Heska Corporation (HSKA)
2003 Interview with: Robert Grieve, Chairman and CEO & Jason Napolitano, CFO
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Continuing product innovation and a completed restructuring plan leading to revenue growth for Heska Corporation

Biotechnology & Drugs


Heska Corporation

1613 Prospect Parkway
Fort Collins, CO 80525
Phone: 970-493-7272

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Robert Grieve
Chairman and
Chief Executive Officer

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Jason Napolitano
Chief Financial Officer

Interview Conducted by:
Diane Reynolds, Co Publisher

January 2003

Bio of CEO

Robert B. Grieve, Ph.D., one of Heska’s 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 Heska’s 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

Jason Napolitano has served as Heska’s 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.

Company Profile:
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 the market.

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.

Products include:
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.

E.R.D.-Screen™ 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 Chemistry System – This is an in-clinic blood chemistry systems.

i-STAT® Portable Clinical Analyzer. The acute care laboratory you can hold in your hand - Chemistry, Hematology and Electrolytes/Blood Gases.

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 Heska.

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 manufacture?

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 together.“

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 in.”

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 revenue.”

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 Heska’s 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 enter?

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 technology.”

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 Hill’s 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 Purina.

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 HMO’s 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, it’s 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 it’s elective for the pet owner and an added expense.  It’s 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 performance?

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.”

It’s a matter of leverage and efficiency.  For example, in R&D we’ve 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 didn’t 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 selling.”

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 horse market?

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 don’t 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 development.”

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 doesn’t 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 won’t. 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 United States.”

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.  We’re 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 don’t believe that any of these companies has as strong a scientific base or intellectual property portfolio as we do.  I’ll 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 I’ve 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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