Animal health is a burgeoning market that is becoming more attractive to life-sciences investors, many of whom have seen the human medicine market grow more problematic thanks to increased regulatory scrutiny, the uncertainty caused by health-care reform, and a generally lackluster environment for health-care investing.

1. Animal Health Becoming Pet Project for Life-Science VCs
Timothy Hay
May 09, 2013
Startups are developing diagnostics, drugs and other products for a growing class of patients--the four-legged kind.
Animal health is a burgeoning market that is becoming more attractive to life-sciences investors, many of whom have
seen the human medicine market grow more problematic thanks to increased regulatory scrutiny, the uncertainty
caused by health-care reform, and a generally lackluster environment for health-care investing.
Jeff J Mitchell/Getty Images
A dog receives treatment in a hydrotherapy tank at a small animal hospital. Startups developing diagnostics, drugs and
other products for four-legged patients are becoming more attractive to venture investors.
"Animal health is a very solid market," said Jim Schultz, founder of Illinois-based venture firm Open Prairie Ventures, a
firm that realized a lucrative exit a few years ago when Sony Corp. acquired portfolio company iCyt Mission
Technology Inc., a maker of disease-research tools for both human and animal health.
"We are actively looking at companies now," Mr. Schultz said. "In fact, we just looked at a dozen or so animal-health
companies in Kansas City. Now we're looking at a couple of those more closely."
The global market for medical products designed for animals has grown to $100 billion, an April report by Bank of
America Merrill Lynch said. Medical products both for livestock and pets are continuing a steady rise, and both have
strong tailwinds that could keep the sectors attractive for years to come, analysts and investors say.
The growing middle class in countries like China and India has led to a major spike in demand for livestock that
provides protein, like cattle and poultry. Products that keep flocks and herds from getting sick are in growing demand.
Meanwhile, keeping pets healthy looks just as promising. Pet ownership is on the rise world-wide, and pets are
increasingly seen as family members--the Bank of America Merrill Lynch study said "pet owners do demonstrate a
willingness to cut spending elsewhere in order to maintain the wellbeing of their pets." It noted that pet-related
spending in the U.S., including on health products, has grown by more than 9% annually since 1959.
From Barn to Living Room
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2. It's that type of steady growth that companies like Fort Collins, Colo.-based VetDC Inc. are banking on.
"Companion animals over the years have moved from the barn to the garage to the living room to the bedroom to the
bed," said Chief Executive Steven Roy. "They're family--that's the bet we're making."
The angel-funded, development-stage company aims to come out soon with a drug that targets lymphoma cells in
dogs, then a series of other drugs. Rather than develop medications from scratch, VetDC acquires licenses for human
drugs that have stalled out in development, and then tweaks the formula for use in pets. The company's cancer drug
originated at Gilead Sciences Inc ., Mr. Roy said.
Acquiring human-drug licenses is a not-uncommon business model, one followed by Kansas City, Kansas-based Arat
ana Therapeutics Inc ., which filed to go public in March.
Aratana, which has acquired licenses for human pain-management and appetite-stimulation drugs, has been funded
by Avalon Ventures , Cultivian Ventures, MPM Capital and other investors.
The company and its investors declined to comment, citing the customary "quiet period" that surrounds initial public
offerings.
The Aratana IPO--as well as Pfizer Inc .'s recent spin-out and IPO of its animal health products division--have caused
a ripple effect of excitement through the industry, said Kimberly Young, vice president of biosciences development at
the Kansas City Area Development Council.
The council manages many operations of the so-called Animal Health Corridor, a stretch of Kansas and Missouri that
is home to more than 100 animal-health companies, many of them well-known brands and others obscure startups.
The council also hosts the annual Animal Health Investment Form, where venture capitalists and animal-health
entrepreneurs mingle, and where funding rounds with a total value of more than $87 million have been sealed over the
past four years, Ms. Young said.
As the council prepares for its fifth such conference this August, it is fielding applications from venture firms who have
never attended in the past, and from several dozen startups eager for funding to continue their work.
"It's exciting, what's going on in the corridor," Ms. Young said. "We are seeing significantly increased interest from
investment funds. The number of startup companies located here has been increasing every year. There are about 28
companies looking to relocate to the corridor, and about two-thirds of those are startups."
Tom Overbay, a conference organizer and a partner at Expedite Animal Health, which advises early-stage animal-
health companies on regulatory and other issues, said, "I don't see this area having a downturn."
Even developing generic pet medicines can be lucrative, according to Portland, Maine-based generics maker Putney
Inc . The company has a five-year plan to reach $175 million in annual revenue, and could one day file to go public,
Chief Executive Jean Hoffman said.
Part of the reason for the interest in animal health is the easier regulatory pathway. Investors and company founders
working on drugs and devices for human health frequently complain about long wait times and a lack of clarity at the
Food and Drug Administration, which regulates such products, but the makers of medicines for pets and livestock
generally give high marks to the FDA's Center for Veterinary Medicine.
"Point-of-Cow"
In its recent survey of the market for animal health products, Bank of America Merrill Lynch pointed out that the
market for products to keep livestock healthy is at least as strong as for comparable products for pets.
Two startups offering diagnostics for livestock--Advanced Animal Diagnostics Inc. and Rapid Diagnostek Inc .--have
both raised funding rounds in the past year. Investors in both companies said they have years of experience backing
medical products for people, and only developed an interest in animal health over time.
"I had passed on this company in the past. I had no interest in a pure animal-health play," said Jack Ahrens of TGap
Ventures , discussing portfolio company Rapid Diagnostek.
After realizing the company was offering a platform technology--test kits that enable regular people, as opposed to just
veterinarians, to screen for viruses, bacteria and other biomarkers that can threaten the health of a herd--the company
began to look more attractive, Mr. Ahrens said.
Rapid Diagnostek, which offers test results in under a minute for conditions like lysteria, heartworm and the flu, last
August raised $4.6 million from TGap, Capital Midwest Fund and NEW Capital Fund.
More recently, in April, Durham, N.C.-based Advanced Animal Diagnostics closed on a $6 million tranche of Series B
funding from Intersouth Partners , Novartis Venture Funds and other investors. The company makes test kits that
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3. analyze milk samples from dairy cows for signs of mastitis, an infectious inflammation of the mammary glands that
spreads quickly through a herd, threatening production.
Simon Wheeler of Novartis Venture Funds said at the time that his firm has little history backing animal-health
companies, but that global demand for healthy production animals had caused him to take a serious look at the sector.
Jeff Boily, an angel investor, limited partner in a venture fund and the chairman of preclinical pet-medicine company
ProteoPex Inc., said animal health has been a "neglected area" that was coming into its own.
"This market is huge and forecast to grow," he said. "It's time to be bullish."
http://www.vet-dc.com
http://www.aratana.com
http://www.putneyvet.com
http://www.advancedanimaldiagnostics.com
http://www.rapiddiagnostek.com
Write to Timothy Hay at timothy.hay@dowjones.com
Document DJFVW00020130509e959aw90m
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