Filed pursuant to Rule 424(b)(4)
Reg. No. 333-198383

PROSPECTUS
2,860,000 Shares
Common Stock

[GRAPHIC MISSING] 

This is a firm commitment initial public offering of 2,860,000 shares of common stock by Jaguar Animal Health, Inc. No public market currently exists for our shares. The initial public offering price of our shares of common stock is $7.00 per share.

Our common stock has been approved for listing on The NASDAQ Capital Market under the symbol “JAGX.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Our business and an investment in our securities involves a high degree of risk. See “Risk Factors” beginning on page 11 of this prospectus for a discussion of information that you should consider before investing in our securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

   
  Per Share   Total
Public offering price   $ 7.00     $ 20,020,000  
Underwriting discounts and commissions(1)   $ 0.49     $ 1,401,400  
Proceeds, before expenses, to us   $ 6.51     $ 18,618,600  
(1) The underwriters will receive compensation in addition to the underwriting discount. The registration statement, of which this prospectus is a part, also registers for sale warrants to purchase 143,000 shares of our common stock to be issued to the representative of the underwriters. We have agreed to issue the warrants to the representative of the underwriters as a portion of the underwriting compensation payable to the underwriters in connection with this offering. See “Underwriting” beginning on page 118 of this prospectus for a description of compensation payable to the underwriters, including a description of the warrants.

We have granted a 45-day option to the underwriters to purchase up to 429,000 additional shares of common stock solely to cover over-allotments, if any.

The underwriters expect to deliver the shares against payment therefor on or about May 18, 2015.

Sole Book-Running Manager

Aegis Capital Corp

Co-Managers

 
Feltl and Company   CRT Capital

May 13, 2015


 
 

TABLE OF CONTENTS

[GRAPHIC MISSING] 


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

 
  Page
Prospectus Summary     1  
Risk Factors     11  
Special Note Regarding Forward-Looking Statements     40  
Industry Data     40  
Use of Proceeds     41  
Dividend Policy     43  
Capitalization     44  
Dilution     46  
Selected Financial Data     48  
Management's Discussion and Analysis of Financial Condition and Results of Operations     49  
Business     61  
Management     88  
Executive Compensation     94  
Certain Relationships and Related Person Transactions     100  
Principal Stockholders     105  
Description of Capital Stock     107  
Shares Eligible for Future Sale     112  
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Common Stock     115  
Underwriting     118  
Legal Matters     127  
Experts     127  
Where You Can Find More Information     127  
Index to Financial Statements     F-1  

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under the circumstances and in the jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where such offer is not permitted.

For investors outside the United States: we have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.

Jaguar Animal Health, our logo, Canalevia and Neonorm are our trademarks that are used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames referred to in this prospectus appear without the ©, ® or TM symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and tradenames.

i


 
 

TABLE OF CONTENTS

  

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the section in this prospectus titled “Risk Factors” and our financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision.

As used in this prospectus, references to “Jaguar,” “we,” “us” or “our” refer to Jaguar Animal Health, Inc.

Overview

Our Company

We are an animal health company focused on developing and commercializing first-in-class gastrointestinal products for companion and production animals. Canalevia is our lead prescription drug product candidate for the treatment of various forms of watery diarrhea in dogs. We achieved statistically significant results in a canine proof-of-concept study completed in February 2015, supporting the conclusion that Canalevia treatment is superior to placebo, with 91% of the Canalevia-treated dogs achieving a formed stool during the study versus 50% of the placebo-treated dogs. We also initiated filing of a rolling new animal drug application, or NADA, with the U.S. Food and Drug Administration, or FDA, for Canalevia for chemotherapy-induced diarrhea, or CID, in dogs, at the end of 2014. Canalevia is a canine-specific formulation of crofelemer, an active pharmaceutical ingredient isolated and purified from the Croton lechleri tree. A human-specific formulation of crofelemer, Fulyzaq, was approved by the FDA in 2012 for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. Members of our management team developed crofelemer, including while at Napo Pharmaceuticals, Inc., or Napo. Neonorm is our lead non-prescription product to improve gut health and normalize stool formation in animals suffering from watery diarrhea, or scours. We launched Neonorm in the United States at the end of 2014 for preweaned dairy calves under the brand name Neonorm Calf and expect to launch additional formulations of Neonorm for other animal species in 2015. We have already shipped approximately $450,000 of Neonorm Calf to distributors. Neonorm is a botanical extract also derived from the Croton lechleri tree. Canalevia and Neonorm are distinct products that are formulated to address specific species and market channels. We have filed nine investigational new animal drug applications, or INADs, with the FDA and intend to develop species-specific formulations of Neonorm in six additional target species.

Diarrhea is one of the most common reasons for veterinary office visits for dogs and is the second most common reason for visits to the veterinary emergency room, yet there are no FDA-approved anti-secretory products for the treatment of diarrhea. We estimate that in the United States, veterinarians see approximately six million annual cases of acute and chronic watery diarrhea in dogs, approximately two-thirds of which are acute watery diarrhea. We believe Canalevia will be effective in treating watery diarrhea because it acts at the last physiological step, conserved across mammalian species, in the manifestation of watery diarrhea, regardless of cause, by normalizing ion and water flow in the intestinal lumen. We are first seeking a minor use, minor species, or MUMS, designation from the FDA for Canalevia for CID in dogs to shorten the timeframe to commercialization. If we receive conditional approval pursuant to MUMS designation, we expect to commercialize Canalevia for CID in dogs in early 2016. We completed a canine proof-of-concept study in February 2015, with statistically significant results, in support of protocol concurrence discussions with the FDA regarding expansion of labeled indications of watery diarrhea beyond CID to include general watery diarrhea. We plan to market Canalevia, if approved, through a focused direct sales force and to complement our internal efforts with distribution partners.

According to the Dairy 2007 study conducted by the United States Department of Agriculture, or USDA, almost one in four preweaned dairy heifer, or female, calves suffers from diarrhea or other digestive problems. The preweaning period is generally the first 60 days after birth. Scours, diarrhea or other digestive problems are responsible for more than half of all preweaned heifer calf deaths, and result in supportive care and treatment costs, impaired weight gain and long-term reduction in milk production.

1


 
 

TABLE OF CONTENTS

  

We believe the incidence rate of scours and its corresponding financial impact represent a large opportunity and that Neonorm has the potential to effectively meet this need. In our clinical study completed in May 2014, Neonorm demonstrated a statistically significant reduction in the severity of watery diarrhea, reduced morbidity and mortality, and improved weight gain as compared to placebo in newborn dairy calves with scours.

We recently launched Neonorm for preweaned dairy calves under the brand name Neonorm Calf. Our commercialization activities are initially focusing on large commercial dairy operations and include active ongoing education and outreach to dairy industry key opinion leaders, such as academics involved in dairy cattle research or who advise the dairy cattle industry, as well as veterinarians. We intend to augment these commercialization efforts by working with regional distributors to leverage the geographic concentration of the dairy market in the United States as well as national distributors to provide wider geographic access to our products. We recently signed a distribution agreement with a veterinary biotechnology company in Latin America for exclusive distribution rights of Neonorm Calf in Argentina, Brazil, Paraguay, Uruguay, and Bolivia. In addition, where appropriate, we intend to explore other international distribution and partnership arrangements. In August 2014, we entered into our first regional distribution agreement for the Upper Midwest region, and in September 2014, entered into an agreement with a national master distributor, who also distributes prescription products for the companion animal market. We expect the ongoing launch of Neonorm to drive awareness among veterinarians regarding the utility of our first-in-class anti-secretory Croton lechleri-derived products, including Canalevia.

We have an exclusive worldwide license to Napo's intellectual property rights and technology related to our products and product candidates, including rights to its library of over 2,300 medicinal plants, for all veterinary treatment uses and indications for all species of animals. This license includes rights to Canalevia, Neonorm and other distinct prescription drug product candidates and non-prescription products in our pipeline along with the corresponding existing pre-clinical and clinical data packages. We also recently expanded our intellectual property portfolio to include combinations of our proprietary anti-secretory product lines, Canalevia and Neonorm, with the non-absorbed antibiotic, rifaximin, for gastrointestinal indications in all animals.

Our management team has significant experience in gastrointestinal and animal health product development. This experience includes the development of crofelemer for human use, from discovery and preclinical and clinical toxicity studies, including the existing animal studies to be used for Canalevia regulatory approvals, through human clinical development. Our team also includes individuals who have prior animal health experience at major pharmaceutical companies, including SmithKline Beecham Corporation, now GlaxoSmithKline LLC, the animal health group of Pfizer Inc., now Zoetis Inc., Vétoquinol S.A., Merial Limited, the animal health division of Sanofi S.A., as well as management experience at major veterinary hospital institutions.

2


 
 

TABLE OF CONTENTS

  

Product Pipeline

We are developing a pipeline of prescription drug product candidates and non-prescription products to address unmet needs in animal health. Our pipeline currently includes prescription drug product candidates for eight indications across multiple species, and non-prescription products targeting seven species.

Prescription Drug Product Candidates

       
Product Candidates   Species   Indication   Recent Developments   Anticipated Near-Term Milestones

Canalevia Dogs CID

•  

MUMS designation/pre-NADA meeting in October 2014

•  

Initiated rolling NADA filing in December 2014

•  

Conditional NADA approval in 1st quarter of 2016

Dogs General watery diarrhea

•  

INAD filed in February 2014

•  

Statistically significant proof-of-concept data in February 2015

•  

Concurrence meeting with FDA in 2015

•  

Initiation of pivotal trial in 2015

•  

Initiate filing NADA in 1st quarter of 2016

Species-specific formulations of crofelemer Horses Acute colitis

•  

INAD filed in February 2014

•  

Safety data in 2nd half of 2015

•  

Apply for MUMS designation in 2nd half of 2015

Horses Diarrhea, colonic and gastric ulcers(1)

•  

INAD filed in February 2015

•  

Proof-of-concept data in 2nd half of 2015

Cats General watery diarrhea

•  

INAD filed in February 2014

•  

Initiated safety and palatability study in cats with diarrhea in March 2015

•  

Safety and proof-of-concept data in 2nd half of 2015/1st quarter of 2016

Virend (topical) Cats Herpes virus

•  

INAD filed in July 2014

•  

Proof-of-concept and top line pivotal efficacy data in 1st quarter of 2016

Species-specific formulations of NP-500 Dogs Obesity-related metabolic dysfunction

•  

INAD filed September 2014

  
Horses Metabolic syndrome

•  

INAD filed in March 2014

  
Cats Type II diabetes

•  

INAD filed in March 2014

  
(1) In combination with omeprazole and/or sucralfate.

Non-Prescription Products

       
Products   Species   Use   Recent Developments   Anticipated Near-Term Milestones

Neonorm Calf Dairy calves Improve gut health and normalize stool formation in preweaned dairy calves with scours

•  

National launch in February 2015

•  

U.S. regional and nationwide distribution agreements signed in 2nd half of 2014

•  

South American distribution agreement signed in 1st quarter of 2015, commercial launch in 2016

•  

Approximately $450,000 of product shipped since commercial launch

•  

Field study results in 2nd quarter of 2015 (study has been ongoing since 4th quarter of 2014); includes evaluation of prebiotic effect

Species-specific formulations of Neonorm Horse foals Normalize stool formation

•  

Completed pilot formulation in April 2014

•  

Completed safety and palatability study in November 2014

•  

Safety and efficacy data in 2nd half of 2015

•  

Commercial launch in 2015

Adult horses Normalize stool formation   

•  

Safety and efficacy data in 1st quarter of 2016

Other farm/
production animals
Normalize stool formation

•  

Initiated market research in New Zealand and China in 2014

•  

Initiate proof-of-concept studies based on market research within the next 12 months

  

3


 
 

TABLE OF CONTENTS

  

Novel Mechanism of Action

Our anti-secretory gastrointestinal products and product candidates act by normalizing the flow of ions and water in the intestinal lumen, the dysregulation of which is the last step common to the manifestation of watery diarrhea. As a result, we believe that our products and product candidates may be effective in addressing watery diarrhea, regardless of cause. In addition, the channels that regulate this ion and water flow, including channels known as CFTR and CaCC (the sites of action of our gastrointestinal products), are generally present in mammals. We therefore expect that the clinical benefit shown in humans, preweaned dairy calves and dogs will be confirmed in multiple other species, including cats and horses. Accordingly, we believe we can bring to market multiple products for a range of species that are first-in-class and effective in preventing the debilitating and devastating ramifications of watery diarrhea in companion and production animals. The following diagram illustrates the mechanism of action of our gastrointestinal products and product candidates, which normalize chloride and water flow and transit time of fluids within the intestinal lumen.

[GRAPHIC MISSING] 

We have recently supplemented our anti-secretory product line by filing intellectual property for combinations with rifaximin, a non-absorbed antibiotic. Rifaximin is approved for human use for the treatment of traveler's diarrhea and chronic administration for hepatic encephalopathy. It is not approved for oral administration in veterinary health, and provides another opportunity for local drug administration (i.e., non-systemic) in the gut of the animal to target bacterial causes of watery diarrhea coincident with an anti-secretory approach to normalization of ion and water flow associated with watery diarrhea.

Business Strategy

Our goal is to become a leading animal health company with first-in-class products that address unmet medical needs in both the companion and production animal markets. To accomplish this goal, we plan to:

Leverage our significant gastrointestinal knowledge, experience and intellectual property portfolio to develop a line of Croton lechleri-derived products for both production and companion animals.  In addition to Canalevia for dogs and Neonorm for preweaned dairy calves, we are developing formulations of these products across multiple animal species and market channels.
Establish commercial capabilities, including third-party sales and distribution networks and our own targeted commercial efforts, through the launch of Neonorm.  We recently launched Neonorm in the United States under the brand name Neonorm Calf. We intend to establish a focused direct sales force for both the companion and production animal markets, as well as continue to partner with leading distributors to commercialize our products.
Launch Canalevia and our other product candidates for companion animals, if approved, leveraging the commercial capabilities and brand awareness we are currently building.  We believe the ongoing Neonorm launch will allow us to establish sales and marketing capabilities in advance of the planned launch of Canalevia for both CID (early 2016) and general watery diarrhea (2016) in dogs, to build corporate brand identity awareness, and to establish distributor relationships relevant to both our non-prescription and prescription drug product lines.

4


 
 

TABLE OF CONTENTS

  

Expand to international markets.  We intend to leverage our proprietary product development in the United States to international markets, with meaningful partnerships to address international requirements for product development, registration, and access to commercialization in relevant markets for each of our prescription and non-prescription products. We may also enter into partnerships that include payment of upfront licensing fees for our products and product candidates for markets outside the United States where appropriate.
Identify market needs that can be readily accessed and develop species-specific products by leveraging our broad intellectual property portfolio, deep pipeline and extensive botanical library.  In addition to our gastrointestinal pipeline product candidates, both Croton lechleri and rifaximin-based, we are also developing products such as Virend for feline herpes and NP-500 for Type II diabetes and metabolic syndrome, both of which have been through Phase 2 human clinical testing. We have exclusive worldwide rights to a library of over 2,300 medicinal plants for all veterinary treatment uses and indications for all species of animals.

Risks Related to Our Business

Our business, and our ability to execute our business strategy, is subject to a number of risks as more fully described in the section titled “Risk Factors.” These risks include, among others, the following:

We have a limited operating history, have not yet generated any material revenues, expect to continue to incur significant research and development and other expenses, and may never become profitable. Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
We have never generated any material revenue from operations and may need to raise additional capital to achieve our goals.
We are substantially dependent on the success of our current lead prescription drug product candidate, Canalevia, and non-prescription product, Neonorm, and cannot be certain that necessary approvals will be received or that these products will be successfully commercialized, either by us or any of our partners.
We are dependent upon our license agreement with Napo, and if this agreement is terminated, we will be unable to commercialize our products and our business will be harmed.
The results of earlier studies may not be predictive of the results of our pivotal trials or other future studies, and we may be unable to obtain any necessary regulatory approvals for our existing or future prescription drug product candidates under applicable regulatory requirements.
Development of prescription drug products, and to a lesser extent, non-prescription products, for the animal health market is inherently expensive, time-consuming and uncertain, and any delay or discontinuance of our current or future pivotal trials, or dosage or formulation studies, would harm our business and prospects.
Even if we obtain any required regulatory approvals for our current or future prescription drug product candidates, they may never achieve market acceptance or commercial success.
We are dependent upon contract manufacturers for supplies of our current prescription drug product candidates and non-prescription products and intend to rely on contract manufacturers for commercial quantities of any of our commercialized products.
If we are not successful in identifying, developing and commercializing additional prescription drug product candidates and non-prescription products, our ability to expand our business and achieve our strategic objectives would be impaired.

5


 
 

TABLE OF CONTENTS

  

Corporate Information

We were founded in San Francisco, California as a Delaware corporation on June 6, 2013. Napo formed our company to develop and commercialize animal health products. As of December 31, 2013, we were a wholly-owned subsidiary of Napo, and as of December 31, 2014, we are a majority-owned subsidiary of Napo. Upon the closing of this offering, we will no longer be majority-owned by Napo. See “Certain Relationships and Related Person Transactions — Transactions with Napo” and “— Napo Arrangements” for information regarding our transactions with Napo.

Our executive offices are located at 185 Berry Street, Suite 1300, San Francisco, California 94107, and our telephone number is (415) 371-8300. Our website address is www.jaguaranimalhealth.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management's Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We can take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we were to generate more than $1.0 billion in annual revenues, have more than $700.0 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. As an emerging growth company, we may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of some reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

6


 
 

TABLE OF CONTENTS

  

The Offering

Common stock offered by us    
    2,860,000 shares (or 3,289,000 shares if the underwriters exercise their option to purchase additional shares in full)
Common stock to be outstanding after this offering    
    8,119,923 shares (or 8,548,923 shares if the underwriters exercise their option to purchase additional shares in full)
Option to purchase additional
shares
   
    We have granted the underwriters a 45-day option to purchase up to 429,000 additional shares of our common stock to cover over-allotments, if any.
Use of proceeds    
    We intend to use the net proceeds from this offering for development work for Canalevia and our other prescription drug products, for studies and commercial activities related to Neonorm, for formulation costs and establishing contract manufacturing capabilities, repayment of $1.3 million of indebtedness and for other research and product development activities, working capital and general corporate purposes. See “Use of Proceeds” for a more detailed description of the intended use of proceeds from this offering.
Risk factors    
    See “Risk Factors” and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.
Proposed NASDAQ Capital Market symbol    
    “JAGX”

The number of shares of common stock to be outstanding after this offering is based on 5,259,923 shares of common stock outstanding as of December 31, 2014, and excludes:

207,664 shares of common stock issuable upon exercise of outstanding warrants as of December 31, 2014 with an exercise price of $2.5281 per share;
16,666 shares of common stock issuable upon exercise of an outstanding warrant as of December 31, 2014 with an exercise price of $6.30 per share;
269,938 shares of our common stock issuable upon exercise of outstanding warrants as of December 31, 2014 with an exercise price of $5.60 per share;
111,605 shares of common stock issuable upon exercise of outstanding warrants issued after December 31, 2014 with an exercise price of $5.60 per share;
659,554 shares issuable upon exercise of outstanding options as of December 31, 2014 with a weighted-average exercise price of $2.67 per share;
68,902 shares issuable upon vesting of outstanding restricted stock unit awards, or RSUs, as of December 31, 2014;
1,484 shares issuable upon vesting of outstanding RSUs issued after December 31, 2014;
203,030 shares issuable upon exercise of stock options, which were authorized after December 31, 2014, and which will be granted effective upon this offering with an exercise price equal to the initial public offering price;
up to 44,642 shares of common stock issuable upon conversion of outstanding convertible promissory notes in the aggregate principal amount of $250,000 issued after December 31, 2014;

7


 
 

TABLE OF CONTENTS

  

25,197 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan; and after taking into account the grant of an equity awards for an aggregate of 204,514 shares under our 2013 Equity Incentive Plan after December 31, 2014; and
333,333 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, as well as any automatic increases in the shares of common stock reserved for future issuance under the 2014 Stock Incentive Plan.

Unless otherwise indicated, the information in this prospectus assumes the following:

a 1-for-1.5 reverse stock split of our common stock effected on October 27, 2014;
the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will be in effect upon the closing of this offering;
the conversion of all 3,015,902 outstanding shares of Series A preferred stock into 2,010,596 shares of common stock upon the closing of this offering;
the issuance of 374,997 shares of common stock upon the conversion of convertible promissory notes in the aggregate principal amount of $2,100,000 upon the closing of this offering at a conversion price of $5.60 per share (which includes $1,000,000 aggregate principal amount issued after December 31, 2014), and which shares will be unregistered;
no conversion into shares of common stock of up to $1.0 million aggregate principal amount of borrowings under our standby letter of credit entered into in August 2014;
no exercise of outstanding options or warrants, or issuance of shares upon the vesting of restricted stock units; and
no exercise by the underwriters of their option to purchase additional shares of common stock.

Recent Developments

Subsequent to December 31, 2014, we completed the following transactions and issuances of securities.

In February 2015, we issued an additional $250,000 aggregate principal amount of convertible promissory notes to two accredited investors and amended and restated the terms of the $650,000 convertible promissory notes issued in December 2014 to conform the terms. All $900,000 aggregate principal amount of these notes bear interest at 12% per annum and become payable upon demand by the holders within 30 days following this offering. In the event this offering is consummated on, or prior to, June 30, 2015, the noteholders may convert the notes at a conversion price equal to $5.60 per share (80% of the initial public offering price). If these notes have not been converted prior to July 31, 2015, nor declared due and payable by the holders within 30 days after this offering, the maturity date will automatically be extended to July 31, 2016 if we have not otherwise elected to prepay these notes within 30 days after this offering. We also issued these investors three-year warrants to purchase an aggregate of 80,355 shares of our common stock (determined by dividing 50% of the corresponding original principal amount issued by the current exercise price). The exercise price is $5.60 per share. In March 2015, holders of $650,000 aggregate principal amount of these notes issued in December 2014 irrevocably elected to have their notes automatically convert into shares of our common stock upon the closing of this offering at a conversion price of $5.60 per share. Accordingly, we expect to issue these holders an aggregate of 116,070 shares of our common stock.

In March 2015, we entered into a non-binding letter of intent with Dechra Pharmaceuticals PLC, pursuant to which we agreed to negotiate a licensing agreement for rights to commercialize our leading prescription drug product candidate, Canalevia, for dogs in the European Union. In connection therewith, Dechra purchased $1.0 million of our convertible promissory notes, the terms of which provide that such notes will automatically convert into shares of our common stock upon the closing of this offering at a conversion price of $5.60 per share. In connection with the purchase of the notes, we also issued Dechra a warrant to purchase approximately 89,285 shares at $5.60 per share, which expires December 31, 2017.

8


 
 

TABLE OF CONTENTS

  

Summary Selected Financial Data

The following tables set forth a summary of our selected historical financial data as of and for the periods ended on the dates indicated. We have derived the statements of comprehensive loss data for the period from June 6, 2013 (inception) through December 31, 2013 and for the year ended December 31, 2014 from our audited financial statements included elsewhere in this prospectus. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the sections in this prospectus titled “Selected Financial Data” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The historical results are not necessarily indicative of the results to be expected for any future periods.

   
  Period from
June 6, 2013
(inception)
through
December 31,
2013
  Year Ended
December 31,
2014
Statements of Comprehensive Loss Data:
                 
Operating expenses:
                 
General and administrative expense   $ 458,473     $ 4,095,324  
Research and development expense     324,479       4,220,338  
Total operating expenses     782,952       8,315,662  
Loss from operations     (782,952 )      (8,315,662 ) 
Interest expense, net     (18,251 )      (345,336 ) 
Change in fair value of warrants           51,423  
Net loss and comprehensive loss   $ (801,203 )    $ (8,609,575 ) 
Accretion of redeemable convertible preferred stock           (646,673 ) 
Net loss attributable to common stockholders   $ (801,203 )    $ (9,256,248 ) 
Net loss per share attributable to common stockholders, basic and diluted(1)   $ (0.30 )    $ (3.24 ) 
Weighted-average common shares outstanding, basic and diluted(1)     2,666,666       2,854,417  
Pro forma net loss per share, basic and diluted(1)   $ (0.30 )    $ (2.02 ) 
Pro forma weighted-average number of common shares outstanding, basic and diluted(1)     2,666,666       4,592,283  

(1) See Notes 2 and 13 to our financial statements for a description of the method used to compute basic and diluted net loss per share and pro forma net loss per share.

9


 
 

TABLE OF CONTENTS

  

     
  As of December 31, 2014
     Actual   Pro Forma(1)   Pro Forma,
As Adjusted(2)
     (unaudited)
Balance Sheet Data:
                          
Cash and cash equivalents   $ 845,192     $ 2,095,192     $ 16,213,792  
Total assets     4,506,630       5,756,630       19,875,230  
Convertible notes payable     424,674       250,000       250,000  
Notes payable     478,709       478,709        
Warrant liability     601,889              
Total liabilities     5,436,964       4,660,401       4,181,692  
Redeemable convertible preferred stock     7,304,914              
Total stockholders' equity (deficit)     (8,235,248 )      1,096,229       15,693,538  

(1) Pro forma column reflects (i) the conversion of all 3,015,902 outstanding shares of Series A preferred stock into 2,010,596 shares of common stock upon the closing of this offering; (ii) the issuance of 374,997 shares of common stock upon the conversion of convertible promissory notes in the aggregate principal amount of $2,100,000 upon the closing of this offering at a conversion price equal to $5.60 per share; (iii) the issuance of $1,250,000 aggregate principal amount of convertible promissory notes after December 31, 2014 ($1,000,000 of which will convert into shares of common stock upon the closing of this offering); (iv) the modification in March 2015 of $650,000 aggregate principal amount of convertible promissory notes issued in December 2014 to automatically convert into shares of common stock upon the closing of this offering at a conversion price equal to $5.60 per share; and (v) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering.
(2) Pro forma as adjusted column further reflects (i) the sale of 2,860,000 shares of common stock that we are offering at an initial public offering price of $7.00 per share, after deducting underwriting discounts and estimated offering expenses payable by us and (ii) the repayment of our $1.0 million standby bridge facility.

10


 
 

TABLE OF CONTENTS

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may harm our business, financial condition, results of operations and prospects.

Risks Related to Our Business

We have a limited operating history, expect to incur further losses as we grow and may be unable to achieve or sustain profitability. Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

Since formation in June 2013, our operations have been primarily limited to the research and development of our lead prescription drug product candidate, Canalevia, to treat various forms of watery diarrhea in dogs, and our lead non-prescription product, Neonorm, to improve gut health and normalize stool formation in preweaned dairy calves with scours, and the recent commercial launch of Neonorm. As a result, we have limited meaningful historical operations upon which to evaluate our business and prospects and have not yet demonstrated an ability to broadly commercialize any of our products, obtain any required marketing approval for any of our prescription drug product candidates or successfully overcome the risks and uncertainties frequently encountered by companies in emerging fields such as the animal health industry. We also have not generated any material revenue to date, and expect to continue to incur significant research and development and other expenses. Our net loss and comprehensive loss for the year ended December 31, 2014 was $8,609,575. As of December 31, 2014, we had an accumulated deficit of $9,410,778. We expect to continue to incur losses for the foreseeable future, which will increase significantly from historical levels as we expand our product development activities, seek necessary approvals for our product candidates, conduct species-specific formulation studies for our non-prescription products and begin commercialization activities. Even though we recently commercially launched Neonorm and if we succeed in developing and broadly commercializing one or more of our products or product candidates, we expect to continue to incur losses for the foreseeable future, and we may never become profitable. If we fail to achieve or maintain profitability, then we may be unable to continue our operations at planned levels and be forced to reduce or cease operations.

Our auditors have included an explanatory paragraph in their audit report on our financial statements for the year ended December 31, 2014, regarding our assessment of substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We believe that the successful completion of this offering will eliminate the doubt and enable us to continue as a going concern. However, if we are unable to continue as a viable entity, our stockholders may lose their entire investment.

We have never generated any material revenue from operations and may not generate any material revenue from our operations in the foreseeable future.

We are an animal health company focused on developing and commercializing prescription drug and non-prescription products for companion and production animals. Since formation in June 2013, we have not generated any material revenue from operations. There is no guarantee that our recent commercial launch of Neonorm for preweaned dairy calves in the United States will be successful or that we will be able to sell any products in the future. Further, in order to commercialize our prescription drug product candidates, we must receive regulatory approval from the FDA in the United States and other regulatory agencies in various jurisdictions. We have not yet received any regulatory approvals for our prescription drug product candidates. In addition, certain of our non-prescription products, such as Neonorm, may be subject to regulatory approval outside the United States prior to commercialization. Accordingly, until and unless we receive any necessary regulatory approvals, we cannot market or sell our products. Moreover, even if we receive the necessary

11


 
 

TABLE OF CONTENTS

approvals, we may not be successful in generating revenue from sales of our products as we do not have any meaningful experience marketing or distributing our products. Accordingly, we may never generate any material revenue from our operations.

We expect to incur significant additional costs as we begin commercialization efforts for Neonorm, and undertake the clinical trials necessary to obtain regulatory approvals for Canalevia, which will increase our losses.

We recently commenced sales of Neonorm for preweaned dairy calves in the United States under the brand name Neonorm Calf. We will need to continue to invest in developing our internal and third-party sales and distribution network and outreach efforts to key opinion leaders in the dairy industry, including veterinarians. We will also need to conduct clinical trials for Canalevia in order to obtain necessary initial regulatory approvals and subsequently broaden Canalevia to additional indications and additional species. We will also need to conduct species-specific testing with Neonorm to expand to additional animal populations.

We are actively identifying additional products for development and commercialization, and will continue to expend substantial resources for the foreseeable future to develop Canalevia and Neonorm and develop products from the library of over 2,300 medicinal plants that we have licensed. These expenditures will include costs associated with:

identifying additional potential prescription drug product candidates and non-prescription products;
formulation studies;
conducting pilot, pivotal and toxicology studies;
completing other research and development activities;
payments to technology licensors;
maintaining our intellectual property;
obtaining necessary regulatory approvals;
establishing commercial supply capabilities; and
sales, marketing and distribution of our commercialized products.

We also may incur unanticipated costs in connection with developing and commercializing our products. Because the outcome of our development activities and commercialization efforts is inherently uncertain, the actual amounts necessary to successfully complete the development and commercialization of our current or future products and product candidates may be greater than we anticipate.

Because we anticipate incurring significant costs for the foreseeable future, if we are not successful in broadly commercializing any of our current or future products or product candidates or raising additional funding to pursue our research and development efforts, we may never realize the benefit of our development efforts and our business may be harmed.

We may need to raise additional capital to achieve our business goals and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, limit, reduce or terminate one or more of our product development programs or future commercialization efforts.

We believe the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operating plan through April 2016 and anticipated commercial launch of Canalevia for CID in dogs, as well as for the pivotal data and regulatory filing with the FDA to expand the indication to general watery diarrhea in dogs. However, we may experience unexpected events that require us to seek additional funds sooner than planned through public or private equity or debt financings or other sources such as strategic collaborations. We do not expect that the net proceeds from this offering will be sufficient to complete the development of all the current products in our pipeline, or any additional products we may identify. We may need to raise additional capital to fund these activities. Other than our standby line of credit (under which we had $1.0 million available as of December 31, 2014), we have no current agreements or arrangements with respect to any such financings or collaborations, and any such financings or collaborations

12


 
 

TABLE OF CONTENTS

may result in dilution to our stockholders, the imposition of debt covenants and repayment obligations or other restrictions that may harm our business or the value of our common stock. We may also seek from time to time to raise additional capital based upon favorable market conditions or strategic considerations such as potential acquisitions.

Our future capital requirements depend on many factors, including, but not limited to:

the scope, progress, results and costs of researching and developing our current and future prescription drug product candidates and non-prescription products;
the timing of, and the costs involved in, obtaining any regulatory approvals for our current and any future products;
the number and characteristics of the products we pursue;
the cost of manufacturing our current and future products and any products we successfully commercialize;
the cost of commercialization activities for Neonorm and Canalevia, if approved, including sales, marketing and distribution costs;
the expenses needed to attract and retain skilled personnel;
the costs associated with being a public company;
our ability to establish and maintain strategic collaborations, distribution or other arrangements and the financial terms of such agreements; and
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation.

Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate one or more of our product development programs or future commercialization efforts.

We are substantially dependent on the success of Canalevia and Neonorm and cannot be certain that Canalevia will be approved or that we can successfully commercialize these products.

We currently do not have regulatory approval for any of our prescription drug product candidates, including Canalevia. Our current efforts are primarily focused on the commercial launch of Neonorm in the United States, and development efforts related to Canalevia for CID in dogs. We are also focused on expanding Canalevia's proposed indications to cover general watery diarrhea in dogs and full FDA approval for CID for dogs. Accordingly, our near-term prospects, including our ability to generate material product revenue, obtain any new financing if needed to fund our business and operations or enter into potential strategic transactions, will depend heavily on the success of Neonorm and, if approved, Canalevia.

Substantial time and capital resources have been previously devoted by third parties in the development of crofelemer, the active pharmaceutical ingredient, or API, in Canalevia, and the botanical extract used in Neonorm. Both crofelemer and the botanical extract used in Neonorm were originally developed at Shaman Pharmaceuticals, Inc., or Shaman, by certain members of our management team, including Lisa A. Conte, our Chief Executive Officer and President, and Steven R. King, Ph.D., our Executive Vice President, Sustainable Supply, Ethnobotanical Research and Intellectual Property and Secretary. Shaman spent significant development resources before voluntarily filing for bankruptcy in 2001 pursuant to Chapter 11 of the U.S. Bankruptcy Code. The rights to crofelemer and the botanical extract used in Neonorm, as well as other intellectual property rights, were subsequently acquired by Napo from Shaman in 2001 pursuant to a court approved sale of assets. Ms. Conte founded Napo in 2001 and is the current interim chief executive officer of Napo and a member of its board of directors. While at Napo, certain members of our management team, including Ms. Conte and Dr. King, continued the development of crofelemer. In 2005, Napo entered into license agreements with Glenmark Pharmaceuticals Ltd., or Glenmark, and Luye Pharma Group Limited for rights to various human indications of crofelemer in certain territories as defined in the respective license agreements with these licensees. Subsequently, after expending significant sums developing crofelemer,

13


 
 

TABLE OF CONTENTS

including trial design and on-going patient enrollment in the final pivotal Phase 3 trial for crofelemer for non-infectious diarrhea in adults with HIV/AIDS on antiretroviral therapy, in late 2008, Napo entered into a collaboration agreement with Salix Pharmaceuticals, Inc., or Salix, for development and commercialization rights to certain indications worldwide and certain rights in North America, Europe, and Japan, to crofelemer for human use. In January 2014, we entered into the Napo License Agreement pursuant to which we acquired an exclusive worldwide license to Napo's intellectual property rights and technology, including crofelemer and the botanical extract used in Neonorm, for all veterinary treatment uses and indications for all species of animals. In February 2014, most of the executive officers of Napo, and substantially all Napo's employees, became our employees. If we are not successful in the development and commercialization of Neonorm and Canalevia, our business and our prospects will be harmed.

The successful development and commercialization of Neonorm and, if approved, Canalevia will depend on a number of factors, including the following:

the successful completion of the pivotal trials and toxicology studies for Canalevia, which may take significantly longer than we currently anticipate and will depend, in part, upon the satisfactory performance of third-party contractors;
our ability to demonstrate to the satisfaction of the FDA and any other regulatory bodies, the safety and efficacy of Canalevia;
our ability and that of our contract manufacturers to manufacture supplies of Neonorm and Canalevia and to develop, validate and maintain viable commercial manufacturing processes that are compliant with current good manufacturing practices, or cGMP, if required;
the success of Neonorm field studies and acceptance of their results by dairy producers;
our ability to successfully launch Neonorm, whether alone or in collaboration with others;
our ability to successfully launch Canalevia assuming approval is obtained, whether alone or in collaboration with others;
the availability, perceived advantages, relative cost, relative safety and relative efficacy of our prescription drug product candidates and non-prescription products compared to alternative and competing treatments;
the acceptance of our prescription drug product candidates and non-prescription products as safe and effective by veterinarians, animal owners and the animal health community;
our ability to achieve and maintain compliance with all regulatory requirements applicable to our business; and
our ability to obtain and enforce our intellectual property rights and obtain marketing exclusivity for our prescription drug product candidates and non-prescription products, and avoid or prevail in any third-party patent interference, patent infringement claims or administrative patent proceedings initiated by third parties or the U.S. Patent and Trademark Office, or USPTO.

Many of these factors are beyond our control. Accordingly, we may not be successful in developing or commercializing Neonorm, Canalevia or any of our other potential products. If we are unsuccessful or are significantly delayed in developing and commercializing Neonorm, Canalevia or any of our other potential products, our business and prospects will be harmed and you may lose all or a portion of the value of your investment in our common stock.

If we are not successful in identifying, licensing, developing and commercializing additional product candidates and products, our ability to expand our business and achieve our strategic objectives could be impaired.

Although a substantial amount of our efforts are focused on the commercial launch of Neonorm and the continued development and potential approval of Canalevia, a key element of our strategy is to identify, develop and commercialize a portfolio of products to serve the animal health market. Most of our potential products are based on our knowledge of medicinal plants. Our current focus is primarily on product

14


 
 

TABLE OF CONTENTS

candidates and products for animals whose active pharmaceutical ingredient or botanical extract has been successfully commercialized or demonstrated to be safe and effective in human trials. In some instances, we may be unable to further develop these potential products because of perceived regulatory and commercial risks. Even if we successfully identify potential products, we may still fail to yield products for development and commercialization for many reasons, including the following:

competitors may develop alternatives that render our potential products obsolete;
potential products we seek to develop may be covered by third-party patents or other exclusive rights;
a potential product may on further study be shown to have harmful side effects in animals or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
a potential product may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
a potential product may not be accepted as safe and effective by veterinarians, animal owners, key opinion leaders and other decision-makers in the animal health market.

While we are developing species-specific formulations, including flavors, methods of administration, new patents and other strategies with respect to our current potential products, we may be unable to prevent competitors from developing substantially similar products and bringing those products to market earlier than we can. If such competing products achieve regulatory approval and commercialization prior to our potential products, our competitive position may be impaired. If we fail to develop and successfully commercialize other potential products, our business and future prospects may be harmed and we will be more vulnerable to any problems that we encounter in developing and commercializing our current potential products.

Our animal health products face significant competition from other pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The development and commercialization of animal health products is highly competitive and our success depends on our ability to compete effectively with other products in the market. We expect to compete with the animal health divisions of major pharmaceutical and biotechnology companies such as Merck Animal Health, Merial Limited, Elanco Animal Health, Bayer Animal Health GmbH, Novartis Animal Health Inc. and Boehringer Ingelheim Animal Health, as well as specialty animal health medicines companies such as Zoetis Inc., Phibro Animal Health Corporation and, in Europe, Virbac S.A., Vétoquinol S.A., Ceva Animal Health S.A. and Dechra Pharmaceuticals PLC. We are also aware of several early-stage companies that are developing products for use in the animal health market, including Aratana Therapeutics, Inc., Kindred Biosciences, Inc., Parnell Pharmaceuticals Holdings Ltd, Nexvet Biopharma and ImmuCell Corporation. We also compete with academic institutions, governmental agencies and private organizations that are conducting research in the field of animal health products.

Although there are currently no FDA-approved anti-secretory products to treat watery diarrhea in dogs, we anticipate that Canalevia, if approved, will face competition from various products, including products approved for use in humans that are used extra-label in animals. Extra-label use is the use of an approved drug outside of its cleared or approved indications in the animal context. All of our potential products could also face competition from new products in development. These and other potential competing products may benefit from greater brand recognition and brand loyalty than our products and product candidates may achieve.

Many of our competitors and potential competitors have substantially more financial, technical and human resources than we do. Many also have more experience in the development, manufacture, regulation and worldwide commercialization of animal health products, including animal prescription drugs and non-prescription products.

For these reasons, we cannot be certain that we and our products can compete effectively.

15


 
 

TABLE OF CONTENTS

We may be unable to obtain, or obtain on a timely basis, regulatory approval for our existing or future prescription drug product candidates under applicable regulatory requirements, which would harm our operating results.

The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of animal health products are subject to extensive regulation. We are usually not permitted to market our prescription drug product candidates in the United States until we receive approval of an NADA from the FDA. To gain approval to market an animal prescription drug for a particular species, we must provide the FDA with efficacy data from pivotal trials that adequately demonstrate that our prescription drug product candidates are safe and effective in the target species (e.g., dogs, cats or horses) for the intended indications. In addition, we must provide manufacturing data evidencing that we can produce our product candidates in accordance with cGMP. For the FDA, we must also provide data from toxicology studies, also called target animal safety studies, and in some cases environmental impact data. In addition to our internal activities, we will partially rely on contract research organizations, or CROs, and other third parties to conduct our toxicology studies and for certain other development activities. The results of toxicology studies and other initial development activities, and of any previous studies in humans or animals conducted by us or third parties, may not be predictive of future results of pivotal trials or other future studies, and failure can occur at any time during the conduct of pivotal trials and other development activities by us or our CROs. Our pivotal trials may fail to show the desired safety or efficacy of our prescription drug product candidates despite promising initial data or the results in previous human or animal studies conducted by others, and success of a prescription drug product candidate in prior animal studies, or in the treatment of humans, does not ensure success in subsequent studies. Clinical trials in humans and pivotal trials in animals sometimes fail to show a benefit even for drugs that are effective because of statistical limitations in the design of the trials or other statistical anomalies. Therefore, even if our studies and other development activities are completed as planned, the results may not be sufficient to obtain a required regulatory approval for a product candidate.

Regulatory authorities can delay, limit or deny approval of any of our prescription drug product candidates for many reasons, including:

if they disagree with our interpretation of data from our pivotal studies or other development efforts;
if we are unable to demonstrate to their satisfaction that our product candidate is safe and effective for the target indication;
if they require additional studies or change their approval policies or regulations;
if they do not approve of the formulation, labeling or the specifications of our current and future product candidates; and
if they fail to approve the manufacturing processes of our third-party contract manufacturers.

Further, even if we receive a required approval, such approval may be for a more limited indication than we originally requested, and the regulatory authority may not approve the labeling that we believe is necessary or desirable for successful commercialization.

Any delay or failure in obtaining any necessary regulatory approval for the intended indications of our product candidates would delay or prevent commercialization of such product candidates and would harm our business and our operating results.

The results of our earlier studies of Neonorm may not be predictive of the results in any future species-specific formulation studies, and we may not be successful in our efforts to develop or commercialize line extensions of Neonorm.

Our product pipeline includes a number of species-specific formulations of Neonorm, our lead non-prescription product. We intend to use a portion of the proceeds of this offering for formulation costs associated with developing such species-specific formulations. The results of our dairy calf studies and other initial development activities and of any previous studies in humans or animals conducted by us or third parties may not be predictive of future results of these formulation studies. Failure can occur at any time during the conduct of these trials and other development activities. Even if our species-specific formulation studies and other development activities are completed as planned, the results may not be sufficient to pursue

16


 
 

TABLE OF CONTENTS

a particular line extension for Neonorm. Further, even if we obtain promising results from our species-specific formulation studies, we may not successfully commercialize any line extension. Because line extensions are developed for a particular species market, we may not be able to leverage our experience from the commercial launch of Neonorm Calf in new animal species markets. If we are not successful in developing and successfully commercializing these line extension products, we may not be able to grow our revenue and our business may be harmed.

Development of prescription drug products is inherently expensive, time-consuming and uncertain, and any delay or discontinuance of our current or future pivotal trials would harm our business and prospects.

Development of prescription drug products for animals remains an inherently lengthy, expensive and uncertain process, and our development activities may not be successful. We do not know whether our current or planned pivotal trials for any of our product candidates, will begin or conclude on time, and they may be delayed or discontinued for a variety of reasons, including if we are unable to:

address any safety concerns that arise during the course of the studies;
complete the studies due to deviations from the study protocols or the occurrence of adverse events;
add new study sites;
address any conflicts with new or existing laws or regulations; or
reach agreement on acceptable terms with study sites, which can be subject to extensive negotiation and may vary significantly among different sites.

Further, Neonorm, and Neonorm may be subject to the same regulatory regime as prescription drug products in jurisdictions outside the United States. Any delays in completing our development efforts will increase our costs, delay our development efforts and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may harm our business, financial condition and prospects. In addition, factors that may cause a delay in the commencement or completion of our development efforts may also ultimately lead to the denial of regulatory approval of our product candidates which, as described above, would harm our business and prospects.

We will partially rely on third parties to conduct our development activities. If these third parties do not successfully carry out their contractual duties, we may be unable to obtain regulatory approvals or commercialize our current or future product candidates on a timely basis, or at all.

We will partially rely upon CROs to conduct our toxicology studies and for other development activities. We intend to rely on CROs to conduct one or more of our planned pivotal trials. These CROs are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs or manage the risks associated with their activities on our behalf. We are responsible for ensuring that each of our studies is conducted in accordance with the development plans and trial protocols presented to regulatory authorities. Any deviations by our CROs may adversely affect our ability to obtain regulatory approvals, subject us to penalties or harm our credibility with regulators. The FDA and foreign regulatory authorities also require us and our CROs to comply with regulations and standards, commonly referred to as good clinical practices, or GCPs, or good laboratory practices, or GLPs, for conducting, monitoring, recording and reporting the results of our studies to ensure that the data and results are scientifically valid and accurate.

Agreements with CROs generally allow the CROs to terminate in certain circumstances with little or no advance notice. These agreements generally will require our CROs to reasonably cooperate with us at our expense for an orderly winding down of the CROs' services under the agreements. If the CROs conducting our studies do not comply with their contractual duties or obligations, or if they experience work stoppages, do not meet expected deadlines, or if the quality or accuracy of the data they obtain is compromised, we may need to secure new arrangements with alternative CROs, which could be difficult and costly. In such event, our studies also may need to be extended, delayed or terminated as a result, or may need to be repeated. If any of the foregoing were to occur, regulatory approval, if required, and commercialization of our product candidates may be delayed and we may be required to expend substantial additional resources.

17


 
 

TABLE OF CONTENTS

Even if we obtain regulatory approval for Canalevia or our other product candidates, they may never achieve market acceptance. Further, even if we are successful in commercially launching Neonorm, it may not achieve commercial success.

If we obtain necessary regulatory approvals for Canalevia or our other product candidates, such products may still not achieve market acceptance and may not be commercially successful. Market acceptance of Canalevia, Neonorm and any of our other products depends on a number of factors, including:

the safety of our products as demonstrated in our target animal studies;
the indications for which our products are approved or marketed;
the potential and perceived advantages over alternative treatments or products, including generic medicines and competing products currently prescribed by veterinarians, and products approved for use in humans that are used extra-label in animals;
the acceptance by veterinarians, companion animal owners and production animal owners, including in the dairy industry, of our products as safe and effective;
the cost in relation to alternative treatments and willingness on the part of veterinarians and animal owners to pay for our products;
the prevalence and severity of any adverse side effects of our products;
the relative convenience and ease of administration of our products; and
the effectiveness of our sales, marketing and distribution efforts.

Any failure by Canalevia, Neonorm or any of our other products to achieve market acceptance or commercial success would harm our financial condition and results of operations.

The dairy industry is subject to conditions beyond our control and the occurrence of any such conditions may harm our business and impact the demand for our products.

The demand for production animal health products, such as Neonorm Calf, is heavily dependent on factors that affect the dairy market that are beyond our control, including the following, any of which may harm our business:

cost containment measures within the dairy industry, in response to international, national and local general economic conditions, which may affect the market adoption of our products;
state and federal government policies, including government-funded programs or subsidies whose discontinuance or modification could erode the demand for our products;
a decline in demand for dairy products due to changes in consumer diets away from dairy products, which could adversely affect the demand for production animal health products;
adverse weather conditions and natural disasters, such as floods, droughts, and pestilence, which can lower dairy yields; and
disease or other conditions beyond our control.

Animal products, like human products, are subject to unanticipated post-approval safety or efficacy concerns, which may harm our business and reputation.

The success of our commercialization efforts will depend upon the perceived safety and effectiveness of animal health products, in general, and of our products, in particular. Unanticipated safety or efficacy concerns can subsequently arise with respect to approved prescription drug products, or non-prescription products, such as Neonorm, which may result in product recalls or withdrawals or suspension of sales, as well as product liability and other claims. Any safety or efficacy concerns, or recalls, withdrawals or suspensions of sales of our products, or human products derived from Croton lechleri, if any, could harm our reputation and business, regardless of whether such concerns or actions are justified.

18


 
 

TABLE OF CONTENTS

Future federal and state legislation may result in increased exposure to product liability claims, which could result in substantial losses.

Under current federal and state laws, companion and production animals are generally considered to be the personal property of their owners and, as such, the owners' recovery for product liability claims involving their companion and production animals may be limited to the replacement value of the animal. Companion animal owners and their advocates, however, have filed lawsuits from time to time seeking non-economic damages such as pain and suffering and emotional distress for harm to their companion animals based on theories applicable to personal injuries to humans. If new legislation is passed to allow recovery for such non-economic damages, or if precedents are set allowing for such recovery, we could be exposed to increased product liability claims that could result in substantial losses to us if successful. In addition, some horses can be worth millions of dollars or more, and product liability for horses may be very high. While we currently have product liability insurance, such insurance may not be sufficient to cover any future product liability claims against us.

If we fail to retain current members of our senior management, or to identify, attract, integrate and retain additional key personnel, our business will be harmed.

Our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We are highly dependent upon our senior management, particularly Lisa A. Conte, our President and Chief Executive Officer, and John A. Kallassy, our Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer. The loss of services of any of our key personnel would cause a disruption in our ability to develop our current or future product pipeline and commercialize our products and product candidates. Although we have offer letters with these key members of senior management, such agreements do not prohibit them from resigning at any time. For example, the resignation of our former Chief Financial Officer, Charles O. Thompson, in September 2014, and the mutually agreed departure of our former Chief Veterinary Officer, Serge Martinod, D.V.M., Ph.D. in February 2015, caused us to incur additional expenses and expend resources to ensure a smooth transition with their respective successors, which diverted management attention away from executing our operational plan during this period. We currently do not maintain “key man” life insurance on any of our senior management team. The loss of Ms. Conte, Mr. Kallassy or other members of our current senior management could adversely affect the timing or outcomes of our current and planned studies, as well as the prospects for commercializing our products.

In addition, competition for qualified personnel in the animal health field is intense, because there are a limited number of individuals who are trained or experienced in the field. Further, our headquarters are located in San Francisco, California, and the dairy and agriculture industries are not prevalent in urban areas such as San Francisco. We will need to hire additional personnel as we expand our product development and commercialization activities. Even if we are successful in hiring qualified individuals, as we are a growing organization, we do not have a track record for integrating and retaining individuals. If we are not successful in identifying, attracting, integrating or retaining qualified personnel on acceptable terms, or at all, our business will be harmed.

We are dependent on two suppliers for the raw material used to produce the active pharmaceutical ingredient in Canalevia and the botanical extract in Neonorm. The termination of either of these contracts would result in a disruption to product development and our business will be harmed.

The raw material used to manufacture Canalevia and Neonorm is crude plant latex, or CPL, derived from the Croton lechleri tree, which is found in countries in South America, principally Peru. The ability of our contract suppliers to harvest CPL is governed by the terms of their respective agreements with local government authorities. Although CPL is available from multiple suppliers, we only have contracts with two suppliers to obtain CPL and arrange the shipment to our contract manufacturer. Accordingly, if our contract suppliers do not or are unable to comply with the terms of our respective agreements, and we are not able to negotiate new agreements with alternate suppliers on terms that we deem commercially reasonable, it may harm our business and prospects. The countries from which we obtain CPL could change their laws and regulations regarding the export of the natural products or impose or increase taxes or duties payable by exporters of such products. Restrictions could be imposed on the harvesting of the natural products or

19


 
 

TABLE OF CONTENTS

additional requirements could be implemented for the replanting and regeneration of the raw material. Such events could have a significant impact on our cost and ability to produce Canalevia, Neonorm and anticipated line extensions.

We are dependent upon third-party contract manufacturers, both for the supply of the active pharmaceutical ingredient in Canalevia and the botanical extract in Neonorm, as well as for the supply of finished products for commercialization.

To date, the CPL, API, botanical extract and some finished products that we have used in our studies and trials were obtained from Napo. We have also contracted with third parties for the formulation of API and botanical extract into finished products for our studies. We have entered into memorandums of understanding with Indena S.p.A. for the manufacture of CPL received from our suppliers into the API in Canalevia to support our regulatory filings, as well as the botanical extract in Neonorm and agreed to negotiate a commercial supply agreement. Indena S.p.A. has never manufactured either such ingredient to commercial scale. As a second supplier situation, we have entered into a non-binding letter of intent with Glenmark for the supply of the API in Canalevia. Glenmark is the current manufacturer of crofelemer, the active API in Canalevia, for the FDA-approved human anti-secretory product, and the manufacturer on file for the NADA to which we have a right of reference. We also plan to contract with different third parties for the formulation and supply of finished products, which we will use in our planned studies and commercialization efforts. However, we have not entered into any definitive agreements with any third parties for the supply of commercial quantities of finished products.

We will be dependent upon our contract manufacturers for the supply of the API in Canalevia. We currently have sufficient quantities of the botanical extract used in Neonorm to support initial commercialization of Neonorm. However, we will require additional quantities of the botanical extract if our commercial launch of Neonorm is successful. If we are not successful in reaching agreements with third parties on terms that we consider commercially reasonable for manufacturing and formulation, or if our contract manufacturer and formulator are not able to produce sufficient quantities or quality of API, botanical extract or finished product under their agreements, it could delay our plans and harm our business prospects.

The facilities used by our third-party contractors are subject to inspections, including by the FDA, and other regulators, as applicable. We also depend on our third-party contractors to comply with cGMP. If our third-party contractors do not maintain compliance with these strict regulatory requirements, we and they will not be able to secure or maintain regulatory approval for their facilities, which would have an adverse effect on our operations. In addition, in some cases, we also are dependent on our third-party contractors to produce supplies in conformity to our specifications and maintain quality control and quality assurance practices and not to employ disqualified personnel. If the FDA or a comparable foreign regulatory authority does not approve the facilities of our third-party contractors if so required, or if it withdraws any such approval in the future, we may need to find alternative manufacturing or formulation facilities, which could result in delays in our ability to develop or commercialize our products, if at all. We and our third-party contractors also may be subject to penalties and sanctions from the FDA and other regulatory authorities for any violations of applicable regulatory requirements. The USDA and the European Medicines Agency, or the EMA, employ different regulatory standards than the FDA, so we may require multiple manufacturing processes and facilities for the same product candidate or any approved product. We are also exposed to risk if our third-party contractors do not comply with the negotiated terms of our agreements, or if they suffer damage or destruction to their facilities or equipment.

If we are unable to establish sales capabilities on our own or through third parties, we may not be able to market and sell our current or future products and product candidates, if approved, and generate product or other revenue.

We currently have limited sales, marketing or distribution capabilities, and prior to our recent launch of Neonorm for preweaned dairy calves, had no experience in the sale, marketing and distribution of animal health products. There are significant risks involved in building and managing a sales organization, including our potential inability to attract, hire, retain and motivate qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively oversee a geographically-dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and

20


 
 

TABLE OF CONTENTS

distribution capabilities and entry into adequate arrangements with distributors or other partners would adversely impact the commercialization of Neonorm, and Canalevia, if approved. If we are not successful in commercializing Neonorm, Canalevia or any of our other line extension products, either on our own or through one or more distributors, or in generating upfront licensing or other fees, we may never generate significant revenue and may continue to incur significant losses, which would harm our financial condition and results of operations.

Changes in distribution channels for animal prescription drugs may make it more difficult or expensive to distribute our prescription drug products.

In the United States, animal owners typically purchase their animal prescription drugs from their local veterinarians who also prescribe such drugs. There is a trend, however, toward increased purchases of animal prescription drugs from Internet-based retailers, “big-box” retail stores and other over-the-counter distribution channels, which follows an emerging shift in recent years away from the traditional veterinarian distribution channel. It is also possible that animal owners may come to rely increasingly on Internet-based animal health information rather than on their veterinarians. We currently expect to market our animal prescription drugs directly to veterinarians, so any reduced reliance on veterinarians by animal owners could harm our business and prospects by making it more difficult or expensive for us to distribute our prescription drug products. Animal owners also may substitute human health products for animal prescription drugs if the human health products are less expensive or more readily available, which could also harm our business.

Legislation has been or may be proposed in various states that would require veterinarians to provide animal owners with written prescriptions and disclosures that the animal owner has the right to fill the prescriptions through other means. If enacted, such legislation could lead to a reduction in the number of animal owners who purchase their animal pharmaceuticals directly from veterinarians, which also could harm our business.

Consolidation of our customers could negatively affect the pricing of our products.

Veterinarians will be our primary customers for our prescription drug products, as well as, to some extent, our non-prescription products, such as Neonorm. In recent years, there has been a trend towards the consolidation of veterinary clinics and animal hospitals. If this trend continues, these large clinics and hospitals could attempt to leverage their buying power to obtain favorable pricing from us and other animal health product companies. Any downward pressure on the prices of any of our products could harm our operating results and financial condition.

We will need to increase the size of our organization and may not successfully manage such growth.

As of March 31, 2015, we had 17 employees. Our ability to manage our growth effectively will require us to hire, train, retain, manage and motivate additional employees and to implement and improve our operational, financial and management systems. These demands also may require the hiring of additional senior management personnel or the development of additional expertise by our senior management personnel. If we fail to expand and enhance our operational, financial and management systems in conjunction with our potential future growth, it could harm our business and operating results.

Our research and development relies on evaluations in animals, which is controversial and may become subject to bans or additional regulations.

The evaluation of our products and product candidates in target animals is required to develop, formulate and commercialize our products and product candidates. Although our animal testing will be subject to GLPs and GCPs, as applicable, animal testing in the human pharmaceutical industry and in other industries continues to be the subject of controversy and adverse publicity. Some organizations and individuals have sought to ban animal testing or encourage the adoption of additional regulations applicable to animal testing. To the extent that such bans or regulations are imposed, our research and development activities, and by extension our operating results and financial condition, could be harmed. In addition, negative publicity about animal practices by us or in our industry could harm our reputation among potential customers.

21


 
 

TABLE OF CONTENTS

If approved, our prescription drug product candidates may be marketed in the United States only in the target animals and for the indications for which they are approved, and if we want to expand the approved animals or indications, we will need to obtain additional approvals, which may not be granted.

If our prescription drug product candidates are approved by regulatory authorities, we may market or advertise them only in the specific species and for treatment of the specific indications for which they were approved, which could limit use of the products by veterinarians and animal owners. We intend to develop, promote and commercialize approved products for other animals and new treatment indications in the future, but we cannot be certain whether or at what additional time and expense we will be able to do so. If we do not obtain marketing approvals for other species or for new indications, our ability to expand our business may be harmed.

Under the Animal Medicinal Drug Use Clarification Act of 1994, veterinarians are permitted to prescribe extra-label uses of certain approved animal drugs and approved human drugs for animals under certain conditions. While veterinarians may in the future prescribe and use human-approved products or our products for extra-label uses, we may not promote our products for extra-label uses. If the FDA determines that any of our marketing activities constitute promotion of an extra-label use, we could be subject to regulatory enforcement, including seizure of any misbranded or mislabeled drugs, and civil or criminal penalties, any of which could have an adverse impact on our reputation and expose us to potential liability. We will continue to spend resources ensuring that our promotional claims for our products and product candidates remain compliant with applicable FDA laws and regulations, including materials we post or link to on our website. For example, in 2012, our Chief Executive Officer received an “untitled letter” from the FDA while at Napo regarding preapproval promotion statements constituting misbranding of crofelemer, which was then an investigational drug. These statements were included in archived press releases included on Napo's website. Napo was required to expend time and resources to revise its website to remove the links in order to address the concerns raised in the FDA's letter.

If our prescription drug product candidates are approved by regulatory authorities, the misuse or extra-label use of such products may harm our reputation or result in financial or other damages.

If our prescription drug product candidates are approved by regulatory authorities, there may be increased risk of product liability if veterinarians, animal owners or others attempt to use such products extra-label, including the use of our products in species (including humans) for which they have not been approved. Furthermore, the use of an approved drug for indications other than those indications for which such products have been approved may not be effective, which could harm our reputation and lead to an increased risk of litigation. If we are deemed by a governmental or regulatory agency to have engaged in the promotion of any approved product for extra-label use, such agency could request that we modify our training or promotional materials and practices and we could be subject to significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry. Any of these events could harm our reputation and our operating results.

We may not obtain or maintain the benefits associated with MUMS designation, including market exclusivity.

Although we requested MUMS designation for Canalevia for CID in dogs, we may not be granted MUMS designation. Even if granted, we may not receive or maintain the benefits associated with MUMS designation. As the sponsor, we are allowed under FDA regulations to apply for MUMS designation of our product candidate prior to its approval. MUMS designation is a status similar to “orphan drug” status for human drugs. If we are granted MUMS designation, we are eligible for incentives to support the approval or conditional approval of the designated use. This designation does not allow us to commercialize a product until such time as we obtain approval or conditional approval of the product.

If Canalevia receives MUMS designation for the identified particular intended use, we will be eligible to obtain seven years of exclusive marketing rights upon approval (or conditional approval) of Canalevia for that intended use and become eligible for grants to defray the cost of our clinical work. Each designation that is granted must be unique, i.e., only one designation can be granted for a particular API in a particular dosage form for a particular intended use. The intended use includes both the target species and the disease or condition to be treated.

22


 
 

TABLE OF CONTENTS

Even if granted, at some point, we could lose MUMS designation. The basis for a lost designation can include but is not limited to, our failure to engage with due diligence in moving forward with a non-conditional approval, or a competing product has received conditional approval or approval prior to our product candidate for the same indication or species. In addition, MUMS designation may be withdrawn for a variety of reasons such as where the FDA determines that the request for designation was materially defective, or if the manufacturer is unable to assure sufficient quantity of the prescription drug product to meet the needs of animals with the rare disease or condition. If this designation is lost, it could have a negative impact on the product and our company, which includes but is not limited to, market exclusivity pursuant to MUMS designation, or eligibility for grants as a result of MUMS designation.

The market for our products and the animal health market as a whole, is uncertain and may be smaller than we anticipate, which could lead to lower revenue and harm our operating results.

It is very difficult to estimate the commercial potential of any of our products because of the emerging nature of our industry as a whole. The animal health market continues to evolve and it is difficult to predict the market potential for our products. The market will depend on important factors such as safety and efficacy compared to other available treatments, changing standards of care, preferences of veterinarians, the willingness of companion and production animal owners to pay for such products, and the availability of competitive alternatives that may emerge either during the product development process or after commercial introduction. If the market potential for our products is less than we anticipate due to one or more of these factors, it could negatively impact our business, financial condition and results of operations. Further, the willingness of companion and production animal owners to pay for our products may be less than we anticipate, and may be negatively affected by overall economic conditions. The current penetration of animal insurance in the United States is low, animal owners are likely to have to pay out-of-pocket, and such owners may not be willing or able to pay for our products.

Our largest stockholder, Napo, controls a significant percentage of our common stock, and its interests may conflict with those of our other stockholders.

Upon the closing of this offering, Napo will beneficially own in the aggregate 32.8% of our common stock. This concentration of ownership gives Napo significant influence over the way we are managed and the direction of our business. In addition, because we and Napo are party to a license agreement, Napo's interests as the licensor of our technology may be different from ours or those of our other stockholders. As a result, the interests of Napo with respect to matters potentially or actually involving or affecting us, such as future acquisitions, licenses, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. Further, Napo has pledged its interests in our common stock as security for certain of its monetary obligations. Accordingly, Napo's ability to take action with respect to these shares may be limited by its agreements with its secured lenders, which may conflict with your interests or those of our other stockholders. If these secured lenders were to foreclose on such shares, these lenders would have significant influence over the way we are managed and the direction of our business. In addition, our Chief Executive Officer is also the interim chief executive officer of Napo and her duties as interim chief executive officer of Napo may conflict with her duties as our Chief Executive Officer, and the resolution of these conflicts may not always be in our or your best interest.

Napo's principal business currently consists of, among other activities, the management of its intellectual property portfolio, including rights under license agreements with respect to such intellectual property. Napo has limited assets, and its primary sources of revenues in recent years have been license fees, warrant exercises, equity and debt investments and, since late 2013, the receipt of royalties pursuant to its license agreements, which have been limited to date. If Napo fails to generate sufficient revenues to cover its operating costs, it could revise its business strategy in ways that could affect its relationship with our company. For example, it could decide to divest its assets, including its stock in our company. Napo's interests in managing its business, including its ownership in our company, may conflict with your interests.

23


 
 

TABLE OF CONTENTS

We may engage in future acquisitions that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

We may evaluate various strategic transactions, including licensing or acquiring complementary products, technologies or businesses. Any potential acquisitions may entail numerous risks, including increased operating expenses and cash requirements, assimilation of operations and products, retention of key employees, diversion of our management's attention and uncertainties in our ability to maintain key business relationships of the acquired entities. In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

Certain of the countries in which we plan to commercialize our products in the future are developing countries, some of which have potentially unstable political and economic climates.

We may commercialize our products in jurisdictions that are developing and emerging countries. This may expose us to the impact of political or economic upheaval, and we could be subject to unforeseen administrative or fiscal burdens. At present, we are not insured against the political and economic risks of operating in these countries. Any significant changes to the political or economic climate in any of the developing countries in which we operate or plan to sell products either now or in the future may have a substantial adverse effect on our business, financial condition, trading performance and prospects.

Fluctuations in the exchange rate of foreign currencies could result in currency transactions losses.

As we expand our operations, we expect to be exposed to risks associated with foreign currency exchange rates. We anticipate that we will commercialize Neonorm for preweaned dairy calves and its line extensions, as well as possibly Canalevia and its line extensions in jurisdictions outside the United States. As a result, we will also be further affected by fluctuations in exchange rates in the future to the extent that sales are denominated in currencies other than U.S. dollars. We do not currently employ any hedging or other strategies to minimize this risk, although we may seek to do so in the future.

Risks Related to Intellectual Property

We are dependent upon our license agreement with Napo and if the agreement is terminated for any reason our business will be harmed.

In January 2014, we entered into a license agreement with Napo, or the Napo License Agreement, which we amended and restated in August 2014 and further amended in January 2015. Pursuant to the Napo License Agreement, we acquired an exclusive worldwide license to Napo's intellectual property rights and technology, including rights to its library of over 2,300 medicinal plants, for all veterinary treatment uses and indications for all species of animals. Under the terms of the Napo License Agreement, we are responsible for, and shall ensure, the development and commercialization of products that contain or are derived from the licensed Napo technology worldwide in the field of veterinary treatment uses and indications for all species of animals. In consideration for the license, we are obligated to pay a one-time non-refundable license fee and royalties. Napo has the right to terminate the Napo License Agreement upon our uncured material breach of the agreement or if we declare bankruptcy. If the Napo License Agreement is terminated for any reason, our business will be harmed.

Napo has also entered into secured financing agreements with certain secured lenders, for whom Nantucket Investments Limited is acting as collateral agent. The security includes certain assets, including the intellectual property and technology licensed to us pursuant to the Napo License Agreement and Napo's shares of our common stock. Although Napo and Nantucket Investments Limited, on behalf of the secured lenders, have entered into a non-disturbance agreement with respect to the Napo License Agreement, in the event of a bankruptcy of Napo or foreclosure action with respect to Napo's assets, there can be no guarantee that the bankruptcy trustee or any other party to such action will not attempt to interfere with or terminate the Napo License Agreement or otherwise require its terms to be changed, which could harm our business. Under the terms of the Napo License Agreement, certain events, such as an acquisition of Napo or a sale by Napo of all

24


 
 

TABLE OF CONTENTS

of the intellectual property and technology licensed to us pursuant to the Napo License Agreement, should result in a fully-paid up license to us of all of such intellectual property and technology. If for any reason, Napo ceases to be the owner of the intellectual property and technology licensed to us pursuant to the Napo License Agreement in such a manner that did not result in a fully-paid up license provided for therein, the owner of such intellectual property and technology could attempt to interfere with or terminate the Napo License Agreement or otherwise attempt to renegotiate the arrangement, which would harm our business.

If Napo experiences financial difficulties, becomes unable to pay its liabilities when due, or declares bankruptcy, its creditors could attempt to assert claims against Napo relating to the formation of our company and the grant of an exclusive license to us.

Napo formed our company in June 2013, and in January 2014, we entered into the Napo License Agreement. Napo currently has no commercial operations and its potential sources of revenue are limited to the third parties who have licensed or may license Napo's intellectual property and technology, or collaborate with Napo in the future. Napo has been involved in litigation with Salix and has expended significant resources in the litigation. At the time of the formation of our company and the date of the Napo License Agreement, Napo's liabilities exceeded its assets on a balance sheet prepared in conformity with U.S. generally accepted accounting principles. Napo has been able to pay its liabilities when due but if Napo experiences financial difficulties, becomes unable to pay its liabilities when due, or declares bankruptcy, a creditor, trustee in bankruptcy, or other representative of a Napo bankruptcy estate could attempt to assert claims against us relating to our formation and Napo's grant of an exclusive license to us. One theory such a party could use to challenge our formation and the license grant is that of fraudulent conveyance. This theory is used by creditors to challenge the transfer of assets made with actual intent to hinder, delay, or defraud creditors, or where a financially distressed entity transfers assets without receiving reasonably equivalent value in exchange, provided such litigation is brought within the applicable statute of limitations. Although we do not believe that our formation or Napo's grant of the license was a fraudulent conveyance, litigation based on such theory, if successful, could result in a court order setting aside the license for the benefit of the creditor pursuing the litigation or all creditors of Napo should it occur in the context of a Napo bankruptcy. Even if unsuccessful, any such action would divert management's attention, potentially be costly to defend and could harm our business.

We currently do not own any issued patents, most of our intellectual property is licensed from Napo and we cannot be certain that our patent strategy will be effective to enhance marketing exclusivity.

The patent prosecution process is expensive and time-consuming, and we may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of inventions made in the course of development and commercialization activities in time to obtain patent protection on them. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties. In particular, we are dependent upon Napo and its licensees to file, prosecute and maintain the intellectual property we license pursuant to the Napo License Agreement. The patents and patent applications we licensed from Napo, or the Napo Patents, which cover both human and veterinary uses, are also licensed by Napo to Salix for certain fields of human use. Under the terms of the collaboration agreement between Salix and Napo, or the Salix Collaboration Agreement, Napo and Salix agreed on who has the first right and responsibility to file, prosecute and maintain the Napo Patents. As a result, under the Napo License Agreement, we only have the right to maintain any issued patents within the Napo Patents that are not maintained in accordance with the rights and responsibilities of the parties under the Salix Collaboration Agreement. There are three issued Napo Patents in the United States that cover, collectively, enteric protected formulations of proanthocyanidin polymers isolated from Croton spp. and methods of treating watery diarrhea using the enteric protected formulations for both human and veterinary uses.

Napo has also licensed its Croton lechleri related intellectual property to Salix, Glenmark and Luye Pharma Group Limited to develop and commercialize crofelemer for human indications in various geographies. In May 2011, Napo filed a lawsuit against Salix in the Supreme Court of the State of New York, County of New York, alleging, among other items, that Salix had breached its collaboration agreement with Napo. By orders entered in December 2013 and January 2014, the court granted Salix's motion for partial

25


 
 

TABLE OF CONTENTS

summary judgment and narrowed the issues for trial. In February 2014, the jury rendered its verdict, concluding that Salix had complied with its contractual obligations in commercializing Fulyzaq in the United States, and had not breached the collaboration agreement. In May 2014, Napo filed a notice of appeal from the court's partial summary judgment ruling as well as from certain court rulings and the judgment entered in February 2014. That appeal is pending. Fulyzaq is dependent upon intellectual property protection from the Napo Patents. Salix currently markets Fulyzaq in the United States for human use and has listed the three issued Napo Patents in the FDA's Orange Book for Fulyzaq. We rely on these issued Napo Patents as intellectual property protection for our prescription drug product candidates and non-prescription products. Pending patent applications within Napo Patents either may not be relevant to veterinary indications and/or may not issue as patents. If any patent application within the Napo Patents is not filed or prosecuted as provided in the Salix Collaboration Agreement, including due to a lack of financial resources, and we are not able to file and prosecute such patent application within the Napo Patents, our business may be harmed. Also, under the Salix Collaboration Agreement, Napo and Salix have agreed on who has the first right to enforce the Napo Patents against potential infringers. In addition, as between Napo and us, Napo has the first right to enforce the Napo Patents against potential infringers. If we are not the party who enforces the Napo Patents, we will receive no proceeds from such enforcement action. In each case, such proceeds are subject to reimbursement of costs and expenses incurred by the other party in connection with such action. If our current or future licensors fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated.

We currently do not own any issued patents. We have filed eleven provisional patent applications in the veterinary field, of which we control the filing, prosecution and maintenance; however, patents based on any patent applications we may submit may never be issued. We have an exclusive worldwide license from Napo to various issued patents and pending patent applications in the field of animal health. The strength of patents in the field of animal health involves complex legal and scientific questions and can be uncertain. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents, if issued, and the patents we have licensed may not adequately protect our intellectual property or prevent others from designing around their claims. If we cannot obtain issued patents or the patents we have licensed are not maintained or their scope is significantly narrowed, our business and prospects would be harmed.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of any patent applications and the enforcement or defense of any patents that issue. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The USPTO has developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, became effective on March 16, 2013. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and that provide opportunities for third parties to challenge any issued patent in the USPTO. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that issue, all of which could harm our business and financial condition.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by

26


 
 

TABLE OF CONTENTS

payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering prescription drug product candidates and non-prescription products, our competitors might be able to enter the market, which would harm our business.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, which would be costly, time-consuming and, if successfully asserted against us, delay or prevent the development and commercialization of our current or future products and product candidates.

Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. There may be patents already issued of which we are unaware that might be infringed by one of our current or future prescription drug product candidates or non-prescription products. Moreover, it is also possible that patents may exist that we are aware of, but that we do not believe are relevant to our current or future prescription drug product candidates or non-prescription products, which could nevertheless be found to block our freedom to market these products. Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that may be infringed by our current or future prescription drug product candidates or non-prescription products. We cannot be certain that our current or future prescription drug product candidates or non-prescription products will not infringe these or other existing or future third-party patents. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents.

To the extent we become subject to future third-party claims against us or our collaborators, we could incur substantial expenses and, if any such claims are successful, we could be liable to pay substantial damages, including treble damages and attorney's fees if we or our collaborators are found to be willfully infringing a third party's patents. If a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the prescription drug or non-prescription product that is the subject of the suit. Even if we are successful in defending such claims, infringement and other intellectual property claims can be expensive and time-consuming to litigate and divert management's attention from our business and operations. As a result of or in order to avoid potential patent infringement claims, we or our collaborators may be compelled to seek a license from a third party for which we would be required to pay license fees or royalties, or both. Moreover, these licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain such a license, the rights may be nonexclusive, which could allow our competitors access to the same intellectual property. Any of these events could harm our business and prospects.

There has been substantial litigation regarding patents and other intellectual property rights in the field of therapeutics, as well as patent challenge proceedings, including interference, derivation and administrative law proceedings before the USPTO, and oppositions and other comparable proceedings in foreign jurisdictions. Under U.S. patent reform laws, new procedures, including inter partes review and post-grant review, were implemented as of September 16, 2012, with post-grant review available for patents issued on applications filed on or after March 16, 2013, and the implementation of such reform laws presents uncertainty regarding the outcome of any challenges to our future patents, if any, and to patents we have in licensed. In addition to possible infringement claims against us, we may be subject to third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review, or other patent office proceedings or litigation in the United States or elsewhere, challenging our patent rights or the patent rights of others. For applications filed before March 16, 2013 or patents issuing from such applications, if third parties have prepared and filed patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the USPTO to determine the priority of invention. Because patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either

27


 
 

TABLE OF CONTENTS

file patent applications on or invent any of the inventions claimed in our patent applications. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. We may also become involved in opposition or similar proceedings in patent offices in other jurisdictions regarding our intellectual property rights with respect to our prescription drug or non-prescription products and technology. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our future patent rights, if any, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Our proprietary position depends upon patents that are formulation or method-of-use patents, which do not prevent a competitor from using the same drug candidate for another use.

Composition-of-matter patents on the API in prescription drug products are generally considered to be the strongest form of intellectual property protection because such patents provide protection without regard to any particular method of use or manufacture or formulation of the API used. The composition-of-matter patents for crofelemer, the API in Canalevia, have expired, and we have licensed from Napo patents and applications covering formulations and methods of use for crofelemer and the botanical extract in Neonorm.

Method-of-use patents protect the use of a product for the specified method and formulation patents cover formulations of the API or botanical extract. These types of patents do not prevent a competitor from developing or marketing an identical product for an indication that is outside the scope of the patented method or from developing a different formulation that is outside the scope of the patented formulation. Moreover, with respect to method-of-use patents, even if competitors do not actively promote their product for our targeted indications or uses for which we may obtain patents, veterinarians may recommend that animal owners use these products extra-label, or animal owners may do so themselves. Although extra-label use may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

If our efforts to protect intellectual property are not adequate, we may not be able to compete effectively in our markets.

We intend to rely upon a combination of regulatory exclusivity periods, patents, trade secret protection, confidentiality agreements, and license agreements to protect the intellectual property related to our current prescription drug product candidates and non-prescription products and our development programs.

If the breadth or strength of protection provided by any patents, patent applications or future patents we may own, license, or pursue with respect to any of our current or future product candidates or products is threatened, it could threaten our ability to commercialize any of our current or future product candidates or products. Further, if we encounter delays in our development efforts, the period of time during which we could market any of our current or future product candidates or products under any patent protection we obtain would be reduced.

Given the amount of time required for the development, testing and regulatory review of new product candidates or products, patents protecting such candidates might expire before or shortly after such product candidates or products are commercialized. Patent term extensions have been applied for US 7,323,195 and US 7,341,744 to account for regulatory delays in obtaining human marketing approval for crofelemer, however, only one patent may be extended per marketed compound. If such extensions are received, then US 7,323,195 may be extended to June 2021 or US 7,341,744 may be extended to December 2020. However, the applicable authorities, including the USPTO and the FDA, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to patents, or may grant more limited extensions than requested. If this occurs, our competitors may take advantage of our investment in development and trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.

28


 
 

TABLE OF CONTENTS

Even where laws provide protection or we are able to obtain patents, costly and time-consuming litigation may be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and some of our competitors have substantially greater intellectual property portfolios than we have.

If we are unable to prevent disclosure of our trade secrets or other confidential information to third parties, our competitive position may be impaired.

We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or for which we have not filed patent applications, processes for which patents are difficult to enforce and other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or had access to our proprietary information, or that our agreements will not be breached. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. If we are unable to prevent disclosure of our intellectual property to third parties, we may not be able to maintain a competitive advantage in our market, which would harm our business.

Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, and erode our competitive position in our market.

We may be involved in lawsuits to protect or enforce any future patents issued to us, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe upon any patents that may issue to us, or any patents that we may license. To counter infringement or unauthorized use of any patents we may obtain, we may be required to file infringement claims or request that our licensor file an infringement claim, which can be expensive and time-consuming to litigate. In addition, if we or one of our future collaborators were to initiate legal proceedings against a third party to enforce a patent covering our current product candidates, or one of our future products, the defendant could counterclaim that the patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review, or post-grant review, or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or future product candidates. Such a loss of patent protection could harm our business. We cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in the defense of any licensed patents against challenge by a third party.

Litigation proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or

29


 
 

TABLE OF CONTENTS

investors perceive these results to be unsuccessful, it could have an adverse effect on the price of our common stock. Finally, we may not be able to prevent, alone or with the support of our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other animal health product companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the animal health industry involves both technological and legal complexity. Therefore, obtaining and enforcing patents is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and implemented wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future.

We may not be able to protect our intellectual property rights throughout the world, which could impair our business.

Filing, prosecuting and defending patents on prescription drug products, product candidates and non-prescription products throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to animal health products, which could make it difficult for us to stop the infringement of our future patents, if any, or patents we have in licensed, or marketing of competing products in violation of our proprietary rights generally. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. Proceedings to enforce our future patent rights, if any, in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

Our business could be harmed if we fail to obtain certain registered trademarks in the United States or in other countries.

In October 2014, our trademark applications for Canalevia and Neonorm were approved for publication. Although we have filed a trademark application for our company name and our logo in the United States, our applications have not been granted and the corresponding marks have not been registered in the United States. We have not filed for these or other trademarks in any other countries. During trademark registration proceedings, we may receive rejections of our trademark applications. If so, we will have an opportunity to respond, but we may be unable to overcome such rejections. In addition, the USPTO and comparable agencies in many foreign jurisdictions may permit third parties to oppose pending trademark applications and to seek to cancel registered trademarks. If opposition or cancellation proceedings are filed against any of our trademark applications or any registered trademarks, our trademarks may not survive such proceedings. Moreover, any name we propose to use with our prescription drug product candidates in the United States, including Canalevia, must be approved by the FDA, regardless of whether we have registered or applied to register as a trademark. The FDA typically conducts a review of proposed prescription drug product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed

30


 
 

TABLE OF CONTENTS

proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology, pharmaceutical or animal health companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees' former employers. Litigation may be necessary to defend against any such claims. Even if we are successful in defending against any such claims, such litigation could result in substantial cost and be a distraction to our management and employees.

Risks Related to Government Regulation

Even if we receive any required regulatory approvals for our current or future prescription drug product candidates and non-prescription products, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.

If the FDA or any other regulatory body approves any of our current or future prescription drug product candidates, or if necessary, our non-prescription products, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product may be subject to extensive and ongoing regulatory requirements. These requirements include, but are not limited to, submissions of safety and other post-marketing information and reports, establishment registration, and product listing, as well as continued compliance with cGMP, GLP and GCP for any studies that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our contract manufacturers or manufacturing processes, or failure to comply with regulatory requirements, must be reported in many instances to the FDA and may result in, among other things:

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, revised labeling, or voluntary or involuntary product recalls;
fines, warning letters or holds on target animal studies;
refusal by the FDA, or other regulators to approve pending applications or supplements to approved applications filed by us or our strategic collaborators related to the unknown problems, or suspension or revocation of the problematic product's license approvals;
product seizure or detention, or refusal to permit the import or export of products; and
injunctions or the imposition of civil or criminal penalties.

The FDA or other regulatory agency's policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates or require certain changes to the labeling or additional clinical work concerning safety and efficacy of the product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would harm our business. In addition, failure to comply with these regulatory requirements could result in significant penalties.

In addition, from time to time, we may enter into consulting and other financial arrangements with veterinarians, who prescribe or recommend our products, once approved. As a result, we may be subject to state, federal and foreign healthcare and/or veterinary medicine laws, including but not limited to anti-kickback laws. If our financial relationships with veterinarians are found to be in violation of such laws that apply to us, we may be subject to penalties.

31


 
 

TABLE OF CONTENTS

The FDA issuing protocol concurrences for our pivotal studies does not guarantee ultimate approval of our NADA.

We intend to seek protocol concurrences with the FDA for the pivotal trial of Canalevia that we plan to conduct for general watery diarrhea in dogs and for future pivotal trials in other indications. A pivotal study protocol is submitted to the FDA voluntarily by a drug sponsor for purposes of obtaining FDA review of the protocol. Prior FDA review of the protocol for a pivotal study makes it more likely that the study will generate information the sponsor needs to demonstrate whether the drug is safe and effective for its intended use. It creates an expectation by the sponsor that the FDA should not later alter its perspectives on these issues unless public or animal health concerns appear that were not recognized at the time of protocol assessment. Even if the FDA issues a protocol concurrence, ultimate approval of an NADA by the FDA is not guaranteed because a final determination that the agreed-upon protocol satisfies a specific objective, such as the demonstration of efficacy, or supports an approval decision, will be based on a complete review of all the data submitted to the FDA. Even if we were to obtain protocol concurrence such concurrence does not guarantee that the results of the study will support a particular finding or approval of the new drug.

Any of our current or future prescription drug product candidates or non-prescription products may cause or contribute to adverse medical events that we would be required to report to regulatory authorities and, if we fail to do so, we could be subject to sanctions that would harm our business.

If we are successful in commercializing any of our current or future prescription drug product candidates or non-prescription products, at least certain regulatory authorities will require that we report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the regulatory authorities could take action including, but not limited to, criminal prosecution, seizure of our products or delay in approval or clearance of future products.

Legislative or regulatory reforms with respect to animal health may make it more difficult and costly for us to obtain regulatory clearance or approval of any of our current or future product candidates and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in the U.S. Congress or other jurisdictions in which we intend to operate that could significantly change the statutory provisions governing the testing, regulatory clearance or approval, manufacture, and marketing of regulated products. In addition, the FDA and other regulations and guidance are often revised or reinterpreted by the FDA and such other regulators in ways that may significantly affect our business and our products and product candidates. Similar changes in laws or regulations can occur in other countries. Any new regulations or revisions or reinterpretations of existing regulations in the United States or in other countries may impose additional costs or lengthen review times of any of our current or future products and product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

changes to manufacturing methods;
new requirements related to approval to enter the market;
recall, replacement, or discontinuance of certain products; and
additional record keeping.

Each of these would likely entail substantial time and cost and could harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition, and results of operations.

32


 
 

TABLE OF CONTENTS

We do not believe that our non-prescription products are subject to regulation by regulatory agencies in the United States, but there is a risk that regulatory bodies may disagree with our interpretation, or may redefine the scope of its regulatory reach in the future, which would result in additional expense and could delay or prevent the commercialization of these products.

The FDA retains jurisdiction over all prescription drug products however, in many instances, the Federal Trade Commission will exercise primary or concurrent jurisdiction with FDA on non-prescription products as to post marketing claims made regarding the product. On April 22, 1996 the FDA published a statement in the Federal Register, 61 FR 17706, that it does not believe that the Dietary Supplement and Health Education Act, or DSHEA, applies to animal health supplement products, such as our non-prescription products. Accordingly, the FDA's Center for Veterinary Medicine only regulates those animal supplements that fall within the FDA's definition of an animal drug, food or feed additive. The Federal Food Drug and Cosmetic Act defines food as “articles used for food or drink for man or other animals and articles used as components of any such article.” Animal foods are not subject to pre-market approval and are designed to provide a nutritive purpose to the animals that receive them. Feed additives are defined as those articles that are added to an animal's feed or water as illustrated by the guidance documents. Our non-prescription products are not added to food, are not ingredients in food nor are they added to any animal's drinking water. Therefore, our non-prescription products do not fall within the definition of a food or feed additive. In light of the pronouncement by the FDA that the DSHEA was not intended to apply to animals, the FDA seeks to regulate such supplements as food or food additives depending on the intended use of the product. The intended use is demonstrated by how the article is included in a food, or added to the animals' intake (i.e., through its drinking water). If the intended use of the product does not fall within the proscribed use making the product a food, it cannot be regulated as a food. There is no intent to make our non-prescription products a component of an animal food, either directly or indirectly. A feed additive is a product that is added to a feed for any reason including the top dressing of an already prepared feed. Some additives, such as certain forage, are deemed to be Generally Recognized as Safe, or GRAS, and therefore, not subject to a feed Additive Petition approval prior to use. However, the substances deemed GRAS are generally those that are recognized as providing nutrients as a food does. We do not believe that our non-prescription products fit within this framework either. Finally, a new animal drug refers to drugs intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in animals. Our non-prescription products are not intended to diagnose, cure, mitigate, treat or prevent disease and therefore, do not fit within the definition of an animal drug. Our non-prescription products are intended to support a healthy gut and normalize stool formation in animals that often contract and suffer from scours, a symptom of which is dehydration. A healthy well-hydrated gut allows them to better fight the scours as they do not also have to struggle with dehydration. Our non-prescription products are not being delivered to treat the disease of scours but rather to provide a more well-hydrated gut and normalize stool formation to better enable the animal to manage the scours. Additionally, because a previously marketed human formulation of the botanical extract in our non-prescription products was regulated as a human dietary supplement subject to the DSHEA (and not regulated as a drug by the FDA), we do not believe that the FDA would regulate the animal formulation used in our non-prescription products in a different manner. We do not believe that our non-prescription products fit the definition of an animal drug, food or food additive and therefore are not regulated by the FDA at this time.

However, despite many such unregulated animal supplements currently on the market, the FDA may choose in the future to exercise jurisdiction over animal supplement products in which case, we may be subject to unknown regulations thereby inhibiting our ability to launch or to continue marketing our non-prescription products. In the past, the FDA has redefined or attempted to redefine some non-prescription non-feed products as falling within the definition of drug, feed or feed additive and therefore subjected those products to the relevant regulations. We have not discussed with the FDA our belief that the FDA currently does not exercise jurisdiction over our non-prescription products. Should the FDA assert regulatory authority over our non-prescription products, we would take commercially reasonable steps to address the FDA's concerns, potentially including but not limited to, seeking registration for such products, reformulating such products to further distance such products from regulatory control, or ceasing sale of such products. Further, the Animal and Plant Health Inspection Service, an agency of the USDA, may at some point choose to exercise jurisdiction over certain non-prescription products that are not intended for production animals. We do not believe we are currently subject to such regulation, but could be in the future. If the FDA or other

33


 
 

TABLE OF CONTENTS

regulatory agencies, such as the USDA, try to regulate our non-prescription products, we could be required to seek regulatory approval for our non-prescription products, which would result in additional expense and could delay or prevent the commercialization of these products.

Risks Related to this Offering and Our Common Stock

The price of our common stock could be subject to volatility related or unrelated to our operations, and purchasers of our common stock could incur substantial losses.

If a market for our common stock develops following this offering, the trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed previously in this “Risk Factors” section of this prospectus and others, such as:

delays in the commercialization of Neonorm, Canalevia or our other current or future prescription drug product candidates and non-prescription products;
any delays in, or suspension or failure of, our current and future studies;
announcements of regulatory approval or disapproval of any of our current or future product candidates or of regulatory actions affecting us or our industry;
manufacturing and supply issues that affect product candidate or product supply for our studies or commercialization efforts;
quarterly variations in our results of operations or those of our competitors;
changes in our earnings estimates or recommendations by securities analysts;
the payment of licensing fees or royalties in shares of our common stock;
announcements by us or our competitors of new prescription drug products or product candidates or non-prescription products, significant contracts, commercial relationships, acquisitions or capital commitments;
announcements relating to future development or license agreements including termination of such agreements;
adverse developments with respect to our intellectual property rights or those of our principal collaborators;
commencement of litigation involving us or our competitors;
any major changes in our board of directors or management;
new legislation in the United States relating to the prescription, sale, distribution or pricing of animal health products;
product liability claims, other litigation or public concern about the safety of our prescription drug product candidates and non-prescription products or any such future products;
market conditions in the animal industry, in general, or in the animal health sector, in particular, including performance of our competitors; and
general economic conditions in the United States and abroad.

In addition, the stock market, in general, or the market for stocks in our industry, in particular, may experience broad market fluctuations, which may adversely affect the market price or liquidity of our common stock. Any sudden decline in the market price of our common stock could trigger securities class-action lawsuits against us. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the time and attention of our management would be diverted from our business and operations. We also could be subject to damages claims if we are found to be at fault in connection with a decline in our stock price.

34


 
 

TABLE OF CONTENTS

No active market for our common stock exists or may develop, and you may not be able to resell your common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock. We and the representative of the underwriters determined the initial public offering price of our common stock by arm's-length negotiations, and the initial public offering price does not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. If no active trading market for our common stock develops or is sustained following this offering, you may be unable to sell your shares when you wish to sell them or at a price that you consider attractive or satisfactory. The lack of an active market may also adversely affect our ability to raise capital by selling securities in the future, or impair our ability to license or acquire other product candidates, businesses or technologies using our shares as consideration.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock before giving effect to this offering. Accordingly, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $5.07 per share, representing the difference between the initial public offering price of $7.00 per share and our pro forma as adjusted net tangible book value per share as of December 31, 2014. In addition, following this offering, purchasers participating in this offering will have contributed approximately 68.0% of the total gross consideration paid by stockholders to us to purchase shares of our common stock through December 31, 2014, but will own only approximately 35.2% of the shares of common stock outstanding immediately after this offering. Furthermore, if the underwriters exercise their option to purchase additional shares of our common stock or our outstanding stock options are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section in this prospectus titled “Dilution.”

If securities or industry analysts do not publish research or reports about our company, or if they issue an adverse or misleading opinions regarding us or our stock, our stock price and trading volume could decline.

We do not currently have research coverage by securities and industry analysts, and if no significant coverage is initiated or maintained following this offering, the market price for our stock may be adversely affected. Our stock price also may decline if any analyst who covers us issues an adverse or erroneous opinion regarding us, our business model, our intellectual property or our stock performance, or if our animal studies and operating results fail to meet analysts' expectations. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline and possibly adversely affect our ability to engage in future financings.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the expiration or termination of the lock-up and other legal restrictions on resale discussed in this prospectus, the trading price of our common stock could decline. Based upon the number of shares outstanding as of December 31, 2014, and an initial public offering price of $7.00 per share, upon the closing of this offering, we will have outstanding a total of 8,119,923 shares of common stock. Of these shares, 2,860,000 shares, plus any shares sold upon exercise of the underwriters' option to purchase additional shares of our common stock, will be freely tradable in the public market immediately following this offering, unless held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following this offering, holders of outstanding convertible notes, warrants, or options may also convert or exercise their securities, and outstanding RSUs may vest, all of which will result in additional shares of our common stock being issued, which ultimately may be sold into the market. Further, we may pay licensing fees or royalties due under our license agreement in shares of our common stock, and reach agreement with other creditors to pay fees due in shares of our common stock, all of which could lead to additional shares being available for resale.

35


 
 

TABLE OF CONTENTS

The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional 5,259,923 shares of common stock outstanding immediately after the offering will be eligible for sale in the public market, 4,517,123 of which shares are held by directors, executive officers and other affiliates and will be subject to vesting schedules or volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. The representative of the underwriters may, in its sole discretion, permit our officers, directors and other stockholders who are subject to lock-up agreements to sell shares even prior to the expiration of the lock-up agreements. In addition, shares of common stock that are subject to outstanding options under our 2013 Equity Incentive Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. The sale or possible sale of these additional shares may adversely affect the trading price of our common stock.

We will have broad discretion to use the net proceeds from this offering, and may use them in ways that do not enhance our operating results or the market price of our common stock.

Our management will have broad discretion regarding the use of the net proceeds from this offering, and we could spend the net proceeds in ways our stockholders may not agree with or that do not yield a favorable return, if at all. We intend to use the net proceeds from this offering for the research and development of our prescription drug and non-prescription products and product candidates, manufacturing, marketing, distribution and commercialization of any products, repayment of indebtedness and other general corporate and working capital purposes. We may also use a portion of the net proceeds to acquire additional product candidates or complementary assets or businesses; however, we currently have no agreements or commitments to complete any such transaction. Our use of these proceeds may differ substantially from our current plans. If we do not invest or apply the net proceeds from this offering in ways that improve our operating results or our prospects, our stock price could decline.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the closing of this offering will contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. We expect these provisions to include the following:

a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could adversely affect the rights of our common stockholders or be used to deter a possible acquisition of our company;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of the holders of at least 75% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

36


 
 

TABLE OF CONTENTS

the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of us.

These provisions could inhibit or prevent possible transactions that some stockholders may consider attractive.

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation generally may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

Our amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated bylaws that will be in effect upon the closing of this offering provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, (iv) any action asserting a claim that is governed by the internal affairs doctrine or (v) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated bylaws. This choice-of-forum provision may limit our stockholders' ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our amended and restated bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could harm our business and financial condition.

We do not intend to pay dividends on our common stock, and your ability to achieve a return on your investment will depend on appreciation in the market price of our common stock.

As described in the section titled “Dividend Policy” in this prospectus, we currently intend to invest our future earnings, if any, to fund our growth and not to pay any cash dividends on our common stock. Because we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation in the market price of our common stock. We cannot be certain that our common stock will appreciate in price.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Upon the closing of this offering, based on shares outstanding as of December 31, 2014 and after taking into account the automatic conversion of outstanding notes that will occur in connection with this offering, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates will beneficially own in the aggregate approximately 57.1% of our outstanding shares of common stock. As a result of their stock ownership, these stockholders may have the ability to influence our management and policies, and will be able to significantly affect the outcome of matters requiring stockholder approval such as elections of directors, amendments of our organizational documents or approvals of any merger, sale of assets

37


 
 

TABLE OF CONTENTS

or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

As a newly public company, we will incur significant additional costs, and our management will be required to devote substantial management time and attention to our public reporting obligations.

As a privately-held company, we have not been required to comply with public reporting, corporate governance and financial accounting practices and policies required of a publicly-traded company. As a publicly-traded company, we will incur significant additional legal, accounting and other expenses compared to historical levels. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations thereunder, as well as under the Sarbanes-Oxley Act, the JOBS Act and the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC, and The NASDAQ Capital Market, may result in an increase in our costs and the time that our board of directors and management must devote to our compliance with these rules and regulations. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to divert management time and attention from our product development and other business activities.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. We will need to expend time and resources on documenting our internal control over financial reporting so that we are in a position to perform such evaluation when required. As an “emerging growth company,” we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company” (i) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (ii) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (iii) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act provides that an emerging growth company can delay its adoption of any new or revised accounting standards, but we have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. In addition, investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.

38


 
 

TABLE OF CONTENTS

We may remain an “emerging growth company” until as late as December 31, 2020 (the fiscal year-end following the fifth anniversary of the closing of this offering), although we may cease to be an “emerging growth company” earlier under certain circumstances, including (i) if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of any June 30, in which case we would cease to be an “emerging growth company” as of December 31 of such year, (ii) if our gross revenue exceeds $1.0 billion in any fiscal year or (iii) if we issue more than $1.0 billion of non-convertible debt over a three-year period.

39


 
 

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing of receipt of clinical trial, field study and other study data, and likelihood of success, commercialization plans and timing, other plans and objectives of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “aim,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Forward-looking statements are subject to inherent risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in a dynamic industry and economy. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties that we may face. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. In addition, assumptions and estimates of our and our industry's future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Special Note Regarding Forward-Looking Statements.”

40


 
 

TABLE OF CONTENTS

USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 2,860,000 shares of common stock in this offering will be approximately $15.1 million, after deducting underwriting discounts and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares from us in full, we estimate that the net proceeds from this offering will be approximately $17.9 million, after deducting underwriting discounts and estimated offering expenses payable by us. Of the estimated offering expenses, we already paid approximately $1.6 million and therefore will have approximately $1.6 million of additional cash from this offering available to us.

We anticipate that we will use the net proceeds from this offering as follows:

approximately $2.4 million for clinical studies and regulatory approval costs related to Canalevia for CID ($0.4 million) and general watery diarrhea ($2.0 million) in dogs;
approximately $2.1 million for clinical studies and regulatory approval costs related to the other prescription drug products in our pipeline, namely species-specific formulations of crofelemer for general watery diarrhea in cats ($0.4 million), acute colitis in horses ($0.7 million), and gastric and colonic ulcers in horses and proof-of-concept studies for NP-500 ($1.0 million);
approximately $3.5 million for studies and activities inside and outside the United States and for commercial activities related to the launch of Canalevia, our lead prescription drug product candidate for the treatment of various forms of watery diarrhea in dogs and for the continued commercialization efforts related to Neonorm both domestically and internationally;
approximately $1.0 million for studies and field trials relating to Neonorm Calf and additional non-prescription formulations of Neonorm for other animal species including horse foals and adult horses;
approximately $2.2 million for costs associated with developing species-specific formulations of our products;
approximately $2.1 million for establishing third-party manufacturing capability, including the technology transfer at Indena S.p.A. pursuant to our memorandums of understanding;
Approximately $1.3 million to repay the notes with an aggregate principal amount of $1.0 million that we borrowed in December 2014 pursuant to our Standby Bridge Financing Agreement. These notes had 10% original issue discount, have a stated interest rate of 12%, and provide for payment of 118% of the aggregate amount of principal plus interest, along with any other payments due, at maturity. We used the funds from these notes for working capital. See “Underwriting — Certain Relationships”; and
the remaining funds will be utilized for working capital and general corporate purposes.

A portion of the proceeds of this offering may also be used for repayment of up to $250,000 aggregate principal amount of convertible promissory notes that is currently outstanding if the holders thereof demand payment thereof, which they have the right to do at any time within 30 days following completion of this offering. In addition, we also have the right to prepay these notes at any time within 30 days following completion of this offering, although we do not currently have any intention to do so. These notes bear interest at 12% per annum, were issued pursuant to a convertible note and warrant purchase agreement dated December 23, 2014, and the proceeds from their sale was used for working capital purposes.

These expected uses of the net proceeds from this offering represents our intentions based upon our current financial condition, results of operations, business plans and conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, complementary business, products or technologies, although we have no present commitments or agreements

41


 
 

TABLE OF CONTENTS

for any specific acquisitions or investments. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

42


 
 

TABLE OF CONTENTS

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments.

43


 
 

TABLE OF CONTENTS

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2014, as follows:

on an actual basis;
on a pro forma basis to give effect to (i) the conversion of all outstanding shares of Series A preferred stock into 2,010,596 shares of common stock upon the closing of this offering; (ii) the issuance of 374,997 shares of common stock upon the conversion of convertible promissory notes in the aggregate principal amount of $2,100,000 upon the closing of this offering at a conversion price equal to $5.60 per share, and which shares will be unregistered; (iii) the issuance of $1,250,000 aggregate principal amount of convertible promissory notes after December 31, 2014 ($1,000,000 of which will convert into shares of common stock upon the closing of this offering); (iv) the modification in March 2015 of $650,000 aggregate principal amount of convertible promissory notes issued in December 2014 to automatically convert into shares of common stock upon the closing of this offering at a conversion price equal to $5.60 per share; and (v) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering; and
on a pro forma as adjusted basis to give further effect to (i) the sale of 2,860,000 shares of common stock in this offering at the initial public offering price of $7.00 per share, after deducting underwriting discounts and estimated offering expenses payable by us and (ii) the repayment of our $1.0 million standby bridge facility.

You should read this information in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and the sections in this prospectus titled “Selected Financial Data” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

     
  As of December 31, 2014
     Actual   Pro Forma   Pro Forma As
Adjusted
     (unaudited)
Cash and cash equivalents   $ 845,192     $ 2,095,192     $ 16,213,792  
Convertible notes payable     424,674       250,000       250,000  
Notes payable     478,709       478,709        
Series A redeemable convertible preferred stock, par value $0.0001 per share: 3,017,488 shares authorized, 3,015,902 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted     7,304,914              
Stockholders' equity (deficit):
                          
Preferred stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted                  
Common stock, par value $0.0001 per share: 10,000,000 shares authorized, 2,874,330 shares issued and outstanding, actual; 50,000,000 shares authorized, 5,259,923 shares issued and outstanding, pro forma; 8,119,923 shares issued and outstanding, pro forma as adjusted     288       525       811  
Additional paid-in capital     1,175,242       12,181,808       27,300,122  
Accumulated deficit     (9,410,778 )      (11,086,104 )      (11,607,395 ) 
Total stockholders' equity (deficit)     (8,235,248 )      1,096,229       15,693,538  
Total capitalization   $ (26,951 )    $ 1,824,938     $ 15,943,538  

44


 
 

TABLE OF CONTENTS

The outstanding share information in the table above is based on 5,259,923 shares of common stock outstanding as of December 31, 2014, and excludes:

207,664 shares of common stock issuable upon exercise of outstanding warrants as of December 31, 2014 at an exercise price of $2.5281 per share; and
16,666 shares of common stock issuable upon exercise of an outstanding warrant as of December 31, 2014 with an exercise price of $6.30 per share;
269,938 shares of our common stock issuable upon exercise of outstanding warrants as of December 31, 2014 with an exercise price of $5.60 per share;
111,605 shares of common stock issuable upon exercise of outstanding warrants issued after December 31, 2014 with an exercise price of $5.60 per share;
659,554 shares issuable upon exercise of outstanding options as of December 31, 2014 with a weighted-average exercise price of $2.67 per share;
68,902 shares issuable upon vesting of outstanding restricted stock unit awards, or RSUs, as of December 31, 2014;
1,484 shares issuable upon vesting of outstanding RSUs issued after December 31, 2014;
203,030 shares issuable upon exercise of stock options, which were authorized after December 31, 2014, and which will be granted effective upon this offering with an exercise price equal to the initial public offering price;
up to 44,642 shares of common stock issuable upon conversion of outstanding convertible promissory notes in the aggregate principle amount of $250,000 issued after December 31, 2014;
25,197 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan; and after taking into account the grant of an equity awards for an aggregate of 204,514 shares under our 2013 Equity Incentive Plan after December 31, 2014; and
333,333 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, as well as any automatic increases in the shares of common stock reserved for future issuance under the 2014 Stock Incentive Plan.

45


 
 

TABLE OF CONTENTS

DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

As of December 31, 2014, our historical net tangible book value was $(8.2) million, or $(2.87) per share of common stock. Our historical net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the number of shares of common stock outstanding as of December 31, 2014.

Our pro forma net tangible book value as of December 31, 2014 was $1.1 million or $0.21 per share of common stock, after giving effect to (i) the conversion of all outstanding shares of Series A preferred stock into 2,010,596 shares of common stock upon the closing of this offering; (ii) the issuance of 374,997 shares of common stock upon the conversion of convertible promissory notes in the aggregate principal amount of $2,100,000 upon the closing of this offering at a conversion price equal to $5.60 per share, and which shares will be unregistered; (iii) the issuance of $1,250,000 aggregate principal amount of convertible promissory notes after December 31, 2014 ($1,000,000 of which will convert into shares of common stock upon the closing of this offering); (iv) the modification in March 2015 of $650,000 aggregate principal amount of convertible promissory notes issued in December 2014 to automatically convert into shares of common stock upon the closing of this offering at a conversion price equal to $5.60 per share; and (v) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering.

After giving further effect to (i) the sale of the 2,860,000 shares of common stock in this offering at the initial public offering price of $7.00 per share, after deducting underwriting discounts and estimated offering expenses payable by us and (ii) the repayment of our $1.0 million standby bridge facility, our pro forma as adjusted net tangible book value as of December 31, 2014 would have been approximately $15.7 million, or $1.93 per share. This amount represents an immediate increase in pro forma net tangible book value of $1.72 per share to our existing stockholders, and an immediate dilution in pro forma net tangible book value of approximately $5.07 per share to new investors purchasing shares of common stock in this offering.

Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution:

   
Initial public offering price per share            $ 7.00  
Historical net tangible book value per share as of December 31, 2014   $ (2.87 )          
Increase attributable to conversion of all outstanding shares of Series A preferred stock and $2,100,000 of convertible promissory notes     3.08        
Pro forma net tangible book value per share as of December 31, 2014     0.21           
Increase in net tangible book value per share attributable to new investors     1.72        
Pro forma as adjusted net tangible book value per share after this offering           1.93  
Dilution per share to new investors         $ 5.07  

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value will increase to $2.16 per share, representing an immediate dilution of $4.84 per share to new investors.

46


 
 

TABLE OF CONTENTS

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2014, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, before deducting underwriting discounts and estimated offering expenses payable by us, at an initial public offering price of $7.00 per share.

         
  Shares Purchased   Total Consideration   Average Price
Per Share
     Number   Percent   Amount   Percent
Existing stockholders     5,259,923       64.8 %    $ 9,402,738       32.0 %    $ 1.79  
New investors     2,860,000       35.2 %      20,020,000       68.0 %      7.00  
Total     8,119,923       100.0 %    $ 29,422,738       100.0 %       

The number of shares of common stock to be outstanding after this offering excludes:

207,664 shares of common stock issuable upon exercise of outstanding warrants as of December 31, 2014 with an exercise price of $2.5281 per share; and
16,666 shares of common stock issuable upon exercise of an outstanding warrant as of December 31, 2014 with an exercise price of $6.30 per share;
269,938 shares of our common stock issuable upon exercise of outstanding warrants as of December 31, 2014 with an exercise price of $5.60 per share;
111,605 shares of common stock issuable upon exercise of outstanding warrants issued after December 31, 2014 with an exercise price of $5.60 per share;
659,554 shares issuable upon exercise of outstanding options as of December 31, 2014 with a weighted-average exercise price of $2.67 per share;
68,902 shares issuable upon vesting of outstanding RSUs as of December 31, 2014;
1,484 shares issuable upon vesting of outstanding RSUs issued after December 31, 2014;
203,030 shares issuable upon exercise of stock options, which were authorized after December 31, 2014, and which will be granted effective upon this offering with an exercise price equal to the initial public offering price;
up to 44,642 shares of common stock issuable upon conversion of outstanding convertible promissory notes in the aggregate principle amount of $250,000 issued after December 31, 2014;
25,197 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan; and after taking into account the grant of an equity awards for an aggregate of 204,514 shares under our 2013 Equity Incentive Plan after December 31, 2014; and
333,333 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, as well as any automatic increases in the shares of common stock reserved for future issuance under the 2014 Stock Incentive Plan.

To the extent any of these outstanding options or warrants are exercised or RSUs vest, there will be further dilution to new investors. If all of such outstanding options or warrants had been exercised or RSUs vested as of December 31, 2014, the pro forma as adjusted net tangible book value after this offering would be $2.10 per share, and total dilution to new investors would be $4.90 per share.

If the underwriters exercise their option to purchase additional shares of common stock in full:

the percentage of shares of common stock held by existing stockholders will decrease to approximately 61.5% of the total number of shares of common stock outstanding after this offering; and
the number of shares held by new investors will increase to 3,289,000, or approximately 38.5% of the total number of shares of common stock outstanding after this offering.

47


 
 

TABLE OF CONTENTS

SELECTED FINANCIAL DATA

You should read the following selected financial data together with our financial statements and related notes appearing elsewhere in this prospectus and the section in this prospectus titled “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Napo formed our company to develop and commercialize animal health products. As of December 31, 2013, we were a wholly-owned subsidiary of Napo, and as of December 31, 2014, we are a majority-owned subsidiary of Napo.

The following tables set forth our selected statements of comprehensive loss data since inception in June 2013 and our selected balance sheet data as of December 31, 2014. We are a development stage company. Data for the period from June 6, 2013 (inception) through and as of December 31, 2013 and 2014 is derived from our audited financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future periods.

   
  Period from
June 6, 2013
(inception)
through
December 31,
2013
  Year Ended
December 31,
2014
Statements of Comprehensive Loss Data:
                 
Operating expenses:
                 
General and administrative expense   $ 458,473     $ 4,095,324  
Research and development expense     324,479       4,220,338  
Total operating expenses     782,952       8,315,662  
Loss from operations     (782,952 )      (8,315,662 ) 
Interest expense, net     (18,251 )      (345,336 ) 
Change in fair value of warrants           51,423  
Net loss and comprehensive loss   $ (801,203 )    $ (8,609,575 ) 
Accretion of redeemable convertible preferred stock           (646,673 ) 
Net loss attributable to common stockholders   $ (801,203 )    $ (9,256,248 ) 
Net loss per share attributable to common stockholders, basic and diluted(1)   $ (0.30 )    $ (3.24 ) 
Weighted-average common shares outstanding, basic and diluted(1)     2,666,666       2,854,417  
Pro forma net loss per share, basic and diluted(1)   $ (0.30 )    $ (2.02 ) 
Pro forma weighted-average number of common shares(1)     2,666,666       4,592,283  

(1) See Notes 2 and 13 to our financial statements for a description of the method used to compute basic and diluted net loss per share and pro forma net loss per share.

 
  As of
December 31,
2014
Balance Sheet Data:
        
Cash and cash equivalents   $ 845,192  
Total assets     4,506,630  
Convertible notes payable     424,674  
Notes payable     478,709  
Warrant liability     601,889  
Total liabilities     5,436,964  
Redeemable convertible preferred stock     7,304,914  
Total stockholders' (deficit)     (8,235,248 ) 

48


 
 

TABLE OF CONTENTS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are an animal health company focused on developing and commercializing first-in-class gastrointestinal products for companion and production animals. Canalevia is our lead prescription drug product candidate for the treatment of various forms of watery diarrhea in dogs. We achieved statistically significant results in a canine proof-of-concept study completed in February 2015, supporting the conclusion that Canalevia treatment is superior to placebo, with 91% of the Canalevia-treated dogs achieving a formed stool during the study versus 50% of the placebo-treated dogs. We also initiated filing of a rolling new animal drug application, or NADA, with the U.S. Food and Drug Administration, or FDA, for Canalevia for chemotherapy-induced diarrhea, or CID, in dogs, at the end of 2014. Canalevia is a canine-specific formulation of crofelemer, an active pharmaceutical ingredient isolated and purified from the Croton lechleri tree. A human-specific formulation of crofelemer, Fulyzaq, was approved by the FDA in 2012 for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. Members of our management team developed crofelemer, including while at Napo Pharmaceuticals, Inc., or Napo. Neonorm is our lead non-prescription product to improve gut health and normalize stool formation in animals suffering from watery diarrhea, or scours. We launched Neonorm in the United States at the end of 2014 for preweaned dairy calves under the brand name Neonorm Calf and expect to launch additional formulations of Neonorm for other animal species in 2015. We have already shipped approximately $450,000 of Neonorm Calf to distributors. Neonorm is a botanical extract also derived from the Croton lechleri tree. Canalevia and Neonorm are distinct products that are formulated to address specific species and market channels. We have filed nine investigational new animal drug applications, or INADs, with the FDA and intend to develop species-specific formulations of Neonorm in six additional target species.

Since inception, we have been primarily focused on designing protocols for studies of Canalevia to treat multiple preselected and distinct types of watery diarrhea in dogs and for Neonorm to improve gut health and normalize stool formation in preweaned dairy calves suffering from scours. We have also conducted a clinical study of Neonorm in preweaned dairy calves with scours. A portion of our activities has also been focused on other efforts associated with being a newly formed company, including securing necessary intellectual property, recruiting management and key employees and initial financing activities.

In January 2014, we entered into the Napo License Agreement, pursuant to which we acquired an exclusive worldwide license to Napo's intellectual property rights and technology, including rights to its library of over 2,300 medicinal plants, for all veterinary treatment uses and indications for all species of animals. Under the Napo License Agreement, Napo also assigned to us equipment, inventory and granted us a right to cross-reference any regulatory submissions or drug-matter files for which Napo has rights and access.

49


 
 

TABLE OF CONTENTS

In consideration for the license from Napo, we are obligated to pay a one-time non-refundable license fee of $1.75 million, less an option fee of $100,000 we paid in July 2013. In December 2014, we paid Napo an additional $25,000, and in January 2015, agreed that the remaining license fee payment will be paid in cash, or if mutually agreed with Napo, in shares of our common stock according to the following schedule:

 
Payment Date   License Fee
Amount
Amendment Date   $ 25,000  
March 31, 2015   $ 25,000  
June 30, 2015   $ 150,000  
September 30, 2015   $ 500,000  
December 31, 2015   $ 500,000  
March 31, 2016   $ 425,000  
Total   $ 1,625,000  

For products derived from Croton lechleri, we will owe Napo a 2% royalty on annual net sales of all products that are prescription drugs (such as Canalevia and any line extensions) approved by the FDA or the equivalent regulatory agency in another country, and, 1% of net sales of non-prescription products (such as Neonorm and any line extensions) that do not require pre-marketing approval from the FDA or the equivalent regulatory agency in another country. We may pay any royalty payments in our common stock at our option. Following the closing of this offering, we will not owe Napo any royalties on sales of non- Croton lechleri products.

Financial Operations Overview

We were incorporated in June 2013 in Delaware. Napo formed our company to develop and commercialize animal health products. Prior to our incorporation, the only activities of Napo related to animal health were limited to the retention of consultants to evaluate potential strategic alternatives. As of December 31, 2013, we were a wholly-owned subsidiary of Napo, and as of December 31, 2014, we are a majority-owned subsidiary of Napo. Upon the closing of this offering, we will no longer be majority-owned by Napo.

We have presented our financial statements on a standalone basis without predecessor or carve-out financial information because we do not have a “predecessor” within the meaning of Rule 405 of Regulation C under the Securities Act. We did not succeed to a major portion of the business or assets of Napo, nor a separately identifiable line of business of Napo. Prior to our formation, Napo's operations did not include an animal health business and we were formed for the purpose of developing and commercializing products in the animal health field. Napo's business was focused on the development of human-specific formulations of its product, as well as licensing activities related to its intellectual property. Since early 2011, Napo's business activities have been limited to activities related to the licensing of its intellectual property, which we did not acquire or succeed to, and there were no predecessor operations of the animal health business in Napo prior to our formation. For these reasons, we did not succeed to substantially all of the business of Napo nor a separately identifiable line of business of Napo.

In July 2013, we entered into an employee leasing and overhead allocation agreement with Napo, or the Service Agreement. The term of the Service Agreement was from July 1, 2013 through February 28, 2014. Pursuant to the Service Agreement, Napo provided us the services of certain Napo employees, and on March 1, 2014, these employees joined our company. In addition, we also agreed to pay Napo for a portion of its overhead costs during the term of the agreement. We agreed to pay Napo for the months from July 2013 through February 2014 as follows: (1) for the period from July 2013 through November 2013, in 2,666,666 shares of common stock and (2) for the period from December 2013 through February 2014, $71,811 per month (consisting of $65,811 for employee services and $6,000 for overhead costs) in cash.

We have not generated any material revenue to date and expect to continue to incur significant research and development and other expenses. Our net loss attributable to common stockholders for the year ended December 31, 2014 was $9,256,248. As of December 31, 2014, we had a total stockholders' deficit of $8,235,248. We expect to continue to incur losses for the foreseeable future as we expand our product

50


 
 

TABLE OF CONTENTS

development activities, seek necessary approvals for our product candidates, conduct species-specific formulation studies for our non-prescription products, establish API manufacturing capabilities and begin commercialization activities.

Operating Expenses

The majority of our operating expenses to date have been for research and development activities related to Canalevia and Neonorm and for costs associated with our formation, including legal, recruiting, travel and financing activities. During 2013, we did not incur any stock-based compensation expense. For the year ended December 31, 2014, operating expenses includes $164,156 of stock-based compensation expense.

Research and Development Expense

Research and development costs are expensed as incurred. Research and development expense consists primarily of third-party consultant fees, expenses attributable to services received from Napo under the Service Agreement and expenses related to our clinical studies. Beginning January 1, 2014, research and development expense also includes personnel-related costs, including salaries and benefits, and other operational costs related to our research and development activities, including costs of studies, raw material acquisition costs, contract manufacturers and service providers, regulatory, professional and consulting fees, and travel costs.

We typically use our employee and infrastructure resources across multiple development programs. We track outsourced development costs by prescription drug product candidate and non-prescription product but do not allocate personnel or other internal costs related to development to specific programs or development compounds.

The timing and amount of our research and development expenses will depend largely upon the outcomes of current and future trials for our prescription drug product candidates as well as the related regulatory requirements, the outcomes of current and future species-specific formulation studies for our non-prescription products, manufacturing costs and any costs associated with the advancement of our line extension programs. We cannot determine with certainty the duration and completion costs of the current or future development activities.

The duration, costs and timing of trials, formulation studies and development of our prescription drug and non-prescription products will depend on a variety of factors, including:

the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials, formulation studies and other research and development activities;
future clinical trial and formulation study results;
potential changes in government regulations; and
the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a prescription drug product candidate or non-prescription product could mean a significant change in the costs and timing associated with our development activities.

We expect research and development expense to increase significantly as we add personnel, commence additional clinical studies and other activities to develop our prescription drug product candidates and non-prescription products.

General and Administrative Expense

General and administrative expense consists of personnel-related costs, including salaries and benefits, and also includes expenses attributable to services received from Napo under the Service Agreement, rent and other facilities costs and professional and consulting fees for legal, accounting, tax services and other general business services. During 2013, we did not incur any stock-based compensation expense. For the year ended December 31, 2014, general and administrative expense includes $106,701 of stock-based compensation expense.

51


 
 

TABLE OF CONTENTS

We expect general and administrative expense to increase significantly as we incur operating costs related to being a public company, including building our corporate infrastructure.

Interest (Expense) Income, Net

Interest (expense) income, net consists primarily of interest expense related to our convertible promissory notes and standby bridge financing commitment. It also includes interest expense and the amortization of a beneficial conversion feature related to convertible promissory notes issued in June and December 2014.

Results of Operations

   
  Period from
June 6, 2013
(inception)
through December 31,
2013
  Year Ended
December 31,
2014
Operating expenses:
                 
General and administrative expense   $ 458,473     $ 4,095,324  
Research and development expense     324,479       4,220,338  
Total operating expenses     782,952       8,315,662  
Loss from operations     (782,952 )      (8,315,662 ) 
Interest (expense), net     (18,251 )      (345,336 ) 
Change in fair value of warrants           51,423  
Net loss and comprehensive loss   $ (801,203 )    $ (8,609,575 ) 

General and Administrative Expense

The following table presents the components of general and administrative expense for the periods indicated:

   
  Period from
June 6, 2013
(inception)
through
December 31,
2013
  Year Ended
December 31,
2014
Personnel and related benefits   $     $ 1,566,288  
Accounting fees           189,520  
Third-party consulting fees and Napo service fees     391,493       660,674  
Legal fees     4,780       414,664  
Travel, other expenses           638,429  
Stock-based compensation           93,360  
Other     62,200       532,389  
Total   $ 458,473     $ 4,095,324  

General and administrative expense for 2013 primarily consists of third-party consulting fees and services provided by Napo personnel pursuant to the Service Agreement related to fundraising, corporate organization and administrative services, as well as Napo overhead allocation expense. Legal fees were related to general corporate activities. Other expenses included costs related to marketing studies, business development consultants and travel.

General and administrative expense for the year ended December 31, 2014 primarily consists of salaries and related benefits for employees, third-party consulting fees, legal and accounting fees, travel expenses, including hotel and airfare, and two months of services provided by Napo personnel pursuant to the Service Agreement, as well as Napo overhead allocation expense and legal costs related to intellectual property development and general corporate activities. In March 2014, upon the conclusion of the Service Agreement with Napo, four Napo employees joined us as our employees.

52


 
 

TABLE OF CONTENTS

Research and Development Expense

The following table presents the components of research and development expense for the periods indicated:

   
  Period from
June 6, 2013
(inception)
through
December 31,
2013
  Year Ended
December 31,
2014
Personnel and related benefits   $     $ 1,117,825  
Third-party consulting and Napo service fees     136,274       174,985  
Materials expense           1,400,160  
Studies, formulation and assay costs     159,048       515,452  
Travel, other expenses           343,768  
Supply costs and contract manufacturing           459,905  
Stock-based compensation           70,796  
Other     29,157       137,447  
Total   $ 324,479     $ 4,220,338  

Research and development expense for 2013 includes expenses associated with services provided by Napo employees, raw material supply costs and manufacturing-related activities. We also retained third-party consultants in connection with our application for MUMS designation for Canalevia for CID in dogs, and the development of a protocol for a study of Neonorm in preweaned dairy calves. Study and assay costs include costs of a study of Neonorm in preweaned dairy calves conducted at a veterinary school.

Research and development expense for the year ended December 31, 2014 primarily consists of materials for studies and pre-commercial manufacturing that were transferred to our company as part of the Napo License Agreement, and expensed. Research and development expenses also include payroll and related benefits for research and development personnel, the costs of a study of Neonorm in preweaned dairy calves, services provided by Napo personnel before they became employees of our company in March 2014, consultants, and manufacturing and raw material supply costs and related activities.

Liquidity and Capital Resources

Since inception, we have not generated any material revenue and we have funded our operations primarily through the issuance of equity securities and convertible promissory notes. We have incurred increasing losses and negative cash flow from operations, and as of December 31, 2014, we had an accumulated deficit of $9,410,778. We anticipate that we will continue to incur losses for at least the next two years due to expenses relating to:

trials of our products and product candidates;
toxicology studies for our product candidates;
establishing contract manufacturing capabilities; and
commercialization of one or more of our prescription drug product candidates, if approved, and commercialization of our non-prescription products.

As of December 31, 2014, we had cash and cash equivalents of $845,192. From June 2014 through December 2014, we issued convertible promissory notes in an aggregate principal amount of $1.1 million. In August 2014, we entered into a standby line of credit with an individual, who is an accredited investor, for up to $1.0 million. As of December 31, 2014, we had not made any drawdowns under this facility. In October 2014, as amended and restated in December 2014, we entered into a $1.0 million standby bridge loan. We also issued $250,000 aggregate principal amount of convertible promissory notes in February 2015 and $1,000,000 aggregate principal amount of convertible promissory notes in March 2015.

53


 
 

TABLE OF CONTENTS

Our auditors have included an explanatory paragraph in their audit report on our financial statements for the year ended December 31, 2014, regarding our assessment of substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We believe that the successful completion of this offering will eliminate the doubt and enable us to continue as a going concern. However, if we are unable to successfully complete this offering, we will need to obtain alternate financing or create operational plans to continue as a going concern.

We believe the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operating plan through April 2016 and anticipated commercial launch of Canalevia for CID in dogs, as well as for the pivotal data and regulatory filing with the FDA to expand the indication to general watery diarrhea in dogs. However, our operating plan may change due to many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We may also not be successful in entering into partnerships that include payment of upfront licensing fees for our products and product candidates for markets outside the United States, where appropriate. If we do not generate upfront fees from any anticipated arrangements, it would have a negative effect on our operating plan.

We expect that we will increase our expenditures following the closing of this offering once we have additional capital on hand in order to continue our efforts to develop animal health products, continue to commercially launch Neonorm and continue development of Canalevia in the near term. We have agreed to pay Indena S.p.A. fees of approximately $2.1 million under memorandums of understanding relating to the establishment of our commercial manufacturing arrangement. The exact amounts and timing of any expenditures may vary significantly from our current intentions.

Cash Flows

The following table shows a summary of cash flows for the periods set forth below:

   
  Period from
June 6, 2013
(inception)
through
December 31,
2013
  Year Ended
December 31,
2014
Cash used in operating activities   $ (334,839 )    $ (5,463,218 ) 
Cash used in investing activities           (55,149 ) 
Cash provided by financing activities     520,206       6,178,192  

Cash Used in Operating Activities

During the period from June 6, 2013 (inception) through December 31, 2013, cash used in operating activities was the result of our net loss of $801,203 offset by the issuance of common stock to Napo for services $359,055, further offset by changes in operating assets and liabilities of $104,628.

During the year ended December 31, 2014, cash used in operating activities was the result of our net loss of $8,609,575, less non-cash expenses related to warrants and stock-based compensation of $316,296, changes in operating assets and liabilities of $1,600,865, and non-cash expense of the write-off of certain materials received from Napo of $1,082,626.

Cash Used in Investing Activities

During the period from June 6, 2013 to December 31, 2013, we did not have any cash provided by or used in investing activities. In the year ended December 31, 2014, cash used in investing activities primarily consisted of purchases of manufacturing-related equipment.

54


 
 

TABLE OF CONTENTS

Cash Provided by Financing Activities

During the period from June 6, 2013 through December 31, 2013, cash provided by financing activities primarily consisted of the gross proceeds from the issuance of convertible promissory notes and warrants to purchase common stock. On February 4, 2014, the convertible notes issued in 2013 were converted in full in exchange for an aggregate of 207,664 shares of common stock at a conversion price of $2.5281, which was equal to 75% of the price per share paid by the purchasers of Series A preferred stock.

During the year ended December 31, 2014, cash provided by financing activities consisted of net proceeds of $6,658,241 from the issuance of 3,015,902 shares of Series A preferred stock and $1.1 million from the issuance of convertible promissory notes and $900,000 from a standby bridge facility.

Description of Indebtedness

Standby Lines of Credit, Convertible Notes and and Warrant Issuances

In August 2014, we entered into a standby line of credit with an individual, who is an accredited investor, for up to $1.0 million pursuant to a Line of Credit Loan Agreement dated August 26, 2014. The minimum amount of any drawdown is $250,000, the lender has no obligation to fund more than once every 10 calendar days, we must provide 15 business days prior notice for any drawdown and may not draw down funds after March 31, 2015. Outstanding borrowings bear interest at a rate of 3.0% per annum, and all borrowings are due in full on the one-year anniversary of the issue date. Following the closing of this offering, outstanding principal amounts borrowed under the standby line of credit may be converted, at the option of the lender, into shares of our common stock at a conversion price equal to 80% of the initial public offering price per share. In connection with the entry into the standby line of credit, we issued the lender a warrant to purchase 33,333 shares of our common stock at an exercise price equal to $5.60 per share, which expires in August 2016. As of December 31, 2014, we had not made any drawdowns under this facility.

Pursuant to an Amended and Restated Standby Bridge Financing Agreement (as amended by Amendment No. 1 thereto), dated as of December 3, 2014 by and between us and GBP Life Science Holdings, LLC, or GPB, and 31 Group LLC, or 31 Group, both accredited investors, on December 3, 2014, we drew down $900,000, the full amount of loans available under the facility (which $900,000 reflected a $100,000 original issue discount), and in connection therewith we issued to each of GBP and 31 Group a $500,000 principal amount senior secured note dated December 3, 2014 (which notes reflected the amounts loaned to us by each investor and the $100,000 original issue discount ($50,000 per note)). The notes mature on or about June 3, 2015, and provide that payment is accelerated to the closing of this offering. Upon repayment of the notes, we will pay aggregate interest thereon in an amount of $120,000 ($60,000 per note). In addition, repayment of the notes shall be in the amount of (a) 114% of the aggregate principal amount, all interest and all other amounts due under the note and related documents if the repayment occurs before April 2, 2015, (b) 116% of the aggregate principal amount, all interest and all other amounts due under the note and related documents if the repayment occurs between 121 and 150 days after the December 3, 2014 issuance date of the note and (c) 118% of the aggregate principal amount, all interest and all other amounts due under the note and related documents if the repayment occurs between 151 and 180 days after the December 3, 2014 issuance date of the notes or upon maturity. In connection with the entry into the agreement, we issued to each of GBP and 31 Group a warrant dated December 3, 2014 to purchase such number of shares of our common stock equal to $500,000 divided by the exercise price. The exercise price of the warrant was equal to the lesser of (i) 80% of the initial public offering price and (ii) 80% of the lowest gross price per share of our common stock sold in a private placement in a transaction or a series of related transactions that equal or exceed $4,000,000 prior to the initial public offering. Such warrants will become exercisable on June 3, 2015 and expire on June 3, 2020. In March 2015, we agreed with the holders of the warrants that the exercise price of the warrant would be initially fixed at $5.60 per share of our common stock, and the warrants would each be exercisable into an aggregate of 178,572 shares of our common stock. See “Underwriting — Certain Transactions.”

On December 23, 2014, pursuant to a convertible note and warrant purchase agreement, we issued $650,000 aggregate principal amount of convertible promissory notes to three accredited investors. In February 2015, we issued an additional $250,000 aggregate principal amount of notes pursuant to this convertible note purchase agreement to two additional accredited investors. In connection therewith, we amended and restated the terms of convertible notes issued in December 2014. All $900,000 aggregate

55


 
 

TABLE OF CONTENTS

principal amount of these notes bear interest at 12% per annum and become payable upon demand by the holders within 30 days following this offering. The noteholders may convert the notes at a conversion price equal to $5.60 per share (80% of the initial public offering price). If these notes have not been converted prior to July 31, 2015, nor declared due and payable by the holders within 30 days after this offering, the maturity date will automatically be extended to July 31, 2016 if we have not otherwise elected to prepay these notes within 30 days after this offering. We also issued these investors three-year warrants to purchase an aggregate 80,355 shares of our common stock (determined by dividing 50% of the corresponding original principal amount issued by the exercise price). The exercise price is $5.60 per share (80% of the initial public offering price). In March 2015, the holders of $650,000 aggregate principal amount of these notes irrevocably elected to have their notes automatically convert into shares of our common stock upon the closing of this offering at a conversion price of $5.60 per share. Accordingly, we expect to issue these holders an aggregate of 116,070 shares of our common stock upon the closing of this offering.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.

Commitments and Contingencies

The following table summarizes contractual obligations as of December 31, 2014:

         
  Payments Due by Period
     Total   Less Than
1 Year
  1 to 3
Years
  3 to 5
Years
  More Than
5 Years
Napo License Agreement(1)   $ 1,875,000     $     $ 1,875,000     $     $  
Convertible notes payable(2)     1,100,000       1,100,000                    
Notes payable     1,000,000       1,000,000                    
Contract manufacturing(3)     2,100,000       2,100,000                    
Sublease(4)     63,795       63,795                          
Total(5)   $ 6,138,795     $ 4,263,795     $ 1,875,000     $     $  

(1) The Napo License Agreement obligates us to pay (i) license fees upon achievement of a cumulative level of $2.0 million of product sales, (ii) royalties on net sales of products utilizing licensed technology and (iii) milestone payments. Royalties are dependent on future product sales and are not reflected in the table above, as they are not estimable. Milestone payments are not payable if we complete this initial public offering prior to December 31, 2015 and are not reflected in the table above. In January 2015, the license agreement was amended to reduce the remaining license fee payable to $1,625,000 with $1,175,000 due in 2015 and the remainder in 2016.
(2) Does not include an additional $250,000 aggregate principal amount of notes issued February 2015.
(3) As of December 31, 2014, our memorandums of understanding with Indena S.p.A. reflected the payment of €1.7 million, including contingent payments based on certain deliverables or events. In February 2015, we agreed to modify the payment schedule to delay certain payments to later in 2015 and revised total payments to €1.8 million.
(4) Represents future lease payments for our San Francisco, California headquarters.
(5) Does not include any amounts that may become payable under our August 2014 $1.0 million standby line of credit.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. We also enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable at any time by us with advance written notice. The amounts due under these agreements are not included in the above tables.

56


 
 

TABLE OF CONTENTS

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Fluctuation Risk

Our cash and cash equivalents as of December 31, 2014 were held in a cash account. Upon completion of this offering, the proceeds from the sale of shares of our common stock will be placed in interest bearing accounts. As a result, our primary exposure to market risk for our cash will be interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because our cash is held in bank accounts, a sudden change in the interest rates associated with our cash and cash equivalents balances would not be expected to have a material impact on our financial condition or results of operations.

We do not have any foreign currency or derivative financial instruments.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our audited financial statements, appearing elsewhere in this prospectus.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued research and development expenses. Estimated accrued expenses include fees paid to vendors and clinical sites in connection with our clinical trials and studies. We review new and open contracts and communicate with applicable internal and vendor personnel to identify services that have been performed on our behalf and estimate the level of service performed and the associated costs incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost for accrued expenses. The majority of our service providers invoice us monthly in arrears for services performed or as milestones are achieved in relation to our contract manufacturers. We make estimates of our accrued expenses as of each reporting date.

We base our accrued expenses related to clinical trials and studies on our estimates of the services received and efforts expended pursuant to contracts with vendors, our internal resources, and payments to clinical sites based on enrollment projections. The financial terms of the vendor agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of animals and the completion of development milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the related expense accrual accordingly on a prospective basis. If we do not identify costs that have been incurred or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not made any material adjustments to our estimates of accrued research and development expenses or the level of services performed in any reporting period presented.

Accounting for Stock-Based Compensation

During 2013, we did not issue any stock awards to employees, directors or consultants and did not incur any stock based compensation expense. Beginning in the second quarter of 2014, we awarded options and restricted stock units. We measure stock-based awards granted to employees and directors at fair value on the date of grant and recognize the corresponding compensation expense of the awards, net of estimated forfeitures, over the requisite service periods, which correspond to the vesting periods of the awards.

57


 
 

TABLE OF CONTENTS

Key Assumptions.  Our Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, the expected term of the option, risk-free interest rates and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows:

Fair value of our common stock — Because the common stock is not yet publicly traded, we estimated the fair value of our common stock, as discussed in “Common Stock Valuations” below. Upon the closing of this public offering, our common stock will be valued by reference to the publicly-traded price of our common stock.
Expected volatility — As we do not have any trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations for common stock values over a period equivalent to the expected term of our stock option grants. We did not rely on implied volatilities of traded options in our industry peers' common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.
Expected term — The expected term represents the period that our stock-based awards are expected to be outstanding. It is based on the “simplified method” for developing the estimate of the expected life of a “plain vanilla” stock option. Under this approach, the expected term is presumed to be the midpoint between the average vesting date and the end of the contractual term for each vesting tranche. We intend to continue to apply this process until a sufficient amount of historical exercise activity is available to be able to reliably estimate the expected term.
Risk-free interest rate — The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Dividend yield — We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
Forfeitures — We estimate forfeitures at the time of grant and revise those estimates periodically in subsequent periods. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

Common Stock Valuations.  The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we used in the valuation model are highly complex and subjective. We base our assumptions on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant and stock award. These judgments and factors will not be necessary to determine the fair value of new awards once the underlying shares begin trading. For now we included the following factors:

the prices, rights, preferences and privileges of our Series A preferred stock relative to those of our common stock;
lack of marketability of our common stock;
our actual operating and financial performance;

58


 
 

TABLE OF CONTENTS

current business conditions and projections;
hiring of key personnel and the experience of our management;
our stage of development;
illiquidity of share-based awards involving securities in a private company;
the U.S. capital market conditions; and
likelihood of achieving a liquidity event, such as this offering or a merger or acquisition of our company given prevailing market conditions.

Following the closing of this initial public offering, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on The NASDAQ Stock Market on the applicable grant date.

Classification of Securities

We apply the principles of ASC 480-10 “Distinguishing Liabilities From Equity” and ASC 815-40 “Derivatives and Hedging — Contracts in Entity's Own Equity” to determine whether financial instruments such as warrants, contingently issuable shares and shares subject to repurchase should be classified as liabilities or equity and whether beneficial conversion features exist.

Income Taxes

As of December 31, 2014, we had net operating loss carryforwards for federal and state income tax purposes of $9,087,176 and $9,068,156, respectively, which will begin to expire in 2033, subject to limitations. Our management has evaluated the factors bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards. Our management concluded that, due to the uncertainty of realizing any tax benefits as of December 31, 2014, a valuation allowance was necessary to fully offset our deferred tax assets. We have evaluated our uncertain tax positions and determined that we have no liabilities from unrecognized tax benefits and therefore we have not incurred any penalties or interest. The Tax Reform Act of 1986, as amended, limits the use of net operating loss and tax credit carryforward in certain situations where changes occur in the stock ownership of a company. In the event we have a change in ownership in the future, as defined by the tax law, utilization of the carryforwards could be limited.

Recently Issued Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,” which provides guidance regarding management's responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the company's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are evaluating the new guidance and have not determined the impact this standard may have on our financial statements.

In June 2014, the FASB issued authoritative guidance that eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. We elected to early adopt this standard in the year ended December 31, 2014 and therefore eliminated the presentation of inception to date information.

59


 
 

TABLE OF CONTENTS

In June 2014, the FASB issued authoritative guidance that requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This guidance will be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2015. We will implement this guidance for all interim and annual periods beginning after December 15, 2015. The adoption of this guidance is not expected to have an impact on our financial condition, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016 and allows for prospective or retrospective application. We are evaluating this pronouncement and have not yet determined the impact it will have on our financial statements.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

60


 
 

TABLE OF CONTENTS

BUSINESS

Overview

We are an animal health company focused on developing and commercializing first-in-class gastrointestinal products for companion and production animals. Canalevia is our lead prescription drug product candidate for the treatment of various forms of watery diarrhea in dogs. We achieved statistically significant results in a canine proof-of-concept study completed in February 2015, supporting the conclusion that Canalevia treatment is superior to placebo, with 91% of the Canalevia-treated dogs achieving a formed stool during the study versus 50% of the placebo-treated dogs. We also initiated filing of a rolling new animal drug application, or NADA, with the U.S. Food and Drug Administration, or FDA, for Canalevia for chemotherapy-induced diarrhea, or CID, in dogs, at the end of 2014. Canalevia is a canine-specific formulation of crofelemer, an active pharmaceutical ingredient isolated and purified from the Croton lechleri tree. A human-specific formulation of crofelemer, Fulyzaq, was approved by the FDA in 2012 for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. Members of our management team developed crofelemer, including while at Napo Pharmaceuticals, Inc., or Napo. Neonorm is our lead non-prescription product to improve gut health and normalize stool formation in animals suffering from watery diarrhea, or scours. We launched Neonorm in the United States at the end of 2014 for preweaned dairy calves under the brand name Neonorm Calf and expect to launch additional formulations of Neonorm for other animal species in 2015. We have already shipped approximately $450,000 of Neonorm Calf. Neonorm is a botanical extract also derived from the Croton lechleri tree. Canalevia and Neonorm are distinct products that are formulated to address specific species and market channels. We have filed nine investigational new animal drug applications, or INADs, with the FDA and intend to develop species-specific formulations of Neonorm in six additional target species.

Diarrhea is one of the most common reasons for veterinary office visits for dogs and is the second most common reason for visits to the veterinary emergency room, yet there are no FDA-approved anti-secretory products for the treatment of diarrhea. We estimate that in the United States, veterinarians see approximately six million annual cases of acute and chronic watery diarrhea in dogs, approximately two-thirds of which are acute watery diarrhea. We believe Canalevia will be effective in treating watery diarrhea because it acts at the last physiological step, conserved across mammalian species, in the manifestation of watery diarrhea, regardless of cause, by normalizing ion and water flow in the intestinal lumen. We are first seeking a minor use, minor species, or MUMS, designation with the FDA for Canalevia for CID in dogs to shorten the timeframe to commercialization. If we receive conditional approval pursuant to MUMS designation, we expect to commercialize Canalevia for CID in dogs in early 2016. We completed a canine proof-of-concept study in February 2015, with statistically significant results, in support of protocol concurrence discussions with the FDA regarding expansion of labeled indications of watery diarrhea beyond CID, to include general acute watery diarrhea. We plan to market Canalevia, if approved, through our focused direct sales force and to complement our internal efforts with distribution partners.

According to the Dairy 2007 study conducted by the United States Department of Agriculture, or USDA, almost one in four preweaned dairy heifer, or female, calves suffers from diarrhea or other digestive problems. The preweaning period is generally the first 60 days after birth. Scours, diarrhea or other digestive problems are responsible for more than half of all preweaned heifer calf deaths, and result in impaired weight gain and long-term reduction in milk production. We believe the incidence rate of scours and its corresponding financial impact represent a large opportunity and that Neonorm has the potential to effectively meet this need. In our clinical study completed in May 2014, Neonorm demonstrated a statistically significant reduction in the severity of watery diarrhea, reduced morbidity and mortality, and improved weight gain as compared to placebo in newborn dairy calves with scours.

We recently launched Neonorm for preweaned dairy calves in the United States under the brand name Neonorm Calf. Our commercialization activities are initially focusing on large commercial dairy operations and include active ongoing education and outreach to dairy industry key opinion leaders, such as academics involved in dairy cattle research or who advise the dairy cattle industry, as well as veterinarians. We intend to augment these commercialization efforts by working with regional distributors to leverage the geographic concentration of the dairy market in the United States as well as national distributors to provide wider geographic access to our products. We recently signed a distribution agreement with Biogenesis Bagó, a

61


 
 

TABLE OF CONTENTS

veterinary biotechnology company in Latin America, a region that contains approximately 401 million dairy and beef cattle and produces approximately 11% of the world's milk supply. The distribution agreement provides Biogenesis Bagó with exclusive distribution rights for Neonorm Calf in Argentina, Brazil, Paraguay, Uruguay, and Bolivia. In addition, where appropriate, we intend to explore other international and distribution partnership arrangements. In August 2014, we entered into our first regional distribution agreement with Animart, Inc. for the Upper Midwest region and, together with this partner, launched Neonorm at the 2014 World Dairy Expo, and in September 2014, entered into an agreement with Vedco, Inc., a national master distributor, who also distributes prescription products for the companion animal market. We expect the ongoing launch of Neonorm to drive awareness among veterinarians regarding the utility of our first-in-class anti-secretory Croton lechleri-derived products, including Canalevia.

We have an exclusive worldwide license to Napo's intellectual property rights and technology related to our products and product candidates, including rights to its library of over 2,300 medicinal plants, for all veterinary treatment uses and indications for all species of animals. This includes rights to Canalevia, Neonorm and other distinct prescription drug product candidates in our pipeline along with the corresponding existing pre-clinical and clinical data packages. We also recently expanded our intellectual property portfolio to include combinations of our proprietary anti-secretory product lines, Canalevia and Neonorm, with the non-absorbed antibiotic, rifaximin, for gastrointestinal indications in all animals.

Our management team has significant experience in gastrointestinal and animal health product development. This experience includes the development of crofelemer for human use, from discovery and preclinical and clinical toxicity studies, including the existing animal studies to be used for Canalevia regulatory approvals, through human clinical development. Our team also includes individuals who have prior animal health experience at major pharmaceutical companies including SmithKline Beecham Corporation, now GlaxoSmithKline LLC, the animal health group of Pfizer Inc., now Zoetis Inc., Vétoquinol S.A., Merial Limited, the animal health division of Sanofi S.A., as well as management experience at major veterinary hospital institutions.

62


 
 

TABLE OF CONTENTS

Product Pipeline

We are developing a pipeline of prescription drug product candidates and non-prescription products to address unmet needs in animal health. Our pipeline currently includes prescription drug product candidates for eight indications across multiple species, and non-prescription products targeting seven species.

Prescription Drug Product Candidates

       
Product Candidates   Species   Indication   Recent Developments   Anticipated Near-Term Milestones

Canalevia Dogs CID

•  

MUMS designation/pre-NADA meeting in October 2014

•  

Initiated rolling NADA filing in December 2014

•  

Conditional NADA approval in 1st quarter of 2016

Dogs General watery diarrhea

•  

INAD filed in February 2014

•  

Statistically significant proof-of-concept data in February 2015

•  

Concurrence meeting with FDA in 2015

•  

Initiation of pivotal trial in 2015

•  

Initiate filing NADA in 1st quarter of 2016

Species-specific formulations of crofelemer Horses Acute colitis

•  

INAD filed in February 2014

•  

Safety data in 2nd half of 2015

•  

Apply for MUMS designation in 2nd half of 2015

Horses Diarrhea, colonic and gastric ulcers(1)

•  

INAD filed in February 2015

•  

Proof-of-concept data in 2nd half of 2015

Cats General watery diarrhea

•  

INAD filed in February 2014

•  

Initiated safety and palatability study in cats with diarrhea in March 2015

•  

Safety and proof-of-concept data in 2nd half of 2015/1st quarter of 2016

Virend (topical) Cats Herpes virus

•  

INAD filed in July 2014

•  

Proof-of-concept and top line pivotal efficacy data in 1st quarter of 2016

Species-specific formulations of NP-500 Dogs Obesity-related metabolic dysfunction

•  

INAD filed September 2014

  
Horses Metabolic syndrome

•  

INAD filed in March 2014

  
Cats Type II diabetes

•  

INAD filed in March 2014

  
(1) In combination with omeprazole and/or sucralfate.

Non-Prescription Products

       
Products   Species   Use   Recent Developments   Anticipated Near-Term Milestones

Neonorm Calf Dairy calves Improve gut health and normalize stool formation in preweaned dairy calves with scours

•  

National launch in February 2015

•  

U.S. regional and nationwide distribution agreements signed in 2nd half of 2014

•  

South American distribution agreement signed in 1st quarter of 2015, commercial launch in 2016

•  

Approximately $450,000 of product shipped since commercial launch

•  

Field study results in 2nd quarter of 2015 (study has been ongoing since 4th quarter of 2014); includes evaluation of prebiotic effect

Species-specific formulations of Neonorm Horse foals Normalize stool formation

•  

Completed pilot formulation in April 2014

•  

Completed safety and palatability study in November 2014

•  

Safety and efficacy data in 2nd half of 2015

•  

Commercial launch in 2015

Adult horses Normalize stool formation   

•  

Safety and efficacy data in 1st quarter of 2016

Other farm/
production animals
Normalize stool formation

•  

Initiated market research in New Zealand and China in 2014

•  

Initiate proof-of-concept studies based on market research within the next 12 months

  

63


 
 

TABLE OF CONTENTS

Canalevia is our lead prescription drug product candidate for CID and general watery diarrhea in dogs. Neonorm is our lead non-prescription product to improve gut health and normalize stool formation for preweaned dairy calves with scours. Both Canalevia and Neonorm are derived from the Croton lechleri tree and act at the same last step in a physiological pathway generally present in mammals. However, they are distinct products based on species-specific formulations of such derivatives and have distinct chemical compositions as well as different levels of purification. Canalevia is a canine-specific formulation of crofelemer, an active pharmaceutical ingredient that is an isolated and purified compound. Neonorm is a formulation of a botanical extract that is less refined than crofelemer and includes many chemical constituents.

We are developing Canalevia as a prescription drug product and Neonorm as a non-prescription product due to differences between the companion and production animal markets. Companion animal owners generally visit veterinarians, who prescribe a product to treat a disease or condition. We believe the ability to make a disease treatment claim is important in this market, and such a claim is only possible with FDA approval as a prescription product. In contrast, dairy farmers and other production animal owners generally make purchasing decisions based on a product's ability to demonstrate an economic benefit from health endpoints, such as weight gain. We believe that data from our clinical study of Neonorm demonstrates such an economic benefit and do not believe the ability to make disease treatment claims will be needed to commercialize the product.

We are initially pursuing conditional FDA approval for Canalevia for CID in dogs pursuant to MUMS designation, and are conducting studies to broaden the Canalevia label to include general watery diarrhea in dogs. A MUMS designation is a status similar to the orphan drug designation in humans. In the case of major animal species such as dogs, cats and horses, MUMS designations are typically limited to drugs that are used to treat a small number of animals each year. For dogs and cats that number is no more than 70,000 and 120,000 animals, respectively. MUMS designation can potentially expedite the process of drug review, approval and product availability to the patient. A sponsor of a MUMS drug can apply for conditional approval, which allows the sponsor to make the drug commercially available before collecting all necessary effectiveness data, but after proving the drug is safe and showing that there is a reasonable expectation of effectiveness.

We also plan to expand our gastrointestinal product line to other animals by developing species-specific formulations and expect to seek protocol concurrences with the FDA where appropriate. For example, we have planned trials to develop formulations of crofelemer for watery diarrhea in cats and acute colitis in adult horses. We also plan to develop specific formulations of Neonorm for foals and adult horses, as well as sheep and other farm animals. A protocol concurrence in animal drug development means that the FDA agrees that the design and analyses proposed in a protocol are acceptable to support regulatory approval of the product candidate with respect to effectiveness of the indication studied and will not change its view of these matters, unless public or animal health concerns arise that were not recognized at the time of concurrence or we change the protocol.

We have licensed intellectual property from Napo to develop prescription drug product candidates for diabetes and metabolic syndrome for dogs, cats and horses, as well as a topical herpes product for cats. Similar to our lead prescription drug product candidate, these products were tested in animals for safety to support their development for use in humans. We recently expanded our gastrointestinal product line to include combinations of our proprietary anti-secretory products derived from Croton lechleri with the non-absorbed antibiotic, rifaximin, a human approved product, for gastrointestinal indications in all animals. We are leveraging the data and knowledge gained during the development of human therapeutics into veterinary applications.

64


 
 

TABLE OF CONTENTS

Business Strategy

Our goal is to become a leading animal health company with first-in-class products that address unmet medical needs in both the companion and production animal markets. To accomplish this goal, we plan to:

Leverage our significant gastrointestinal knowledge, experience and intellectual property portfolio to develop a line of Croton lechleri-derived products for both production and companion animals.

Our management team collectively has over 100 years of experience in the development of gastrointestinal prescription drug and non-prescription products. This experience covers all aspects of product development, including discovery, pre-clinical and clinical development and regulatory strategy. In addition to our near-term development efforts advancing Canalevia for dogs and Neonorm for preweaned dairy calves, we are developing formulations of these products to address the unmet medical need for the treatment of watery diarrhea and to improve gut health and normalize stool formation across multiple animal species and market channels. Our products are designed with a thorough understanding of not only species-specific health issues, but also market practices, the economics of current treatment strategies, competitive dynamics, government initiatives, such as concern for extensive antibiotic usage, and effective channels for new product introductions. Many of our products are being formulated into separate and distinct gastrointestinal products accounting for multiple specific species, markets and regulatory dynamics.

Establish commercial capabilities, including third-party sales and distribution networks and our own targeted commercial efforts, through the launch of Neonorm.

We recently launched Neonorm in the United States under the brand name Neonorm Calf. We intend to establish a focused direct sales force, initially for the production animal markets and have already hired our first sales representative. We will direct our sales and marketing efforts on educational activities and outreach to key opinion leaders and decision makers at targeted regional and global accounts and also plan to continue to partner with leading distributors to commercialize our products. We expect that our current and future distribution partners will have the presence, name recognition, reputation and reach in the veterinary markets and in both key urban and rural centers, as appropriate. We believe this overall approach is scalable and transferable as we expand our commercialization efforts to companion animals, as well as when we expand internationally.

Launch Canalevia and our other product candidates for companion animals, if approved, leveraging the commercial capabilities and brand awareness we are currently building.

We expect to launch Canalevia in 2016 for both CID and general watery diarrhea in dogs, leveraging the sales and marketing capabilities established from our launch of Neonorm. As our focus shifts to companion animals, our direct sales force will also increasingly target high prescribing veterinarians for companion animals. We believe the third-party sales and distribution networks we establish in connection with our launch of Neonorm will be highly relevant for the companion animal market as well. In addition, while we believe Neonorm addresses a smaller market opportunity than our companion animal product candidates, it is a first-in-class product with the same novel mechanism of action as Canalevia. As such, Neonorm provides a scientific and promotional foundation that we believe we can leverage for our companion animal prescription product development and launch events.

Expand to international markets.

We intend to leverage our proprietary product development in the United States to international markets, with meaningful partnerships to address international requirements for product development, registration, and access to commercialization in relevant markets for each of our prescription and non-prescription products. As an example, we recently signed a distribution agreement with Biogenesis Bagó, a large veterinary biotechnology company in Latin America, a region that contained approximately 401 million dairy and beef cattle in 2009 and produces approximately 11% of the world's milk supply. The distribution agreement provides Biogenesis Bagó with exclusive distribution rights for Neonorm Calf in Argentina, Brazil, Paraguay, Uruguay, and Bolivia. Further, certain markets, such as high performance horses, have strong international synergies benefiting market awareness and demand. We may also enter into partnerships that include payment of upfront licensing fees for our products and product candidates for markets outside the United States where appropriate.

65


 
 

TABLE OF CONTENTS

Identify market needs that can be readily accessed and develop species-specific products by leveraging our broad intellectual property portfolio, deep pipeline and extensive botanical library.

In addition to our anti-secretory gastrointestinal product development efforts, we have expanded the depth of our gastrointestinal pipeline product candidates to include combinations of our proprietary anti-secretory products derived from Croton lechleri with the non-absorbed antibiotic, rifaximin, a human approved product, for gastrointestinal indications in all animals. We are also developing products such as Virend for feline herpes and NP-500 for Type II diabetes and metabolic syndrome. Both of these product candidates have been through Phase 2 human clinical testing. In addition, we have exclusive worldwide rights to Napo's library of over 2,300 medicinal plants for veterinary use in all species. We believe we have the product candidates and expertise to address many unmet animal health needs for both companion and production animals. We believe our extensive library of medicinal plants will enable us to develop first-in-class products that address significant health issues and concerns of many markets and geographies.

Products in Development

Market Background — Watery Diarrhea

We believe there is an unmet medical need for the treatment of watery diarrhea. The devastating dehydration that often occurs as a result of watery diarrhea in animals, including dogs, horses and preweaned dairy calves, can manifest quickly, have long-term health implications and result in death. Other than the FDA-approved human formulation of crofelemer, there are no approved anti-secretory agents that directly address the water loss associated with watery diarrhea. Current treatments for watery diarrhea include oral rehydration solution, or ORS, anti-motility agents, absorbents and antibiotics. However, each of these approaches has known limitations. While ORS replaces the water loss associated with diarrhea, it can often extend the duration and severity of diarrhea. Anti-motility agents work by the mechanism of constipation, or temporarily paralyzing normal intestinal contractions, or peristaltic activity. These agents are contraindicated for chronic use and are therefore inappropriate for certain conditions, such as chronic CID. Anti-motility agents can also cause pain, cramping, and rebound diarrhea. Absorbents simply attempt to absorb the toxin in the gut, often causing additional pain and cramping, and do not directly address the water loss. Antibiotics attempt to treat the infectious agent releasing the toxin, but do not directly address water loss and carry a risk of altering gut flora, which alteration itself can cause diarrhea. Systemic antibiotic usage has also come under increased scrutiny by the FDA due to problems associated with antibiotic resistance.

We believe that an ideal treatment for watery diarrhea would directly address water loss without causing constipation, affecting normal peristaltic activity or altering normal body absorption of other drugs or normal physiological function of the gut. We believe addressing water loss associated with watery diarrhea will improve the quality of life of dogs and provide attendant benefits to the dog owner, improve the health and productivity of dairy cattle and provide similar health and economic benefits in multiple other species. Our gastrointestinal products and product candidates act by normalizing the flow of ions and water in the intestinal lumen, the dysregulation of which is the last step common to the manifestation of watery diarrhea. As a result, we believe that our products and product candidates may be effective in addressing watery diarrhea, regardless of cause. In addition, the channels that regulate this ion and water flow, including channels known as CFTR and CaCC (the sites of action of our gastrointestinal products), are generally present in mammals. We therefore expect that the clinical benefit shown in humans and preweaned dairy calves will be confirmed in multiple other species, including dogs. Accordingly, we believe we can bring to market multiple products among multiple species that are first-in-class and effective in preventing the debilitating and devastating ramifications of watery diarrhea in animals.

66


 
 

TABLE OF CONTENTS

The following diagram illustrates the mechanism of action of our gastrointestinal products, which normalize chloride and water flow and transit time of fluids within the intestinal lumen.

[GRAPHIC MISSING] 

Canalevia — Chemotherapy-Induced Diarrhea in Dogs

Overview

Canalevia is an oral, twice daily, chewable, beef-flavored formulation of crofelemer that we are developing for the treatment of CID in dogs. Canalevia is enteric coated for targeted release of crofelemer, the active pharmaceutical ingredient, or API, in Canalevia, in the intestine. We are seeking MUMS designation for Canalevia for CID in dogs to shorten the timeframe to commercialization. We initiated filing of a rolling NADA at the end of 2014. If we receive conditional approval from the FDA for this indication, we expect to launch Canalevia for CID in dogs by early 2016. Under MUMS designation, we would be required to initiate a pivotal study in the five years following conditional approval to generate the data required for full approval. We expect to meet this requirement with data generated from our ongoing clinical development program for the expanded indication of general watery diarrhea in dogs. Canalevia recently achieved statistically significant results in a canine proof-of-concept study completed in February 2015, supporting the conclusion that Canalevia treatment is superior to placebo, with 91% of the Canalevia treated dogs achieving a formed stool during the study versus 50% of the placebo-treated dogs.

Market Opportunity

We believe there is a significant unmet medical need for the treatment of CID in dogs. There is currently no FDA-approved anti-secretory product to treat CID in dogs. We estimate that there are over 230,000 dogs receiving chemotherapy treatment for cancer each year in the United States, with over 25% suffering from CID. Severe diarrhea is a frequent side effect of the most commonly administered chemotherapy drugs. Similar to the effects in humans, we believe that if left untreated, CID in dogs can result in:

fluid and electrolyte losses, which can cause dehydration, electrolyte imbalance and renal insufficiency;
nutritional deficiencies from alteration of gastrointestinal transit and digestion; and
increased risk of infectious complication.

Efficacy of the underlying cancer treatment may also be jeopardized if CID severity requires reductions in the absorption, frequency and/or dosage of chemotherapy. From the dog owner's perspective, there are significant practical implications of CID in dogs that may affect living arrangements, as well as the cost, time and attention required to clean and care for the dog and its surroundings on a daily basis. Veterinarians sometimes prescribe human drugs in an effort to treat CID in dogs, but do not have the benefit of clinical support with respect to efficacy or dosing. In addition, administering a potentially unpalatable human formulation is often difficult and may lead to further uncertainty of the amount actually ingested by the dog.

67


 
 

TABLE OF CONTENTS

Our Solution

We believe that Canalevia is an ideal treatment for CID in dogs because of its demonstrated novel anti-secretory mechanism of action. Canalevia acts locally in the gut and is minimally absorbed systemically. It does not alter gastrointestinal motility, has no significant effects on normally functioning intestinal ion channels and electrolyte or fluid transport, and has no side effects different from placebo. These features are further augmented by its lack of effects on the absorption and/or metabolism of co-administered chemotherapy drugs, orally or by other routes of administration. Canalevia acts by normalizing the flow of excess ions and water in the intestinal lumen. The flow of excess ions and water into the intestinal lumen is the last step common to the manifestation of watery diarrhea. As a result, we believe Canalevia may be effective in the treatment of watery diarrhea, regardless of cause, including CID.

Human formulations of crofelemer have been studied and found effective in human patients with various types of watery diarrhea, including traveler's diarrhea, HIV-related diarrhea and other acute infectious diarrheas, including cholera. Crofelemer has been clinically demonstrated to have a safety profile not different from placebo in humans and several animal species, including dogs.

Clinical Data

Canalevia is a canine-specific formulation of crofelemer. A human-specific formulation of crofelemer, Fulyzaq, was approved by the FDA in 2012 for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. A number of clinical studies of crofelemer were conducted by Napo in dogs in support of this approval that included dose toxicity studies. Safety was established by conducting a series of toxicity studies involving a total of 32 dogs. Dosage levels varied within and across the studies: two single dose acute toxicity studies were conducted on four dogs each; two seven-day repeat administration studies were conducted on four dogs each; one 30-day repeat administration study was conducted on four dogs; and one nine-month repeat administration study on eight dogs. The toxicology studies in dogs showed minimal to no adverse effects following dosing up to approximately 50 times the anticipated efficacious dose. The clinical studies previously conducted in dogs also included multiple dose studies. We believe these studies will meet FDA requirements for a pivotal safety package and will support our anticipated dosing of Canalevia in dogs.

In multiple third-party human clinical trials involving approximately 2,400 patients, enteric-coated crofelemer showed statistically significant results relative to placebo in normalizing stool formation and improvements in other endpoints related to treating watery diarrhea. In these trials, the “p” values were statistical calculations to determine whether the effects of crofelemer were significant in comparison to placebo based on pre-specified statistical targets. Depending on the trial design, we specified that any result less than p=0.05 would be significant. In a pivotal trial in support of approval for human use, crofelemer demonstrated significant benefit in the chronic indication of diarrhea in adults with HIV/AIDS on anti-retroviral therapy, achieving highly significant results (p=0.0096) in the primary endpoint measuring frequency of diarrhea.

In addition to the pivotal trial in HIV/AIDS associated diarrhea, human clinical trials included double-blind, placebo-controlled chronic and acute studies, across different human patient populations, and included safety studies in pediatric patients as young as three months of age. For example, in a 3-day treatment study of approximately 100 adult human patients with acute watery diarrhea of multiple and/or unknown etiologies, crofelemer achieved clinical success in 79% of the patients, compared to 28% receiving placebo (p<0.05). Clinical success was defined as the complete cessation of diarrhea for 12 hours or two consecutive normal stools within 48 hours of first dose. Crofelemer also achieved statistical significance across each of the seven other endpoints measured in that study, including a 96% reduction in watery stools from baseline, compared to 54% for placebo (p<0.05) and an 89% reduction in urgency compared to 43% for placebo (p<0.05). Across the diseases and human patient populations studied to date with crofelemer, there have been no drug related serious adverse events or safety profile different from placebo.

Next Steps and Commercialization Plans

We are seeking MUMS designation for Canalevia for the treatment of CID in dogs. MUMS designation provides an opportunity to shorten the time to commercialization. We are relying on previously conducted toxicology studies in dogs that were required for FDA approval of the human formulation of crofelemer to

68


 
 

TABLE OF CONTENTS

provide required safety data. We have established a safety database that we believe meets the qualifications for MUMS designation. We had our initial meeting with the FDA in October 2014 to reach agreement on the timing for submissions of the technical sections of an NADA filing, and initiated a rolling NADA filing for Canalevia for CID in dogs in December 2014. If we receive conditional approval with MUMS designation, we could begin sales of Canalevia for this indication in the first quarter of 2016. With conditional approval under MUMS designation, we would be required to initiate a pivotal study in the five years following such conditional approval to generate the data required for full FDA approval. We expect to meet this requirement with data generated from our ongoing clinical development program for the expanded indication of general watery diarrhea in dogs.

We plan to market Canalevia, if conditionally approved by the FDA, through a focused direct sales force and to complement our internal efforts with a distribution partner.

Canalevia — Expansion to General Watery Diarrhea in Dogs

Overview

We are also developing Canalevia for general watery diarrhea in dogs, regardless of cause. According to the American Veterinary Medical Association, there were approximately 70 million dogs in the United States in 2012. We recently completed a randomized, blind, multicenter proof-of-concept study of Canalevia in dogs in February 2015, with statistically significant results. Crofelemer, the API in Canalevia, demonstrated efficacy in numerous human clinical trials of acute watery diarrhea induced by various infectious pathogens, including E. coli, V. cholera and non-specific pathogens (e.g., Traveler's). Following oral dosing for two or three days, crofelemer, together with ORS, produced significant reduction in watery diarrhea, as demonstrated by the reduction of watery stool passage as well as reduced duration of diarrhea, urgency and dehydration.

Market Opportunity

Diarrhea is one of the most common reasons for veterinary office visits for dogs and the second most common reason for visits to the veterinary emergency room, yet there are no FDA-approved anti-secretory agents to treat the indication. We estimate that veterinarians see approximately six million annual cases of acute and chronic watery diarrhea in dogs in the United States, approximately two-thirds of which are acute watery diarrhea.

Veterinarians typically treat watery diarrhea in dogs with antibiotics, probiotics, dietary restrictions and products approved and formulated for humans, such as Imodium and other anti-motility agents, as well as binding agents that absorb water such as Kaopectate and Pepto-Bismol. None of these treatment options address the water loss associated with watery diarrhea. Further, because none of the human products are FDA approved for animal use, veterinarians do not have the benefit of clinical support with respect to efficacy or dosing. Moreover, administering a potentially unpalatable human formulation is often difficult and may lead to further uncertainty of the amount actually ingested by the dog.

We believe that Canalevia is an ideal treatment for general watery diarrhea in dogs because of its demonstrated novel anti-secretory mechanism of action. If approved for use in general watery diarrhea in dogs, Canalevia will be the only FDA-approved anti-secretory agent to treat diarrhea in dogs.

Clinical Data

Overview.  Canalevia demonstrated a statistically significant clinical response and resolution of diarrhea in a randomized, blind, multicenter study, which assessed the clinical efficacy in alleviating clinical signs associated with watery diarrhea in dogs. The five-month trial was completed in February 2015. This was a proof of concept study with the goal of defining endpoint assessments and statistical analyses to inform a trial design to FDA for a pivotal regulatory dog Canalevia study for the more general watery diarrhea indications.

Study Protocol.  The goal of the study was to investigate the treatment group differences in change from baseline fecal consistency and frequency in dogs with watery diarrhea during a three-day exposure to either Canalevia or placebo. Veterinarians or trained veterinary technicians conducted this blinded, randomized, placebo-controlled, proof-of-concept study over afive-month period using animals obtained through rescue organizations, shelters and from client owners. There were 39 dogs enrolled in the study based on a score of stool formation (described in the chart below). Dogs were enrolled in the trial if they were determined to have

69


 
 

TABLE OF CONTENTS

a baseline fecal score of 4 or 5. Dogs with bloody diarrhea (i.e., fecal score of 6) and/or suspicion of parvovirus were excluded. Subsequent to enrollment, the dog was confined and treatment was administered at the beginning of the score confirmation.

Fecal Scoring Chart — Purina Dog Scale

 
Score   Description
1     Well-formed, moist stools  
2     Soft, most, amorphous  
3     Viscous liquid with some particulate matter  
4     Watery, liquid stool with little particulate matter  
5     Severe watery diarrhea; no particulate matter visible  
6     Hemorrhagic diarrhea  

Dogs were randomly allocated in a 1:1 ratio to one of two treatments. The treatments were Canalevia (crofelemer) ~2 mg/kg BID (actually dosed at 40 mg packet for animals weighing 2 – 20 kg and two 40 mg packets for dogs 20 – 40 kg) and placebo. Each dog was treated twice a day for three days so that six doses of test article were received. For the shelters, it was planned that six assessments of fecal scores would be taken per day for each of the three treatment days and one additional follow-up day. For dogs enrolled at clinics, there could be less data because animals can be released after four treatments if the diarrhea had resolved. Treatment was assigned as A and B, but statistical analyses were blinded as to whether the treatment assignments correspond to Canalevia or placebo.

Fecal scoring endpoints were defined using the chart above.

Fecal Score Analysis.  A total of 39 dogs were analyzed: 23 on Canalevia and 16 on placebo. The mean baseline fecal score in both treatment groups is 4.2. The proportion of dogs with alleviated signs of acute watery diarrhea was analyzed. Resolution of diarrhea was defined as a fecal score of 1 or 2 at any post-baseline time. Dogs that did not have a score of 1 or 2 recorded were considered not resolved.

Resolution of Diarrhea.  Using a definition of diarrhea resolution being a fecal score of 1 or 2 at any post-baseline time, 21 of 23 (91.3%) dogs on Canalevia responded. This contrasts with placebo, where 8 of 16 (50.0%) dogs responded. These response rates support the conclusion that a larger proportion of dogs on Canalevia respond as compared to placebo. The two-sided p-value from Fisher's Exact test is 0.0073.

Clinical Responder Evaluation.  Under the framework of the endpoint definitions, each dog was coded as a responder or nonresponder on each day. As seen in the table below, response in Canalevia arm is greater than placebo on all days by at least 10%. A responder is a dog who had formed stools with no follow up unformed stool, day by day.

A Cochran-Mantel-Haenszel test stratified by day provides evidence that the clinical response in Canalevia is greater than placebo (p=0.013).

Using a Fisher's Exact test a significant difference occurs after the treatment period, on Day 4 (p=0.046).

70


 
 

TABLE OF CONTENTS

Clinical Response by Day

[GRAPHIC MISSING] 

The protocol for this study is based on our experience and success in previous human and dairy calf studies evaluating Croton lechleri derivatives and their effect on watery diarrhea. Based on the results, we expect to seek protocol concurrence from the FDA and anticipate commercial launch for Canalevia for this indication in early 2017.

Crofelemer — Equine Line Extension

We intend to develop a species-specific formulation of crofelemer to treat acute colitis in horses. We believe colitis affects thousands of horses in the United States each year. Acute colitis can cause sudden, massive fluid loss and severe electrolyte imbalances that can result in death in a matter of hours. Acute colitis often occurs when salmonella and C. difficile, bacteria that are normally present in the gut, are activated by stress, or when the bacteria N. risticii is ingested, causing Potomac horse fever. A 2009 Compendium Equine article reported fatality rates of 32% to 60% for salmonellosis and 15% to 35% for Potomac horse fever. Stress (e.g., shipping, changes in daily routines, illness, hospitalization, racing), recent diet changes, recent antimicrobial administration and non-steroidal anti-inflammatory drug therapy can also put horses at risk for acute colitis. The current standard of care includes hospitalization, intubation and intravenous fluids, with little opportunity to culture stools to determine the exact source of the disease. We believe treatment of acute colitis in high-value race and performance horses with crofelemer represents a premium niche market opportunity.

We intend to seek MUMS designation for our product for treatment of acute colitis in adult horses, which may shorten the timeframe to commercialization. If approved, we believe we could launch an equine formulation of crofelemer in 2016.

We are also developing a formulation of a Croton lechleri-derived product potentially in combination with omeprazole and/or sucralfate as a total intestinal tract health product for horses. Ulcers are lesions of the lining of the digestive tract and are very common in horses used for many competitive activities including racing, dressage, show jumping, endurance events, and western performance. Diarrhea is often a coincident problem. We believe

71


 
 

TABLE OF CONTENTS

that because Croton lechleri-derived products have been shown to act locally in the gut and have traditional use and rodent model benefit for ulcers, this equine formulation of a Croton lechleri-derived product potentially in combination with omeprazole and/or sucralfate has the potential to address both gastric and colonic ulcers in horses, as well as diarrhea. There are currently no marketed FDA-approved treatments for colonic ulcers in horses, because physiological factors such as pH, bile, etc. render many drugs ineffective. We estimate that there are over 3.9 million performance horses in the United States. According to a 2005 study, 54% of performance horses have both colonic and gastric ulcers and 97% of performance horses have either a gastric (87%) or a colonic (63%) ulcer. We believe that many owners give their horses daily doses of omeprazole and/or sucralfate to treat and prevent ulcers, which practice can cost up to $50 per day. We believe a product treating both gastric and colonic ulcers, as well as diarrhea, would represent a significant advance in the management of gastrointestinal disease in horses. We anticipate that this product will capitalize on our work with targeted delivery in the gastrointestinal tract of other mammals.

Crofelemer — Cats

According to the American Veterinary Medical Association, there were approximately 74 million cats in the United States in 2012. We estimate that veterinarians see approximately 2.9 million annual cases of general watery diarrhea in cats. Veterinarians typically treat watery diarrhea in cats with the same treatments used for dogs, namely antibiotics, probiotics, dietary restrictions and products approved and formulated for humans, such as Imodium and other anti-motility agents, as well as binding agents that absorb water such as Kaopectate and Pepto-Bismol.

We are currently developing a species-specific formulation of crofelemer, Felevia, for cats and have begun a safety and palatability study in cats with diarrhea. We intend to continue safety, proof-of-concept and pivotal studies in cats in 2015 and 2016, with safety and proof-of-concept data in the second half of 2015 or the first quarter of 2016, and top line pivotal efficacy data in 2016. If data is positive and we receive FDA approval, we anticipate commercial launch in 2017.

Neonorm — Improve Gut Health in Preweaned Dairy Calves with Scours

Overview

This formulation of Neonorm is an enteric-coated tablet designed to be orally administered to preweaned dairy calves twice daily for three days. In our clinical study completed in May 2014, Neonorm demonstrated a statistically significant reduction in morbidity, as well as reduced mortality and improved weight gain as compared to placebo in newborn dairy calves with scours. We recently launched Neonorm for preweaned dairy calves in the United States under the brand name Neonorm Calf. We do not believe that Neonorm fits within the FDA's definition of an animal drug, food or feed additive. Thus, we do not believe that it is regulated by the FDA at this time. The FDA previously regulated a human-specific formulation as a dietary supplement, rather than as a drug. To support the commercial launch, we are also conducting field studies of Neonorm involving approximately 700 preweaned dairy calves in total at the following leading veterinary academic institutions: Cornell University, Tufts University and in collaboration with our distributor, Animart. We expect to announce this data in the second quarter of 2015. Our commercialization activities are initially focused on large commercial dairy operations, and include active ongoing education and outreach to dairy industry key opinion leaders in the dairy industry, such as academics involved in dairy cattle research or who advise the dairy cattle industry, as well as veterinarians. We intend to augment these commercialization efforts by working with regional distributors to leverage the geographic concentration of the dairy market and, if appropriate, with international partners. In August 2014, we entered into our first regional distribution agreement for the Upper Midwest region, and together with this partner, launched Neonorm Calf at the 2014 World Dairy Expo. In September 2014, we entered into an agreement with a national master distributor, who also distributes prescription products for the companion animal market. We also recently signed a distribution agreement with Biogenesis Bagó, a large veterinary biotechnology company in Latin America, a region that contains approximately 401 million dairy and beef cattle and produces approximately 11% of the world's milk supply. The distribution agreement provides Biogenesis Bagó with exclusive distribution rights for Neonorm Calf in Argentina, Brazil, Paraguay, Uruguay, and Bolivia.

72


 
 

TABLE OF CONTENTS

Scours Market Opportunity

Scours refers to watery diarrhea in production animals, including dairy calves, which results from infectious agents that cause the secretion of ions and water into the intestinal lumen. Animals with scours may experience severe dehydration and electrolyte imbalance, which can lead to renal insufficiency, nutritional deficiencies, lower production in dairy cattle and even death. Current treatments include fluid and electrolyte replacement, continuous milk feeding, antibiotics (for calves with systemic involvement (e.g., fever) with an increased risk of bacteremia), non-steroidal anti-inflammatory drug therapy and vaccines.

According to the USDA, there are approximately 9.2 million milk-producing dairy cows in the United States. We estimate from USDA sources that there were over 11 million dairy calves born in 2013. Dairy cows are continuously bred, both to maintain lactation and to produce dairy calves to maintain the herd. Dairy heifer calves are separated from their mothers shortly after birth and raised on commercial milk replacers until weaned at about 60 days of age. Male dairy calves are typically sold into the beef industry.

Almost one in four, or 23.9%, of dairy heifer calves had diarrhea or other digestive problems according to the USDA Dairy 2007 study. Scours, diarrhea or other digestive problems are responsible for more than half of all preweaned heifer calf deaths, and result in supportive care and treatment costs, impaired weight gain and long-term reduction in milk production. Of dairy farm operations surveyed in the Dairy 2007 study, 62.1% used antibiotics for diarrhea or other digestive problems, including preweaned heifer calves not reporting diseases or disorders. Of preweaned heifer calves that were affected by diarrhea or other digestive problems, almost three-fourths, or 74.5%, were treated with an antibiotic.

Our Solution

We believe Neonorm is an ideal solution to improve gut health and normalize stool formation in dairy calves suffering from scours. Neonorm has been formulated and clinically tested to improve gut health by specifically addressing the normalization of stool formation and ion and water flow in the intestinal lumen of newborn dairy calves with scours. Like Canalevia, Neonorm acts locally in the gut and is minimally absorbed systemically. It does not alter gastrointestinal motility, has no significant effects on normally functioning intestinal ion channels and electrolyte or fluid transport, and has no side effects different from placebo. As a result, stool formation is normalized in a short period of time, weight loss is mitigated, supportive care costs and rehydration therapies such as ORS are reduced, and the risk of mortality is minimized.

Clinical Data

Overview.  Neonorm demonstrated a statistically significant reduction in the severity of watery diarrhea and reduced daily incidence of watery diarrhea in a double-blind, randomized, placebo-controlled challenge study in newborn dairy calves with scours completed in May 2014. Neonorm also showed improvements in average daily weight gain and mortality. Scours-associated financial losses to the dairy industry arise not only from dairy calf mortality and impaired growth, but also from costs associated with veterinary care, medications and incremental labor to treat the sick dairy calves. The lifetime productivity for dairy cattle is influenced by early development and weight gain. Dairy calves with impaired preweaned growth may produce less milk over their lifetime. We believe our results demonstrate that the use of Neonorm in calves with scours can improve the economic return to dairy producers.

Study Protocol.  The study enrolled 39 healthy newborn dairy calves, randomized into two groups. The calves were all challenged with enterotoxigenic E. coli, the most common bacterial cause of scours in dairy calves, in a controlled clinical setting. Clinical signs of watery diarrhea generally occurred 12 hours after the challenge. The first dose was administered to all calves at 12 hours. Additional doses were administered every 12 hours until hour 72 for a total of 6 doses. Twenty calves received Neonorm and 19 calves received placebo. Consistent with standard industry practice, calves with watery diarrhea were treated for dehydration with oral rehydration therapy or intravenous fluid. We examined the calves twice daily for 10 days as well as at days 15 and 25 for fecal consistency, dehydration, appetite, attitude and other adverse health disorders. In addition, all calves were weighed on the first day of the study and 25 days later. For all measurements except weight, we believe that days 1 through 8 to 10 following the E. coli challenge (i.e., 4.5 and 6.5 days after treatment is concluded) represent the most relevant timeframe to evaluate the treatment effect of Neonorm or placebo. After that period, other digestive ailments unrelated to the challenge may occur during the preweaning development of the calves. While most calves that do not die will eventually return to normal

73


 
 

TABLE OF CONTENTS

stool formulation after suffering from scours, studies have shown that the weight loss as a result of scours has a detrimental effect on lifetime milk productivity of the dairy cow. Thus, we believe resolving scours in the first ten days after onset can have positive economic impacts.

The study's goal was to evaluate the severity and incidence of diarrhea, mortality and weight gain. In this study, the “p” values were statistical calculations to determine whether the effects of Neonorm were significant in comparison to placebo based on pre-specified statistical targets. We specified that any result less than p=0.05 would be significant. The fecal scoring chart used in the study was the University of Wisconsin Calf Health Scoring Chart, modified to track a subset of the most severe, and potentially fatal, watery diarrhea, which we scored as 4, as set out in the following chart.

Modified University of Wisconsin Calf Health Scoring Chart

     
  Score   Calf Feces Description   Potential Treatment

Normal 0 Normal, formed pasty feces None
1 Semi-formed pasty feces
Moderate Diarrhea 2 Loose, watery feces but stays on top of bedding Oral electrolytes
Severe Diarrhea 3 Watery feces with mucus, sifts through bedding Oral electrolytes, intravenous fluids,
and antibiotics
4 Diarrhea with blood

Reduced Fecal Consistency Score.  Neonorm significantly decreased the severity of watery diarrhea over the course of the 25-day period (p=0.0133) and increased the speed of improvement in watery diarrhea, as shown by the decrease in average daily fecal scores. Quantitative analysis of fecal samples collected through day 10 further supported these results. Neonorm significantly increased the average fecal dry matter content, an objective measure of fecal consistency, compared to placebo (p=0.03). The multivariate analyses used each fecal consistency score, or fecal dry matter measure, data point collected for each animal in calculating statistical significance. The following chart sets out the average fecal consistency score over 25 days.

Average Daily Calf Fecal Scores

[GRAPHIC MISSING] 

Reduced Daily Incidence of Watery Diarrhea.  Neonorm decreased the daily incidence of watery diarrhea, which was defined as an average daily fecal consistency score of two or greater, over the 25-day

74


 
 

TABLE OF CONTENTS

period (p=0.0545). On day eight, there were no calves that had been administered Neonorm with an average daily fecal score of two or greater, whereas 37% of calves administered placebo had an average daily fecal score of two or greater.

Daily Incidence of Watery Diarrhea

[GRAPHIC MISSING] 

Proactive and Reactive Use.  We believe the data support both the proactive and reactive use of Neonorm. In order to standardize the treatments, the first dose was administered 12 hours after the challenge with the bacteria. At that stage, some calves showed signs of watery diarrhea and others were at an earlier phase of the disease pathogenesis. We anticipate that Neonorm would be used in a comparable manner in dairy operations to dose sick calves reactively, and dose other calves proactively before development of clinical symptoms. We are further evaluating proactive use of Neonorm in field studies on commercial dairy farms.

Duration, Mortality and Weight Gain.  Calves that were administered Neonorm showed a reduced average duration of watery diarrhea as compared to placebo. While this study was not powered for statistical significance, we plan to use our observations in this study to power our planned field studies to seek statistical significance on these endpoints. The following chart shows the average duration of watery diarrhea, as defined by a fecal score of two or greater, and severe watery diarrhea, as defined by a fecal score of three or greater, of calves administered Neonorm as compared to placebo. Measurements were taken twice daily and each case of watery or severe diarrhea counted for one half day of duration. Calves that died during the study were measured based on their most recently available fecal score until day 25.

   
  Average Duration of
Watery Diarrhea
(Score 2 and above)
  Average Duration of
Severe Watery Diarrhea
(Score 3 and 4)
Administered     3.03 days       1.10 days  
Placebo     5.16 days       2.42 days  

After 25 days, only one calf died in the group administered Neonorm as compared to four calves in the placebo group. In addition, the calves administered Neonorm gained an average of 281g/day compared to 219g/day for the control group (62g difference per day). The average difference over the 25 day study period was a weight gain of 15.5 pounds for calves administered Neonorm, compared to 12.1 pounds for those receiving placebo, which is a relative improvement of approximately 28% during the period. While this study was not powered for statistical significance for these endpoints, we plan to use our observations in this study to power our planned field studies to seek statistical significance on weight gain. The lifetime productivity for dairy cattle is influenced by early development and weight gain. Preweaning nutrition has a significant effect on mammary gland development, the timing of puberty and the age at which the dairy cow first produces milk.

75


 
 

TABLE OF CONTENTS

To support our commercial launch, we are also conducting field studies of Neonorm involving approximately 700 preweaned dairy calves in total at the following leading veterinary academic institutions: Cornell University, Tufts University and in collaboration with our distributor, Animart. We anticipate announcing data from these studies by the second quarter of 2015. If the results confirm our existing data, and based on current industry cost standards, we estimate that Neonorm could save approximately $110 on average per treated dairy calf presenting with scours, accounting for costs to replace the dairy calf, costs of supportive care and improvement in future milk production. We believe that dairy farm operators currently target approximately $3 of expected savings for every $1 spent on animal health products. We believe our study demonstrates the potential for Neonorm to be a novel first-in-class product that provides health and economic benefits to the dairy industry.

Commercialization Plans

We recently launched Neonorm in the United States under the brand name Neonorm Calf. In July 2014, we commenced initial launch activities and met with key opinion leaders at a dairy industry conference, and in August 2014, we entered into our first regional distribution agreement with Animart, Inc. for the Upper Midwest region. In September 2014, together with this distribution partner, we launched Neonorm Calf at the World Dairy Expo, which launch focused on key dairy states including Wisconsin, Minnesota and Iowa. In September 2014, we entered into an agreement with Vedco, Inc., a national master distributor, who also distributes prescription products for the companion animal market.

While Animart, Inc. will focus their distribution primarily to dairy farm operator customers in the Upper MidWest region, Vedco, Inc. will distribute Neonorm Calf to other distributors nationwide, who then sell to their veterinary clinic customers. We launched Neonorm Calf nationwide in early 2015. According to the USDA, ten states account for approximately 75% of the U.S. dairy market, with three primary geographic regions: the North East, the Upper Midwest and California, as illustrated by the following map.

[GRAPHIC MISSING] 

Workforce Needs in Veterinary Medicine estimates that there are approximately 1,000 dairy veterinarians engaged in the food-animal industry in the United States. We believe a focused direct sales force initially targeting large commercial dairy operations, and potentially in conjunction with regional distribution partners,

76


 
 

TABLE OF CONTENTS

can be effective in reaching this market. We plan to establish an active ongoing industry education and outreach program. We expect to publish our clinical data in peer reviewed journals and to present at conferences attended by members of the dairy industry.

We also plan to explore international expansion opportunities for Neonorm Calf where appropriate. We recently signed a distribution agreement with Biogenesis Bagó, a large veterinary biotechnology company in Latin America, a region that contained approximately 401 million dairy and beef cattle in 2009 and produces approximately 11% of the world's milk supply. The distribution agreement provides Biogenesis Bagó with exclusive distribution rights for Neonorm Calf in Argentina, Brazil, Paraguay, Uruguay, and Bolivia.

Neonorm Line Extensions

We believe that due to Neonorm's mechanism of action and our data in preweaned dairy calves, we will be able to develop and commercialize species-specific formulations of Neonorm for the estimated approximately 22 million beef calves in the United States, and multiple other animal species, such as horses, goats and sheep