Heska's Long Ascent To Profitability

by Richard Daub

It has been a long climb for US-based Heska, developer of advanced diagnostic products for companion animals, but the company has finally made to profitability and is poised to continue climbing. Animal Pharm's Richard Daub recently caught up with Heska's chief executive Robert Grieve at the New York Society of Security Analysts (NYSSA) Biotech/Specialty conference in Manhattan, where he was the sole representative of the animal health industry.

In October 1990, Animal Pharm reported on a small California startup named Paravax that had just signed a licensing agreement with the animal health division of Bayer subsidiary Mobay Corp for a cat vaccine against toxoplasma gondii (Animal Pharm No 214, p 21). The following year, Paravax—which would later be renamed Heska—packed up and headed east towards the snowcapped peaks of the Rocky Mountains and settled in Fort Collins, Colorado, where the company would spend the next decade-and-a-half before moving into a brand new 60,000 sq ft facility in nearby Loveland in 2005. 
      Heska went public in 1997 (NASDAQ: "HSKA"), and since then shareholders have been waiting for the bottom line to change from red to black and for the company to finally realize its profit potential. In 2005, Heska finally did achieve full-year profitability—barely—with a gross profit of $282,000, accomplishing chief executive Robert Grieve's goal of profitability by 2006 and prompting him to call it "the best year in Heska's history" (Animal Pharm No 586, p 5).  
      Heska began 2006 with a $239,000 loss in the first quarter, but posted a record $14.5m profit in the second quarter and a $7.9m profit in the third. Earnings for the full year won't be released until March, but it looks like 2006 will be even better than their best year. 
      "We could go on for days," Dr Grieve laughed when asked about Heska's journey towards profitability. "But let's put it this way. The company went public in July 1997, and basically the notion at the time was [that Heska was] sort of biotech's answer to animal health. There were many, many different high-risk products in the pipeline, and then subsequently a number of acquisitions of businesses occurred. 
      "But the economics of the business weren't working out, and, in fact, at the end of fiscal year 1998, the company had about a $46 million operating loss on $39 million in revenue. It also incurred quite a lot of debt, both in terms of straight debt and very expensive capital equipment leases. At that time, the board of directors asked me to take over as CEO. 
      "I started officially on January 1st, 1999. Unofficially, I started the month earlier with rounds of layoffs and restructurings and so forth. I took over then in '99 to try and improve the situation. So, our goal over those years has been, even as a public company, to get from these horrendous losses to profitability, cash flow self-sufficiency, growing the brand, keeping our best employees, and serving the customer with a vision of future growth, and being in the right markets." 

Heska goes public

After the July 1997 initial public offering that raised $48.5m and saw a swift spike in share price from $8.62 on the first day of trading to $15.62 less than three months later, the stock price began a long slide, as did most US tech stocks when the "dot-com bubble" burst. In December 2002 share price bottomed out at $.30, and from there the stock started to slowly rebound. By January 2004 share price had climbed back as high as $3.24 only to once more slip back under $1.00. For the past year it has traded in the range of $.91 to $1.90, most recently in the neighborhood of $1.65. 
      "I think the share price is lagging for a number of reasons," said Dr Grieve. "Think about it—the company had lost $46 million on $39 million in revenue—what kind of future did that portend? Analyst expectations had been missed consistently for four, five, six quarters that the company had been public at that time, and at least one significant analyst had said publicly that 'the wheels had come off'. Those are hard things to recover from. 
      "We've been very quiet, relatively speaking, in all those years while we were getting our house in order. But now it's time to start to market the story, to let people know there's a buying opportunity. 
      "Pursuant to that, we have to grow the company. We have to find a way to grow the company, expand our footprint, and continue to grow in the right healthy way." 

competing with a giant

To compete with veterinary diagnostics giant IDEXX, a company that recently reported 2006 sales of $606.3m in its companion animal group alone (Animal Pharm No 606, p 4), may seem like a daunting task, but Heska has managed to survive. 
      "As a small company, the way that we've competed is with quality," said Dr Grieve. "You couldn't possibly compete as a small company with small market share if you didn't have quality. We'd, of course, like to have more of that share, and in order to get more of that share, it would be better for us, and I think for the profession, to understand what quality is and how it's appreciated so that the veterinarian could make educated buying decisions with quality as a factor." 
      When asked he how defined 'quality', Dr Grieve responded, "Accurately producible, reliable results." 

the fleeting optimism of gene therapy

The area of gene therapy once held great hope in the veterinary world, and Heska was among those exploring its potential. In 2001 the company announced that it was developing a gene-based immune system stimulator that could be injected directly into cancerous tumors in dogs (Animal Pharm No 459, p 19), and in 2003 Heska initiated trials of a gene-based therapy designed to treat canine oral melanoma (Animal Pharm No 515, p 15).  
      By 2005, however, optimism for gene therapy had all but died, prompting Animal Pharm to run a feature that explored what went wrong (Animal Pharm No 563, p 13). When asked about it now, Dr Grieve made it sound like a failed notion of the distant past. 
      "We haven't done anything in gene therapy for quite some time," he said. "We had programs many years ago, particularly around solid tumor therapy that involved cytokine gene therapy into solid tumors. We saw remarkably exciting early results, particularly with malignant melanoma, and, to a lesser extent, soft-tissue sarcomas. As exciting as the therapy was at the proof-of-concept level, there was a problem in manufacturing scale. Trying to figure a manufacturing solution that would be importable to the end user was beyond the scope of any feasible analysis at that time." 
      As for whether or not Heska will pursue gene therapy in the future, Dr Grieve sounded doubtful. 
      "It's not in the current pipeline," he said. "It's something that we might consider in the future. I believe that there's an enormous opportunity for products that address solid tumors. The holy grail would be a product that worked on a number of important solid tumors in both dogs and cats that could be used on an outpatient basis rather than inpatient with all the attendant secondary side effects of chemotherapy or radiation—something that could be used across all solid tumors, both species, outpatient use, didn't make the animal sick as a result. But it has to be made in an economically acceptable threshold with consistent manufacturing quality." 

looking ahead

"I think critical mass attainment is the overarching obstacle that we face," said Dr Grieve. "In our environment, we need to get bigger. We need to get bigger faster so that we can compete more successfully in the commercial channels, and so that we can compete more successfully internationally. It's sort of a paradox that in order to grow, you have to be big, and we're sort of straddling that strategic conundrum right now. So, we're focused on growing, and that's a challenge." §

Published in Animal Pharm, February 2007