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product innovation and a completed restructuring plan leading to revenue growth for Heska
Biotechnology & Drugs
1613 Prospect Parkway
Fort Collins, CO 80525
Chief Executive Officer
Chief Financial Officer
Interview Conducted by:
Diane Reynolds, Co Publisher
Bio of CEO
Robert B. Grieve, Ph.D., one of Heskas founders,
currently serves its as Chief Executive Officer and Chairman of the Board. Dr. Grieve was named Chief Executive Officer
effective January 1, 1999, Vice Chairman effective March 1992 and Chairman of the Board
effective May 2000. Dr. Grieve also served as
Chief Scientific Officer from December 1994 to January 1999 and Vice President, Research
and Development, from March 1992 to December 1994. He
has been a member of Heskas Board of Directors since 1990. Dr. Grieve holds a Ph.D. degree from the
University of Florida and M.S. and B.S. degrees from the University of Wyoming.
Bio of CFO
Napolitano has served as
Heskas Chief Financial Officer since May 2002. From
July 1990 to March 2001, Mr. Napolitano held various positions at Credit Suisse First
Boston, where he was promoted to Vice President in 1997 and Director in 2000 and where he
worked in areas including health care investment banking and mergers & acquisitions. From March 2001 to May 2002, Mr. Napolitano was an
independent financial consultant whose clients included Heska Corporation. Mr. Napolitano has a B.S. from Yale University.
Founded in 1988, Heska Corporation (Nasdaq: HSKA) develops, manufactures and
markets innovative health products for dogs and cats. With unprecedented innovation, Heska
brings simple solutions to complex veterinary medical needs to improve the quality of
diagnosis, treatment and prevention of disease for companion animals. Among other
advances, they have developed technology for the accurate diagnosis of allergy the
most common cause of skin disease afflicting dogs. Heska has advanced the state of allergy
diagnosis for veterinary medicine with its ALLERCEPT family of allergy diagnostic
and treatment products.
In the past, Heska's research has led to significant developments in flea control and gene
therapy. Through genomic sequencing, Heska's scientists identified hundreds of novel
molecular targets for flea control products. Other important milestones have been attained
recently in the development of a gene therapy product for the treatment of cancer in dogs.
In 2000, Heska's diverse product line grew to more than 30 companion animal health
products. This growth demonstrates their ability to create, market and sell product
innovations to this highly specialized market. For example, Solo Step CH, a
one-step, patient-side test for canine heartworm detection is the easiest, fastest test on
As a result of this increasing demand for improved pet health care, Heska continues to
strengthen its market presence in the United States and is currently selling its products
to more than 14,000 U.S. veterinary clinics. Heska addresses the special needs of these
clinics by offering unique products that expand practice areas and by providing medical
and technical consultation support.
HESKA® Solo Step CH. - The easiest,
fastest patient-side heartworm test on the market. Solo Step CH Batch Test Strips are in vitro
diagnostic tests for the detection of Dirofilaria immitis
antigens in canine serum or plasma.
HESKA® ALLERCEPT Testing and Treatment Services, The
ALLERCEPT test uses certain unique proprietary allergens and a proprietary detection
system making it the most sensitive and specific test for IgE. Extremely accurate diagnosis can then continue
with allergen-specific treatment.
F.A. Granules (Omega-3 & Omega-6 Fatty Acid Supplement) -
Provides high levels of uniquely sourced fatty acids in a flavor base dogs love.
Urine Test - Incorporates a monoclonal antibody specific for canine albumin (other proteins do not interfere with
this test). It identifies dogs at
risk of developing end-stage renal disease and allows veterinarians to help them much earlier in the process.
SPOTCHEM EZ Automated Dry
This is an in-clinic blood chemistry systems.
Portable Clinical Analyzer.
The acute care laboratory you can hold in your hand - Chemistry, Hematology and
HESKA® ABC-Diff Hematology Analyzer. Accurate in-clinic hematology
analyzer delivers rapid results and improved practice profits.
CEOCFOinterviews: Dr. Grieve, please give us a brief description of
Dr. Grieve: Heska is focused on companion animal health.
We research, develop, manufacture and sell products for companion animals,
primarily dogs and cats. In addition, we have a wholly-owned subsidiary in Iowa,
Diamond Animal Health, that manufactures private label products for third parties.
CEOCFOinterviews: What are some of the other products that you
Mr. Napolitano: Beyond companion animal health, Diamond
manufactures products including vaccines for food animals such as cattle and fish.
Dr. Grieve: Historically, Diamond has focused on making
cattle vaccines for sale within the US.
CEOCFO: Do you market the cattle products yourself?
Mr. Napolitano: The cattle area is not a core focus of
ours. We primarily have a sales and marketing partner we work with called AgriLabs.
AgriLabs is exclusively a sales and marketing organization with shareholder
distributors whose combined distribution network covers 47% of the U.S. market. We
actually just signed a long-term agreement with AgriLabs through the year 2013. As
part of the agreement, AgriLabs is required to make certain minimum purchases, which grow
throughout the life of the agreement. If they fail to make those minimums, they
would lose exclusivity on our fine line of Bovine vaccines. We think that is very
unlikely that they want to do that given the economics of the arrangement that we have put
CEOCFOinterviews: You principally sell your companion animal
products through the veterinarians, is that correct?
Dr. Grieve: That is correct.
CEOCFOinterviews: Some companies are selling veterinary products
on-line. Does that affect your business?
Dr. Grieve: We have not been affected by that. We sell
directly to the veterinarian ourselves or through third party independent distributors.
There have been concerns that the people who sell online, to some extent, are
involved in selling prescription-based products directly to the consumer and are
circumventing the veterinarian. That is clearly not something we are involved
CEOCFOinterviews: Right now, how much are you spending on R&D?
Dr. Grieve: We are spending in the neighborhood of $9 million
dollars a year on R&D on a consolidated basis and tracking roughly at 20% of overall
CEOCFOinterviews: Where will future research and development
expenditures be focused?
Dr. Grieve: Today, we are principally focused on dogs and
cats, because that is where the real substantial growth is in this marketplace. Therefore,
we imagine the bulk of our R&D expenditures and our marketing expenditures to remain
in that area.
CEOCFOinterviews: How is it that Heska has experienced three
consecutive years of growth?
Dr. Grieve: I think that our growth has been primarily
related to our innovation in product development. We are constantly bringing out new
products. For example, next year we plan to have four additional companion animal
health products. The introduction of new products and their support of our marketing
and sales effort tends to result in rapid revenue growth
CEOCFOinterviews: How large is your patent portfolio?
Dr. Grieve: Naturally our patent portfolio is very
substantial. We have in the neighborhood of 170 US issued patents, another 86 US
pending patents and a similar foreign patent portfolio.
CEOCFOinterviews: Since we spoke the last time you have gone
through two years of restructuring, which has now since been completed. What is
Heskas focus going forward?
Dr. Grieve: I would have to say with the restructuring
completed, our focus going forward is growth and more growth. We are interested in
transitioning beyond the restructuring for survival to financial success and then growth.
We intend to build on that to generate more significant growth as a company,
creating a bigger footprint. I envision more products being steadily introduced as
well as expansion into other geographic markets.
CEOCFOinterviews: What other geographic markets would you like to
Dr. Grieve: In the next two years you will see us paying more
attention to Europe, continental Europe and the UK. In addition, we will also
pay more attention to Australia.
CEOCFOinterviews: What are your new goals for Heska?
Mr. Napolitano: We have set a corporate goal of profitability
for our current quarter, ending on December 31. We have given investors guidance
that we expect to have less than a million dollar loss in that period but we are doing
everything that we can to get to profitability to meet our corporate goal.
CEOCFOinterviews: With all of the expansion that you are
speaking of right now does this company have the revenue to do all of that?
Dr. Grieve: We are finally on a solid footing now, having
completed this restructuring. As Jason mentioned a very substantial goal of ours is
to be profitable in the fourth quarter, that is, this quarter. We believe that this
is just more evidence of the sensibility of our financial model and the structure we have
here, which is a result of all of the restructuring. We can now build from that
platform going forward.
CEOCFOinterviews: How are things developing with your cancer
therapy for companion animals?
Dr. Grieve: We are currently taking our cancer therapy
through clinical trials. It has been slower to get dogs into enrollment than we have
anticipated originally. However, it continues to proceed through those clinical
trials. We are focused on the treatment of solid tumors in dogs.
CEOCFOinterviews: Would you ever consider other areas of cancer,
such as those found in cats?
Dr. Grieve: Ultimately we would be interested in going after
the different cancers in cats. However, this particular product is focused on solid
tumors and the important cancers in cats usually involve leukemia which is not
approachable with this particular technology, so that would have to wait for another
CEOCFOinterviews: How are your alliances progressing?
Dr. Grieve: I think we are doing well with our alliances in
general. Our longest standing alliance is with Novartis AG (NYSE: NVS), with whom we
continue to do collaborative research and development. We also enjoy certain
geographic distribution relationships with Novartis such as in Japan, where they sell our
heartworm diagnostic product. In addition, we have had an alliance with Hills
Pet Nutrition, Inc. Our very exciting E.R.D.-Screen Urine Test product is a
productive alliance that we continue to enjoy with them. Apart from that, we have
key supplier alliances in our instrumentation area including Arkray, a Japanese company
who worked with us in developing the SPOTCHEM EZ Automated Dry Chemistry System,
which is an example of an outstanding partnership.
CEOCFOinterviews: Please tell us about your alliance with Ralston
Dr. Grieve: We have a relationship with Nestle Ralston Purina
Petcare (subsidiary of Nestle S.A. NSRGY), where they have developed with us
certain of our technologies, especially related to the area of Feline Type II diabetes
where they have multiple feline diets on the market for that disease. There are
other potential projects with Ralston that we cannot comment on right now.
CEOCFOinterviews: Is there any one relationship you rely on more?
Dr. Grieve: I would say, no, thankfully no. We have a
diversity of relationships all with their own strengths.
CEOCFOinterviews: I know before we spoke about the HMOs and
where the government was going to make spending decisions for people and their pets
easier. Has that advanced any further?
Dr. Grieve: First, you have a great memory Diane. No,
its very much the same as we described when we last talked. It is very much
the same situation where there is pet insurance available, but its elective for the
pet owner and an added expense. Its more widespread than in the past, but it
is by no means prevalent. Pet insurance is very important to a lot of people, myself
included. However, it is pretty much a discretionary expense, not mandated by
anyone. It is not widely used by pet owners but increasingly used.
CEOCFOinterviews: What were the key points for your financial
Dr. Grieve: We have continued to make progress over this
restructuring period in a lot of different areas. First, we have grown revenues in
our key market focus in companion animal health. That revenue has continued to grow
nicely. That has grown both by our base products growing and new products coming
online such as our E.R.D. -Screen product in 2002. In addition, we have been
extremely conservative and careful on how we manage our operating expenses, careful to
make sure that we spend enough in R&D to ensure growth and then careful never to spend
any more than absolutely necessary anywhere else. I think that the combination of
revenue growth on a year-to-year basis, gross margin improvement, and careful control of
operating expenses have all been keys to generating our financial performance.
matter of leverage and efficiency. For example, in R&D weve focused
principally on products that will launch in the next 18 months or so and on those major
long-term projects that have very substantial revenue potential where we have proof of
concept. We have set to the side other projects that were either not of near term
impact or where we didnt have proof of concept. In the case of marketing and
selling expenses, going into 2002 we consciously moved to a strategy that involved
independent distributors. While they take a certain percentage against our revenue,
we are able reduce and offset some of our fixed operating expense base in marketing and
Mr. Napolitano: It has also been the result of some
tough strategic decisions we had to face. For example, probably the largest would be
the one earliest this year to not focus on the horse market. We had a nasal drop
equine flu vaccine out that we feel is head and shoulders the best product in the market.
It was also our only product in the horse market. We made the decision to
exit that market and focus our resources on dogs and cats. We licensed that equine
flu vaccine to Intervet, which has a large presence in the horse market. To be
competitive we felt we would have really have to have a portfolio of horse-related
products. So our decision to exit the horse market effectively ended a group of research
projects that we decided not to pursue.
CEOCFOinterviews: What else affected your decision to exit the
Mr. Napolitano: We felt that we had a substantial critical
mass in the dog and cat markets. We had experienced some significant successes in
those areas and we felt that it was best to focus our limited resources in those areas.
By also pursuing horses, we ran the risk of stretching ourselves too thin. We
intend to be very good at anything we pursue.
CEOCFOinterviews: Can you tell us about your new website and your
plans on how it will be used in the future?
Dr. Grieve: We have a group of people across our IT and
marketing areas that are constantly looking at the web in ways that it is used now and
that we may use it in the future. We would hope, for example, to use it as more of a
direct sales channel to veterinarians in the future. I dont think that the
customer is quite there yet. Frankly, it is easy for them to buy from us today by
traditional means, but we are always looking at easier and faster ways to accomplish the
same end. We have people in IT and marketing as well as a full time webmaster
focused on making sure that we are right at the front end of our website
Mr. Napolitano: You are also going to be seeing us use the
web more as a marketing tool. If you go on our website now you will be able to see
several videos on our products. The most recently announced and launched is what we
call our G2 monitor. This is the only digital at the source monitor out there.
One of its key advantages which impresses veterinarians is that it doesnt
lose signal like a conventional monitor can. With a standard monitor, you tend to
lose the signal for a period with an animal that flips over or moves around a lot, but
with our digital monitor, you wont. We put a video on the web that demonstrates
that. This is a great aid in marketing to a veterinarian. At their convenience, they
can download a one minute video that demonstrates actually how the product looks and
performs in the field.
CEOCFOinterviews: How many people do you have out in the field?
Dr. Grieve: We have approximately 30 people in the field that
manage territories and that in turn are managed by five regional managers across the
CEOCFOinterviews: Will European expansion involve your own sales
team or will it be done through partnerships?
Dr. Grieve: Our sales in Europe will principally be generated
by third parties. We will have partnerships with companies that are manufacturers
with direct sales forces themselves or with distributors. Our decision making here
will be on a product-by-product and country-by-country basis.
CEOCFOinterviews: So growth will be strictly internally driven.
Dr. Grieve: Yes, our growth will be fueled of our inline
product base and the addition of new products. Were not contemplating anything
but organic growth at this time.
CEOCFOinterviews: In closing, what would you like to say to current
shareholders and our readers in the business and investment community?
Dr. Grieve: With restructuring behind us we are now talking
about a profitability goal. It is a very exciting milestone for the company and as
we look at the future, it is all about getting to the point where we can sustain
profitability and continue to introduce innovative products for veterinary medical needs.
That has driven growth in our market and has certainly driven growth in our company
and is precisely how we see ourselves acting and working in the future.
Mr. Napolitano: I think what would be of most
interest to your readers is what we view as a very attractive investment opportunity in
our stock. I track what we call our comparable companies and the latest numbers I ran were
as of late November. As of that time, we
traded at what we call a revenue multiple of 0.5x. Simply
stated, for every dollar of revenue we generate, we get about 50 cents of valuation in the
marketplace. When I look at what we consider
our comparable companies, or other companies in the market that are similar to us, I see
multiples that are substantially higher. For example, Virbac Corporation (Nasdaq: VBAC)
trades at a revenue multiple of about 2; so for every dollar of revenue they generate,
they get about $2.00 of valuation in the marketplace.
Another comparable company, Abaxis, Inc. (Nasdaq: ABAX), trades at about 2.3
times revenue and IDEXX Laboratories, Inc. (Nasdaq: IDEXX), which is largest company in
our marketplace trades at about 2.5 times revenue. I
dont believe that any of these companies has as strong a scientific base or
intellectual property portfolio as we do. Ill
hazard a guess that we have greater growth opportunities than any of those companies do.
Yet, we are trading at a 75% discount to even the lowest revenue multiple of those three.
When I look at the opportunity for upside by investing in our stock I am very excited.
Your readers will be able to see from publicly available information that Ive bought
over a hundred thousand shares in this quarter alone.
I believe that demonstrates my evaluation of Heska stock as an investment
opportunity. Even if we only get to a 50% trading
discount to our comparable companies, that will represent substantial gains for those who
hold our stock.
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