Heska Corporation

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Heska Corporation

1613 Prospect Parkway
Fort Collins, Colorado 80525
Telephone: (970) 493-7272
Toll Free: (800) 464-3752
Fax: (888) 437-5215
Web site:http://www.heska.com

Public Company
Incorporated: 1988 as Paravax
Employees: 463
Sales: $51.2 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HSKA
NAIC: 325412 Pharmaceutical Preparations Manufacturing; 339112 Veterinarians Instruments and Apparatus Manufacturing; 42210 Drugs and Druggists Sundries Wholesalers; 541710 Biotechnology Research and Development Laboratories or Services

The Heska Corporation is involved in biotechnical research for the development of vaccines and related diagnostic products for companion animals. The company manufactures health care products for dogs, cats, and horses and markets them to veterinarians. Products include treatments for fleas, heartworms, allergies, dermatitis, and viral infections. Heska also manufactures and distributes diagnostic and monitoring devices to veterinarians.

1980s Origins

Dr. Robert Grieve and Barr Dolan founded Heska in 1988 as Paravax, a name that reflected the companys intention to develop vaccines to treat parasites in companion and farm animals. Dolan provided funding as a venture capitalist with Charter Ventures, while Grieve provided expertise as professor of parasitology at the College of Veterinary Medicine at Colorado State University (CSU) in Fort Collins. With three employees, Paravax applied biotechnologymolecular biology, biochemistry, immunology, and genetic engineeringto the prevention and control of parasitic diseases, such as heartworm, transmitted by mosquitoes, and dermatitis, skin allergies caused by flea bites. Up to this time, most animal vaccine development addressed only viral and bacterial infections. Paravax intended the parasite vaccines to hinder the spread of disease much like rabies and distemper vaccines hinder those viruses. Dolan established Paravax in Mountain View, California, but the company relocated to Fort Collins in 1991 to be in closer contact with Grieve and to be closer to research facilities at CSU.

The first years at Paravax focused on research and development. Methods involved dissecting insects and removing the ovaries and salivary glands of fleas and the intestines of mosquitoes, to map the genetic codes and identify the amino acids that controlled digestion or reproduction. By cloning protein compounds that stopped digestion or reproduction, the company hoped to develop a genetically engineered vaccine that either killed the parasite or at least halted reproduction.

In October 1990 Paravax signed a research, development, and licensing agreement with Maboy Corporation, a subsidiary of Bayer USA, Inc., to create a vaccine for the prevention of toxoplasmosis in cats. The vaccine design aimed to reduce the excretion of the eggs of toxoplasma gondii, the protozoa that causes the disease, in cat feces. While the disease occasioned mild discomfort in cats, it was potentially harmful to pregnant women, as a cause of miscarriages and birth defects, and to people with immune disorders. Under the agreement Maboy financed the research and took responsibility for marketing the product when it gained approval from the U.S. Department of Agriculture (USDA). Paravax handled research and development and received a royalty based on sales. Also, in June 1991 Paravax received a $50,000 Small Business Research Grant from the National Institute of Health for research on the toxoplasmosis vaccine.

As biotechnical research continued, the proceedings compelled Grieve to leave his position at CSU and join Paravax as chief scientific officer in 1994. The following year Paravax changed its name to Heska, a Lakota word meaning white mountain, reflecting the companys location near the Rocky Mountains. With $10.63 million in venture capital$10 million from Volendam Investeringen NV and $630,000 from Charter VenturesHeska continued its research and development, began efforts for marketing and sales, and started to acquire technology and products.

The company signed a licensing agreement with Atrix Laboratories in April 1995 to develop a periodontal treatment for companion animals. Atrix agreed to develop a sublingival product using its ATRIGEL Drug Delivery System. The implant released antibiotic doxycycline over several days to kill periodontal-causing bacteria. Atrix took responsibility for laboratory studies and production, and Paravax took responsibility for clinical testing in dogs and cats and for marketing and distribution worldwide.

Research and development on vaccines for companion animals expanded and progressed. Diseases addressed included Bartonella henselae, known as cat scratch fever and caused by the scratch of a infected cats claw. Though generally not a fatal disease, it has been fatal to people with damaged immune systems. Heska completed development of a vaccine to kill fleas or hinder reproduction. The vaccine contained an antibiotic that the flea absorbed when it bit into an animal; the antibiotic bonded with digestive or reproductive proteins in the flea. All animal testing of products took place at CSU and followed the universitys animal welfare guidelines.

During 1996 Heska doubled its research staff and facilities, increasing staff to more than 200 and adding two buildings to existing facilities, for a total of five facilities in the Fort Collins area. Increased spending on research accompanied this expansion, from $6.4 million in 1995 to $14.5 million in 1996 and $20.3 million in 1997.

Eight Years of Research Yields First Revenues

By 1996 the company had obtained government approval for several products and prepared for market production. Heska acquired Diamond Animal Health, a federally licensed biological and pharmaceutical manufacturing facility in Des Moines, Iowa. Assets included 166,000 square feet of operating space on 34 acres of land. Their Introductory products included many innovations, such as the first vaccine to prevent heartworm, the first vaccine for flea control, and the first vaccine for toxoplasmosis. The company also completed development of vaccines for cat scratch fever, equine influenza, feline leukemia, and feline immunodeficiency virus, as well as products to diagnose, prevent, and treat flea allergy dermatitis. Immunotherapy treatment sets, specific to each allergy, covered prescriptions for several injections with higher dosages during the course of the treatment, strengthening the immune response of the pet over the months.

In 1996 Heskas first revenues from products sales reached $15.6 million, for a total of $17.5 million in revenues, including funds received for sponsored research. This represented a very substantial increase; comparatively, in 1995 the company earned revenues of $4.7 million from royalties and $2.2 million from sponsored research.

Heska sought to expand through acquisitions in the United States and Europe in 1997. Heska entered the European animal health care market by providing veterinarian diagnostic services through its own laboratories. Hence, the company acquired Bloxham Laboratories Limited in the United Kingdom and attained production capacity when it purchased an interest in CMG Centre Medical des Grands Places S.A. in Switzerland. The company established Heska AG to manage operations in Europe from Basel, Switzerland.

Acquisitions in the United States included Astarix, which specialized in allergy research and development, and Center Laboratories in Port Washington, New York, which provided a licensed manufacturing facility for allergy immunotherapy products. Heska acquired an interest in Sensor Devises, Inc., manufacturer and distributor of monitoring instruments, such as for monitoring pulse rate or respiration of animal patients under anesthesia. Renamed Heska Waukesha, Heska obtained complete ownership of the company in March 1998. Overall acquisitions increased Heskas staff to 500 employees, with 300 at research laboratories and administrative offices in Fort Collins and the balance at all other facilities.

Heska became a public company in July 1997 with an initial offering of stock at $8.50 per share, though the original asking price ranged from $14.00 to $16.00 per share. The offering raised $45 million for continued research, development, manufacturing, and marketing efforts. New products at this time included diagnostic products for heartworms in cats and a chewable dietary supplement to treat hypothyroidism in dogs.

Heskas strategy for expansion in 1998 involved alliances with other animal health and medical research companies. An exclusive agreement with iSTAT Corporation gave Heska the rights to market a portable blood analyzer and cartridges used to detect blood gases and electrolytes in animals with respiratory disease, renal disease, and disturbance of the central nervous system, or for monitoring animals under anesthesia for long periods of time. The product complemented Heskas existing line of monitoring instruments and diagnostic products.

Heska sought cooperative agreements with other health researchers to increase their technological options in product development. An agreement with Iomai Corporation involved evaluation of that companys proprietary Transcutaneous Immunization Technology for possible use in a painless, no-needle vaccine delivery systems for cats, dogs, and horses. Heska paid an option fee for an exclusive license in which Iomia would receive license fees, milestone payments, research funding, and royalties. Also, in a license agreement with Vaxcel Inc., Heska gained the rights to a microencapsulation technology for the development of oral vaccines.

Company Perspectives:

Heska is dedicated to improving the health and well-being of companion animals, and their owners, by creating and marketing innovative products, services and solutions.

In July 1998, the USDA approved Heskas breakthrough Solo Step FH, a feline diagnosis kit for heartworm infection completed in one step. The point-of-care product allowed veterinarians to diagnosis the disease using three drops of the cats blood, obtaining results in five to ten minutes. Heska also received six patents from the U.S. Patent and Trademark Office in September. The patents involved a novel vaccine delivery system for recombinant canine herpes virus, a flea allergen treatment, and four heartworm antigens.

In late 1998 Heskas pursuit of collaborative partnerships culminated in several cooperative agreements. An agreement with the National Jewish Medical and Research Center in Denver gave Heska access to the intellectual property for new treatments of cancer in companion animals. In exchange Heska agreed to make research milestone payments and to pay royalties. Heska hoped to treat tumors with a local injection of genes to induce a stronger immune system response from the pet. GeneMedicine Inc. allowed Heska to evaluate proprietary catonic lipid and polymer-based DNA formulation and delivery technologies. Research with the technology involved medicines for cancer-infectious diseases, utilizing therapeutic proteins or to stimulate the immune system in helpful ways. An agreement with Phytopharm plc involved the evaluation of a botanical compound with the potential for an exclusive license. Through a distribution agreement with Novartis Agro KK Heska gained the right to evaluate selected veterinary products from Novartis Animal Health in exchange for allowing Novartis to market certain Heska products in Japan, including heartworm diagnostic kits, periodontal treatments, and feline viral vaccines.

Striving for Profitability in 2000

After ten years in operation, Heska had not yet made a profit and decided to restructure the company to reduce overhead in an attempt to step toward the founding goal to be profitable in 2000. Heska eliminated or deferred research projects as research costs peaked at $25.1 million in 1998. In late 1998 the company eliminated 70 positions in Fort Collins, primarily research and development personnel, for an $8 million expense reduction in 1999. Leadership changes accompanied the restructuring. Fred Schwarzer, CEO since 1993, became chairman of the board, and Grieve became CEO effective January 1, 1999. The following August Heska announced its consolidation of diagnostic and monitoring equipment operations in Waukesha, Wisconsin, with facilities in Fort Collins and Des Moines, thereby reducing staff by 40 and closing the Wisconsin facility for a $2 million annual savings. Heska also discontinued products with low volume sales and low profit margins and narrowed its focus to veterinary products for companion animals.

Heskas research and development efforts continued to bear fruit. In 1999 the company launched a single-step diagnostic test and monitoring product for heartworm infection in dogs, HESKA Solo Step CH. The company received four patents in October, two for novel flea allergens and two for use of high affinity Immunoglobulin E (IgE) receptor alpha chain to detect IgE levels in cats and dogs. A total of 12 patents were issued in 1999 for a cumulative total of 42 patents, with 93 patents pending and related international patent filings. Heska also received USD A approval of Flu Avert I.N., an equine influenza vaccine, and began selling the product to veterinarians in December 1999. The nasal mist proved to be effective for up to six months in clinical tests, more effective than existing equine flu vaccines.

Heskas efforts to become profitable produced mixed results. Revenues increase 29 percent over 1998, at $51.2 million in 1999, and net loss decreased from $44.3 million in 1998 to $35.4 million net loss in 1999. While Heska paid some debt, its accumulated deficit reached $152.6 million in 1999. A public offering of 6.5 million shares, at $2.06 per share, to institutional investors in December 1999, raised $13.3 million for continued operations.

In its efforts to become profitable, Heska divested intellectual property and several facilities. The company sold its canine periodontal treatment, PERIOceutic Gel, to Pharmacia & Up-john Animal Health, a company that already held a large share of the market for dental products for companion animals. In addition to receiving payment for worldwide sales and distribution rights, Heska received royalties based on sales of the product. Heska also sold two subsidiary units, Heska UK, a diagnostic laboratory serving veterinarians, and Centre Laboratories in Port Washington, New York, which produced allergy testing agents for humans and pets. Alk-Abello purchased the manufacturing facility and other assets for $6.4 million and agreed to supply Heska with allergen extracts and immunotherapy treatment sets. Alk-Abello also licensed Heskas intellectual property for recombinant allergens for human treatments, agreeing to pay royalties for product sales.

In 2000 Heska launched several health care products for cats. HESKA Feline ImmuCheck Assays tested the serum level of antibodies for feline panleukopenia virus, feline herpesvirus, and feline calicivirus. The diagnostic products assisted veterinarians in deciding the level of vaccination for these diseases by determining the strength of a cats own immune response. Also, in cooperation with Ralston Purina, Heska developed a cat food for diabetic cats, DM-Formula. Under the CNM brand Ralston Purina marketed the cat food to veterinarians.

Key Dates:

Paravax is founded to develop vaccines for animals.
The company relocates to Fort Collins, Colorado.
The company is renamed Heska.
The company obtains its first revenues from direct sales of products.
The company makes its initial public offering of stock.
The management restructures the company to increase its profitability.
Heska introduces the ALLERCEPT Detection System.

As Heska focused its research, development, and marketing activities on diagnostic and treatment products for companion animals, the company began to license intellectual property for use in human therapeutic applications, receiving fees and royalty payments in exchange. In an exclusive agreement, Circassia licensed certain small cat allergen peptides, and obtained the option to license house dust mite, ragweed, rye grass, and dog allergen peptides for human applications. Meiji Milk Products Co. of Tokyo licensed Japanese pollen allergens from Heska for human treatments in Japan.

In fall 2000 Heska presented research results for its ALLERCEPT Detection System, a technology for the diagnosis of allergies in companion animals. The test measured the level of IgE from a small blood sample; high levels of IgE indicated the presence of allergens. The test also identified the particular allergen from a panel of pollen, grass, mold, and insect allergens. Before ALLERCEPT, allergen testing involved great discomfort to the pet, requiring the veterinarian to shave a patch of skin and administer several injections. This form of testing entailed subjective evaluation. The ALLERCEPT test made detection and treatment easier and more effective while it addressed a primary reason that people take their pets to the veterinarian.

Strategic alliances continued to be an important avenue of growth and development. Heska entered into a collaborative effort with Valentis, Inc. through the license of a gene delivery system and DNA manufacturing technology. Heska applied the technology to the treatment of canine cancer hoping that clones of immune stimulators administered directly into cancerous tumors would reduce tumor growth and prevent the spread of cancer in other areas of the body. The company paid a license fee and agreed to make milestone payments, and to pay royalties from sales of the final product.

A distribution agreement with Novartis Animal Health in January 2001 involved giving Novartis exclusive rights to sell Heskas E-Screen Test in Europe. E-Screen Test prescreened dogs for allergens through a general test of IgE levels before the ALLERCEPT system tested for specific allergens. Production took place at CMG Heska allergy products facility in Fribourg, Switzerland.

Principal Subsidiaries

CMG-Heska Allergy Products S.A. (Switzerland); Diamond Animal Health, Inc.

Principal Competitors

American Home Products; Aventis; Bayer AG; Merial Ltd.; Novartis Animal Health; Pfizer, Inc.; Scherring-Plough Corporation; Pharmacia & Upjohn, Inc.; IDEXX Laboratories, Inc.

Further Reading

Aguilar, John, Fort Collins Company Takes Lead in Pet Health, Denver Post, July 24, 2000, p. E1.

Alliance Between Heska Corporation and Ralston Purina Results in Nutritional Product, PR Newswire, July 28, 2000.

Cornelius, Coleman, Going through the Woof: Fast-Rising Fort Collins Firm Keeps Pets Healthy, Owners Happy, Denver Post, January 5, 1998, p. E1.

Day, Janet, Paravax Itching to End Fleas, Denver Post, July 23, 1995, p. G1.

Gellici, Janet, and Arthur Harrison, Paravax Developing Vaccine Against Ticks, Denver Post, October 9, 1992, p. C1.

Heska and Novartis Enter into European Distribution Pact, PR Newswire, January 3, 2001.

Heska Announces Completion of Public Offering, PR Newswire, December 3, 1999.

Heska Announces Cost Reduction and Restructuring Plan, PR Newswire, December 2, 1998.

Heska Corporation Granted Four Patents for Allergy Products, PR Newswire, October 13, 1999.

Heska Granted Six Patents for Novel Vaccine Delivery System, Flea Allergens and Heartworm Antigens, BIOTECH Patent News, September 1, 1998.

Heska Launches In-Clinic Canine Heartworm Diagnostic Test in U.S., PR Newswire, January, 1998, p. 2559.

Heska Launches In-Clinic Feline Heartworm Test in U.S., PR Newswire, July 27, 1998.

Lenthe, Sue, Leaner Heska Corp. Focuses on Future, Cuts Center Company on Core Products, Northern Colorado Business Report, October 20, 2000, 2B.

Wood, Carol, Heska Doubles Work Force, Northern Colorado Business Report, December 1, 1996, p. 1A.

Mary Tradii