Are Investors Barking up the Wrong Tree With This Pure-Play Pet Stock?

By Markets Fool.com

Pet owners are spending billions of dollars every year on pet treatments and that's inspired Aratana Therapeutics (NASDAQ: PETX) to invest millions of dollars into developing next-generation pet medicines. Last fall, the company's shares got hit hard when an important clinical trial fell short, but recent Food and Drug Administration approvals could mean that sales begin rolling in soon.

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In this clip from The Motley Fool'sIndustry Focus: Healthcarepodcast, analyst Kristine Harjes and Todd Campbell discuss the opportunities and risks ahead for this small-cap company.

A full transcript follows the video.

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This podcast was recorded on Aug. 31, 2016.

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Kristine Harjes: We've talked about Zoetis, the big guy in pure-play animal health, and we've mentioned some of the other large pharmaceutical companies that have their hands in this market. There are also a ton of other smaller companies that are also pure plays, but on a much smaller scale than Zoetis.

One of them that I thought we should talk about was Aratana. The ticker there is PETX. They're up 56% year to date, and have been incredibly volatile along the way. Last September, they lost 50% of their value due to poor trial results. This mirrored something you might see in a human-health company. They were testing two different drugs for dogs with B-cell lymphoma. The trial came out with negative news; the stock shed a bunch of value. It goes to show, the risks tied to a lot of early-stage biotechs in human health are kind of similar to the ones here in animal health.

Todd Campbell:Yeah. And as we get wealthier as a nation, and start spending more and more on our pets, you're probably going to see an increasing trend toward our willingness to spend money on life-extending therapies, something we maybe didn't do 20 years ago.

Aratana is an interesting company. It's a pure-play developer of next-generation therapies for animals. But where Zoetis is the tried-and-true proven leader, this is a very unproven, new, young, clinical-stage company, and a tiny one at that. It only has a $321 million market cap. A lot of the value in this is going to be: "Can they develop these drugs for things like lymphoma, or some of these other drugs they've been working on, and get those to market and turn those into top sellers that allow them to turn a profit?"

Harjes:And they do have a few drugs that are approved and on the market. They have Entyce, which is an appetite stimulant for dogs. They have a drug called Galliprant, which is licensed to the Eli Lilly animal-health segment, which is called Elanco. They also have two drugs called Blontress and Tactress, which are lymphoma treatments for dogs.

But product sales in the second quarter only totalled $230,000, which is really not much at all. This is out of total revenue for the company of about $21.1 million. The vast majority of that -- actually, more than that net income number -- came from revenue from Elanco and that partnership.

Campbell:Yeah. This is definitely a company that you have to do some digging on. Don't just look at the top-line number and say, "They did $30 million in revenue in the second quarter." That's not true. They received a big licensing payment from Elanco in the second quarter, and that swelled their top-line and bottom-line number. Really, it's too early to know whether or not these are going to be big sellers for this company, and whether or not this is going to translate into meaningful and consistent sales and profit going forward.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.