Making a Bet on Pets

 | Jan 13, 2014 | 3:00 PM EST  | Comments
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Stock quotes in this article:

petm

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pets

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mwiv

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kin

As I was leaving the grocery store the other day, I walked by the pet store located in the same shopping center. I observed the activity inside and outside and was reminded of what many believe today -- when it comes to their pets, Americans rarely spare any expense, whether it is for pet food, toys or healthcare. Our pets have become family members. Pet owners are willing to spend whatever it takes to provide their pets with the best.

This loyalty to pets has manifested in the stock market. Businesses such as retailer PetSmart (PETM), online pharmacy PetMed Express (PETS), and animal-health-products supplier MWI Veterinary Supply (MWIV) have been solid winners for years. Marketers have also pounced, offering products like organic pet food, all-natural pet-grooming products, and much more.

So it was a touch of irony that Sunday night I learned that value investor Seth Klarman's Baupost Group took a nearly 18% stake in Kindred Biosciences (KIN) just weeks after the company's initial public offering. It was a tiny IPO by Wall Street standards, less than $100 million raised, so it's understandable why the IPO got no attention. But with a current market cap of $200 million, this little business deserves attention.

Kindred is a biotech focused on animal healthcare. Much the same way biotechs create human drugs, Kindred is attempting to do the same for animals. Specifically, the company is focusing on treatments for cats, dogs and horses. Kindred is entering a very unfilled, but unique, field. If humans can be cured of life-threatening diseases, why can't animals?

The value proposition of what Kindred does is twofold. First, the cost to bring a NADA (new animal drug application) from the concept stage to marketing approval is a fraction of the costs for a human drug. Second, while it may take five or more years before a human drug is approved, it can take as little as two years for a NADA. This structure gives Kindred not only the ability to pursue more drug candidates, but do so at a very attractive return on investment. In fact, Kindred plans to have at least one treatment ready for marketing by mid-2015. 

Kindred offers a unique opportunity in an underserved market. The looming risk for any player is a failure to market any potential drug candidate, but those odds are improved in the animal health market. Yet the upside revenue and profit potential is just as great as some human-based drug candidates.

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