety in dogs.

The study was re-evaluated according to target animal safety study guidelines and submitted to the CVM for review. In January 2015, we received the target animal safety technical section complete letter from the CVM.

Effectiveness. We performed initial proof of concept studies in laboratory dogs followed by a multi-site, randomized, blinded dose-ranging study in client-owned pets with osteoarthritis. The study enrolled over 350 dogs across four treatment arms including three different AT-001 treatment regimens and a placebo. Effectiveness in the study was determined by using a validated pain scoring system referred to as the Canine Brief Pain Inventory (“CBPI”). The clinical success rates at day 28 for the selected dose regimen vs. the placebo group, when compared in a two-group parallel design, represent a statistically significant difference (p<0.05). Adverse reactions at the selected dose were comparable to the placebo.

We discussed with the CVM the results of this study and agreed to complete a pivotal field effectiveness study at our selected once- daily oral dose, compared to placebo, with the same concurred study protocol used in the dose-ranging study.

We completed the in-life phase of this study in late 2014. The clinical success rates based on the validated CBPI at day 28 were 48.1% for the selected dose regimen vs. 31.3% for the placebo group, which represents a statistically significant difference (p<0.05) , thereby achieving the study’s primary endpoint as agreed under protocol concurrence with the CVM. The two subsets of the CBPI, the pain severity score and the pain interference score both improved significantly on day 28 (p<0.01). Furthermore, the clinical success rates on days 7, 14 and 21 versus placebo group were all statistically significant (p<0.05). Adverse reactions at the selected dose were limited to mild adverse events and did not exhibit abnormalities in liver and renal parameters as observed with the use of Coxib NSAIDs.

We believe that these results when submitted and reviewed will result in an effectiveness technical section complete letter in late-2015.

Chemistry, Manufacturing and Control (“CMC”). We have engaged a contract manufacturer for the API process development and a specialized animal health contract manufacturer to develop and make the formulated product. Both API and formulated product are manufactured according to current Good Manufacturing Practices, or cGMP, standards. We have developed the process according to standards from the Veterinary International Conference on Harmonization (“VICH”), which can be used to supply both human and veterinary development and commercialization. We have selected a final formulation of AT-001, and produced clinical trial material. Three API cGMP batches and three formulated product cGMP batches have been put on VICH stability testing.

 

In early 2015, we submitted the drug master file (“DMF”) and CMC technical section to the CVM and we anticipate the CMC technical section complete letter in 2016.

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Development Plan. Our plan is to complete the effectiveness technical sections by submitting the results of our dog pivotal field effectiveness study. We will respond to any questions related to our effectiveness and CMC technical section submissions. We plan to have the three major technical sections of the NADA for AT-001 complete by mid-2016 and, assuming we achieve that goal and our submission is acceptable, we would anticipate NADA approval in late 2016.

Our European regulatory strategy tracks that of the United States. We believe that data provided for our NADA filing in the United States should largely satisfy the European requirements. We expect to submit a dossier to the EMA for use of AT-001 in dogs in 2016 with approval anticipated in 2017.

AT-001 in cats

Safety. We have conducted a number of laboratory probe studies to test the safety of AT-001 in cats. A 28-day safety study in 24 normal, healthy cats suggests that AT-001 is well tolerated at levels representing multiples of the potential therapeutic dose for up to 28 days. We also evaluated the safety of AT-001 in cats in post-operative settings. Under these conditions, we observed a dose-dependent increase of blood parameters related to liver metabolism, which is a signal of potential liver toxicity. Study results demonstrate a trend that this observation is a combined effect of the medication used to produce general anesthesia and high AT-001 dosages. While we cannot rely on any of these initial studies as pivotal safety studies, consistent with FDA requirements, we will include the results of these studies in our NADA as additional information.

Effectiveness. We performed initial proof of concept studies in a surgical pain model in laboratory cats. While a clear effectiveness signal in cats was observed, the relatively high dosages needed to cover such an acute pain setting, potentially in combination with the effects of general anesthesia medication led to an increase of blood parameters related to liver metabolism. Hence an adequate therapeutic window could not be established in the acute surgical pain model. However, based on the clear efficacy signal we decided to pursue a chronic pain indication for cats where the clinical dose and different clinical setting may indeed result in an acceptable therapeutic window. We believe that AT-001 will be effective at a lower dose in the chronic setting where we can avoid the interaction with anesthesia agents. Because no therapies are currently approved in the United States for chronic use in cats, the need is high and the rationale is strong for continuing to define the therapeutic window. Hence, we will proceed in developing AT-001 for DJD pain in cats.

Development plan. During 2014, we initiated a proof of concept study in client-owned cats with DJD to develop a study design, establish a dose regimen, and test various endpoints to be used in a pivotal field effectiveness study. Based on the treatment regimen we plan to design and perform a guideline target animal safety study. We plan to develop a cat-specific drug product and submit a separate CMC technical section.

AT-002

Overview

AT-002 (capromorelin) is a potent and selective ghrelin agonist, which causes appetite stimulation and growth hormone secretion. We in-licensed AT-002 from RaQualia and are developing AT-002 for the stimulation of appetite in dogs and we are also developing AT-002 for weight gain in cats and dogs.

 

Medical need and market opportunity

The control of hunger and satiety involves a complex system in mammals. In many acute and chronic disease states, as well as with aging, lack of appetite is a problem and can fuel a downward spiral. Malnutrition and decreased muscle mass can result from inadequate food intake regardless of the underlying condition. In humans, doctors can rationalize with the patients the importance of maintaining nutrition despite the lack of natural appetite and there are medical therapeutics approved in humans to treat inappetence. Veterinarians and pet owners cannot successfully rationalize with pets about the importance of maintaining nutrition and there are no approved medical therapeutics to treat inappetence in pets. This can be a frustrating clinical situation for the veterinarian and pet owner and often contributes to the decision to euthanize a pet. In a recent survey of veterinarians 83.6% believed that stimulation of appetite and weight gain in dogs represented a significant unmet need.

Fear, pain, stress, trauma, organic disease, dental disease, oral fractures and cancer are all possible causes of inappetence in pets. For example, in pets undergoing cancer treatment, the cancer therapy is commonly stopped when the pet loses appetite and body weight. Chemotherapy is the most common form of treatment. According to our market research, inappetence is seen in approximately 30% of dogs who receive chemotherapy, although in clinical studies we observe inappetence rates to be lower but still clinically meaningful. We believe that, if approved, AT-002 could be an important medicine in managing inappetence and weight in cancer.

As a second example, inappetence and weight loss commonly occurs in conjunction with chronic renal failure (“CRF”). We estimate that 1.6% of cats in the United States have CRF and that 30% of cats with CRF experience inappetence during the course of their disease. Dietary therapy with a diet that is designed for cats and dogs with renal insufficiency is recommended regardless of the

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severity of disease. Unfortunately many of the therapeutic diets that are prescribed may be less palatable to pets than normal diets. We believe that, if approved, AT-002 could be an important medicine in managing inappetence and weight loss that occurs in connection with CRF.

Other possible uses include inappetence associated with liver disease, cardiac disease, pancreatitis and gastrointestinal disorders.

Currently available treatments and their limitations

The first goal of therapy for inappetence is to correct the underlying cause. Often veterinarians will begin treatment of inappetence by recommending a change to a highly palatable diet such as tuna for cats and chicken or beef for dogs. Depending on the severity of the condition, the animal may be supported with fluids and electrolytes until the diagnosis of the underlying condition is made and effective treatment is initiated where possible. Prolonged or severe inappetence may require hospitalization and feeding tube placement. There are no drugs approved for the treatment of inappetence in cats and dogs. Drug therapy to address inappetence has focused primarily on human drugs affecting the central nervous system control of feeding such as benzodiazepines, cyproheptadine and mirtazapine. However, these drugs are not approved for veterinary use, have limited effectiveness and are contraindicated for cats with hepatic lipidosis. More recently, we have seen veterinarians using Cerenia (maropitant), which is indicated for the control of vomiting. We believe a significant number of veterinarians are not prescribing these therapies due to the limited safety and efficacy data. As a result, we believe there is a significant market opportunity for a therapeutic product that is safe and can effectively stimulate appetite in pets.

Our solution—AT-002

AT-002 is a potent and selective ghrelin agonist. Ghrelin is a 28-amino acid peptide hormone, also referred to as the hunger hormone, produced predominantly in the stomach. It is the endogenous ligand of the ghrelin receptor, also known as growth hormone secretagogue receptor (“GHS-R”). By activation of the ghrelin receptor, ghrelin stimulates appetite and growth hormone secretion, and also exhibits a role in regulation of gastrointestinal motility and energy balance. Ghrelin binds to specific receptors and affects signaling in the hypothalamus, interacting with other hormones to cause the feeling of hunger and stimulate food intake. In addition to its effects on appetite, ghrelin stimulates growth hormone secretion by activation of GHS-Rs in the pituitary. This effect acts to build lean body mass, which has been shown to result in increased strength in frail, elderly people.

 

AT-002 is a small molecule that mimics ghrelin and binds to the GHS-R. The appetite stimulation and GH-releasing activity of AT-002 has been demonstrated in laboratory cats and dogs where AT-002 treatment results in increased food intake and weight gain. Similarly, chronic oral dosing of AT-002 in dog GLP toxicology study stimulated appetite, weight gain and caused increased plasma growth hormone levels.

AT-002 in dogs

Safety. In the toxicology program that was conducted to support human drug development, a series of studies investigated the effects of oral once daily administration of the compound to male and female dogs. We use the results from a dog GLP 12-month toxicology study of AT-002 administered orally once daily to demonstrate target animal safety in dogs.

We have re-evaluated this study according to target animal safety study guidelines and have submitted it for CVM review. We received the target animal safety technical section complete letter from the CVM in the first quarter of 2015.

Effectiveness. Several laboratory studies in healthy dogs with various daily oral doses of AT-002 for four to ten days were completed prior to our licensing AT-002. These studies demonstrated increased food intake and weight gain. We conducted a seven-day, placebo controlled, blinded dosing study in dogs to confirm these results, and confirmed that treated dogs showed a sustained increase in appetite and body weight over the treatment period, with the placebo control treated dogs losing weight, likely due to intensive handling and blood sampling.

We evaluated the effectiveness of AT-002 compared to placebo for the treatment of inappetence in a pilot placebo-controlled, blinded, multi-center field study in client-owned patients. There were 36 inappetent dogs: 19 were treated with capromorelin and 17 with placebo. Effectiveness parameters include owner assessment of appetite and body weight gain compared to baseline and compared to the dog’s best lifetime condition. Dogs were treated once daily for seven days. Compared to the placebo control animals, the appetite score and body weight of the AT-002 treated patients were statistically significantly increased on day 6 after 7 daily treatments (p<0.05). Mean change in appetite score was an increase of 79.37% for capromorelin compared to 22.16% for placebo treatment. Capromorelin-treated dogs had an increase in body weight from Day 0 to Day 6 of 3.22% compared to a decrease of 0.52% in the placebo group. The results compared to best lifetime condition showed a positive trend towards the AT-002 treatment, but were not statistically significant.

 

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Based on these proof of concept studies we have discussed and agreed with the CVM on a study design for the pivotal field effectiveness studies. This randomized, placebo-controlled, multi-center study was initiated in December 2013 to enroll approximately 200 client-owned dogs. We anticipate achieving full enrollment in the second quarter 2015.

CMC. When we licensed the drug, the chemical process was scaled up to kilogram quantities but was not optimized. Our contract manufacturer developed an API process according to VICH standards that can be used to supply both human and veterinary development and commercialization. We have successfully completed process development of AT-002, with three cGMP batches manufactured and put on VICH stability testing. As with AT-001, we are using an animal health specialty contract manufacturer to develop the formulation according to CVM and EMA standards. We have manufactured three cGMP batches of formulated product, which are being used as clinical trial material and for VICH stability testing. We have submitted the AT-002 DMF and CMC technical section, and after responding to any questions, we anticipate a technical section complete letter in late 2015.

Development plan. We plan to complete the pivotal field effectiveness study and we anticipate submission to the CVM in mid-year 2015 to complete the effectiveness technical section and we will respond to any questions related to our effectiveness and CMC technical section submissions. We plan to have all three major technical sections of the NADA completed in time to receive NADA approval in 2016.

Based on our early interactions with the regulatory authorities in Europe we ceased pursuit of an open appetite stimulation claim which was allowed by the FDA. We believe that the first claim in dogs for Europe will be a chronic use weight gain claim that we will also pursue for the U.S. as a label extension after approval of the acute appetite stimulation claim.

AT-002 in cats

Safety. When we licensed AT-002, included in the data was a two-week safety study in cats. Because we expect the potential patient population for AT-002 to include elderly cats suffering from chronic renal failure, we tested the safety of AT-002 in a model of kidney compromised laboratory cats. The results from the two-week study in normal cats suggested that AT-002 was well tolerated. The results from our safety study in kidney-compromised cats also demonstrated no treatment related side effects. Based on these studies, we believe we have demonstrated that AT-002 has a favorable safety profile in cats and expect that sufficient safety margins will be seen in the pivotal safety study.

Effectiveness. Several laboratory studies in healthy cats using various daily AT-002 oral doses were also included in the data package when we licensed AT-002. Food intake and weight gain were increased after administration of AT-002 to cats. We confirmed these results in several laboratory studies in cats, which demonstrated a statistically significant increase in food intake after AT-002 treatment.

We conducted a dose confirmation study in client-owned cats similar to that of the pilot study for AT-002 in dogs. As expected, we confirmed that cat owners have difficulty assessing appetite in cats. Based on this experience and the study results in laboratory cats we are looking to extend the treatment duration to measure weight gain and/or weight control. Thus, we have selected a multi-week treatment term and weight gain and/or control claim and started a pilot field study in client owned cats. We anticipate results from this study in mid-2015 and, if successful, we will formulate a development plan to present to the FDA.

 

CMC. We have selected a final formulation for AT-002 for cats and expect to follow a similar process to that described above for AT-002 for dogs.

 

Development plan. We plan to complete a pilot study in 2015 to measure weight gain and/or weight control in client-owned cats in order to develop a study design for a pivotal field effectiveness study. To fulfill the safety requirements, our development plan includes a standard safety study in cats according to VICH guidelines. Concurrently, we continue to develop our CMC data package. We plan to have a pre-submission meeting with the CVM to discuss a detailed development plan at the appropriate time.

AT-003

Overview

AT-003 is a bupivacaine liposome injectable suspension that we in-licensed from Pacira. The product was approved for use in humans as a local, post-operative analgesic by the FDA in October 2011 and is marketed by Pacira for use in controlling post-operative pain following various types of surgical procedures. We intend to develop AT-003 as a therapeutic to manage post-operative pain in cats and dogs. We expect to use the same product in both species.

Medical need and market opportunity

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Veterinarians perform approximately 19 million dog surgeries and 14 million cat surgeries each year. Approximately 50% of dog surgeries and 58% of cat surgeries, respectively, are spays and neuters, while other common surgeries include cancer surgery, declaw, cruciate repairs and fracture repairs. There is no established protocol for the use of pain medications in these surgeries and pain management practices have traditionally been based on the veterinarian’s views on the level of pain associated with a specific surgical procedure and the perceived pain tolerance of the pets. Recently, as pet owners have begun requesting analgesia for their pets’ painful conditions, veterinarians have made advances in treating pain in pets. Furthermore, animal research demonstrates that pain can have a detrimental effect on healing, and pain experts in academia and specialty practices are advocating more use of local anesthesia for pain control.

Currently available treatments and their limitations

The most widely used drugs approved for treatment of post-operative pain are Coxib NSAIDs and fentanyl in dogs and Coxib NSAIDs and butorphanol in cats. In surgeries associated with the most severe post-operative pain, fentanyl is commonly used. Fentanyl is a controlled narcotic drug, and pets are often kept in the hospital while receiving fentanyl. In our experience, the majority of fentanyl is dispensed as fentanyl patches, although such use in pets has not been approved. In 2012, Nexcyon received FDA approval for a transdermal fentanyl solution, and Elanco launched the product in 2013 under the tradename Recuvyra. Use has been limited due to a number of label requirements relating to human safety and application. We believe that there are unmet needs in pets receiving these more painful surgeries, especially if effective and extended pain relief could be achieved with a non-narcotic medicine. The same group of NSAIDs approved to treat the pain and inflammation associated with osteoarthritis in dogs are used for post-operative pain. Some of these drugs can be given in the veterinary hospital as an injection, and then oral formulations are dispensed to the owner for a few days of treatment at home. For cats, only two NSAIDs are approved by the CVM for use in post-operative pain. These are Onsior, which is given orally and is approved for no more than three days of use, and Meloxicam, which is approved for one injectable dose only.

 

Among the drugs used for post-operative pain, some have been approved by the CVM, while others are used off label. The most commonly used post-operative pain medication in dogs is Rimadyl, which has been approved by the CVM for this use. As previously described in our discussion regarding AT-001 for dogs, Coxib NSAIDs have demonstrated significant side effects that result in prescribed monitoring of dog health during their use. For example, some dogs have an idiosyncratic sensitivity that results in hepatic toxicity and, in extreme cases, death. Consequently, we believe veterinarians would appreciate a drug for post-operative use that was effective, but also safe on the liver, gastrointestinal system and kidneys. The most common product for post-operative pain in cats is generic buprenorphine. As recently as 2014, Abbott Animal Health, which was acquired by Zoetis, Inc. (“Zoetis”), received the first FDA veterinary approval for Simbadol buprenorphine injection. This product can be given to cats once daily for up to 3 days to provide up to 72 hours of pain relief.

 

Our solution—AT-003

AT-003 is a 1.3% bupivacaine liposome injectable suspension. It consists of microscopic, spherical multivesicular liposomes, which is Pacira’s proprietary DepoFoam drug delivery system. Bupivacaine is released from the DepoFoam particles by mechanisms involving reorganization of the barrier lipid membranes and subsequent diffusion of the drug occurs over an extended period of time. The formulation has been shown to extend the duration of human post-operative analgesia from approximately six to eight hours, to as long as 72 hours in some instances, which can eliminate the need for follow-on post-operative administration of other pain drugs. Additionally, the slower uptake of the bupivacaine into the systemic circulation helps avoid high plasma concentration and presumably lowers the risk of systemic toxicity.

Bupivacaine is a local anesthetic that prevents the generation and conduction of nerve impulses, apparently by increasing the threshold for electrical excitation in the nerve, by slowing the propagation of the nerve impulse, and by reducing the rate of rise in the action potential. Bupivacaine has a history of use in the United States of more than 30 years and its pharmacology, pharmacodynamics and toxicology in laboratory animals and humans are well understood. Bupivacaine is widely used by veterinary surgeons.

AT-003 in dogs

Safety. Pacira conducted an extensive toxicology program to support human drug development. Both the liposome formulation alone and the bupivacaine formulated product underwent extensive in vitro and in vivo safety testing, which included numerous studies performed in laboratory dogs. As a result we have seven studies that support safety of AT-003 in dogs.

We selected a toxicity study with twice-weekly subcutaneous dosing for four weeks in dogs that was conducted as part of the human development program as our pivotal dog safety study for AT-003. The study was conducted to evaluate potential local and systemic toxicity and the reversibility, progression or delayed appearance of any observed changes in a four-week post-dose observation period.

The study was re-evaluated according to target animal safety study guidelines and submitted to the CVM for review. In January 2015, we received the target animal safety technical section complete letter from the CVM.

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Effectiveness. We have conducted a dose ranging study in a surgical pain model in laboratory dogs. Based on the results we chose a dose for further evaluation in a pilot field study of AT-003 for managing post-operative pain in dogs following surgery.

In the pilot field study, pain levels of 46 client-owned dogs were assessed repeatedly for 72 hours following knee surgery using the Glasgow Composite Measure Pain Scale. Treatment with AT-003 resulted in a statistically significant reduction in mean total pain scores over time compared to placebo (p<0.05). In addition, the percent of dogs treated with AT-003 that did not require additional pain medication was statistically greater (p<0.05) compared to placebo at each 24-hour interval for up to 72 hours after surgery.

We discussed the design of a pivotal field effectiveness study with the FDA and commenced a pivotal field effectiveness study in December 2014 under a protocol concurred by the FDA. We anticipate top line data in mid-2015.

CMC. We use the same product that was approved by the FDA for the AT-003 development program and expect to receive a CMC technical section complete letter based on the same data that was submitted to the FDA for the NDA of EXPAREL. We have started to assemble a full CMC package which we plan to submit to the CVM and expect they will perform a full review.

Development plan. We expect to complete the FDA effectiveness review, complete the FDA CMC review and receive the related technical section complete letters by mid-2016. We anticipate filing the Administrative NADA in 2016 and, assuming we achieve that goal and our submission is acceptable, we anticipate NADA approval in 2016. We believe EMA approval would follow a year later.

AT-003 in cats

Safety. To initially evaluate the safety of AT-003 in cats, we performed a pilot toxicokinetic study in laboratory cats. Five groups of 4 to 5 month old cats were administered once subcutaneously with saline, bupivacaine HCL at 1 mg/kg, or AT-003 at three different dosages (low, mid and high). We expect the high dose to cover 5 times the therapeutic dose. We did not observe any negative findings in any dose group, with the exception of limited abrasions of the injection site. We believe these abrasions can be explained by expected inflammatory reactions to the liposomal formulation used in the study.

Once a dose regimen has been established we plan to perform a guideline target animal safety study according to a study protocol that will be submitted to the CVM for concurrence. We expect the study design will be similar to the subcutaneous toxicity study in dogs.

Effectiveness. We have conducted dose ranging studies in soft tissue and orthopedic surgical pain model in laboratory cats. While we could not observe a benefit of AT-003 over conventional bupivacaine HCL in soft tissue surgery, we saw a clear signal in the orthopedic surgical pain model.

Based on the results from studies in the orthopedic surgical pain model, we designed a pilot field study to evaluate if the results can be repeated under practice conditions. If this study confirms the laboratory model result, we plan to discuss a pivotal study protocol with the FDA.

 

CMC. We use the same product that was approved by the FDA for the AT-003 development program and expect to receive a CMC technical section complete letter based on the same data that was submitted to the FDA for the NDA of EXPAREL. We have started to assemble a full CMC package which we plan to submit to the FDA and expect they will perform a full review.

 

Development plan. We held a pre-development plan meeting with the FDA where we discussed an outline of our proposed development activities including the CMC submission plans. We plan to complete a pilot field study in a surgical pain model in cats during 2015. Once we have established a treatment regimen in cats we will schedule another pre-development plan meeting with the CVM to present and discuss the programs to cover the approval requirements for safety and effectiveness. We anticipate filing our NADA in 2016 and, assuming we achieve that goal and our submission is acceptable, we could expect NADA approval in 2017 or 2018. We believe EMA approval would follow a year later.

AT-004 and AT-005

Overview

Our proprietary monoclonal antibody platform allows us to engineer pet specific antibodies that are highly specific to pet targets and compatible with their immune system.

AT-004 is a caninized monoclonal antibody intended for the treatment of B-cell lymphoma in dogs. AT-004 was approved by the USDA Center for Veterinary Biologics (“CVB”), in January 2015 under a full license as an aid for the treatment of B-cell lymphoma in dogs.

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AT-005 is a caninized monoclonal antibody intended for the treatment of T-cell lymphoma in dogs. We received conditional licensure for AT-005 in January 2014 and we anticipate full product license in 2015.

Based on industry data, CHOP-based chemotherapy alone has plateaued in veterinary medicine with median remission in lymphoma just under 9 months. In human medicine, Rituxan (rituximab) has become the standard of care in non-Hodgkin’s lymphoma since its introduction approximately two decades ago. According to research, overall survival in humans increased by 55% due to the addition of Rituxan to standard CHOP chemotherapy. We need additional data to understand the outcome of adding monoclonal antibodies to chemotherapy in canine lymphoma.

The clinical studies that were required by the USDA to support the licenses for AT-004 and AT-005 were conducted as single arm studies that were compared to historical controls for untreated dogs with lymphoma. Hence, notwithstanding the fact that we have received licenses for these products, we continue to conduct post-approval studies to evaluate the products in the context of market conditions, which include concomitant use of chemotherapy.

In May 2014, we commenced a study to evaluate AT-005 in combination with two different chemotherapy regimens used to treat dogs diagnosed with intermediate- to high-grade peripheral T-cell lymphoma. In addition, in the fourth quarter of 2014, we began to make the product commercially available to study sites as well as other selected sites. AT-005 was being used in approximately two dozen hospitals at the end 2014, and we anticipate that approximately 50 hospitals by the end of the second quarter of 2015 and approximately 75 hospitals by the end of the third quarter of 2015 will be using the product.

In February 2015, we and our partner Elanco terminated by mutual consent an exclusive commercial license agreement for AT-004 in the U.S and Canada reverting control of all commercial, development and manufacturing activities of AT-004 back to us. We are evaluating whether to conduct additional studies of AT-004 in combination with different chemotherapy regimens used to treat dogs diagnosed with intermediate- to high-grade peripheral B-cell lymphoma. In addition, over the course of 2015, we plan to begin to make the product commercially available to our current T-cell study sites as well as other selected sites.

Medical need and market opportunity

Cancer is a major cause of morbidity and mortality in dogs, with approximately 50% of dogs diagnosed with cancer at some point in their lives. According to the Morris Animal Foundation cancer is the number one cause of death in dogs over the age of two and one in four dogs will die from cancer. Lymphoma is one of the most common cancers in dogs and is the most common cancer treated with chemotherapy. Certain breeds have a higher lymphoma prevalence, including popular breeds such as golden retrievers, German shepherds, Poodles, Scottish terriers and Boxers. The incidence rate increases with age. According to The Veterinary Cancer Center and North Carolina State University data (“VCC”), in the United States there are approximately 300,000 dogs diagnosed annually with lymphoma, of which approximately 76%, or 228,000, is B-cell lymphoma, and 24%, or 72,000, is T-cell lymphoma. Other market research studies indicated incidence to be higher or lower than the VCC incidence number and consistent epidemiological data does not currently exist.

The current lymphoma market is difficult to estimate as the majority of the treatments consist of generic human-labeled chemotherapeutic agents. We believe based on our own market research study that chemotherapy costs to pet owners range from $2,500 to $10,000 per patient depending on the stage of cancer, response rates and geographic location. We estimate the average treatment costs to be approximately $5,000 per patient. Treatment costs include the expense of the veterinary oncology specialists and their highly skilled staff. A course of chemotherapy typically includes numerous examinations as well as the pharmaceutical and diagnostic costs associated with the treatment. Treatments can extend over a number of weeks during which careful monitoring of the patient is required. Weekly infusions are common and regularly require several hours in the hospital. There are over 300 board-certified veterinary oncologists practicing in 200 veterinary cancer centers and an estimated 800 additional hospitals specializing in cancer treatments. Typically this type of veterinary care is unavailable outside the large urban areas. In total in the United States there are an estimated 5,000 veterinary hospitals of the total 25,000 veterinary hospitals treating some cancer.

 

Currently available treatments and their limitations

Advances in therapy have extended not only length of life but also the quality of life for dogs with lymphoma. Chemotherapy is the most commonly recommended treatment, and combinations of drugs offer the greatest chance of remission. However, even when treated aggressively, cancer is likely to return. Other than our products, there are currently are no antibody-based therapeutics approved for pets for the treatment of cancer.

With multi-agent chemotherapy the median survival time for a dog with lymphoma is approximately one year, with 25-percent of dogs living two years or longer. Phenotype is currently one of the most important prognostic factors. In general, with current therapies B-cell lymphoma has a higher remission rate, longer remission duration, and longer survival times as compared to T-cell lymphoma. The most common adverse effects of cancer chemotherapy in dogs are gastrointestinal, such as loss of appetite, vomiting, diarrhea, or a decreased white blood cell count, which may increase the risk of secondary infections.

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Treatment options for either lymphoma include treatment with:

 

 

 

 

 

 

 

 

 

 

Some of the more aggressive lymphomas are unresponsive to any available treatment. Current options to treat B-cell and T-cell lymphoma in dogs are limited to mostly chemotherapy. The most common multi-agent chemotherapy commonly known as CHOP is the University of Wisconsin-Madison 19 week combination chemotherapy protocol.

Typically, improvement is only achieved with the chemotherapeutic treatments during the treatment period and, with every cycle, their effectiveness decreases over time, while their toxicity increases. Although many dogs achieve initial remission with standard chemotherapy, most will eventually relapse. Cancer cells become increasingly resistant to chemotherapeutic agents during the course of treatment. Therefore, an approach specifically dedicated to dogs, with minimal side effects, would address a significant unmet medical need.

Our solution—AT-004

AT-004 is a caninized monoclonal antibody, engineered using our monoclonal antibody platform, intended for the treatment of B-cell lymphoma in dogs. AT-004 provides a targeted immunotherapy that specifically recognizes with high affinity the target, canine CD20, at the surface of cells involved in the proliferation of lymphoma in dogs. AT-004, upon binding to the target, depletes B-lymphoma cells.

AT-004 was approved by the CVB, in January 2015 under a full license as an aid for the treatment of B-cell lymphoma in dogs. The license was issued following acceptance of data supporting that AT-004 has demonstrated efficacy, is safe under normal conditions of use in the field and has acceptable potency and purity. We believe this full licensure represents the only full license for a species-specific monoclonal antibody within the animal health industry and the first species-specific biologic product approved for use as a therapeutic for canine B-cell lymphoma.

AT-004 in dogs

Safety. AT-004 was administered intravenously to several client-owned dogs of various breeds, ages and gender, presenting with B-cell lymphoma. The dosing regimen consisted of 2 doses of 5.0 mg/kg each on the first week followed by 1 dose of 5.0 ± 1.0 mg/kg per week for 7 weeks. The results from our safety study demonstrated no treatment related side effects. In rare instances, administration of AT-004 caused lethargy and inflammatory or hypersensitivity for which treatment involving antihistamines or anti-inflammatories was deemed appropriate. Based on these studies, we believe we have demonstrated that AT-004 is generally safe and well tolerated both locally and systemically in dogs with B-cell lymphoma with what appears to be no known contraindications for its use.

Effectiveness. Pharmacokinetics studies performed in dogs presenting with B-cell lymphoma with the recommended dose of AT-004 showed that its elimination half-life ranges between 3 and 4 days after a single dose. In addition, high plasma levels of AT-004 were achieved in all animals after the first and second dose and persisted at significant levels during the treatment intervals with elimination half-life of longer than one week after multiple doses. Studies with AT-004 in client-owned dogs of various breeds, ages and gender presenting with B-cell lymphoma were performed and compared to historical non-treated groups. Treatment with 2 doses of 5.0 mg/kg each on the first week followed by 1 dose of 5.0 ± 1.0 mg/kg per week for 7 weeks resulted in significant increased survival compared to the non-treated historical group.

One study of 27 dogs (24 randomized), initiated by veterinarian oncologists demonstrated the effectiveness in client-owned patients of AT-004 when used after abbreviated CHOP (one 4 week cycle) chemotherapy protocols compared to control groups treated with CHOP (one 4 week cycle) chemotherapy alone. Effectiveness parameters included owner assessment of clinical response, overall survival, and quality of life. Treatment with AT-004 post-abbreviated chemotherapy increased the probability of achieving sustained improvement and increased overall survival when compared to control groups. The median progression free and overall survival times in the monoclonal antibody treated group were 167 and 325 days respectively, compared to 93.5 and 177 days for the placebo group.

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CMC. We currently manufacture AT-004 for commercial availability at our USDA-licensed manufacturing facility in San Diego, California, which includes the steps of production, fill and finish, and testing for product release. In 2014, we  increased our capacity in the San Diego facility and continue to explore options to establish increased manufacturing capacity to satisfy long-term demands of AT-004, as well as AT-005.  

In January 2015, we identified a quality issue in the manufacturing of one serial lot of AT-004 that had been manufactured in 2013. We completed an investigation into the serial lot and identified an environmental contaminant in certain of the vials in the lot, and in agreement with the USDA, that serial lot will be destroyed. In connection with the investigation, the other manufacturing lots of AT-004 were inspected and no other contaminated vials were found.

Commercial Development Post Approval Studies. We anticipate initiating studies under field conditions in the third quarter of 2015 to generate additional data that will help to position our B-cell lymphoma monoclonal antibody product in cancer treatment protocols. We expect to report on the results from these in the next 18 to 24 months.

Our solution—AT-005

AT-005 is a caninized monoclonal antibody, engineered using our monoclonal antibody platform, intended for the treatment of T-cell lymphoma in dogs. AT-005 provides a targeted immunotherapy that specifically recognizes with high affinity the target, canine CD52, at the surface of cells involved in the proliferation of lymphoma in dogs. AT-005, upon binding to the target, depletes T-lymphoma cells.

We submitted AT-005 data to the CVB supporting that the product has demonstrated a reasonable expectation of efficacy, is safe under normal conditions of use in the field and has acceptable potency and purity. We received a conditional license from the USDA for AT-005 as an aid for the treatment of T-cell lymphoma in dogs in January 2014 and we commenced limited marketing of the product in late 2014 as we completed the additional clinical studies required to obtain a full license.

AT-005 in dogs

Safety. AT-005 was administered intravenously to several client-owned dogs of various breeds, ages and gender, presenting with T-cell lymphoma. The dosing regimen consisted of 2.5 mg/kg administered with two doses on week 1 to 4 at 2 to 3 day intervals followed by 4 doses every other week. The results from our safety study demonstrated no treatment related side effects. Based on these studies, we believe we have demonstrated that AT-005 is generally safe and well tolerated both locally and systemically in dogs with T-cell lymphoma with what appears to be no known contraindications for the use of this product in dogs with T-cell lymphoma to date.

 

Effectiveness. Pharmacokinetics studies performed in dogs presenting with T-cell lymphoma with the recommended dose of AT-005 showed that AT-005 levels in plasma were reflective of dosing and were detectable after the first administration, and peaked after the second dose. Levels remained detectable throughout the study. The volume of distribution approximated the plasma volume, indicating that AT-005 mostly remained in plasma. The half-life ranged between 3 and 7 days after the first injection. Studies with AT-005 in client-owned dogs of various breeds, ages and gender, presenting with T-cell lymphoma were performed and compared to historical non-treated groups. The AT-005 treated group experienced a significant increase survival compared to the non-treated historical group.

CMC. We currently manufacture AT-005 at our USDA-licensed manufacturing facility in San Diego, California which includes the steps of production, fill and finish, and testing for product release. We have increased our capacity in the San Diego facility and continue to explore options to establish increased manufacturing capacity to satisfy long-term demands of AT-005, as well as AT-004.

Development plan. We completed data collection that we believe further supports the safety and efficacy of the product and submitted to the USDA as we move toward obtaining full licensure of the product. We anticipate to receive full licensure in 2015. If approved, we expect AT-005 will be the first species-specific biologic product used as a therapeutic for canine T-cell lymphoma.

Commercial Development Post Approval Studies. We initiated studies under field conditions in the second quarter of 2014 to generate additional data that will help to position our lymphoma product in cancer treatment protocols. We anticipate to report on the results from these multicenter, blinded, placebo-controlled, randomized studies, namely T-CHOMP and T-LAB, in the next 12 to 18 months.

 

AT-014 in dogs

 

In March 2014, we licensed AT-014, a novel her2/neu-directed cancer immunotherapy for the treatment of canine osteosarcoma and other cancers, from Advaxis. In July 2014, we submitted for a product license with the USDA and we are in ongoing communication with the USDA to agree on the data requirements toward U.S. veterinary biologics licensure. We received data from a clinical study in 18 client-owned dogs with osteosarcoma treated with AT-014. The median survival time (“MST”) of a historic control group was 316

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days. The MST of the treatment group had not been reached with 80% of dogs (15 dogs) surpassing the MST of the control group (p<0.001) and 60% still alive. We have started the process to transfer manufacturing from Advaxis to a USDA-licensed contract manufacturer of our choice. In March 2015, we received notice that the USDA accepted the data from a clinical study in client owned osteosarcoma patients to provide reasonable expectation of efficacy to support conditional licensure for AT-014. We anticipate receipt of a conditional USDA license in the second half of 2016.

We believe that approximately 10,000 dogs in the United States are affected by osteosarcoma annually. This incidence figure is dated some decades ago and we believe that the actual incidence may be higher as not all cases are confirmed or recorded. Osteosarcoma is seen more in large breed dogs such as: Saint Bernard, Great Dane, Irish setter, Doberman pinscher, Rottweiler, German shepherd and Golden retriever. The current standard of care is amputation and post-operative chemotherapy. We believe that the MST for dogs affected by osteosarcoma is approximately nine to twelve months, with only approximately 25% of dogs surviving two years.

Other Products in Development

We have several other products in our development pipeline at various stages of development. These include:

 

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

Product Selection and Development

We believe the pet therapeutics market is significantly underserved, and we have identified for further pursuit more than 20 therapeutic areas that overlap with areas of human biopharmaceutical development. We are actively engaged in the pursuit of compounds and molecules in various stages of human and animal development through a systematic and opportunistic approach. In selecting potential compounds for development, our in-house team of pet health experts and outside consultants relies on database searches, medical literature, patent review and their extensive knowledge of companies involved in human biopharmaceutical research. In some instances, we may enter into an agreement that gives us the exclusive opportunity to further investigate the compound prior to its in-licensing. We review all products with a goal of developing them for cats, dogs or both and achieving regulatory approval in the United States and Europe.

 

We seek to identify validated compounds that have demonstrated safety and effectiveness in at least two species, such as mice, rats, dogs or humans, and are in or have completed Phase I or Phase II clinical trials in humans. We identify these compounds by focusing on human biopharmaceutical products in development where we can leverage the existing investment in those products. As a prerequisite for human trials, the FDA requires pre-clinical safety studies in two mammalian species. These safety studies are often conducted in dogs, which in many cases allows us to rely on those studies for demonstrating safety for our intended use. For example, prior to licensing AT-001 and AT-002 from RaQualia, we obtained a significant amount of data from dog safety studies of AT-001 and AT-002. This information allowed us to evaluate the risk of development prior to licensing the compound and to initiate a proof of concept study in dogs prior to investing in key pivotal studies.

 

We also seek to identify compounds with well-developed API process chemistry, allowing us to further leverage the existing investment in the human biopharmaceutical product. As products proceed through human development, API manufacturing processes become more defined and we can more easily evaluate the route to the scale-up required for commercialization. A significant part of the product review process includes a thorough review of the manufacturing, which is conducted by our experienced manufacturing and development personnel.

We receive in-bound requests to license compounds and molecules from potential collaborators. We believe our experience in pet therapeutics and human drug development makes us an attractive partner or licensee for companies that are looking for capital efficient ways to leverage their existing product portfolios.

When a compound or molecule is identified, we attempt to enter into a license agreement where we obtain exclusive, worldwide rights to its development and commercialization in animal health. In exchange, we typically pay an upfront amount and a combination of milestones and royalties going forward.

Option Program

As part of our product selection and development effort, we enter into option agreements with human biopharmaceutical companies to access certain product candidates. These agreements are for a predetermined period of time and enable us to perform additional due diligence and further evaluate the product candidate prior to entering into a license. We negotiate the terms of the license at the time of the option agreement and those terms become effective only if we exercise the option. Using this strategy, we have the ability to perform due diligence on multiple molecules in the same therapeutic class. We have entered three such option agreements for molecules in human pharmaceutical development; two of these molecules were in the same therapeutic class, and after performing an analysis of both compounds, we decided to allow the option on one molecule to expire unexercised (“AT-alpha”). After successfully

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finalizing our diligence work during the option period on the second molecule (“AT-gamma”), we entered into an exclusive license agreement with Atopix for the development and commercialization of a novel oral CRTH2 antagonist for animal health indications, including for the treatment of atopic dermatitis (“AT-018” which was formerly known as AT-gamma). We have one additional option with a third party for a molecule that we are considering licensing for further development in epilepsy in dogs (“AT-beta”).

De Novo Product Generation

We operate two development sites, one in San Diego, California and the other in Leuven, Belgium, where we are engaged in the identification of new product candidates. At our facility in San Diego, we are developing patent protected, species-specific, monoclonal antibodies against biological targets of known activity using our proprietary monoclonal antibody platform. At our Leuven facility, we are engaged in the development of antiviral and other small molecules for use as pet therapeutics. We have an agreement with KU Leuven Research & Development, pursuant to which it screens various human compound libraries. From there, we select a small number of promising lead candidates to optimize and test for safety and pharmacokinetics for application in pet therapeutics. We believe these development capabilities may provide a source for additional product candidates.

Diagnostic Products

In the course of evaluating various products and product technologies, we have identified two diagnostic technologies that we believe can be developed for application in pet therapeutics—a Koi herpesvirus diagnostic (“KHV”) diagnostic, and a lymphoma diagnostic.

 

 

 

 

Production Animal Products

While production animals themselves are not a core part of our strategy, we have determined that certain of our technologies have applicability in food animals. We are currently in the pre-clinical stage with two products to treat two diseases occurring in livestock animals: classical swine fever virus (“CSFV”), and foot and mouth disease virus (“FMDV”). Historically, outbreaks of each of these diseases have resulted in significant negative economic consequences as both infected and healthy animals in an affected area must be destroyed. We are attempting to develop antiviral medications to treat these diseases. In addition, we may license or develop technologies and products that may have use in production animals, including opportunities in endemic diseases which are of commercial interest.

We intend to continue to seek non-dilutive sources of financing or third-party capital to develop these products to a point where we can divest them to a third party, joint venture with a production animal-focused company, or spinout the production animal assets while retaining rights to applications of the technologies or products in pets.

Research and Development

We have incurred and will continue to incur research and development expense as we develop our business. Our research and development expenses were $20.0 million, $10.9 million and $7.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Sales and Marketing

We intend to commercialize our products globally through a direct sales organization or strategic partnerships in a manner designed to optimize our commercial efforts. Additionally, we intend to seek opportunities to collaborate with companies where we can provide commercialization for their approved, or close-to-approved, pet therapeutic products.

To prepare for the commercial introduction of our pipeline products, we have begun pre-launch marketing activities. Our marketing team is working closely with our development team on the key differentiating features and benefits of our compounds. We are focusing on labeling, pet-friendly formulations and user-friendly packaging to meet the needs of veterinarians and pet owners. We are establishing trademarks for the products and will conduct primary market research with key opinion leaders, veterinarians and pet owners to establish the optimal product positioning and pricing. As clinical data becomes available, we are preparing peer-reviewed

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journal articles and presentations that can be delivered at veterinary conferences and that can be used as key elements of our promotional materials at commercial introduction.

As part of our commercial strategy, we intend to employ a direct sales organization to market our products in the United States. Our direct sales organization will sell products directly to veterinarians, who in turn typically sell pet therapeutics products to pet owners at a mark-up. According to industry sources, approximately one-third of companion animal practice revenue comes from prescription drug sales, vaccinations and non-prescription medicines. In light of the veterinarian’s goal of improving the health of pets and the ability to generate revenue from the sale of therapeutic products, we believe veterinarians are motivated to prescribe innovative therapeutics that are safe, effective and supported by reliable clinical data and regulatory approval.

Our AT-004 monoclonal antibody product for B-cell lymphoma and AT-005 monoclonal antibody product for T-cell lymphoma in dogs have received a full license and conditional license, respectively, from the USDA. AT-004 and AT-005 are our first marketed products in the United States. We have built an approximately twelve person specialty commercial team consisting of a medical director, medical science liaisons and marketing, pharmacovigilance, and other operations personnel. We plan to work collaboratively with the veterinary oncologists to determine ideal diagnostic and treatment protocols for lymphoma. As noted previously, we are conducting two multicenter, blinded, placebo-controlled, randomized studies (T-CHOMP and T-LAB) to generate additional data that will help to position our lymphoma monoclonal antibody products in cancer treatment protocols.

The T-cell lymphoma monoclonal antibody limited commercial introduction has focused on the T-cell Experience Program (T-CEP) with several dozen oncology practices providing data in return for a price discount. As noted previously, we expect AT-005 to be used through this T-CEP program in approximately 50 hospitals by the end of the second quarter 2015 and approximately 75 hospitals by the end of the third quarter 2015. Through February 2015, 34 T-CEP practices have enrolled T-cell lymphoma patients and data has been recorded on 73 T-cell lymphoma dogs. The monoclonal antibody usage is currently tracking at approximately a 55%/45% split of first line therapy versus using the monoclonal antibody in cases of relapse from previous protocols. AT-004 is being used in a variety of protocols ranging from full CHOP chemotherapy to abbreviated chemotherapy to monotherapy. The majority of dogs (59%) are currently receiving the product in combination with full CHOP chemotherapy based on our data. We intend to initiate a similar B-cell Experience Program in 2015.

 

A specialty commercial team allows us to begin to build the necessary infrastructure and systems to support a larger specialty and primary care sales organization. Currently we are selling the monoclonal antibody lymphoma products directly to veterinary oncologists, but with additional product approvals, we will need to expand our reach and frequency to include primary care veterinarians. We expect to add additional sales, marketing and medical personnel in the course of 2015 and 2016 as we advance toward product approvals for specialists as well as primary care veterinarians.

 

In addition to a direct sales organization in the United States, we believe that we can use distributors to expand our commercial reach in an efficient manner. Animal health companies commonly use wholesale veterinary distributors to inventory, sell, invoice and ship products to independent veterinarians. We estimate that the top three national distributors are responsible for approximately 70% of U.S. pet sales from veterinarians. We intend to strategically balance our direct sales organization with national and regional distributors in a manner that optimizes our commercial efforts and allows us to provide coverage to a more expansive group of veterinary practices while incrementally growing our direct sales organization.

Manufacturing

We have no internal manufacturing capabilities for the pharmaceutical drug products regulated by the CVM. To ensure dependable and high quality supply of API for our clinical studies, we have chosen to rely on cGMP compliant contract manufacturers rather than devote capital and manpower toward developing or acquiring internal manufacturing facilities. We believe we have or will have sufficient supply of formulated drugs to conduct each of our currently contemplated studies. We will need to identify contract manufacturers to provide commercial supplies of the formulated drugs for any of our pharmaceutical product candidates, other than AT-003, that obtain marketing approval. We intend to secure contract manufacturers with established track records of quality product supply and significant experience with regulatory requirements of both CVM and EMA. For AT-001 and AT-002, we have identified commercial manufacturers and are in the process of negotiating agreements. For AT-003, we have entered into a commercial supply agreement with Pacira.

 

We manufacture our monoclonal antibody products at our USDA-licensed facility in San Diego, California. We perform all steps for production including cell line development, assay development, production in batch mode, fill and finish, release of products, and packaging. During 2015, we will manufacture AT-004 and AT-005. We have expanded our production capacity which we expect will provide modest but sufficient product quantities to meet initial commercial supply requirements of the products. We are exploring options to establish larger biological manufacturing capacities to satisfy long-term demands.

 

Exclusive Supply Agreement with Pacira

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In December 2012, we entered into an exclusive license agreement and related exclusive supply agreement with Pacira. Under the supply agreement, Pacira is our exclusive supplier of AT-003 and will supply us with finished drug product in vials. We are responsible for the labeling, packaging and shipping of the product. We must submit rolling forecasts to Pacira, with a portion of each forecast constituting a binding commitment. The term of the supply agreement extends for as long as the license agreement with Pacira continues in force. The license agreement has a term of fifteen years, until December 5, 2027, after which we have the option to renew the term for an additional five years. Pacira may terminate the 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. In this case, 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 the supply agreement.

 

API Development Agreement with RaQualia

 

In July 2012, we entered into an API development agreement with RaQualia pursuant to which we agreed to develop a manufacturing process for AT-001 that is cGMP compliant. During 2014, we fulfilled this obligation through a contract manufacturer, Cambridge Major Laboratories, Inc. (“CML”), whom we engaged in August 2011 to develop the manufacturing process for AT-001. CML developed the API process according to ICH standards that can be used to supply both human and veterinary development and commercialization. We have supplied to RaQualia a defined amount of AT-001 and non-exclusively license to RaQualia certain technical information relating to the manufacture of AT-001 for research, development and regulatory purposes and for the manufacture and commercialization of pharmaceuticals incorporating AT-001 for human use only, subject to certain restrictions. We must also negotiate in good faith a supply agreement to govern any further supply of AT-001 to RaQualia. RaQualia paid us $0.8 million upon the execution of the agreement in 2012 and an additional $0.8 million upon the delivery of a specified amount of AT-001 in the fourth quarter of 2014. This agreement will remain in effect until we have received approval from the FDA of the CMC technical section of our NADA for AT-001. Either we or RaQualia can terminate the agreement if the other party breaches a material provision of the agreement or becomes insolvent, if our exclusive license agreement with RaQualia for AT-001 terminates or expires, or if any FDA action prevents us from developing and supplying AT-001 as specified under the agreement and we and RaQualia cannot agree on a response to such FDA action.

Competition

The development and commercialization of new animal health medicines is highly competitive, and we expect considerable competition from major pharmaceutical, biotechnology and specialty animal health medicines companies. As a result, there are, and likely will continue to be, extensive research and substantial financial resources invested in the discovery and development of new animal health medicines. Our potential competitors include large animal health companies, such as Zoetis; 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; Virbac Group; Ceva Animal Health; Vetoquinol and Dechra Pharmaceuticals PLC. We are also aware of several smaller early stage animal health companies, such as Kindred Bio, NexVet and VetDC that are developing products for use in the pet therapeutics market.

If approved, we expect AT-001 (grapiprant) will face competition from Rimadyl, marketed by Zoetis, and generic Carprofen, Deramaxx, marketed by Elanco, Previcox, marketed by Merial, and Metacam, marketed by Boehringer Ingelheim, and generic Meloxicam. NexVet is developing a monoclonal antibody for osteoarthritis pain. At the product level, we are currently not aware of any direct competitor for AT-002 (capromorelin). However, we are aware that some veterinarians utilize mirtazapine, a human generic antidepressant with known side effects and limited effectiveness, to treat inappetence. We expect AT-003 (bupivacaine liposome injectable suspension) will compete primarily with the Coxibs and injectable buprenorphine and anesthetics, such as bupivacaine, which is not approved for non-human use but is widely used by veterinarians. Recuvyra fentanyl transdermal solution received approval in the United States and Europe for control of postoperative pain from surgical procedures in dogs. 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, though we are unaware of any companies that are actively promoting this use. We are aware of a number of biotechnology companies including VetDC, Karyopharm and Nexvet that are developing drugs for the treatment of lymphoma in dogs, including some that have received MUMS designation. Among the larger animal health companies, Merial is developing a lymphoma vaccine based on technology similar to their melanoma vaccine. We know of no direct competitor for AT-014 in osteosarcoma. We know of no direct competitor for AT-006 or AT-007, but we may face competition from generic human antivirals with known side effects and limited effectiveness.

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 resources. In addition, many of our competitors have more experience than we have in the development, manufacture, regulation and worldwide commercialization of animal health medicines. We are also competing with academic institutions, governmental agencies and private organizations that are conducting research in the field of animal health medicines.

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Our competition will be determined in part by the potential indications for which our products are developed and ultimately approved by regulatory authorities. Additionally, the timing of market introduction of some of our potential products or of competitors’ products may be an important competitive factor. Accordingly, the speed with which we can develop our compounds, complete target animal studies and approval processes, and supply commercial quantities to market are expected to be important competitive factors. We expect that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent position.

 

Intellectual Property and License Agreements

We seek to protect our products and technologies through a combination of patents, regulatory exclusivity, and proprietary know-how. Our goal is to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our current compounds and any future compounds for development, proprietary information and proprietary technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, even patent protection may not always afford us with complete protection against competitors who seek to circumvent our patents.

We depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors, none of which is patentable. To help protect our proprietary know-how, which is not patentable, and inventions for which patents may be difficult to obtain or enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we generally require all of our employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.

Exclusive License Agreements with RaQualia

In December 2010, we entered into two agreements with RaQualia pursuant to which we exclusively licensed intellectual property rights relating to AT-001 and AT-002 in the animal health field. Pursuant to these agreements we obtained the rights to certain patents in the United States and other jurisdictions. The patents relating to AT-001 include composition of matter claims as well as claims to methods of use of AT-001. The patent rights relating to the use of AT-001 further include methods of preparing the compounds of interest and salts, polymorphs and intermediates thereof, as well as certain combination therapies. Additionally, we licensed from RaQualia additional patent rights relating to AT-002 that include composition of matter claims as well as claims to methods of use of AT-002 Under these agreements, we were granted exclusive, worldwide licenses to develop, manufacture and commercialize AT-001 and AT-002 in the field of animal health, except that we cannot develop, manufacture or commercialize injectable AT-001 products in Japan, South Korea, China or Taiwan. We have the right to grant sublicenses to third parties under these agreements. Under our agreement with RaQualia, we are responsible for using commercially reasonable efforts to develop and commercialize AT-001 and AT-002. 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 5 years of patent term extension upon FDA approval of a commercial use of the corresponding product. The remainder of the patents licensed under these agreements are expected to terminate between 2016 and 2031.

We paid RaQualia upfront license fees under each of the AT-001 and AT-002 agreements of $3.0 million and $4.4 million, respectively. We are also responsible for contingent milestone payments upon achievement of development and regulatory milestones and royalties on net sales of licensed products, subject to certain potential offsets and deductions, under each of the AT-001 and AT-002 agreements. The potential milestone payments associated with AT-001 total $10.0 million, and the royalty percentage is in the mid-single digits. The potential milestone payments associated with AT-002 total $8.5 million, and the royalty percentage is in the mid-single digits. We must also pay to RaQualia a portion of royalties we receive from any sublicensees, subject to a minimum royalty on net sales by such sublicensees. Our royalty obligations apply on a country-by-country and licensed product-by-licensed product basis, and end upon the expiration or abandonment of all patents with valid claims covering a licensed product in a given country.

 

Each of the AT-001 and AT-002 agreements continues until terminated. RaQualia may terminate the AT-001 agreement or the AT-002 agreement if we fail to pay any undisputed fee under the relevant agreement and do not cure such failure within 60 days after RaQualia notifies us of such failure. We may terminate the AT-001 agreement or the AT-002 agreement, or any license granted under either agreement, on a patent-by-patent and country-by-country basis at will, upon 30 days’ prior written notice to RaQualia. Once all of the patents licensed under the AT-001 agreement or the AT-002 agreement have expired or been abandoned, the licenses granted under the relevant agreement become fully-paid and irrevocable.

Exclusive License Agreement with Pacira

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In December 2012, we entered into an exclusive license agreement and related exclusive supply agreement with Pacira Pharmaceuticals, Inc., or Pacira. Under the license agreement, we were granted an exclusive, worldwide license to develop and commercialize, but not to manufacture, AT-003 in the veterinary field. Pursuant to this agreement we obtained the rights to certain patent rights relating to AT-003 including composition of matter claims and methods of use thereof. The patents relating to AT-003 are expected to expire between 2015 and 2031.

We have the right to grant sublicenses to third parties outside the United States upon Pacira’s approval. Any sublicenses we wish to grant to third parties within the United States must be discussed with Pacira and approved by Pacira in its sole discretion and good faith reasonable business judgment. We are responsible for using commercially reasonable efforts to develop and commercialize AT-003, and for launching AT-003 within a specified time period following regulatory approval in certain countries.

We paid Pacira an upfront fee and are responsible for contingent milestone payments upon the achievement of certain development and commercial milestones and for royalties on net sales of AT-003 by us and our affiliates. The total upfront license fees and potential milestone payments associated with AT-003 are $43.5 million, with a tiered royalty percentage in the low- to mid-20s. We must pay Pacira a royalty on net sales of AT-003 by us and our affiliates, subject to certain reductions. We must also pay to Pacira a percentage of all payments we receive from any sublicensee, subject to certain offsets, and under certain circumstances, share a portion of Pacira’s royalty payment obligations to its third-party licensors. We are responsible for meeting minimum annual revenue requirements for AT-003 beginning the fifth year after the first commercial sale of AT-003. If we fail to meet these requirements, either we or Pacira may terminate the license agreement.

The term of the license agreement extends for 15 years, until December 5, 2027, after which we have the option to renew the term for an additional five years. Pacira may terminate the agreement in its entirety if we fail to pay any amount due within a specified time period, or on a country-by-country basis if we fail to achieve regulatory approval of AT-003 in the United States or the European Union or fail to dose our first subject in any other countries by a certain date. Pacira may also terminate the agreement on a country-by-country basis if we fail to achieve first commercial sale within a specified time period following receipt of regulatory approval in such country. We may terminate the agreement on a country-by-country basis either upon the entry of a generic competitor, or at will outside the United States or the European Union. Either we or Pacira may terminate the agreement if the other party materially breaches or files for bankruptcy and fails to cure such breach within a specified time period, or if we do not pay the minimum annual revenue requirements referenced above. The agreement automatically terminates if Pacira terminates the related supply agreement and if certain circumstances involving a U.S. sublicensee occur and we do not meet certain financial obligations to Pacira.

 

Vet Therapeutics

As part of our Vet Therapeutics acquisition, we acquired a patent family related to the speciesization of antibodies that cover 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 patent filings that cover specific canine monoclonal antibodies directed to various targets, including an issued U.S. patent directed to the canine CD 52 development antibody, which will expire in 2029.

Aratana NV

As part of our January 2014 acquisition of Okapi Sciences, we acquired certain patent rights that cover formulations of AT-006 and 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 certain patent rights that covers the composition and methods of use of AT-007, AT-008 and AT-011. These patent rights, if the patent applications included therein issue, will expire in 2031.

Regulatory

The development, approval and sale of animal health products are governed by the laws and regulations of each country in which we intend to sell our products. To comply with these regulatory requirements, we have established processes and resources to provide oversight of the development and launch of our products and their maintenance in the market.

United States

Three federal regulatory agencies regulate the health aspects of animal health products in the United States: the FDA; the USDA; and the Environmental Protection Agency (“EPA”).

The CVM at the FDA regulates animal pharmaceuticals under the Food, Drug and Cosmetics Act. The CVB at the USDA regulates veterinary vaccines and some biologics pursuant to the Virus, Serum, Toxin Act. The EPA regulates veterinary pesticides under the Federal Insecticide, Fungicide and Rodenticide Act. Many topical products used for treatment of flea and tick infestations are regulated by the EPA.

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Our current product candidates are animal pharmaceuticals regulated by the CVM and monoclonal antibodies regulated by the USDA. Manufacturers of animal health pharmaceuticals, including us, must show their products to be safe, effective and produced by a consistent method of manufacture. The CVM’s basis for approving a drug application is documented in a Freedom of Information Summary. We will be required to conduct post-approval monitoring of FDA- and EMA-approved pharmaceutical products and to submit reports of product quality defects, adverse events or unexpected results to the CVM’s Surveillance and Compliance group.

European Union

The EMA regulates the scientific evaluation of applications for marketing authorizations via the centralized procedure for medicines developed by pharmaceutical companies for use in the EU. Its veterinary review section is distinct from the review section for human drugs. The Committee for Medicinal Products for Veterinary Use (“CVMP”), is responsible for scientific review of the submissions for animal pharmaceuticals and vaccines. However, the European Commission is responsible for the grant of EU marketing authorizations. Once a centralized marketing authorization is granted by the European Commission, it is valid throughout the European Economic Area (“EEA”) (meaning the 28 member states of the EU plus, by extension pursuant to the EEA Agreement, Norway, Iceland and Liechtenstein). The centralized procedure is mandatory for approval of certain veterinary medicines, including those derived from biotechnology processes and veterinary medicines for use as growth or yield enhancers. Other veterinary medicines may be approved centrally if the product contains a new active substance or if the applicant can demonstrate to the CVMP that the product is sufficiently innovative. We believe our current product candidates contain new active substances or are sufficiently innovative and thus will be subject to central approval.

For all other products, the competent authorities of the EU Member States are responsible for granting marketing authorizations for products that are sold in their markets. Applicants who intend to market such products in more than one Member State may seek marketing authorizations under the mutual recognition procedure or the decentralized procedure, which are procedures designed to streamline and harmonize approval in multiple EU Member States. If the product has already been authorized in one Member State, the mutual recognition procedure facilitates mutual recognition of the existing authorization, so called reference Member State approval, in another Member State. The decentralized procedure, on the other hand, may be used in cases where the product has not received a marketing authorization in any Member State. Under this procedure, the applicant submits an identical dossier to each relevant Member State, and one, known as the reference Member State, takes the lead in reviewing the application. Under both procedures, other member states are required to accept the reference Member State’s view on the approvability of the product unless they can identify significant public health reasons not to do so.

In general, the requirements for regulatory approval of an animal health product in the EU are similar to those in the United States, requiring demonstrated evidence of purity, safety, efficacy and consistency of manufacturing processes.

Rest of World

Each other country has its own regulatory requirements for approving and marketing veterinary pharmaceuticals. For example, in Brazil, the Ministry of Agriculture, Livestock Products and Supply (“MAPA”), is responsible for the regulation and control of pharmaceuticals, biologicals and feed additives for animal use. MAPA’s regulatory activities are conducted through the Secretary of Agricultural Defense and its Livestock Products Inspection Department. In addition, regulatory activities are conducted at a local level through the Federal Agriculture Superintendence. These activities include the inspection and licensing of both manufacturing and commercial establishments for veterinary products, as well as the submission, review and approval of pharmaceuticals, biological and feed additives.

In Australia, the Australian Pesticides and Veterinary Medicines Authority (“APVMA”), is the Australian government statutory authority for the registration of all agricultural and veterinary products. The APVMA assesses applications from manufacturers of veterinary pharmaceuticals and related products.

Many country specific regulatory laws contain provisions that include requirements for labeling, safety, efficacy and manufacturers’ quality control procedures to assure the consistency of the products, as well as company records and reports. With the exception of the EU, the regulatory agencies of most other countries generally refer to the FDA, USDA, EMA, and other international animal health entities, including the World Organization for Animal Health and the Codex Alimentarius Commission, in establishing standards and regulations for veterinary pharmaceuticals and vaccines.

Other Regulatory Considerations

Regulatory rules relating to human food safety, food additives, or drug residues in food will not apply to the products we currently are developing because our products are not intended for use in food production animals.

 

Advertising and promotion of animal health products is controlled by regulations in many countries. These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency. We will conduct a

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review of advertising and promotional material for compliance with the local and regional requirements in the markets where we sell pet therapeutics.

Requirements for Approval of Veterinary Pharmaceuticals for Pets

As a condition to regulatory approval for sale of animal products, regulatory agencies worldwide require that a product to be used for pets be demonstrated to:

 

 

 

 

 

 

 

 

Safety. To determine that a new veterinary drug is safe for use, regulatory bodies will require us to provide data from a safety study generated in laboratory cats and dogs tested at doses higher than the intended label dose, over a period of time determined by the intended length of dosing of the product. In the case of the CVM, the design and review of the safety study and the study protocol are completed prior to initiation of the study to help assure that the data generated will meet FDA requirements. These studies are conducted under rigorous quality control, including GLP, to assure integrity of the data. They are designed to clearly define a safety margin, identify any potential safety concerns, and establish a safe dose for the product. This dose and effectiveness is evaluated in the pivotal field effectiveness study where the product is studied in the animal patient population in which the product is intended to be used. Field safety data, obtained in a variety of breeds and animals kept under various conditions, are evaluated to assure that the product will be safe in the target population. Safety studies are governed by regulations and regulatory pronouncements that provide the parameters of required safety studies and are utilized by regulatory bodies in the United States, the European Union, Japan and other countries.

 

Effectiveness. Early pilot studies may be done in laboratory cats or dogs to establish effectiveness and the dose range for each product. Data on how well the drug is absorbed when dosed by different routes and the relationship of the dose to the effectiveness are studied. When an effective dose is established, a study protocol to test the product in real world conditions is developed prior to beginning the study. In the case of the CVM, the pivotal effectiveness field study protocol is submitted for review and concurrence prior to study initiation, to help assure that the data generated will meet requirements.

 

The pivotal field effectiveness study must be conducted with the formulation of the product that is intended to be commercialized, and is a multi-site, randomized, controlled study, generally with a placebo control. To reduce bias in the study, individuals doing the assessment are not told whether the subject is in the group receiving the treatment being tested or the placebo group. For pharmaceuticals, in both the United States and the European Union, the number of patients enrolled in the pivotal field effectiveness studies is required to be approximately 100 to 150 animal subjects treated with the test product and a comparable number of subjects in the control group that receive the placebo. In many cases, a pivotal field study may be designed with clinical sites in both the European Union and the United States, and this single study may satisfy regulatory requirements in both the European Union and the United States.

 

Chemistry, Manufacturing and Controls (“CMC”). To assure that the product can be manufactured consistently, regulatory agencies will require us to provide documentation of the process by which the API is made and the controls applicable to that process that assure the API and the formulation of the final commercial product meet certain criteria, including purity and stability. After a product is approved, we will be required to communicate with the regulatory bodies any changes in the procedures or manufacturing site. For FDA and EMA approvals, both pharmaceutical API and commercial formulations are required to be manufactured at facilities that practice cGMP.

 

Environmental and Human Safety. We will not be required under United States law to provide an environment impact statement for products currently in development if the products are given at the home of the pet’s owner or in a veterinary hospital. If products might result in some type of environmental exposure or release, the environmental impact must be assessed. For approval in the EU, a risk assessment for potential human exposure will be required.

Labeling, All Other Information, and Freedom of Information Summary. We also will be required to submit the intended label for the product, and also any information regarding additional research that has been conducted with the drug, to the CVM and other regulatory bodies for review. We will draft, and submit for regulatory review, the Freedom of Information Summary for use in the United States. This summary outlines the studies and provides substantial information that CVM uses to assess the drug’s safety and effectiveness and then publishes on its website.

Regulatory Process at the FDA

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To begin the development process for our products in the United States, we establish an Investigational New Animal Drug (“INAD”), file with the CVM. We then hold a pre-development meeting with the CVM to reach a general agreement on the plans for providing the data necessary to fulfill requirements for an NADA. During development, we will submit pivotal protocols to the CVM for review and concurrence prior to conducting the required studies. We will gather and submit data on manufacturing, safety and effectiveness to the CVM for review, and this review will be conducted according to timelines specified in the Animal Drug User Fee Act. Once all data have been submitted and reviewed for each technical section – safety, effectiveness and CMC – the CVM will issue us a technical section complete letter as each section review is completed, and when the three letters have been issued, we will compile a draft of the Freedom of Information Summary, the proposed labeling, and all other relevant information, and submit these as an administrative NADA for CVM review. Generally, if there are no deficiencies in the submission, the NADA will be issued within four to six months after submission of the administrative NADA. After approval, we will be required to collect reports of adverse events and submit them on a regular basis to the CVM.

The CVM has an alternative approval process for drugs used in minor species, or for drugs that are used for a ‘minor use’ in a major species. This process is called MUMS which stands for minor use, minor species. For example, if it can be documented that the population of cats or dogs that contract a specific condition is below a specified number, a company can apply to the CVM for MUMS designation. Once designation has been granted, then we must submit the same safety and CMC data as required for a full NADA, and also submit some evidence of effectiveness. After a review period, the CVM can then grant a conditional approval. This approval allows for the commercialization of the product, while completing the pivotal effectiveness study required for a full NADA. Because in many cases the CMC section of the submission takes the longest, MUMS conditional approval may not shorten the time to commercialization. Following submission, review and approval of the pivotal field effectiveness study, the CVM may grant a full NADA.

Requirements for Approval of Certain Veterinary Biologics for Pets

There are many parallels between the requirements to receive approvals for a veterinary pharmaceutical product and certain veterinary biologics product. The terminology differs but the three main components are the same: efficacy, manufacturing, and safety. USDA regulations are designed to ensure that veterinary biologics are pure, safe, potent and effective. The differences compared to pharmaceutical product regulations are based on the immunological nature of the mode of action of the product and the manufacturing process involving living organisms.

Efficacy. Documentation requirements depend significantly on product type and typically include data from preliminary dose determination studies and master seed immunogenicity/efficacy studies.

 

Safety. Typical safety documentation includes safety data from laboratory animal studies, typically rodents, studies in host animals, typically laboratory dogs or cats, in biocontainment, and field safety studies conducted in client-owned animals.

Manufacturing. The required documentation must include an Outline of Production, Master Seed Reports, and Summary Information Formats, or SIFs, for novel live biological products and products based on recombinant DNA technology. SIFs contain additional safety and identity data to establish proper biocontainment requirements and to conduct confirmatory testing. Other supportive documentation is product-type specific and includes in-process procedures and corresponding validation reports, potency test development report, stability reports, and veterinary biologics production and test for satisfactory three consecutive prelicensing serials (numbered lots) of product.

Other information includes labels or label sketches.

A unique requirement for veterinary biologics in the United States is that manufacturers must hold a U.S. Veterinary Biologics Establishment License to produce licensed veterinary biologicals. An establishment license will only be issued if at least one biological product qualifies for a license. Applications for veterinary biologics establishments include articles of incorporation for the applicant, qualifications of veterinary biologics personnel for key employees, water quality statement, facility blueprints, plot plans, and legends.

Regulatory Process at the USDA

Applicants are encouraged to contact the CVB early in the product development process. A licensing reviewer will be assigned to help with the regulatory process. Initially, the CVB will confirm that the proposed product meets the definition of a veterinary biologic and is subject to regulation by the CVB. The CVB then recommends that applicants submit a licensing plan, including pivotal study protocols, to the CVB for review and comment prior to initiating work that will be used to support product licensure. The USDA provides a complete list of guidance documents named “Veterinary Services Memorandums” that lay out the data requirements and regulatory process. Applicants that do not hold a U.S. Veterinary Biologics Establishment License need to submit the required documentation for the establishment and the product concurrently.

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Study protocols and reports can be submitted any time after the initial applications have been made. The administrative process is facilitated by forms (APHIS Forms) that accompany the submissions and capture regulatory actions. There is no requirement to submit parts of dossiers or entire dossiers. The CVB provides official responses to submissions in hard copy mail indicating if more data are needed or that the submission was satisfactory to support licensure. When master seed and master cell reports have been found to be satisfactory, samples have to be submitted to the CVB laboratory for confirmatory testing. Once all requirements have been satisfactorily met, the CVB will issue a veterinary biological product license.

In cases of emergencies, which means there is no approved product available, the USDA will issue a time-limited conditional license after the manufacturing and safety requirements have been substantially fulfilled and a reasonable expectation of efficacy has been established. The applicant has to continue the pivotal efficacy program and product testing validation. The conditional license can be extended if reasonable progress towards full licensure can be demonstrated.

There are no statutory review times. Submissions enter the review queue in chronological order. Hence predictions of development timelines and time to approval are difficult to make. However, we believe the typical time to achieve conditional licensure is approximately three years and the typical time to achieve full licensure is approximately five years.

Furthermore, while the CVB regulates certain biologics (for instance, based on the immunological nature of the mode of action) the CVM regulates other biologics in a manner described under “Regulatory Process at the FDA.”

 

European Regulatory Process

The EMA is responsible for coordinating scientific evaluation of applications for marketing approval via the centralized procedure for pet therapeutics in the EU. To perform these evaluations the EMA established a specific scientific committee, the CVMP. The CVMP considers applications submitted by companies for the marketing approval of individual pet therapeutics and evaluates whether or not the medicines meet the necessary quality, safety and efficacy requirements. Assessments conducted by the CVMP are based on scientific criteria and are intended to ensure that pet therapeutics reaching the marketplace have a positive benefit-risk balance in favor of the pet population they are intended for. Based on the CVMP’s recommendation, a centralized marketing authorization is granted by the European Commission, which allows the product to be marketed throughout the EEA. The CVMP is also responsible for various post-authorization and maintenance activities, including the assessment of modifications or extensions to an existing marketing authorization.

To obtain a centralized marketing authorization from the European Commission, we must submit a marketing authorization application called a dossier. The dossier is the EMA’s equivalent of the FDA’s NADA and includes data from studies showing the quality, safety and efficacy of the product. The CVMP reviews and evaluates the dossier. For any dossier, a rapporteur and co-rapporteur are appointed from the members of the CVMP. Their role is to lead the scientific evaluation and prepare the assessment report. The rapporteur can utilize experts to assist it in performing its assessment. The report is critiqued by the co-rapporteur and other members of the CVMP before the CVMP makes its determination. The final opinion of the CVMP is generally given within 210 days of the submission of a dossier.

For products that are not eligible for centralized approval, the competent authorities of the EU Member States are responsible for granting marketing authorizations for products that are sold in their markets. Such products may be approved nationally in one Member State, or in multiple Member States via the mutual recognition procedure or the decentralized procedure.

In the EU, products for MUMS are eligible for regulatory incentives such as free scientific advice and fee reductions. These incentives may apply, for example, if it can be documented that the population of cats or dogs that contract a specific condition is below a specified number in Europe. However, the EMA recently announced that fee reductions are only applicable to products indicated for food-producing species. An applicant may apply to the EMA for MUMS classification for any product irrespective of the intended route of approval (i.e. centralized, decentralized or national approval) and incentives may be requested for all routes of authorization. The CVMP has established guidelines specific to MUMS for data requirements, which apply to all sections of the application, i.e. quality, safety and efficacy. Consequently, there may be scope for a reduced quality data package. Similarly, the safety and efficacy sections might be abridged to a certain extent (more flexibility for the combination of dose-determination, dose-confirmation and field studies) provided reasonable evidence of safety and effectiveness are submitted. However, the CVMP and national veterinary medicines regulators have significant discretion in this respect. Overall, data requirements for demonstrating quality, efficacy and safety in the target species for minor use indications of a new medicine will be determined on a case-by-case basis and any potential applicant should seek scientific advice on specific data requirements to guide its research and development activities.

 

Segment and Geographic Information

We operate in one business segment and have operations in the United States and Belgium. See Note 3 to our consolidated financial statements for further information regarding our segment, including revenues, loss from operations and total assets, and geographic information including revenues and long-lived assets.

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Employees

As of December 31, 2014, we had a total of 57 employees, including 49 full-time employees.

As of March 9, 2015, we have a total of 60 employees, including 55  full-time employees. We have a total of 21 employees with D.V.M., V.M.D., M.D. or Ph.D. degrees. Within our workforce, 27 employees are engaged in research and development and 33 in business development, marketing, finance, legal, human resources, facilities, information technology and general management and administration.

Available Information

We maintain a website at www.aratana.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission.

 

Executive Officers of the Registrant

The executive officers of Aratana Therapeutics, Inc. as of March 9, 2015, are as follows:

 

Steven St. Peter, M.D., age 48, is one of our founders and has served as our President and Chief Executive Officer since September 2012. He has been a member of our Board of Directors since December 2010 and served as the Chairman of our Board of Directors from December 2010 to September 2012. Dr. St. Peter was a Managing Director of MPM Asset Management LLC from January 2004 to May 2012, where he focused his investments on both venture and buyout transactions across the pharmaceuticals and medical technology industries. He has previous investment experience from Apax Partners and The Carlyle Group, two private equity firms. Dr. St. Peter was previously an Assistant Clinical Professor of medicine at Columbia University. He received his M.D. from Washington University and completed his residency and fellowship at the Hospital of the University of Pennsylvania. Prior to his medical training, he was an investment banker at Merrill Lynch. Dr. St. Peter also holds an M.B.A. from the Wharton School of Business at the University of Pennsylvania and a B.A. in Chemistry from the University of Kansas. Dr. St. Peter has served as a director of PharmAthene, Inc., a publicly-traded biodefense company, since August 2007 and is currently a member of its governance and nominating committee. Dr. St. Peter has also served as a member of the Board of Directors of the Kansas City Area Life Sciences Institute since March 2014. Dr. St. Peter’s previous board experience includes MPM Acquisition Corp., Proteon Therapeutics, Inc. and Rhythm Pharmaceuticals, Inc. As noted above, Dr. St. Peter is a member of our Board of Directors and as such, we believe Dr. St. Peter is qualified to serve on our Board because of his diverse background as a venture capital investor, investment banker, physician and director of several healthcare companies, which brings a unique perspective to our Board.

 

Ernst Heinen, D.V.M., Ph.D., age 52, has served as our Chief Development Officer since March 5, 2014. In addition, he served as our Head of Drug Evaluation and Development from June 2012 until March 5, 2014. From 1990 to 2012, Dr. Heinen held positions of increasing responsibility at Bayer Animal Health, the animal health division of Bayer AG, where he ultimately served as Vice President of Research &  Development and Veterinary Technical Services, Pets. Dr. Heinen currently serves on the Kansas State University Olathe Advisory Board and previously served on the boards of the Kansas City Area Development Council and the Center for Animal Health Innovation, and he is the author of dozens of scientific articles and presentations focused on the animal health industry. Dr. Heinen received a veterinary degree and a D.V.M. in veterinary microbiology from the Justus-Liebig-University of Giessen Veterinary School in Giessen, Germany, and is a certified specialist in veterinary microbiology.

 

Linda Rhodes, V.M.D., Ph.D., age 65, has served as our Chief Scientific Officer since September 2012. She served as a member of our Board of Directors from February 2011 to March 5, 2014. In addition, she served as our Chief Executive Officer from February 2011 to September 2012. In 2001, Dr. Rhodes was a founding partner of AlcheraBio LLC, an animal health consulting and contract research firm, which was acquired in October 2008 by Argenta, a New Zealand animal health formulations and contract manufacturing organization, and she served as its Vice President of Clinical Development from February 2008 to February 2011. She is an Adjunct Professor for the Graduate School of Animal Science at Rutgers University and is a member of the Board of Directors of the Alliance for Contraception in Cats and Dogs, a non-profit organization. She also serves as a member of the Scientific Advisory Board of the Found Animals Foundation. She has been a member of the Board of Directors of ImmuCell Corporation, a publicly-traded animal health company, since 2005, and is currently the chair of its compensation committee. From 1998 to 2001, she was a director of production animal development projects and new technology assessment at Merial Ltd., an animal health company. Prior to that role, she held various research positions at Merck Research Laboratories and Sterling Winthrop Drug Company. She has held several teaching positions and worked as a bovine veterinarian in private practice. She earned her Ph.D. in Physiology/Immunology from Cornell University and her V.M.D. from the University of Pennsylvania School of Veterinary Medicine, graduating summa cum laude. She also holds a Bachelor of Arts degree from Sarah Lawrence College.

 

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Julia A. Stephanus, age 56, has served as our Chief Commercial Officer since January 2013. From September 2010 through December 2012, Ms. Stephanus was director of the global pet franchise for Ceva Animal Health, where she oversaw the commercial development of new products as well as global marketing for strategic pet products. In 2006, Ms. Stephanus founded Summit VetPharm, the developer of Vectra, a pet parasiticide product line, and served as its President and Chief Executive Officer until it was acquired by Ceva Animal Health in August 2010. Prior to founding Summit VetPharm, Ms. Stephanus worked in various sales and marketing positions for Pfizer Inc. and its legacy companies, where she had the commercial responsibility for, among other things, the development and global launch of two highly-profitable pet products: Rimadyl, the first NSAID approved for osteoarthritis in dogs, and Revolution, the first topical endectocide for heartworm and fleas in cats and dogs. Ms. Stephanus received a B.A. from Indiana University and has attended executive education programs at Harvard, Columbia and the Wharton School of Business at the University of Pennsylvania.

Craig A. Tooman, age 49, has served as our Chief Financial Officer since November 2013 and our Treasurer since January 2014. He was a member of our Board of Directors from April 2012 to November 2013. Mr. Tooman previously served as the Chief Executive Officer of Avanzar Medical, Inc., a privately-held company focused on commercial oncology opportunities, from February 2012 until November 2014. Mr. Tooman was also the founder and principal of Stockbourne LLC, a firm that provides strategic business and financial advisory services, a position he held from January 2011 to November 2013. From July 2010 to January 2011, Mr. Tooman was the Senior Vice President of Finance and Chief Financial Officer of Ikaria Inc., a biotherapeutics company. From January 2005 to July 2010, Mr. Tooman was the Executive Vice President of Finance and Chief Financial Officer at Enzon Pharmaceuticals, a biopharmaceutical company. Prior to that, Mr. Tooman was the Senior Vice President of Strategic Planning and Corporate Communications at ILEX Oncology, Inc. and the Vice President of Investor Relations at Pharmacia Corporation. Since 2011, Mr. Tooman has served on the Board of Directors of Insite Vision Incorporated and he is currently the Chairman of its audit committee and a member of its compensation committee. He has a B.A. in Economics from Kalamazoo College and M.B.A. in Finance from the University of Chicago.

 

Non-Employee Directors

The non-employee directors of Aratana Therapeutics, Inc. as of March 9, 2015 are as follows:

 

Jay Lichter, Ph.D., age 53, has been a member of our Board of Directors since December 2010 and currently serves as the Chairman of the Board. He is an experienced biotechnology and pharmaceutical business executive with over 25 years of experience in management, scientific research and business development. Since 2007, Dr. Lichter has been a Managing Director at Avalon Ventures, an early-stage venture capital fund focused on information technology and life sciences. In that role, he led Avalon’s investments in and served as a Director and Chief Executive Officer for Afraxis, Inc., Carolus Therapeutics, Inc., ReVision Therapeutics, Inc. and Zacharon Pharmaceuticals, Inc., all of which are privately-held biotechnology companies. He also led Avalon’s investments or serves on the board of Avalon’s investments in privately-held companies Sova Pharmaceuticals, Inc., Avelas Biosciences, Inc., COI Pharmaceuticals Inc. and Sitari Pharmaceuticals Corp. Dr. Lichter is a co-founder and former Chief Executive Officer (from 2008 until November 2010) of Otonomy, Inc., a publicly-traded biopharmaceutical company, and has served as a Director of Otonomy since May 2008 and is currently a member of its audit committee and chair of its compensation committee. Dr. Lichter holds a B.S. and a Ph.D. in biochemistry from the University of Illinois. He also completed post-doctoral fellowships at Yale University and Du Pont Merck Pharmaceutical Company. We believe Dr. Lichter is qualified to serve on our Board based on his experience as a venture capitalist investing in and serving on the boards of multiple life sciences companies, and his general leadership, financial and operational expertise.

 

Laura A. Brege, age 57, has been a member of our Board of Directors since February 2014. She has served as President and Chief Executive Officer of Nodality, Inc., a privately-held life sciences company, since September 2012. Prior to joining Nodality, from January 2011 to January 2012, Ms. Brege was the Executive Vice President, Corporate Affairs of Onyx Pharmaceuticals, Inc. From October 2007 to January 2011, she was the Chief Operating Officer, and from June 2006 to October 2007, she was the Executive Vice President and Chief Business Officer of Onyx Pharmaceuticals. From 1999 to 2006, Ms. Brege was a General Partner at Red Rock Capital Management, a venture capital firm. Previously, Ms. Brege served as Chief Financial Officer at companies such as COR Therapeutics, Inc., a biotechnology company, and Flextronics, Inc., a supply-chain solutions company. Ms. Brege currently also serves on the Board of Directors of publicly-traded Acadia Pharmaceuticals, Inc., Dynavax Technologies Corporation, Pacira Pharmaceuticals, Inc. and Portola Pharmaceuticals, Inc. Ms. Brege has served as a Director of Acadia since May 2008 and is currently a member of its audit committee and has served as a Director and chair of the audit committee of Dynavax since February 2015. Ms. Brege has served as a Director of Pacira since June 2011 and is currently the chair of its audit committee and a member of its nominating and governance committee and has served as a Director and member of the audit committee of Portola since January 2015. Ms. Brege previously served as a member of the Board of Directors of publicly-traded Angiotech Pharmaceuticals, Inc. from 2007 to 2011 and Delcath Systems, Inc. from 2012 to December 2014. Ms. Brege earned her undergraduate degrees from Ohio University and has an M.B.A. from the University of Chicago. We believe Ms. Brege is qualified to serve on our Board based on her strong background in finance and her extensive executive leadership experience in the life sciences and biotechnology industries, including her service as a public company director and in various executive officer roles.

 

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David L. Brinkley, age 57, has been a member of our Board of Directors since March 2014. Mr. Brinkley worked for Theravance, Inc., a publicly-traded biopharmaceutical company, from 2000 to 2013, most recently as the Head of Business Development from November 2008 to July 2013. Mr. Brinkley had previously served as Senior Vice President, Commercial Development at Theravance from September 2000 through December 2007, when he left to start a consulting practice. From 1996 to 2000 he served as Worldwide Team Leader for Viagra at Pfizer Inc., leading the team that had full responsibility for the global launch and marketing of Viagra. Mr. Brinkley joined Pfizer in 1995 through its acquisition of SmithKline Beecham’s Animal Health operations and was Director of New Product Planning before leading the Viagra launch team. Mr. Brinkley held various management positions with SmithKline Animal Health from 1983 to 1995. Mr. Brinkley previously served on the Board of Directors of Ziarco Pharma Ltd., a privately-held pharmaceutical company. Mr. Brinkley holds an M.A. with honors in International Economics from the School of Advanced International Studies of the Johns Hopkins University and a B.A. in International Relations from Kent State University, where he graduated with University Honors. We believe Mr. Brinkley is qualified to serve on our Board due to his extensive leadership experience in the biopharmaceutical industry, including his roles at Theravance and Pfizer.

 

Robert “Rip” Gerber, age 52, has been a member of our Board of Directors since October 2012. Since July 2009, he has served as the President and Chief Executive Officer of Locaid Technologies, Inc., a telecommunications software company and a leading “Location-as-a-Service” (LaaS) platform in the wireless industry, and a member of its Board of Directors. From June 2006 to June 2009, Mr. Gerber served as the Chief Marketing Officer and a member of the advisory board of SignalDemand Inc., a private firm focused on producing margin optimization software. From May 2004 to May 2006, Mr. Gerber served as Chief Marketing Officer and Senior Vice President of Intellisync Corporation, a public company and provider of data synchronization software to consumer mobile devices. Prior to that role, he served as Senior Vice President at Carlson Companies, Inc., one of the largest family-held corporations in the United States. Mr. Gerber was also on the founding executive team of Commtouch Software, Inc., where, as Chief Marketing Officer, he was a lead executive in taking the Company public in 1999. Earlier in his career, Mr. Gerber was a consultant for Deloitte & Touche LLP, a public accounting firm. Mr. Gerber serves on the Board of Directors of CTIA—The Wireless Association, a wireless non-profit trade group, a position he has held since January 2014. He holds an M.B.A. from Harvard Business School and a B.S. in Chemical Engineering from the University of Virginia. We believe Mr. Gerber is qualified to serve on our Board because of his experience as an entrepreneur and his extensive background in operational, marketing and strategic planning.

 

Irvine “Irv” O. Hockaday, Esq., age 78, has been a member of our Board of Directors since August 2014. Mr. Hockaday is the retired President and Chief Executive Officer of Hallmark Cards, Inc. Prior to joining Hallmark in 1983, Mr. Hockaday served as President and Chief Executive Officer of Kansas City Southern Industries, Inc. He was a member of the Hallmark Board of Directors from 1978 through 2001. Mr. Hockaday has been on the Board of Directors of the Estee Lauder Companies, Inc. since 2001 and is currently lead Director and chair of its audit committee. Mr. Hockaday is a former Director or Lead Director of Crown Media Holdings, Inc., Dow Jones & Company, Inc., Ford Motor Company and Sprint Nextel Corporation. He currently holds various civic positions including trustee of the Hall Family Foundation and board member of Kansas City Area Life Sciences Institute and has previously served as chairman of the board of the Tenth District Federal Reserve Bank. He graduated with an A.B. in English from Princeton University in 1958 and from the University of Michigan Law School with a J.D. in 1961. We believe Mr. Hockaday is qualified to serve on our Board due to his extensive experience as a Chief Executive Officer and board member of public companies.

 

Merilee Raines, age 59, has been a member of our Board of Directors since February 2014. Ms. Raines served as Chief Financial Officer of IDEXX Laboratories, Inc., a publicly-traded company providing diagnostic and IT products and services primarily to the companion animal health market, from October 2003 until her retirement in May 2013. Ms. Raines also served as Executive Vice President of IDEXX Laboratories from July 2012 to May 2013, and as Corporate Vice President, Finance of IDEXX Laboratories from May 1995 to July 2012. Ms. Raines has served as a Director of Watts Water Technologies, Inc., a publicly-traded manufacturer of products and systems focused on control, conservation and quality of water, since 2011, and is currently a member of its nominating and corporate governance committee and chair of its audit committee. Ms. Raines has also served as a Director of Affymetrix, Inc., a publicly-traded provider of life sciences products and molecular diagnostic products, since January 2015, and is currently a member of its audit committee. Ms. Raines earned a bachelor’s degree in mathematics from Bowdoin College and an M.B.A. from the University of Chicago. We believe Ms. Raines is qualified to serve on our Board based on her experience as an executive of a public company in the animal health industry and her extensive financial expertise, including her role as Chief Financial Officer of IDEXX Laboratories and her service on the audit committees of Watts Water Technologies and Affymetrix.

 

Robert P. Roche, age 59, has been a member of our Board of Directors since June 2014. Mr. Roche is the founding member of Robert Roche Associates, LLC, a consulting firm providing guidance to the pharmaceutical and healthcare industries. Mr. Roche created this firm upon his retirement from Cephalon, Inc., a biopharmaceutical company, in February 2010. Mr. Roche joined Cephalon in January 1995 as the Vice President of Sales and Marketing and was named Executive Vice President, Worldwide Pharmaceutical Operations of Cephalon in 2005. Before joining Cephalon, Mr. Roche served as Director and Vice President, Worldwide Strategic Product Development, for SmithKline Beecham’s central nervous system and gastrointestinal products business. Mr. Roche also was Managing Director of SmithKline’s pharmaceutical operations in the Philippines. Prior to that, he held senior marketing positions in Canada and Spain and had product planning responsibilities for SmithKline in Latin America. Mr. Roche began his pharmaceutical

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career in 1982 with SmithKline as a U.S. pharmaceutical sales representative. Mr. Roche has served as a Director of Antares Pharma, Inc., a publicly-traded specialty pharmaceutical company, since July 2013 and is currently a member of its governance and nominating committee and audit committee. He formerly served as a Director of LifeCell Corp. until its acquisition in 2008, EKR Therapeutics until its acquisition in 2012, NuPathe Inc. until its acquisition in February 2014 and Civitas Therapeutics until its acquisition in November 2014. He also serves on the boards of Bryn Mawr Hospital and Westtown School. Mr. Roche earned his B.A. from Colgate University and his M.B.A. from The Wharton School at the University of Pennsylvania. We believe Mr. Roche is qualified to serve on our Board due to his executive and board leadership experience in the global pharmaceutical industry and his extensive commercial operations and product launch background.

 

John Vander Vort, Esq., age 50, has been a member of our Board of Directors since September 2012. Mr. Vander Vort is currently a Managing Director at Pilot House Associates, LLC, a family investment office based in Boston that he joined in September 2014. Prior to this role, Mr. Vander Vort was a Managing Director and the Chief Operating Officer of Charlesbank Capital Partners, a private equity firm. Mr. Vander Vort joined Charlesbank in September 2013 from MPM Asset Management LLC, a venture capital firm, where he served as a Managing Director, the Chief Operating Officer and the Chief Compliance Officer since May 2005, and he served on the Board of Directors of MPM Acquisition Corp., a public shell company, from February 2008 to November 2010. Prior to joining MPM Asset Management, from May 2003 until May 2005, he worked as Portfolio Manager for DuPont Capital Management. Prior to that, he was a General Partner and co-founder of BlueStream Ventures, a venture capital firm. Previously, he was a Managing Director at Dain Rauscher Wessels (now the Royal Bank of Canada), where he was the head of the West Coast networking and communications investment banking group and served as an advisor to leading venture-backed technology companies. Mr. Vander Vort began his career as a corporate transaction attorney in the San Francisco office of Cooley Godward, where he represented venture capital firms and venture-backed companies. Mr. Vander Vort earned his B.A. from Amherst College and his J.D. from The University of Chicago Law School. We believe Mr. Vander Vort is qualified to serve on our Board because of his background in venture capital, significant legal experience and business acumen.

 

Wendy L. Yarno, age 60, has been a member of our Board of Directors since October 2013. Ms. Yarno is currently an independent consultant in the life sciences industry. Ms. Yarno retired in September 2008 from Merck & Co., Inc. following a 26-year career there in commercial and human resource positions of increasing seniority, most recently Chief Marketing Officer before she retired. In that role, Ms. Yarno led a global organization charged with all aspects of supporting pre-and post-launch commercialization of pharmaceuticals in more than 20 therapeutic areas. Prior to this role, she served as General Manager, Cardiovascular/Metabolic U.S. Business Unit, where she had P&L responsibility for Merck’s largest therapeutic area, and as Senior Vice President, Human Resources. From September 2010 through September 2011, Ms. Yarno was the Chief Marketing Officer of HemoShear LLC, a biotechnology research company and leading developer of human cell-based surrogate systems for discovery and assessment of new drug compounds. Ms. Yarno has served as a Director and member of the governance and nominating committee and compensation committee of St. Jude Medical, Inc., a Fortune 500 medical device company, since 2002 and has served as a Director of Medivation, Inc., a publicly-traded biopharmaceutical company, since 2013 and is currently a member of its governance and nominating committee and audit committee and chair of its compensation committee. Ms. Yarno also served as a Director and member of the compensation committee of Durata Therapeutics, Inc., a publicly-traded pharmaceutical company, from August 2014 until November 2014 when Durata was acquired by Actavis plc. Ms. Yarno received a B.S. in Business Administration from Portland State University and an M.B.A from Temple University. We believe Ms. Yarno is qualified to serve on our Board based on her extensive experience in commercialization of pharmaceutical products and in human resource management in the pharmaceutical industry.

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Item 1A  RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the important risks described below, as well as the other information contained in or incorporated by reference into our public filings with the Securities and Exchange Commission, 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.

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 18 products under development including one biologic, AT-004, for which we received a full license from the U.S. Department of Agriculture in January 2015, and another biologic, AT-005, which is under a conditional license from the USDA and which we began limited marketing in the fourth quarter of 2014 to our clinical investigator sites and certain other sites as we complete the requirements to obtain a full license. We are not profitable and have incurred losses in each year since our inception in December 2010. 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 continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the year ended December 31, 2014 was $38.8 million and for the year ended December 31, 2013 was $6.9 million. As of December 31, 2014, we had a deficit accumulated since inception of $68.0 million and we had $98.1 million in cash, cash equivalents and short-term investments. 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 (“CVM”), or for our biologic products, 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, a majority 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 and commercialization 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. As of the date of the filing of this annual report, we believe that our existing cash, cash equivalents and short-term investments and existing Credit Facility will allow us to fund our operations and our debt obligations through December 31, 2016. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

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

We currently have one product approved for commercial distribution, AT-004, which has received a full license from the USDA, and one product which has received a conditional license from the USDA, AT-005. To date, we have invested substantial 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 Sciences, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 compliance with complex regulatory requirements.

 

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 will 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.

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.

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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 products 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 products will depend on a number of factors, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Any failure by our current or future products 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 Sciences, 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 Sciences depend in part on our ability to integrate their businesses with ours. We are a party to an exclusive license agreement with Elanco for one of our therapeutic candidates, AT-006, through our acquisition of Okapi Sciences. The difficulties of combining the operations of the acquired companies include, among others, challenges in maintaining previously-established relationships with licensors and licensees. Many

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of these factors will be outside of our control, for instance, the acquisition of Novartis Animal Health, Inc. by Elanco. There is no assurance that this transaction will not cause delays or changes in the development and commercialization of AT-006.

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:

 

 

 

 

 

 

 

 

 

 

 

 

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 is 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 most 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:

 

 

 

 

 

 

 

 

 

 

 

 

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If we experience delays in the completion of, or terminate 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 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; Virbac Group; Ceva Animal Health; Vetoquinol and Dechra Pharmaceuticals PLC. We are also aware of several smaller early stage animal health companies such as Kindred Bio, NexVet and VetDC that are developing products for use in the pet therapeutics market. If approved, we expect that AT-001 (grapiprant) will face competition from Rimadyl, marketed by Zoetis; generic Carprofen and Deramaxx, marketed by Elanco; Previcox, marketed by Merial; Metacam, marketed by Boehringer Ingelheim; and generic Meloxicam. NexVet is developing a monoclonal antibody for osteoarthritis pain. We are currently not aware of any direct competitor for AT-002 (capromorelin). However, we are aware that some veterinarians utilize mirtazapine, a human generic antidepressant to attempt to treat inappetence. We expect AT-003 (bupivacaine liposome injectable suspension) will compete primarily with the Coxibs and injectable buprenorphine and anesthetics, such as bupivacaine, which is not approved for non-human use but is widely used by veterinarians. Recuvyra fentanyl transdermal solution received approval in the United States and Europe for control of postoperative pain from surgical procedures in dogs. We are also unaware of any approved products for the treatment of lymphoma in dogs, although we are aware of a number of biotechnology companies such as NexVet, Karyopharm and VetDC that are developing products for the treatment of lymphoma in dogs, including some that have received MUMS designation. We expect that AT-004 and AT-005 will face competition from human generic chemotherapies, though we are unaware of any companies that are actively promoting this use. Among the larger animal health companies, Merial is developing a lymphoma vaccine based on technology similar to their melanoma vaccine. We know of no direct competitor for AT-014 in osteosarcoma.

Many of our competitors have substantially more resources than we do, including both financial and technical resources. In addition, many of our competitors have more experience than we have in the development, manufacture, regulation and worldwide commercialization of animal health medicines. We are also competing with academic institutions, governmental agencies and private organizations that are conducting research in the field of animal health medicines.

Our competition will be determined in part by the potential indications for which our products are developed and ultimately approved by regulatory authorities. Additionally, the timing of market introduction of some of our potential products or of competitors’ products may be an important competitive factor. Accordingly, the speed with which we can develop our compounds, complete target animal studies and approval processes, and supply commercial quantities to market are expected to be important competitive factors. We expect that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent position.

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

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identify and license potential product candidates, we may still fail to yield product candidates for development and commercialization for many reasons, including the following:

 

 

 

 

 

 

 

 

 

 

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 team as well as our senior scientists. 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.

In addition, we could experience difficulties attracting and retaining qualified employees 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. Failure to attract and retain highly qualified personnel could have an adverse effect on our business and our ability to develop and commercialize our product candidates.

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 of these approved drug candidates.  

 

With respect to our small molecules and antiviral programs, we do not currently have, nor do we currently plan to acquire, the internal infrastructure or capability 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 small molecule and antiviral products except AT-003. For AT-003, we have entered into a commercial supply agreement with Pacira Pharmaceuticals, Inc., or Pacira. If this supply agreement terminates for any reason, or Pacira does not produce the necessary quantities, we may be unable to arrange for alternative supply of AT-003 in a timely manner, on commercially reasonable terms, or at all. With respect to AT-003 and our other product candidates, any delay in our ability to identify and contract with a replacement or an initial third-party contract manufacturer, as applicable, on commercially reasonable terms, or at all, would have an adverse impact upon our business.

The facilities used by our contract manufacturers to manufacture the active pharmaceutical ingredients and formulated drugs may be subject to inspections by one or more regulatory bodies. 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. 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 our contract manufacturers cannot successfully manufacture material that conforms to our specifications and complies with regulatory requirements, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. 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 any such agency withdraws any such

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approval in the future, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop and obtain regulatory approval for or market our product candidates, if approved.

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. In addition, 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. Neither we nor our third-party manufacturers may successfully complete any manufacturing scale-up activities required to increase existing manufacturing capabilities in a timely manner, or at all.

Furthermore, 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. 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.

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, for example we announced in February 2015 that there was a potential quality issue in the manufacturing of one serial lot of AT-004. We completed an investigation into the serial lot and identified an environmental contaminant in certain of the vials in the lot, and in agreement with the USDA, that serial lot will be destroyed. 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.

During 2015, we plan to manufacture AT-004 and AT-005 at our USDA-licensed facility in San Diego. We perform all steps for production including cell line development, assay development, production in batch mode, fill and finish, release of products and packaging. We continue to explore options to establish increased manufacturing capacity to satisfy long-term demands of AT-004 as well as AT-005. There is no assurance that we will be able to manufacture these or other biologics at full commercial scale and at an economical cost. We may experience supply constraints or other supply challenges as we attempt to increase manufacturing capacity. We may encounter difficulties with new or existing manufacturing processes and we may experience delays, may be required to seek additional regulatory approvals and/or may incur significant expense in scaling up the capacity and operations to meet anticipated demand in 2015 and future years. If there is a disruption to our relevant operations in San Diego, we will have no other means of producing our products until operations are restored or we procure alternative manufacturing facilities. Additionally, any damage to or destruction of our facilities or equipment may significantly impair our ability to manufacture products on a timely basis.

We currently rely on third parties to conduct 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. 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 any such study may be delayed or require us to utilize additional resources.

 

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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 for the treatment of pain and inflammation associated with degenerative joint disease in cats, AT-002 for the stimulation of appetite for dogs and to maintain or gain body weight in chronically diseased dogs and cats, and AT-003 for the treatment of post-operative pain in cats and dogs. In addition, we have received a full license from the USDA for AT-004 as an aid for the treatment of B-cell lymphoma in dogs, and we have received a conditional license from the USDA for AT-005 as an aid for the treatment of T-cell lymphoma in dogs. If our product candidates are approved, we may market or advertise them only 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 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.

We currently have a very small commercial organization. If we are unable to expand sales capabilities on our own or through third parties, we may not be able to market and sell significant amounts of our current or future product candidates, if approved, or generate product revenue.

We currently have a very small commercial organization. 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. We expect to expand our direct sales organization in the United States, complemented by distributors, to commercialize our product candidates, which will be expensive and time-consuming. Because we have limited prior experience in the marketing, sale and distribution of pet therapeutics, 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 our products. 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. 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 approximately 15 full-time employees to approximately 60 full-time employees as of March 9, 2015. 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:

 

 

 

 

 

 

 

 

Any failure to successfully manage our growth could have a material adverse effect on our ability to effectively carry out our target animal studies, continue our development activities and commercialize our product candidates.

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

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“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 continue 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.

 

The restatement of our consolidated financial statements for the year ended December 31, 2013 has subjected us to a number of additional risks and uncertainties, including increased possibility of legal proceedings.

 

As discussed elsewhere in this Annual Report, our management determined that our consolidated financial statements for the year ended December 31, 2013 should be restated due to errors relating to the valuation of the intangible asset AT-004 in connection with our October 2013 acquisition of Vet Therapeutics, Inc. As a result of the restatement, we have become subject to a number of risks and uncertainties, including possible shareholder or other litigation, in connection with the restatement.

 

Management recently identified a material weakness in our internal control over financial reporting, which could have a significant adverse effect on our business and the price of our common stock.

Our management is required to report annually on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404. 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 our internal controls was identified in connection with the preparation of our financial statements and the audit of our financial results for 2011, which we remediated as of December 31, 2012. In addition, we identified a material weakness in our internal controls relating to the valuation of the intangible asset AT-004 in connection with our October 2013 acquisition of Vet Therapeutics, Inc., and concluded that our internal control over financial reporting as of December 31, 2014 was ineffective. As described in Part II, Item 9A of this Annual Report, management is taking steps to remediate the material weakness in our internal controls. There can be no assurance that any measures we take will remediate the material weakness identified, nor can there be any assurance as to how quickly we will be able to remediate this material weakness.

In the future, we may identify additional material weaknesses or significant deficiencies, and we may not be able to remediate them 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 report from our independent registered public accounting firm, if such a report is required. 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 materially adversely affect our business, reduce the market’s confidence in our common stock, adversely affect the price of our common stock and 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.

 

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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, 2014, we had net operating loss carryforwards, or NOLs, for federal and state income tax purposes of $15.2 million and $13.3 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 the future, 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 be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs reflected on our consolidated balance sheet, even if we attain profitability. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since its formation, due to significant complexity and related costs associated with such a study.

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

We may face competition from products produced by other companies, including generic (or non-patented) 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, 2014, we had licensed approximately 21 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. In addition, as part of our Vet Therapeutics acquisition, we acquired a patent family related to the speciesization of antibodies that covers all Vet Therapeutics products. We also acquired a patent family related to antibody constant domain regions and uses thereof, which also covers all Vet Therapeutics products. We also acquired pending patent applications that cover specific canine monoclonal antibodies directed to various targets, including an allowed U.S. patent directed to the canine CD-52 development antibody. Further, as part of our acquisition of Okapi Sciences, we acquired two patent applications that cover formulations of AT-006 and commercially-viable methods of making the active ingredient of AT-006. We also have a license to an issued U.S. patent that covers the active ingredient of AT-007. We also have patent applications in the United States, Europe and other countries that cover therapeutic uses of AT-007. 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.

 

The protection afforded to our patents, 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.

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

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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 related to canine monoclonal antibodies directed to canine CD-52 and a filed patent application that specifically covers our canine monoclonal antibodies directed to canine CD-20, as well as pending related applications and foreign counterpart patents and applications.

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. 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. 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 U.S. Patent and Trademark Office (“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

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novel implementation of such reform laws presents uncertainty regarding the outcome of challenges to our patents in the future. 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 been issued that a third party might assert are infringed by one of our current or future product candidates. Because patent applications can take many years to issue and may be confidential for eighteen months or more after filing, there also 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.

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, milestone payments, royalties or other payments. 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. 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.

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, 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

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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 due to 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.

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. We cannot be certain that we have executed such agreements with all parties, including our collaborators and contract manufacturers, 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. 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 be issued 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 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.

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.

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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 certain of these filings, and failure to finally secure these registrations could adversely affect our business.

We have filed and obtained two trademark applications for our company name and design mark in the United States, and filed and obtained six foreign registrations for our company and design mark (in Australia, China, the European Community, and Japan) and filed eight foreign applications (in Brazil, Canada, China, and the European Community), although we cannot make assurances that the trademarks will become registered. We have obtained four U.S. registrations and have filed nine trademark applications for commercial trade names for our current product candidates in the United States as well as certain other foreign registrations and applications, although we cannot make assurances that the trademarks applications will be registered. 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 have in the past and may in the future be filed against our trademarks, and our trademarks may not survive such proceedings. Additionally, we may need to enforce our trademark rights against third parties and expend significant additional resources to enforce such rights against infringements. 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 Aratana NV 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.

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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. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There is no assurance that the USDA will issue a final product license for AT-005. We have received only a conditional license for AT-005 that expires in January 2016. 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 products 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 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

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our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

 

 

 

 

 

 

 

 

 

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 (“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.

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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:

 

 

 

 

 

 

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

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 and others, such as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 or other 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.

 

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.

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.

As of March 9, 2015, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 44% of our voting stock. 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 stockholders may believe to be in their best interest.

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

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.

 

Item 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

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Item 2.  PROPERTIES

Our corporate headquarters are located in Kansas City, Kansas, where we lease and occupy approximately 5,400 square feet of office space pursuant to a lease that expires on September 30, 2015 and occupy an additional approximately 800 square feet of office space pursuant to a services agreement with a term that expires on September 30, 2015, subject to the right of either party to terminate such services agreement for material breach of any provision of such services agreement upon 10 days’ prior written notice. We also maintain additional corporate office space in Kansas City of approximately 1,650 square feet pursuant to a sub-lease that expires on December 31, 2015 subject to a one-year option through 2016 at our discretion. We are in the process of evaluating our options for the location and size of our corporate headquarters in the area.

We also maintain additional corporate office space of approximately 2,300 square feet in Boston, Massachusetts pursuant to a lease that expires on August 31, 2016.

Additionally we lease approximately 3,300 square feet of office, laboratory and manufacturing space in San Diego, California that expires on May 31, 2016, and we lease approximately 8,000 square feet of office and research laboratory space in Leuven, Belgium that expires on October 30, 2018.

Item 3.  LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

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.

 

 

 

 

 

As of March 9, 2015, there were approximately 62 holders of record and 34,910,462 shares of our common stock outstanding.  

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.

Unregistered Sales Of Equity Securities

There were no share repurchases during the fourth quarter of the fiscal year ended December 31, 2014.

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Stock Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended the (“Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows a comparison from June 27, 2013 (the date our common stock commenced trading on the NASDAQ Global Select Market) through December 31, 2014 of the cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index (the “S&P 500”), the NASDAQ Composite Index (the “NASDAQ Composite”) and the NASDAQ Biotechnology Index (the “NBI”). The graph assumes that $100 was invested at the market close on June 27, 2013 in the common stock of Aratana Therapeutics, Inc., the S&P 500, the NASDAQ Composite and the NBI and data for the S&P 500, the NASDAQ Composite and the NBI assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.

 

 

 

 

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Item 6.  SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial data of our company as of and for each of the years in the five-year period ended December 31, 2014 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

The information presented in the following tables has been adjusted to reflect the restatement of our Consolidated Financial Statements for the year ended December 31, 2013 resulting from our review of our allocation of the purchase price for the October 2013 acquisition of Vet Therapeutics, Inc. (“VTI”), and in particular, the allocation of the purchase price to identifiable and amortizable intangible assets, goodwill and net deferred tax liabilities, as is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements in Part II, Item 8. Historical results are not necessarily indicative of the results to be expected in future periods.

For a discussion of certain factors that materially affect the comparability of the selected consolidated financial data or cause the data reflected herein not to be indicative of our future results of operations or financial condition, see Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes of our consolidated financial statements included elsewhere in this report.

 

 

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Item 7.  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 consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business, and expectations regarding product development and licensing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this annual report 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 or elsewhere in this annual report.

Restatement of Previously Reported Audited Annual Consolidated Financial Information

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to certain adjustments made to the previously reported audited Consolidated Financial Statement for the year ended December 31, 2013 in connection with the restatement of such financial statements in Part IV, Item 15 of this Annual Report. Refer to the Explanatory Note preceding Part 1, Item 1 of this Annual Report and Notes 2 and 20 in the Notes to the Consolidated Financial Statements included in this Annual Report for additional details regarding the restatement.

Overview

We are a pet therapeutics company focused on licensing, developing and commercializing innovative biopharmaceutical products for companion animals. We operate in one business segment which sits 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 18 therapeutic candidates in development consisting of small molecule pharmaceuticals and large molecule biologics that target large opportunities in serious medical conditions in pets.

Our most advanced products from a development and commercialization perspective, AT-004 and AT-005, are monoclonal antibodies for treating lymphoma in dogs. AT-004, which treats B-cell lymphoma, received a full license from the U.S. Department of Agriculture (USDA) in January 2015. AT-004 was previously out-licensed through an exclusive commercial agreement between Aratana and Elanco Animal Health (“Elanco”). However, on February 24, 2015, the parties terminated that license by mutual consent and we intend to commence post-approval studies and commercialize the product ourselves beginning in 2015. In January 2015, we identified a quality issue in the manufacturing of one serial lot of AT-004 that had been manufactured in 2013. We completed an investigation into the serial lot and identified an environmental contaminant in certain of the vials in the lot, and in agreement with the USDA, that serial lot will be destroyed. In connection with the investigation, the other manufacturing lots of AT-004 were inspected and no other contaminated vials were found. AT-005, which treats T-cell lymphoma, received a conditional license from the USDA in January 2014 and full license is anticipated in 2015. Our other lead products include small molecules directed at treating osteoarthritis pain and inflammation, stimulation 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. During 2014, we added over 10 new programs and advanced several of our leading programs within our portfolio. In January 2014, we acquired Okapi Sciences, which provided us with a pipeline of antiviral drugs, including product candidates focused on the treatment of herpes and immunodeficiency in cats. We also in-licensed a cancer immunotherapy targeting canine osteosarcoma, and an allogeneic stem cell treatment for osteoarthritis. After evaluating a compound under our Option Program targeting atopic dermatitis, in the fourth quarter of 2014, we executed a license agreement to move this compound into development.

 

In December 2014, we announced positive top-line results from the AT-001 pivotal field study in client-owned dogs with osteoarthritis. Clinical success rates based on the validated Canine Brief Pain Inventory (“CBPI”) at day 28 were 48.1% for the once-daily dose of AT-001 vs. 31.3% for the placebo group which represents a statistically significant difference (p<0.05), thereby achieving the study's primary endpoint as agreed under protocol concurrence with the FDA's Center for Veterinary Medicine (“CVM”). Furthermore, the clinical success rates on days 7, 14 and 21 vs. placebo group were all statistically significant (p<0.05). Adverse reactions in the pivotal field effectiveness study were limited to mild adverse events and AT-001 was not associated with abnormalities in liver and renal parameters that are associated with NSAIDs from the class of cyclooxygenase inhibitors, or Coxibs.

 

We anticipate submitting the pivotal study results to the CVM to satisfy the effectiveness technical section in 2015. In January 2015, we received the target animal safety technical section complete letter for AT-001 in dogs from the CVM. We anticipate the CMC technical section complete letter for AT-001 in 2016, after which we anticipate filing an Administrative New Animal Drug Application (“NADA”) in 2016. We continue to anticipate approval of AT-001 in dogs in 2016. During 2014, we initiated a proof of concept study of AT-001 in client-owned cats with degenerative joint disease (DJD).

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AT-002, our ghrelin agonist for appetite stimulation, continues to enroll patients in its pivotal field effectiveness study in client-owned dogs. We anticipate completing full enrollment in the second quarter of 2015. In March 2015, we received a target animal safety technical section complete letter for AT-002 in dogs from the CVM.

We initiated a pivotal field effectiveness study in dogs for AT-003 in December 2014. The study will evaluate AT-003 for post-operative pain management in dogs undergoing knee surgery. In January 2015, we received the target animal safety technical section complete letter for AT-003 in dogs from the CVM.

We have successfully completed enrollment of our multicenter, blinded, placebo-controlled, randomized study (T-CHOMP) designed to assess the benefit of adding AT-005 to a multi-agent chemotherapy protocol for dogs with intermediate to high grade T-cell lymphoma. The study is expected to be completed in the next 12 to 18 months.

We continue to enroll patients in our multicenter, blinded, placebo-controlled, randomized study (T-LAB) designed to assess the benefit of adding AT-005 to an abbreviated chemotherapy protocol for dogs with intermediate to high grade T-cell lymphoma. The study is expected to fully-enroll in 2015 and results are expected in 2016.

We continue to expand AT-005 availability in our T-cell Clinical Experience Program or T-CEP. We are currently receiving product orders from approximately two dozen oncology practices.

In March 2015, we received notice that the USDA accepted the data from a clinical study in client owned osteosarcoma patients to provide reasonable expectation of efficacy to support conditional licensure for AT-014. We anticipate receipt of a conditional USDA license in the second half of 2016.

We have incurred significant net losses since our inception. We incurred net losses of $38.8 million, $6.9 million and $11.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. 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 December 31, 2014, we had a deficit accumulated since inception of $68.0 million and cash, cash equivalents and short-term investments of $98.1 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, there is a risk that 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. As of the date of the filing of this annual report, we believe that our existing cash and cash equivalents, short-term investments, which includes the net proceeds received by us in our public offerings of common stock, as discussed below, and existing Credit Facility with Square 1 Bank (the “Credit Facility”) will allow us to fund our operations through December 31, 2016.

Recent Developments

Public Offerings

On February 3, 2014, we completed a public offering of our common stock in which we issued and sold 5,150,000 shares of common stock at a public offering price of $19.00 per share. We received net proceeds of approximately $90.5 million after deducting underwriting discounts and commissions of approximately $5.9 million and other offering expenses of approximately $1.5 million.

 

On September 22, 2014, we completed a public offering of our common stock in which we issued and sold 5,175,000 shares of common stock at a public offering price of $9.25 per share. We received net proceeds of approximately $44.8 million after deducting underwriting discounts and commissions of approximately $2.9 million and other offering expenses of approximately $0.4 million.

Sale of Advaxis Inc. (“Advaxis”) Shares

During January 2015, we sold shares of Advaxis common stock for net proceeds of $1.5 million. The shares were acquired as part of the license agreement executed in 2014.

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Acquisition of Okapi Sciences NV (“Okapi Sciences”)

On January 6, 2014, we acquired Okapi Sciences, a Belgium-based company with a proprietary pet therapeutics antiviral platform and product candidates designed to treat important viral diseases. This acquisition provided us with a pipeline of antiviral drugs, including product candidates focused on the treatment of herpesvirus and immunodeficiency virus infections in cats.

To acquire Okapi Sciences, we paid its equity holders approximately €10.3 million (equivalent to $14.1 million) in cash and issued a promissory note for €11 million (approximately $15.1 million). The promissory note bore interest at 7% per annum payable quarterly in arrears and was scheduled to mature on December 31, 2014, subject to mandatory prepayment in the event of an equity financing. Such an equity offering closed on February 3, 2014, as indicated above, and, in connection with that financing, the holders of the note payable related to the Okapi Sciences acquisition were repaid. 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 included the equity offering that closed on February 3, 2014. Subsequent to the equity offering this obligation was settled through the payment in cash of $15.2 million. We believe the strategic acquisition of Okapi Sciences further enhances our leadership position in pet therapeutics by bringing with it a combination of individuals, strong relationships with academic institutions, novel technologies and products, and favorable geographic location.

License Agreements

Elanco, formerly Novartis Animal Health

On February 24, 2015, we and our partner Elanco terminated by mutual consent an exclusive commercial license agreement for AT-004 in the U.S and Canada reverting control of all commercial, development and manufacturing activities of AT-004 back to us. As part of the termination agreement, Elanco agreed to pay the full approval milestone and all amounts due with respect to product manufactured for Elanco in 2014 totaling $3.2 million. We agreed to pay Elanco $2.5 million to reacquire all rights to AT-004, plus a milestone of $0.5 million due after we complete our first commercial sale of the product, expected in the second half of 2015.  

 

RaQualia Pharma Inc. (“RaQualia”)

In October 2014, we received notice that the AT-001 API we delivered to RaQualia was accepted. Per the terms of the AT-001 RaQualia API Development Agreement, we received $0.8 million for the successful development and delivery of the API to RaQualia. During the fourth quarter of 2014, we recognized the $0.8 million deferred income related to the payment received at execution and another $0.8 million of income from the successful delivery.

Atopix Therapeutics Ltd (“Atopix”)

On October 10, 2014, we entered into an exclusive license agreement (“Atopix Agreement”) with Atopix. The Atopix Agreement granted us an exclusive global license to develop and commercialize products specifically developed for animal use that contain an oral CRTH2 antagonist developed by Atopix. We are developing this product for the treatment of atopic dermatitis for dogs (AT-018). 

 

CRTH2 is a G protein-coupled receptor expressed selectively by key cells that mediate allergic responses, and it has been shown to play an important role in both allergic sensitization and effector responses to allergen. CRTH2 antagonists block mast cell-dependent activation of Th2 lymphocytes, basophils and eosinophils, interrupting an important immune pathway. Studies in models of allergic dermatitis have demonstrated that CRTH2 antagonists reduce accumulation of leukocytes, tissue swelling and production of cytokines, chemokines and IgE.

We made a one-time payment to Atopix of $1 million and have agreed to pay additional milestones potentially totaling $4.5 million and mid-single digit royalties on our product sales, if any, under the terms of this agreement. Atopix is currently evaluating its lead once-daily oral candidate having the same active ingredient as the AT-018 (known as OC459) in a human Phase 2 study in moderate to severe atopic dermatitis, and is supporting a registration study of OC459 in patients with eosinophilic asthma in Russia.

We do not expect to achieve milestones related to the Atopix Agreement within the next twelve months.

 

Vet-Stem, Inc. (“Vet-Stem”)

 

On June 12, 2014, we entered into an Exclusive License Agreement with Vet-Stem (the “Vet-Stem Agreement”) that granted us the exclusive United States rights for commercialization and development of Vet-Stem’s allogeneic stem cells being developed for the treatment of pain and inflammation of canine osteoarthritis (“AT-016”). Vet-Stem is responsible for the development and obtaining regulatory approval of AT-016 and we are responsible for the commercialization of licensed products. Under the terms of the Vet-Stem Agreement, we paid an initial license fee of $0.5 million.  

 

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Advaxis

 

On March 19, 2014, we entered into an Exclusive License Agreement with Advaxis (the “Advaxis Agreement”) that granted us exclusive global rights for development and commercialization of certain animal health products for Advaxis’ containing the active pharmaceutical ingredient included in ADXS-cHER2 product in animal health applications. We are developing this product for the treatment of osteosarcoma in dogs (“AT-014”) as well as three additional cancer immunotherapy products for the treatment of three other types of cancer. Under the terms of the Advaxis Agreement, we paid $2.5 million in exchange for the license, 306,122 shares of common stock, and a warrant to purchase 153,061 shares of common stock. We will be required to pay Advaxis milestone payments of up to an additional $6.0 million in clinical and regulatory milestones for each of the four products, assuming approvals in both cats and dogs, in both the United States and the European Union. In addition, we agreed to pay up to $28.5 million in commercial milestones, as well as tiered royalties ranging from mid-single digit to 10% on the our product sales, if any.

 

Under the terms of the subscription agreement, we acquired 306,122 shares of common stock and a warrant to purchase another 153,061 shares of common stock for $1.8 million. The warrant is exercisable through March 19, 2024, at an exercise price of $4.90 per share of common stock and is to be settled through physical share issuance or net share settlement where the total number of issued shares is based on the amount the market price of common stock exceeds the exercise price of $4.90 on date of exercise.

 

We do not expect to achieve milestones related to the Advaxis Agreement within the next twelve months.

Other

 

On June 13, 2014, we amended our Credit Facility with Square 1 Bank to, among other things, convert $15.0 million in outstanding term loans under the Credit Facility into non-revolving loans (the “Converted Loans”) and modified certain terms and conditions of the loans, including fixing the interest rate at a fixed annual rate of 5.50%. We are obligated to make interest-only payments on any loans funded under the Credit Facility until June 13, 2016, on which date all amounts owed with respect to such non-revolving term loans will be due. If we remain in compliance with the terms of the Credit Facility through June 13, 2016 and we and Square 1 Bank, mutually agree to the structure of the financial covenants going forward, we shall have the option (subject to Square 1 Bank’s agreement to such financial covenant structure) to amortize the principal amount of the loans under the Credit Facility starting on June 13, 2016. If we elect to amortize the principal amount of the loans under the Credit Facility on June 13, 2016 (subject to Square 1 Bank’s agreement to the financial covenant structure going forward), the principal amount of the loans shall be payable in 24 equal monthly installments of principal, plus all accrued but unpaid interest, beginning on the date that is one month immediately following June 13, 2016.

Financial Overview

Revenue

During 2014, our AT-004 product for the treatment of B-cell lymphoma in dogs, was licensed in the United States and Canada to Elanco. Under the terms of the agreement, we received a royalty for commercial product sales and were responsible for the manufacturing of AT-004. In February 2015, we entered into a termination agreement with Elanco pursuant to which we reacquired the commercial and manufacturing rights to the AT-004 product, which received full approval in January 2015. We plan to commercialize the product ourselves. AT-005, our product for the treatment of T-cell lymphoma in dogs, was granted conditional approval in early 2014. During the three months ended December 31, 2014, we commenced limited commercial introduction of AT-005 to veterinary oncology practices and recorded revenue of $40,000. As we continue to generate data and awareness of the benefits of monoclonal antibody treatment, we anticipate that we will generate modest revenue for AT-004 and AT-005 in 2015. We anticipate full USDA licensure for AT-005 in 2015.

AT-006 is licensed worldwide to Elanco. As part of the agreement, we receive collaboration revenue as a result of research and development services completed.

Cost of Product Sales

The cost of the product sold includes direct material, direct labor, and overhead cost associated with manufacturing the product and third party royalties we owe for licensed technology associated with those products that are sold commercially. During 2014, we manufactured and provided product to Novartis Animal Health (now Elanco) on a cost plus margin basis per the license agreement. During the fourth quarter of 2014, we began reporting the cost of the AT-005 product for the commercial sales we generated during the quarter.

Royalty Expense

 

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Royalty expense includes third party royalties for licensed technologies pertaining to our AT-004 and AT-005 products. Royalties are either a minimum amount per year or a percentage of net product sales.

Operating Expenses

The majority of our operating expenses to date have been for the licensing of and the research and development activities related to our lead development programs.

Research and Development Expense

Research and development costs, which consist primarily of costs associated with our product development efforts, including target animal studies, are expensed as incurred. Research and development expense consists primarily of contracted development costs, wages, stock-based compensation and employee benefits for all employees engaged in scientific research and development functions, and other operational costs related to our research and development activities, including facility-related expenses, license payments made under our licensing agreements, regulatory, professional and consulting fees, travel costs and allocated corporate costs.

We have been developing our lead programs in parallel and typically use our employee and infrastructure resources across multiple development programs. We track contracted development costs by development compound but do not allocate personnel or other internal costs related to development to specific programs or development compounds. These expenses are included in personnel costs and other internal costs, respectively.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of personnel costs, including salaries, related benefits and stock-based compensation for employees in commercial, administration, finance, information technology, human resources, legal, and business development. Selling, general and administrative expenses also includes allocated rent and other facilities costs; conference and sponsorship activities, information technology services, professional and consulting fees for general and commercial business purposes, for accounting and tax services, business development activities, general legal services; and travel and other costs.

In-Process Research and Development Expense

In-process research and development (“IPR&D”) expense consists of costs associated with acquired in-licensed technology, including upfront payments. If a technology has not reached technological feasibility in animal health indications and has no alternative future use in the field of animal health, it is expensed upon acquisition.

Amortization of Acquired Intangible Assets

Amortization expense is from the amortization of our AT-004 and AT-005 products. During 2014, amortization expense was incurred for both AT-004 and AT-005.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our cash and cash equivalents and short-term investments.

Interest Expense

As of December 31, 2014, we have borrowed $15.0 million under our Credit Facility, and we incur interest expense associated with those borrowings. A more detailed description of our Credit Facility is available under the caption “Liquidity and Capital Resources.”

Other Income

We recognized other income for the successful development and delivery of AT-001 API to RaQualia. During the fourth quarter of 2014, we recognized $0.8 million of deferred income related to the payment received from RaQualia at execution and received another $0.8 million of income from the successful delivery.

Other income also consists of amounts received under a research and development voucher program grant agreement with the Kansas Bioscience Authority (“KBA”), which was executed in March 2012. We were eligible to receive up to $1.3 million over an estimated two year period, in the form of a quarterly reimbursement of 33% of costs incurred during that period for pre-formulation, formulation, manufacture and pivotal studies associated with the AT-001 and AT-002 programs, to the extent that such costs are incurred with specifically named Kansas companies. From inception through December 31, 2014, we received $0.6 million under this agreement. We do not expect to receive other monies under the voucher program.

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Income Taxes

As of December 31, 2014, we had federal and state net operating loss carryforwards of $15.2 million and $13.3 million, respectively, and federal and state research and development tax credit carryforwards of $0.7 million and $0.5 million, respectively.

On October 15, 2013, we acquired Vet Therapeutics Inc. (“Vet Therapeutics”). As a result of the acquisition, we recognized approximately $12.7 million of net deferred tax liability primarily related to the step-up of intangible assets for book purposes. The taxable temporary difference from the acquisition is considered a source of future taxable income in determining the realizability of our deferred tax assets. As such, the Vet Therapeutics acquisition impacted our assessment of the valuation allowance recorded against our deferred tax assets. As a result of this assessment, during the three months ended December 31, 2013, we released our valuation allowance recorded against federal deferred tax assets and recorded an income tax benefit of approximately $12.7 million in our consolidated statement of operations.

On January 6, 2014, we acquired Okapi Sciences (which was renamed Aratana Therapeutics (“Aratana NV”) in April 2014). As a result of the acquisition, we recorded approximately $3.7 million of net deferred tax liability primarily related to the step-up of intangible assets for book purposes. The taxable temporary difference from the acquisition is considered a source of future taxable income in determining the realizability of our deferred tax assets. During 2014, we recognized approximately $1.4 million of income tax benefit for losses incurred in Aratana NV.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements appearing elsewhere in this filing, we believe that the estimates and assumptions involved in the following accounting policies may have the greatest potential impact on our consolidated financial statements.

Business Combination

 

On January 6, 2014, we acquired Okapi Sciences, a Leuven, Belgium based company with a proprietary antiviral platform and three clinical/development stage product candidates.

Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management, but which are inherently uncertain.

We generally employ the income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Net assets acquired are recorded at their fair value and are subject to adjustment upon finalization of the fair value analysis.

On October 15, 2013, we acquired Vet Therapeutics, Inc., a San Diego-based company with a proprietary antibody-based biologics platform. We plan to continue to advance this pipeline of monoclonal antibody biologic drugs, including the lymphoma franchise, which currently comprises our AT-004, AT-005, AT-009, AT-010 and AT-015 products and product candidates.

We agreed to pay up to $5.0 million in contingent cash consideration in connection with the achievement of certain regulatory and manufacturing milestones for AT-004. 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. This resulted in aggregate contingent purchase consideration of $3.8 million. 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. At each reporting date, we revalue the contingent consideration obligations to the reporting date fair values and record increases and decreases in the fair values as income or expense in the consolidated statements of operations until actual settlement occurs. 

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Increases or decreases in the fair values of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of earn-out criteria and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

Impairment of Intangible Assets and Goodwill

Indefinite-lived IPR&D intangible assets are assessed for impairment at least annually. In addition, all intangible assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, we compare forecasts of undiscounted cash flows for definite-lived intangible assets and discounted cash flows for indefinite-lived IPR&D intangible assets expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted (definite-lived) or discounted (indefinite-lived) future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, we have not recorded any impairment losses on intangible assets.

 

We completed our annual indefinite-lived IPR&D intangible assets impairment testing during the fourth quarter of 2014. For purposes of impairment testing, the fair value of the indefinite-lived IPR&D intangible assets were determined by using the framework of ASC 820, Fair Value Measurement. When determining the fair value of the indefinite-lived IPR&D intangible assets, we revisited all assumptions used in measuring the indefinite-lived IPR&D intangible assets at the time of acquisition, and evaluated and considered new and updated data and information available. We noted the fair values for all indefinite-lived IPR&D intangible assets were greater than the carrying value. As such, no impairment was recognized as of the testing date.

 

We completed our annual goodwill impairment testing during the third quarter of 2014. We elected to bypass the qualitative assessment. We determined as of the testing date that we still consisted of one operating segment which is comprised of one reporting unit. In performing step one of the assessment, we determined that our fair value, determined to be our market capitalization, was greater than our carrying value, determined to be stockholder’s equity. Based on this result, step two of the assessment was not required to be performed, and we determined there was no impairment of goodwill as of the testing date.

 

Revenue Recognition

 

Our principal revenue streams were licensing and collaboration and product sales. Beginning in 2014, as a result of the Okapi Sciences NV acquisition (Note 20), we generate revenue from research and development services. Revenues from the performance of research and development services are recorded as licensing and collaboration revenue in the consolidated statements of operations and are recognized on a proportional basis as costs are incurred.

We recognize revenue when all of the following conditions are met:

Our principal revenue streams and their respective accounting treatments are discussed below:

(i) Product sales - Revenue for the sale of products is recognized when delivery has occurred and substantially all the risks and rewards of ownership have been transferred to the customer. Revenue for the sale of products are recorded net of sales returns, allowances and discounts.

(ii) Royalty revenue - Royalty revenue relating to our out-licensed technology is recognized when reasonably estimable. The revenues are recorded based on estimates of the licensee’s sales that occurred during the relevant period. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically in the following quarter. If we are unable to reasonably estimate royalty revenue or do not have access to the information, then we record royalty revenue on a cash basis.

(iii) Licensing and collaboration revenues - Revenues derived from product out-licensing arrangements typically consist of an initial up-front payment on inception of the license and subsequent milestone payments contingent on the achievement of certain clinical and sales milestones. Product out licensing arrangements may require us to provide multiple deliverables to the licensee which would require the total selling price to be allocated between each of the separable elements in the arrangement using the relative selling price

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method. An element is considered separable if it has value to the customer on a stand-alone basis. The selling price used for each separable element will be based on vendor specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. Revenue is then recognized as each of the separable elements to which the revenue has been allocated is delivered.

Milestone payments which are non-refundable, non-creditable and contingent on achieving certain development, regulatory, or commercial milestones are recognized as revenues either on achievement of such milestones or over the period we have continuing substantive performance obligations.

Research and Development

As part of the process of preparing our consolidated financial statements, we are required to estimate accrued research and development expenses. Examples of estimated accrued expenses include fees paid to clinical research organizations (“CROs”), in connection with target animal studies, to investigative sites in connection with target animal studies, to contract manufacturers in connection with the production of active pharmaceutical ingredient, and formulated drug, and to other parties for outsourced chemistry services.

We review new and open contracts and communicate with applicable internal and vendor personnel to identify services that have been performed on our behalf and estimate the level of service performed and the associated costs incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost for accrued expenses. The majority of our service providers invoice us monthly in arrears for services performed or as milestones are achieved in relation to our contract manufacturers. We make estimates of our accrued expenses as of each consolidated balance sheet date.

We base our accrued expenses related to target animal studies on our estimates of the services received and efforts expended pursuant to contracts with CROs that conduct and manage target animal studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of animals and the completion of development milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the related expense accrual accordingly on a prospective basis. If we do not identify costs that have been incurred or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not made any material adjustments to our estimates of accrued research and development expenses or the level of services performed in any reporting period presented in this document.

Stock-Based Compensation

We measure stock-based awards granted to employees and directors at fair value on the date of grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Stock-based compensation related to restricted stock awards is based on the market value of our common stock on the date of grant and is recognized as expense, net of forfeitures, ratably over the requisite service period. Generally, we issue stock-based awards with only service-based vesting conditions and record compensation expense for these awards using the straight-line method. Our intention is to grant stock-based awards with exercise prices equivalent to the fair value of our common share as of the date of grant.

We account for all stock-based awards issued to non-employees based on the fair value of the award on each measurement date. Stock-based awards granted to non-employees are subject to revaluation at each reporting date over their vesting terms. As a result, the charge to operations for non-employee awards with vesting conditions is affected each reporting period by changes in the fair value of our common stock.

The fair value of each stock-based award is estimated using the Black-Scholes option-pricing model. Prior to 2014, due to the lack of company-specific historical and implied volatility information, we estimated our expected volatility based on the historical volatility of our publicly-traded peer companies.  Beginning in the first quarter of 2014 we began to base expected volatility on the historical volatility of our common stock as adequate historical data regarding the volatility of our common stock price had become available. The expected term of our awards has been determined utilizing the “simplified” method as we do not have sufficient historical experience for option grants overall, rendering existing historical experience irrelevant to expectations for current grants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash

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dividends and do not expect to pay any cash dividends in the foreseeable future. The assumptions we used to determine the fair value of stock-based compensation granted in each period were as follows, presented on a weighted average basis:

 

 

 

These assumptions represent our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, we have considered our historical experience to estimate pre-vesting forfeitures. If our actual forfeiture rate is materially different from the estimate, our stock-based compensation expense could be different from what we have recorded in the current period. We had an aggregate of $13.3 million and $4.3 million of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, as of December 31, 2014, which is expected to be recognized over a weighted-average of 2.94 years for stock options and 1.97 years for restricted stock.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities, other than those arising from business combinations, are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

We account for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act (“JOBS Act”), was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.

In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, and (ii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering, which such fifth anniversary will occur in 2018, or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

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Results of Operations

Comparison of the Years Ended December 31, 2014 and 2013 

 

 

 

 

Revenues

 

 

Total revenue for the year ended December 31, 2014 was $0.8 million compared to total revenue of $0.1 million in 2013. This increase was primarily due to an increase of $0.5 million in collaboration revenue related to AT-006 as a result of research and development completed under our license agreement with Elanco and an increase of $0.1 million for AT-004 product sold at a cost plus margin basis to our former partner Elanco. In 2014, we also recorded $40,000 in product sales of AT-005, which was granted conditional approval in early 2014. In 2013, we reported $0.1 million in revenue as a result of AT-004 product sold to Elanco.

 

During 2014, AT-004 for the treatment of B-cell lymphoma in dogs, was licensed in the United States and Canada to Elanco. Under the terms of the agreement, we received a royalty for commercial product sales and were responsible for the manufacturing of AT-004. During 2014, we recorded $0.2 million in product sales for AT-004. On February 24, 2015, we and our partner Elanco terminated by mutual consent an exclusive commercial license agreement for AT-004 in the U.S and Canada, reverting control of all commercial, development and manufacturing activities of AT-004 back to us. AT-005, our product for the treatment of T-cell lymphoma in dogs, was granted conditional approval in early 2014 and we commenced sales during the fourth quarter of 2014 recording product sales of $40,000. As we continue to generate data and awareness of the benefits of monoclonal antibody treatment, we anticipate that we will generate modest revenue for AT-004 and AT-005 in 2015. We anticipate full USDA licensure for AT-005 in 2015.

 

Cost of Product Sales

 

 

The cost of product sales includes direct material, direct labor, stock-based compensation and overhead costs associated with manufacturing products. During 2014, we manufactured and provided product to Elanco on a cost plus margin basis per the license agreement. During the fourth quarter of 2014, we began reporting the cost of the AT-005 product for the commercial sales we generated during the quarter. Cost of product sales increased $0.2 million due to the increased volume of AT-004 sold to Elanco and we began selling AT-005 during 2014.

 

Research and development expense

 

 

Research and development expense increased by $9.1 million for the year ended December 31, 2014 as compared to 2013. This increase was primarily due to a $5.2 million increase in contracted development costs as a result of the advancement of lead programs, as well as an increased number of programs and related studies, a $2.9 million increase in personnel costs primarily related to increased staff as a results of the Vet Therapeutics and Okapi Sciences acquisitions and a $0.9 million increase in other costs related to supporting multiple facilities and an increased number of programs under development. We expect research and development expense will increase for the foreseeable future as we continue to advance our portfolio of therapeutic candidates. At this time, due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. We expect to fund our research and development expenses from our cash and cash equivalents, and short-term investments and any future collaboration arrangements. We cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

 

Royalty Expense

 

 

 

We are required to pay third party royalties for licensed technology associated with those products that are sold commercially. During 2013 and 2014, we recognized royalty expense for net product sales allocable to our monoclonal antibody targets and recombinant antibodies. In 2014, we recognized $72,000 in royalty expenses which includes an accrued minimum royalty of $70,000 related to the Crucell Commercial Agreement. During 2013, this minimum royalty expense was borne by Vet Therapeutics before the acquisition.

 

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Selling, General and administrative expense

 

 

Selling, general and administrative expense increased by $9.4 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase was primarily due to a $4.6 million increase in stock-based compensation expense due to increased stock prices and an increase in the number of grants provided to new employees, $1.6 million in costs associated with our commercial infrastructure and business development initiatives; and a $1.6 million increase in personnel-related costs, which was the result of increased staffing, employee benefits, travel and supplies. We expect selling, general and administrative expense to continue to increase as we continue to build our corporate infrastructure in the support of continued development and commercialization of AT-001, AT-002, AT-003, AT-004 and AT-005, biologics and other development programs. These expected increases will be further driven by the increased personnel, and facilities resulting from our acquisitions of Vet Therapeutics and Okapi Sciences.

In-process research and development expense

 

 

In-process research and development expense increased by $2.2 million for the year ended December 31, 2014. In 2014, we incurred $0.7 million, $0.5 million and $1.0 million of in-process research and development expense under our agreements with Advaxis, Vet-Stem and Atopix, respectively. We did not acquire any in-process research and development programs during 2013, other than those acquired in the acquisition of Vet Therapeutics, which were capitalized.

Amortization of Acquired Intangible Assets

 

 

 

Amortization expense increased by $1.6 million for the year ended December 31, 2014. This increase is due to a full year of amortization of AT-004 and 11 months of amortization of AT-005. We began amortizing AT-005 intangible over its 20 year estimated useful life during the period as conditional approval was received. 

 

Other income (expense)

Changes in the components of other income (expense) were as follows:

Interest income

 

 

Interest income increased by $48,000 for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase primarily relates to interest earned related to deposits held at Square 1 Bank and short-term investments in reverse repurchase

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agreements. We also had increased deposits and investments in 2014 due to the additional proceeds acquired in public offerings in January 2014 and September 2014.

Interest expense

 

 

Interest expense increased by $0.6 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase was due to interest expense related to our Credit Facility, which was entered into during March 2013 and notes payable associated with the acquisition of Vet Therapeutics and Okapi Sciences. Accretion of the debt discount and deferred financing costs totaled $41,000, which is non-cash interest included in our interest expense above.

Other income

 

 

Other income increased by $1.8 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. This activity is related primarily to the successful development and delivery of the API to RaQualia. During the fourth quarter of 2014, we recognized $0.8 million of deferred income related to the payment received from RaQualia at execution and received another $0.8 million of income from the successful delivery. We also recorded other income associated with research and development voucher program grant agreement with the KBA, which was executed in March 2012. We were eligible to receive up to $1.3 million over an estimated two-year period, in the form of a quarterly reimbursement of 33% of costs incurred during that period for pre-formulation, formulation, manufacture and pivotal studies associated with the AT-001 and AT-002 programs, to the extent that such costs are incurred with specifically named Kansas companies. From inception through December 31, 2014, we have received $0.6 million under this agreement.

 

Income tax benefit

 

 

Income tax benefit decreased by $11.3 million for the year ended December 31, 2014. This decrease in income tax benefit is due to the change in judgment on our existing valuation allowance against our deferred tax assets, following the Vet Therapeutics acquisition during 2013. The income tax benefit recognized during 2014 is due to losses incurred in Aratana NV.

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Comparison of the Years Ended December 31, 2013 and 2012

 

 

Revenue

With the purchase of Vet Therapeutics, we acquired AT-004 for the treatment of B-cell lymphoma in dogs. During 2013, this product was licensed in the United States and Canada to Elanco and had been granted a full approval from the USDA in 2015. Under the terms of the agreement, we received a royalty for commercial product sales. During 2013, we were responsible for the manufacturing of AT-004 until the successful transfer of the manufacturing technology to Elanco’s chosen manufacturer. Elanco purchased the product we manufactured at cost plus an agreed upon margin.

Cost of Product Sales

The cost of the product sold includes direct material, direct labor, and overhead cost associated with manufacturing the product. During 2013, we continued to manufacture and provide AT-004 to Elanco on a cost plus margin per the license agreement.

Research and development expense

 

 

Research and development expense increased by $3.6 million for the year ended December 31, 2013 as compared to 2012. This increase was primarily due to a $1.8 million increase in personnel costs as a result of increased staffing, a $1.4 million increase in other costs primarily related to three option programs to in-license new compounds, a $0.9 million increase in contracted development costs related to development of AT-001, and a $0.6 million increase in contracted development costs related to commencement of development of AT-003. This increase is partially offset by a decrease of $1.1 million in contracted development costs relating to AT-002. AT-002 incurred increased clinical study costs during the period and decreased manufacturing cost as compared with the comparable period in 2012.

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General and administrative expense

 

 

General and administrative expense increased by $5.6 million for the year ended December 31, 2013 compared to 2012. This increase was primarily due to a $1.5 million increase in professional fees associated with the higher costs of public company requirements, $1.3 million in costs associated with our commercial infrastructure and business development initiatives; and a $0.9 million increase in personnel-related costs, which was the result of increased staffing, employee benefits, travel and supplies.

In-process research and development expense

 

 

In-process research and development expense decreased by $1.5 million for the year ended December 31, 2013. We did not acquire any in-process research and development programs during 2013, other than those acquired in the acquisition of Vet Therapeutics, which were capitalized.

Amortization of Acquired Intangible Assets

 

 

Amortization expense increased by $0.3 million for the year ended December 31, 2013. This increase is solely due to the acquisition of Vet Therapeutics. We identified certain intangible assets associated with AT-004 and began amortizing this intangible over its 20 year estimated useful life during the period as conditional approval had already been received.

 

Other income (expense)

Changes in the components of other income (expense) were as follows:

Interest income

 

 

Interest income increased by $54,000 for the year ended December 31, 2013 compared to 2012 and primarily relates to interest earned related to deposits held at Square 1 Bank and investments in certificates of deposit.

 

Interest Expense

 

 

Interest expense increased by $0.4 million for the year ended December 31, 2013 compared to no interest expense incurred during 2012. This increase was due to interest expense related to our Credit Facility, which was entered into during March 2013 and note payable associated with the acquisition of Vet Therapeutics. Accretion of the debt discount and deferred financing costs totaled $30,000, which is non-cash interest included in our interest expense above.

 

Other income

 

 

Other income increased by $0.4 million during the year ended December 31, 2013 compared to the year ended December 31, 2012. This activity is related primarily to a research and development voucher program grant agreement with the KBA, which was executed in March 2012. From inception through December 31, 2013, we received $0.6 million under this agreement.

Income Tax Benefit

 

 

Income tax benefit increased by $12.7 million for the year ended December 31, 2013. This increase is due to the change in judgment on our existing valuation allowance against our deferred tax assets following the Vet Therapeutics acquisition. As a result, we recognized approximately $12.7 million of net deferred tax liability, primarily related to the step-up of intangible assets for book purposes. The taxable temporary difference from the acquisition is considered as a source of taxable income in determining the realizability of our deferred tax assets. As a result, a portion of the valuation allowance against our net deferred tax asset was reversed during 2013, resulting in the recognition of tax benefit of approximately $12.7 million.

 

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations and have not generated significant revenue since our inception in December 2010, and as of December 31, 2014, we had a deficit accumulated since inception of $68.0 million.

As of December 31, 2014, we had cash, cash equivalents and short-term investments of $98.1 million.

On February 3, 2014, we completed a public offering of our common stock in which we issued and sold 5,150,000 shares of common stock at a public offering price of $19.00 per share. We received net proceeds of approximately $90.5 million after deducting underwriting discounts and commissions of approximately $5.9 million and other offering expenses of approximately $1.5 million.

On September 22, 2014, we completed a public offering of 5,175,000 shares of our common stock for approximately $44.8 million of net proceeds. The offering was made pursuant to a shelf registration statement filed with the Securities and Exchange Commission on July 15, 2014, which was declared effective on July 30, 2014.

As of the date of the filing of this annual report, we believe that our existing cash and cash equivalents, short-term investments, which includes the net proceeds received by us in our public offering of common stock, as discussed above, and existing Credit Facility will allow us to fund our operations through December 31, 2016. We anticipate that we will continue to incur losses for at least the next several years. We expect an increase in investment related to our research and development and commercial activities and, as a result,

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we may need additional capital to fund our operations, which we may obtain from public or private equity, debt financings or other sources, such as corporate collaborations and licensing arrangements.

In March 2014, we entered into a license agreement with Advaxis for the development and commercialization of certain animal health products containing the active pharmaceutical ingredient included in Advaxis’ ADXS-cHER2 product in animal health applications, including AT-014. In January 2015, we sold shares of Advaxis common stock acquired in connection with our entry into the license agreement for proceeds of $1.5 million.

Indebtedness

In March 2013, we entered into a loan and security agreement, or Credit Facility, with Square 1 Bank, as lender. The Credit Facility originally provided for an initial term loan of $5.0 million in principal and additional term loans not to exceed $5.0 million in principal. We borrowed $5.0 million under the Credit Facility. On October 11, 2013, we entered into an amendment of the Credit Facility, which, among other things, increased the amount that remains available for us to draw by an additional $5.0 million, to a total of $10.0 million. Simultaneously with the closing of the Credit Facility amendment on October 11, 2013, we borrowed the total $10.0 million available under the Credit Facility, as amended. Pursuant to the terms of the Credit Facility amendment, upon consummation of the merger with Vet Therapeutics, Vet Therapeutics then became a co-borrower under the Credit Facility, as amended, and granted a security interest in substantially all of its assets to Square 1 Bank.

On June 13, 2014, we and Vet Therapeutics entered into an additional amendment of the Credit Facility, which, among other things, converted $15.0 million in outstanding term loans under the Credit Facility into non-revolving loans and modified certain terms and conditions of the loans, including fixing the interest rate at a fixed annual rate of 5.50%. We are obligated to make interest-only payments on any loans funded under the Credit Facility until June 13, 2016, on which date all amounts owed with respect to such non-revolving term loans will be due. If we and Vet Therapeutics remain in compliance with the terms of the Credit Facility through June 13, 2016 and Square 1 Bank, us and Vet Therapeutics mutually agree to the structure of the financial covenants going forward, we and Vet Therapeutics shall have the option (subject to Square 1 Bank’s agreement to such financial covenant structure) to amortize the principal amount of the loans under the Credit Facility starting on June 13, 2016. If we and Vet Therapeutics elect to amortize the principal amount of the loans under the Credit Facility on June 13, 2016 (subject to Square 1 Bank’s agreement to the financial covenant structure going forward), the principal amount of the loans shall be payable in 24 equal monthly installments of principal, plus all accrued but unpaid interest, beginning on the date that is one month immediately following June 13, 2016.

 

The term loans are to be used to supplement our growth capital needs and for general corporate purposes. The Credit Facility is secured by substantially all of our personal property other than our intellectual property, and pursuant to the terms of the Credit Facility, we are not permitted to encumber, or grant a security interest in, our intellectual property. At December 31, 2014, total borrowings under the Credit Facility were $15.0 million.

We are obligated to pay a success fee of up to $0.3 million if we close a sale of substantially all of our assets or capital stock, or consummate a reorganization where our voting stockholders before such transaction hold less than 50% of our voting securities after such transaction.

The Credit Facility includes restrictions on, among other things, our ability to incur additional indebtedness, pay dividends in cash or make other distributions in cash, make certain investments, create liens, sell assets, make loans and make capital expenditures. The Credit Facility requires that we maintain a liquidity ratio of at least 1.00-to-1.00 of unrestricted cash and 50% of account receivables to all indebtedness at the bank. At December 31, 2014, we were in compliance with all financial covenants.

The Credit Facility also includes events of default, the occurrence and continuation of any of which provide Square 1 Bank the right to exercise remedies against us and the collateral securing the loans under the Credit Facility, including our cash. These events of default include, among other things, our failure to pay any amounts due under the Credit Facility, our insolvency, the occurrence of a material adverse effect, the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $350,000.

In October 2013, in connection with the acquisition of Vet Therapeutics, we issued to the former shareholders of Vet Therapeutics’ common stock a promissory note in the principal amount of $3.0 million with a maturity date of December 31, 2014. The promissory note bore interest at a rate of 7% per annum, payable quarterly in arrears, and was subject to prepayment by us in the event of specified future equity financings. On February 4, 2014, we paid the promissory note and accrued interest of $20,000 in connection with the public offering that closed February 3, 2014.

In January 2014, in connection with the acquisition of Okapi Sciences, we issued as partial consideration for all of the outstanding capital stock of Okapi Sciences, a promissory note in the principal amount of €11.0 million (approximately $14.9 million USD), which bore interest at a rate of 7% per annum, payable quarterly in arrears, with a maturity date of December 31, 2014, subject to mandatory prepayment by us in the event of a specified future equity financing. On February 4, 2014, the promissory note and accrued interest was paid in cash in the amount of $15.2 million, in connection with the public offering that closed on February 3, 2014.

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Cash Flows

The following table shows a summary of our cash flows for the periods set forth below:

 

 

Net cash used in operating activities

During the year ended December 31, 2014, net cash used in operating activities was $32.2 million. We had a pretax loss of $40.3 million. Net cash used in operating activities primarily resulted from the adjustments of a non-cash expense for stock-based compensation of $7.1 million, IPR&D expense of $2.2 million, non-cash depreciation and amortization expense of $2.0 million, non-cash deferred income tax benefit of $1.4 million and working capital changes of $2.7 million. Our net losses were primarily attributable to research and development activities related to our research and development programs and our selling, general and administrative expenses, offset by $0.8 million revenue in the period. Net cash used by changes in our working capital consisted primarily of a decrease of $1.1 million in accounts payable, a decrease of $0.9 million in deferred income, and increase $0.5 million in accrued expenses, offset by uses of cash related to increase of $0.6 million in prepaid expenses. The increase in accrued expenses primarily related to the timing of payments made for our contracted research and development activities. The increase in prepaid expenses relates primarily to research and development agreements.

 

During the year ended December 31, 2013, net cash used in operating activities was $16.2 million. We had a pretax loss of $19.7 million. Net cash used in operating activities primarily resulted from the non-cash deferred income tax benefit of $12.7 million and from the net loss of $6.9 million, which includes adjustments of a non-cash expense for stock-based compensation of $1.0 million and working capital changes of $1.8 million. Our net losses were primarily attributed to research and development activities related to our AT-001, AT-002, AT-003, AT-004 and AT-005 programs and our general and administrative expenses, as we had no significant revenue in the period. Net cash provided by changes in our working capital consisted primarily of an increase of $1.0 million in accounts payable, an increase of $0.2 million in accrued expenses, offset by uses of cash related to increase of $0.2 million in prepaid expenses. The increase in accrued expenses primarily related to the timing of payments made for our contracted research and development activities. The increase in prepaid expenses relates primarily to research and development agreements.

During the year ended December 31, 2012, net cash used in operating activities was $7.8 million. Net cash used in operating activities primarily resulted from our net loss of $11.6 million, partially offset by net non-cash charges of $1.6 million and net cash provided from changes in operating assets and liabilities of $2.2 million. Our net losses are primarily attributed to research and development activities related to our AT-001, AT-002 and AT-003 programs and our general and administration expenses, as we had no revenue in the period. Our non-operating charges in the period consisted primarily of a charge of $1.5 million related to in-process research and development acquired from Pacira that had not yet achieved technological feasibility in animal health indications and did not have an alternative use, and $0.1 million of stock-based compensation expense. Net cash provided from changes in our operating assets and liabilities consisted primarily of increases of $0.8 million in deferred income, $1.0 million in accrued expenses and $0.5 million in accounts payable, partially offset by a $0.1 million decrease in other liabilities. The increase in deferred income relates to the upfront payment received from the RaQualia contract which will be recognized as income upon delivery of all the services required under the contract. The increases in accrued expenses and accounts payable primarily relate to the timing of payments made for our outsourced research and development activities.

Net cash used in investing activities

During the year ended December 31, 2014, net cash used in investing activities was $100.1 million, which related to the purchase of short-term investments for $371.2 million, as well as cash paid for the Okapi Sciences acquisition of $12.1 million, partially offset by proceeds from the maturities of investments of $286.7 million.

 

During the year ended December 31, 2013, net cash used in investing activities was $29.2 million, which related to the acquisition and related expenses for Vet Therapeutics of $31.0 million. In addition, $6.9 million of short-term marketable securities matured, partially offset by the purchase of $5.2 million of marketable securities.

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During the year ended December 31, 2012, net cash used in investing activities was $1.0 million. Net cash used in investing activities primarily resulted from the purchase of in-process research and development from Pacira for $1.0 million. During this period, we sold and purchased $6.6 million of marketable securities, resulting in no net change in cash.

Net cash provided by financing activities

During the year ended December 31, 2014, net cash provided by financing activities was $101.0 million. Net cash provided by financing activities primarily resulted from net proceeds of $137.2 million, net of commissions, raised in conjunction with public offerings, and proceeds of $0.2 million received from the exercise of stock options. This was partially offset by payments of $18.1 million related to payments of promissory notes, $15.2 million paid for contingent consideration, $2.2 million paid for public offering costs and $1.1 million paid for repurchase of common stock.

 

During the year ended December 31, 2013, net cash provided by financing activities was $72.5 million. Net cash provided by financing activities primarily resulted from net proceeds of $36.9 million, net of commissions, raised in conjunction with our initial public offering, net proceeds of $19.7 million from private investment in a public entity, net proceeds of $14.9 million from our Credit Facility, $3.4 million raised from the private placement of our series C convertible preferred stock prior to our initial public offering of common stock, and proceeds of $0.2 million received from the exercise of stock options. This was partially offset by payments of $2.6 million related to our initial public offering.

During the year ended December 31, 2012, net cash provided by financing activities was $16.8 million. Net cash provided by financing activities primarily resulted from gross proceeds of $7.7 million raised from the private placement of our series B convertible preferred stock, partially offset by issuance costs of $0.1 million; gross proceeds of $8.7 million raised from the private placement of series C convertible preferred stock, partially offset by issuance costs of $0.1 million; proceeds received from the exercise of stock options of $0.3 million; and proceeds received from the sale of restricted stock of $0.1 million.

Future Funding Requirements

We anticipate that we will continue to incur net losses for the next several years due to expenses for our development programs, including continuing studies in both cats and dogs for our programs in the United States and Europe and the in-licensing or acquisition of additional compounds for development as pet therapeutics.

In addition, we intend to hire additional personnel to build out a commercial sales force in the United States in anticipation of USDA and CVM approval of our products.

As of the date of the filing of this annual report, we believe that our cash, cash equivalents and short-term investments, and existing Credit Facility will fund our operations through December 31, 2016. 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 forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in the section of this filing entitled “Risk Factors.”

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

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2014 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

 

 

 

 

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Off-Balance Sheet Arrangements

Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.

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Recently Issued and Adopted Accounting Pronouncements

Intangibles—Goodwill and Other: Testing Goodwill for Impairment: In September 2011 the Financial Accounting Standards Board (“FASB”) issued guidance that simplifies how an entity tests goodwill for impairment. This guidance allows an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result the existence of its qualitative, events and circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. This update does not change the current guidance for testing other indefinite-lived intangible assets for impairment. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this standard in 2014 resulted from our business combination and did not have any impact on our financial position, results of operations, comprehensive income or cash flows as the guidance did not apply be until the first year we completed a goodwill impairment test.

Income Taxes—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the consolidated financial statements if a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. These changes became effective for us on January 1, 2014. As the Company does not have any unrecognized tax benefits, this new guidance has no impact on our financial condition, results of operations or cash flows.

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance will supersede the revenue recognition requirements in topic, Revenue Recognition, and most industry-specific guidance. This guidance also supersedes some cost guidance included in subtopic, Revenue Recognition – Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of topic, Property, Plant, and Equipment, and tangible assets within the scope of topic, Intangibles – Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this guidance.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

These changes become effective for us on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently assessing the impact, if any, this new guidance will have on our financial condition, results of operations or cash flows.

 

Development Stage Entities — Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance, Consolidations

 

In June 2014, the FASB issued guidance that removes all incremental reporting requirements from GAAP for development stage entities, including the removal of the topic development stage entities. These changes eliminate the requirement to report inception-to-date information in the statements of income, cash flows, and shareholder equity. These changes became effective for us on January 1, 2015 and early adoption is permitted. We opted to adopt this guidance as of June 30, 2014. The adoption of this guidance resulted in decreased financial statement disclosures, but did not impact our financial condition, results of operations or cash flows. 

 

Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide disclosure in the footnotes under certain circumstances. This guidance is 

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effective for fiscal years ending after December 15, 2016 with early adoption permitted. We do not expect that this guidance will have a material impact on our consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Fluctuation Risk

Our cash,  cash equivalents and short-term investments as of December 31, 2014 consisted primarily of cash,  certificates of deposit and reverse repurchase agreements. Our primary exposure to market risk for our cash, cash equivalents and short-term investments is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations.

 

We have borrowed $15.0 million under our Credit Facility.  We are obligated to make interest-only payments on any loans funded under the Credit Facility until June 13, 2016, on which date such non-revolving term loans will be due. The loan under the Credit Facility bears interest at a fixed annual rate equal to 5.50%. Given the amounts outstanding and available under the Credit Facility, and the interest rate paid to date, we do not believe a 1.0% increase in the interest rate would have a material effect on our financial condition or results of operations.

Foreign Exchange Risk

We are exposed to market risk associated with foreign currency exchange rate fluctuations, and this market risk was further enhanced as a result of our acquisition of Okapi Sciences during January 2014. We face exposure to movements in foreign currency exchange rates whenever we enter into transactions with third parties that are denominated in currencies other than our functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. During 2013, 2012, and 2011, our exposure to this risk was minimal as most of our operating activities were conducted in the United States and denominated in U.S. dollars.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data are listed under Item 15(a) and have been filed as part of this Annual Report on Form 10-K on the pages indicated.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.  CONTROLS AND PROCEDURES

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective at the reasonable assurance level as of December 31, 2014. This conclusion is due to the material weakness in our internal control over financial reporting described below.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.

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Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management identified a material weakness in our internal control over financial reporting. As a result of the material weakness, management concluded that, as of December 31, 2014, our internal control over financial reporting was ineffective.

 

Our management identified a material weakness in our internal control over financial reporting relating to accounting for business combinations. Specifically, management did not have effective controls to identify erroneous inputs and assumptions used to value intangible assets acquired in a business combination. This material weakness resulted in the restatement of our consolidated financial statements for the year ended December 31, 2013 as described in Note 2 of this Annual Report. To the extent we complete another business combination prior to remediating the material weakness, this material weakness could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

 

As we are an emerging growth company, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting.

 

Remediation Plan

 

To remediate the material weakness described above and enhance our internal control over financial reporting, management is conducting a thorough review of its internal controls over its accounting for business combinations and will implement controls to specifically address completeness and accuracy of significant inputs and assumptions used in valuing acquired assets.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2014 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.  OTHER INFORMATION

None.

 

 

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PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information concerning the Company’s executive officers is contained in Part I of this Annual Report on Form 10-K. The rest of the information required to be disclosed by this item will be contained in the Proxy Statement for the Company’s 2015 Annual Meeting of Stockholders and which is incorporated herein by reference.

Item 11.  EXECUTIVE COMPENSATION

The information required to be disclosed by this item will be contained in the Proxy Statement for the Company’s 2015 Annual Meeting of Stockholders and which is incorporated herein by reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required to be disclosed by this item will be contained in the Proxy Statement for the Company’s 2015 Annual Meeting of Stockholders and which is incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required to be disclosed by this item will be contained in the Proxy Statement for the Company’s 2015 Annual Meeting of Stockholders and which is incorporated herein by reference.

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required to be disclosed by this item will be contained in the Proxy Statement for the Company’s 2015 Annual Meeting of Stockholders and which is incorporated herein by reference.

 

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PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1), (a)(2) and (c). The response to this portion of Item 15 is submitted as a separate section of this report commencing on page F-1.

 

(a)(3) and (b). Exhibits (numbered in accordance with Item 601 of Regulation S-K).

 

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†Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.

††Management contract or compensatory plan or arrangement.

*  Filed herewith.

** Furnished herewith.

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date: March 16, 2015

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.