Expert Financial Analysis and Reporting

Investment Summary

At long last, the exciting new product potential of Antares is becoming a commercial reality. A very significant milestone for Antares was the approval gained by its distribution partner Teva in 2Q, 2016 for an AB rated generic to Imitrex (sumatriptan). This was the first of four AB rated generics that are known to be in development by Antares and Teva. There are likely to be more. I estimate that this product will contribute about $10 million to revenues in 2018 and perhaps $6 million to pretax profits.  This has been followed by the launch in March 2018 of the Makena auto-injector that uses Antares technology and the Teva/ Antares AB generic to EpiPen was approved on August 17, 2018.

I estimate that Teva’s peak sales of the AB generic to EpiPen could reach $200 million (although it could be more) in 2020 and contribute $17 million of pretax income to Antares. Based on a 21% corporate tax rate and 157 million shares outstanding, it could contribute $0.09 per share in 2020.

I have just written an extensive report on AMAG which focused on the potential for the Makena auto-injector. The consensus Wall Street estimate appears to be $175 million of sales of the auto-injector in 2019. I estimate that this could lead to $14 million of pretax profits for Antares. Based on a 21% corporate tax rate and 157 million shares outstanding this could contribute $0.06 per share. I also came up with an optimistic case in which the Makena auto-injector could reach $293 million of sales and a disappointing scenario in which sales would reach $142 million. The respective EPS contributions at a 21% corporate tax rate would be $0.10 and $0.05. I lean more toward the optimistic scenario than to consensus estimates.

Antares has only provided general guidance on the potential royalty rates and profits from injector sales that it will receive on the AB generics and the Makena auto-injector. I have tried to be conservative with my estimates so there could be upside to my numbers.

The next major product approval looming is Xyosted which has a PDUFA date of September 29, 2018, which Antares calls its most important asset by far. Recall that Antares received an unexpected Complete Response Letter in October 2017. It is unclear as to why the FDA issued this CRL, but it did not request any new clinical trials. Antares refiled the NDA and the FDA quickly accepted the filing leading me to  have a high expectation for approval at the PDUFA date. The pharmacokinetic profile for Xyosted is the best of all the testosterone products that I am aware of and testosterone replacement is all about pharmacokinetics.

I think that Xyosted could be best in class for testosterone replacement products and has potential sales of several hundreds of millions in the US; the biggest selling testosterone product AndroGel reached $650 million before being genericized. However, this will require significant investment spending; I estimate that the launch could cost in excess of $50 million in 2019 based on what I seen with other new products. AMAG has said that the launch of its new product Intrarosa will cost $80 million.

Antares has indicated that it intends to participate in the marketing of Xyosted, but hasn’t confirmed whether it will go it alone or seek a partner. If I were CEO, I would seek a partnership with a larger company. There are likely a large number of interested partners with AbbVie being at the top. It previously dominated the market with its topical product AndroGel, which has gone generic. Such a deal would likely include a substantial upfront payment and covering a significant part of the launch expense. For example, Antares might focus on endocrinologists and the partner on general practitioners and other specialties. I would think that such discussions are probably already underway and contingent on approval.

The pipeline beyond these three products is also impressive.

• AB rated generic to Byetta (exenatide) partnered with Teva: Legal challenges have been resolved and introduction is contingent on FDA approval which is difficult to predict. It could be soon or drag on as the FDA is very backed up on generic approvals. This is a modest opportunity, probably less than Imitrex (sumatriptan)
• AB rated version of Forteo (teraperatide). Teva has settled litigation with Eli Lilly in the US and needs to obtain FDA approval. A US launch is possible in 2H, 2019. Unlike with Imitrex and EpiPen, Teva will be launching this product in foreign markets. This is a major opportunity, perhaps more than twice as large as EpiPen
• Antares just announced that it has reached an agreement with Pfizer to develop an undisclosed product. What is interesting about this deal is that Pfizer has a substantial in house ability to make syringes and chose to go outside with Antares. This highlights the uniqueness of Antares’ auto-injector technology. If so, there are likely to be many, many such deals with big pharma in the future.
• Antares will likely submit an IND in 2H, 2018 for the third product that it will develop on its own. This follows Otrexup and Xyosted.

Investment Recommendation

I am obviously reiterating my Buy recommendation. If I were to ignore Xyosted for the moment, I think that the profit contributions from the AB generic to EpiPen and the Makena auto injector could lead to corporate EPS of around $0.20 or more in 2019. Based on the existing pipeline, particularly the AB rated generic to Forteo, there could then be explosive growth in 2020. And of course, the pipeline will almost certainly continue to expand rapidly, witness the Pfizer deal. In this scenario, I judge that it would be possible that the stock could sell at 20 to 30 times earnings in 2019 and result in a price target of $4 to $6.

But, how do we think about Xyosted? If I am correct, this is a blockbuster product with several hundreds of millions of dollars of sales potential whose value is probably meaningfully greater than the currently approved products and the known products in the pipeline. However, if Antares goes it alone, the launch expense of perhaps $50 million would more than offset profits of the marketed products in 2019 and might require an equity offering. On the other hand, a strong partnership could easily fund much of the cost of the launch and meaningfully reduce the loss incurred by Antares. I would be an enthusiastic buyer in either case, but I think the market might be concerned by the go it alone strategy and would be much more enthusiastic about a partnering deal. At this point in time, I am waiting for approval of Xyosted and plans for marketing before trying to estimate EPS for 2019 and 2020.

Thoughts on the AB Generic to EpiPen

Like many Antares investors, I was beginning to question whether the Teva/ Antares AB generic would ever be approved. In 2012, Teva settled litigation with Mylan that allowed the generic to come to market in 2015. However, in January, 2015, Mylan filed a Citizen’s petition that delayed the approval and then in February 2016, Antares received a Complete Response Letter. Teva and Antares filed a response and Teva originally suggested approval was likely in 1H, 2017. As time went on with no approval, it seemed possible that some problem could prevent approval. However, on August 17, 2018 the approval finally came through. This has been an exasperating experience for investors. The FDA delay for approval of this important generic drug has not been explained and one has to wonder why it wasn’t approved in 2015.

Mylan does not breakout sales of EpiPen, but based on reports I have heard, US sales are about $650 million. In most cases, a first generic is followed by a number of others in a period of a year or two, which leads to significant price erosion. This is not likely to be the case in the EpiPen situation. I am not aware of any other AB generics that are in late stage development or have been filed with the FDA. Given, the difficulty that Teva and Antares encountered in gaining approval, there may not be other generics for some period of time. Other manufacturers can and have introduced a comparable product that delivers epinephrine, but they can not be substituted for EpiPen. This is no easy task as we have seen with the struggle of Teva and Antares. This suggests that there will not be multiple generics and steep price competition.

The EpiPen market will likely be shared by two companies and it is not in the self-interest of either to compete aggressively on price. Neither Mylan nor Teva would benefit from this strategy. My expectation was that Teva might come in at a 25% price discount and capture 40% of the market. However, news reports have indicated that there is a manufacturing issue for EpiPen that is limiting shipments so that perhaps my expectations could be exceeded. For the time being, I am staying with these estimates which indicate that Teva could achieve peak sales of about $200 million, probably by 2020.

Antares has not given specific guidance on its share of the economics on the AB generic to EpiPen.  However, general statements lead me to estimate that based on $200 million of sales by Teva that Antares will receive a royalty of about 8% of sales or $16 million that goes straight to the pretax line of Antares. In addition, it could receive about 2% of Teva sales for injector sales. These have a gross margin of 50% and have no selling expense so that so that the profit contribution is 1% of sales or $2 million at the pretax line. All in. Antares could book $18 million of pretax profits in 2020.

Thoughts on the Makena Auto-Injector Potential for Antares

I just completed a detailed report on the potential for the Makena auto-injector called "Trying to Project 2019 Sales for the Makena Franchise" which should read to understand my reasoning as the situation is extremely complex. The Makena franchise was close to $400 million at its peak based on intramuscular dosing. I believe that the Makena sub-cutaneous auto-injector is significantly superior for the patients and more cost effective for the physician. In my opinion, if price were not an issue, virtually all patients would receive the auto-injector.  However. Makena costs managed care about $6,000 and Medicaid $3,000 for a course of treatment so that price might be an important factor in some cases. A generic to the intramuscular formulation was introduced in July 2018 and more are expected by the end of the year. There is no generic competition to the auto-injector and is not likely to be for many years. Obviously, AMAG is attempting to switch as much of the franchise as possible to the auto-injector

The Wall Street consensus for Makena auto-injector sales in 2019 appears to be about $175 million. In my report, I came up with an optimistic scenario in which sales reach $293 million and a disappointing case that results in $142 million of sales. I estimate that Antares will receive a royalty of about 7% of sales and that sales of injectors to AMGA amount to 2% of Makena sales and has a gross margin of 50% so that the pretax profit contribution is 1% of sales. Under these three scenarios, the pretax profit contribution to Antares in 2018 could be as follows:

• Wall Street consensus sales of $175 million: The pretax profit contribution would be $14 million. Assuming a 21% corporate tax rate and 157 million shares outstanding this would contribute $0.06 per share.
• Optimistic case of $293 million: The pretax profit contribution would be $23 million. Assuming a 21% corporate tax rate and 157 million shares outstanding this would contribute $0.10 per share.
• Disappointing case of $142 million: The pretax profit contribution would be $11 million. Assuming a 21% corporate tax rate and 157 million shares outstanding this would contribute $0.05 per share.

Potential of Two Known Products in the Pipeline

Antares has partnered with Teva to develop an AB rated generic to Byetta (exenatide). A legal settlement has been reached with Astra-Zeneca so that marketing in the US can begin as soon as the sNDA is approved. The FDA has been very slow on approving generics so that Teva has no clear idea on when approval might come. This is a modest opportunity, probably less than Imitrex (sumatriptan).

Antares has also partnered with Teva to develop an AB rated generic to Eli Lilly’s Forteo (teraperatide).  Teva has settled litigation with Lilly, but the FDA has not yet approved the sNDA. Teva has not spoken on the potential timing of the launch, but Lilly has indicated that it does not expect a generic in the US before 2H, 2019.

In Europe, there is no such thing as an AB rating that allows a generic to be substituted when a prescription is written for the brand name, but there is something similar called therapeutic equivalence. Teva has received such approval in 17 European countries, but has not settled litigation with Eli Lilly that would allow marketing to begin.

This is a giant opportunity for Teva and Antares, much bigger than EpiPen, as Forteo does over $900 million of sales in the US and perhaps $700 million in Europe. Also, Antares has indicated that royalties as a percent of sales will be meaningfully higher than on the other AB generics and Makena.