Aratana Announces Seminal Global Collaboration with Elanco,

Laying the Groundwork for Long-Term Shareholder Value

Zachary Fink Co-Founder and Portfolio Manager, Bioterp Partners
4/28/16

On the afternoon of April 25th, Aratana Therapeutics (PETX) announced a global strategic collaboration
with Elanco to develop and commercialize Galliprant. Despite the complexity of the deal, a brief analysis
reveals that this is a great collaboration for Aratana and its shareholders. Unfortunately, it appears the
market is interpreting the collaboration as Aratana selling the golden goose (Galliprant) to resolve the
debt covenant. I disagree with this interpretation, and to clear up any misunderstanding, I want to
provide some of my basic analysis of the deal which demonstrates why this is an ideal collaboration
for shareholders. Before getting into this analysis, some color on the key details of this collaboration
(outlined in 8-K) is appropriate:

Aratana granting Elanco exclusive rights to develop, manufacture, market, and commercialize
Galliprant globally, with a co-promote collaboration in the US.
Aratana and Elanco agreed to pay 25% (capped at unknown amount)/75% (respectively) of all
development fees in connection with preclinical and clinical trials necessary for development of
Galliprant.
Aratana is responsible for development and regulatory activities required for Galliprant approval
in the US and EU.
Elanco is responsible for all other development activities.
Aratana receives an upfront payment of $45 million.
Aratana is eligible for $83 million in regulatory and sales milestones:
o $4 million milestone for manufacturing of Galliprant
o $4 million milestone for EU approval
Aratana receives royalties on Galliprant global sales in the mid-single to low-double digits.
Co-Promotion: Aratana receives fees for services performed and expenses incurred (could be
extended at future date):
o Prior to December 31, 2018: 25% of the gross margin on sales of Galliprant in US (in
addition to royalties on global sales in the mid-single to low-double digits)
o After December 31, 2018: mid-single digit percentage of net sales of Galliprant sales in
US (in addition to royalties on global sales in the mid-single to low-double digits)
Co-Promotion: The co-promotion of Galliprant will be supervised and managed by a
subcommittee composed of representatives from Aratana and Elanco.

Elanco Collaboration Value with Respect to Galliprant

The Elanco collaboration unlocks significant immediate and long-term value creation through not only
Galliprant, but via Entyce and Nocita (and the rest of their pipeline). Before getting to the broader
benefits of this collaboration, I want to provide a brief analysis on why Aratana did not give up as
much of the economics of Galliprant in the US as it seems. This is apparent when comparing a basic
value analysis of this collaboration to my Galliprant valuation model in my PETX long thesis. I believe

the deal has the potential to meet or exceed my modeled valuation for Galliprant alone, and that
doesnt even include the immense value of this collaboration to Aratanas pipeline, and Aratanas
broader business (discussed below).
As a reminder, I was modeling the value of Galliprant in the US and EU at $5.57/share including
$0.34/share for an upfront payment (of note, this model included future share dilution). With this deal
(which now takes a share dilution out of my model), I believe Aratana is in the process of realizing
$1.44/share in value from upfront and near term milestone payments ($45 million upfront and $8
million near-term milestone payments). It is important to understand I believe this collaboration will
significantly accelerate the ramp of Galliprants launch, in addition to significantly expanding Galliprants
market penetration globally.
I believe my previous market penetration assumptions, as well as sell-side analysts, significantly
underestimate the future revenues of Galliprant. Thus, I believe Aratana is poised to realize a significant
portion of the sales milestones in addition to unlocking the double digit royalties of global sales under
the collaboration agreement. Assuming Aratana receives a conservative $50m in total in future sales
milestones, the value from royalties/fees from the global and co-promotion collaboration would have to
cover approximately $3.50/share. Sparing the model, it would appear these royalties/fees should come
close or even exceed this value if Galliprant has the level of market penetration I think is possible,
especially considering the very favorable economics of the collaboration prior to 2019. This is of course
dependent on Galliprants clinical safety and efficacy profile translating to the commercial setting.
To provide some context to why I believe Aratana is poised to have significant market penetration in the
canine osteoarthritis (OA) market, some basic analysis of the canine OA market dynamics are outlined
below. Before getting into this, a review of Galliprants science and market opportunity, covered in my
long thesis (pages 8 and 20), is appropriate.
First, Elanco is the ideal collaborator considering they market Deramaxx (and Onsior in cats), one of the
leading NSAIDs (Figure 1). In light of Deramaxxs market penetration, Galliprant should enable Elanco to
leverage their large sales team to expand penetration in the canine OA market. Notably, Galliprants
market opportunity is underestimated because of two key reasons:
1. Galliprant should allow a greater number of dogs to be eligible
for NSAID therapy and to stay on therapy for longer duration. For
context, according to Aratana, the average NSAID treated dog is
on therapy approximately 80 out of 365 days per year.
2. The current NSAID market, in dollar value, is understated today
because generic carprofen (23% of market) is significantly
cheaper than branded NSAIDs.
Despite the size of the market, it should be apparent that penetrating this
Figure 1 (Company Presentation)
space, with significant competition from entrenched players, will not be
easy (or cheap). In order to maximize the value of Galliprant and overall
shareholder value, collaborating on the global commercialization of Galliprant with one of these
established companies was truly the best decision for Aratana and its shareholders. Notably, this deal
likely allows Aratana to significantly accelerate the clinical development of Galliprant in cats, a market

where there is essentially zero competition besides Onsior for the acute setting. Elanco is an ideal
partner here considering their experience in feline OA already.
Considering the above analysis, I believe it should be apparent even when only considering the
economics of this deal with respect to Galliprant that Aratana executed a great deal with Elanco, a
company that checks all the boxes as an ideal collaborator to maximize the value of Galliprant.

Elanco Collaboration Value with Respect to Aratanas Business Strategy

Looking at the bigger picture of Aratanas future, the Elanco collaboration should drive value for
Aratana on multiple fronts, not just related to Galliprant. First, Aratana now has an ideal platform to
expose all veterinarians to the Aratana brand, essentially piggy-backing off Elancos massive sales
organization to build the Aratana brand ahead of (and during) the launch of Entyce and Nocita. To
emphasize, this will be invaluable to Aratana maximizing the economics and value of Entyce and
Nocita products for which Aratana maintains 100% economics. Second, this deal theoretically
increases the partnering value of Entyce and Nocita as it is essentially seminal to the companion
animal health space. Third, this deal should establish Aratana as a leader in the canine OA space,
paving the way for future commercial success with AT-016, Aratanas autologous stem cell treatment
for canine OA.
The benefits of these key dynamics to Aratana cannot be emphasized enough. Building the brand is so
important in the animal health space (see my PETX long thesis, page 15), and for Aratana to have the
opportunity to leverage Elancos sales force to do this, is ideal. In addition, this collaboration gives
Aratana the opportunity to apply any learnings from the Galliprant launch to the launch of Entyce and
Nocita. Some color surrounding the benefits of the Elanco collaboration to the launch of Entyce and
Nocita, and Aratanas ability to maximize value of the programs, is appropriate.
As mentioned, Aratana will be essentially piggy-backing off Elancos marketing of Galliprant to build
the Aratana brand. This will be instrumental in exposing all vets to Aratanas products, and will enable
Aratana to maximize the economics of their relatively limited sales force (compared to the large animal
health companies). In addition, Aratana will be able to focus on the launch of Entyce and Nocita in the
US, which should now require less resources to maximize the value of these assets. Importantly, this
deal gives Aratana more leverage when negotiating ex-US partnerships for Entyce and Nocita in the
future considering the seminal nature of this deal.
Looking at Aratanas broader pipeline, Aratana establishing themselves as a leader in the canine OA
market via the Elanco collaboration should specifically benefit AT-016. Recall, AT-016 is Aratanas offthe-shelf allogenic stem cell therapy for the treatment of canine OA. If AT-016s placebo-controlled
pilot data is confirmed in a larger pilot study, AT-016 appears to be poised to potentially be the first
FDA-approved disease modifying treatment for canine OA. There is clearly immense value in AT-016 if its
clinical development continues to be successful, and considering Aratana positioning themselves to be a
leader in canine OA, Aratana appears well positioned to fully maximize the value of AT-016.

Conclusion
It is disappointing to see the market interpreting this deal as Aratana selling the golden goose in
Galliprant to resolve the debt covenant. It is unfortunate Aratana appears to be getting punished on a
deal that will not only drive significant shareholder value, but will also have the added benefit of

completely fulfilling the debt covenant with a collaboration that covers only one of their three key
programs. I hope my basic and brief analysis above conveys my belief that any value/economics
Aratana gave up on Galliprant, Aratana will gain back through benefits outlined above. Aratana
securing a collaborative and flexible global development deal with a top tier animal health company
such as Elanco, on their lead asset Galliprant (AT-001), is a testament to the immense value Elanco
sees in this asset, especially considering the seminal nature of this collaboration for the companion
animal health space. To emphasize, this deal is even more impressive considering Aratana and Elanco
could mutually agree to maintain the 25% gross margin fees for the co-promotion of Galliprant in the US
in the future. The Elanco collaboration will benefit Aratana immensely with respect to building the
brand, and providing the groundwork for successful commercial launches for Entyce and Nocita (and
potentially AT-016). Although difficult to quantitatively value, the value in these dynamics cannot be
overstated. In conclusion, I maintain my conviction that Aratanas stock in undervalued ahead of
multiple value driving events and derisked product launches in 2016.

Disclosure: Mr. Fink and/or his affiliates hold a long position in Aratana Therapeutics.
Copyright 2016 by Zachary Fink
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