Expert Financial Analysis and Reporting

Investment Thesis

Finally, the FDA comes through with the approval for Makena SC. My Buy recommendation on Antares is based on an extensive and promising pipeline which I wrote about in my August 17, 2017 report This Small, Emerging Biotechnology Company Is Poised for Explosive Growth Based on Five Major New Product Introductions by 2020. Like Makena SC, since then I have been frustrated by regulatory delays on the other four products, but I consider approval of each as a matter of when rather than if. I continue to recommend the stock. My year end price target is $4.00+.

I was looking for approval of Xyosted in October 2017, but Antares received a CRL instead. Given the strong data supporting the 505 (b) 2 regulatory filing, this was a shock. We are currently awaiting a response from the FDA that will clarify the regulatory status and possible approval timeline. My best judgement is that Xyosted could be approved in November 2018. See my report Update on Xyosted for more detail.

Teva has suggested that the AB rated version of EpiPen could be approved in early 2018. At one point, there was an expectation of approval in 2016. The FDA has been very slow to act on this regulatory filing in large part due to maneuverings on the part of EpiPen’s marketer, Mylan.

The US launch of the AB rated version of Byetta could have occurred in October 2017 if the FDA had granted approval; legal issues have been settled. The FDA has been very slow on approving generics and this probably accounts for the product not yet being approved.

Teva could launch an AB rated version of Forteo (teriparatide) in some European markets in 2018. We are waiting to hear.

The approval of Makena SC is much welcomed. This could be a major driver of profits for Antares. Makena IM achieved about $385 to $390 million of sales in 2017 and the goal of AMAG is to convert all of this into Makena SC. I am waiting for some details on launch metrics before making sales projections, but my sales guess is that we could see $50 to $100 million in 2018 and $200+ million in 2019. I emphasize that this is a guess.

I estimate that at $100 million of Makena SC sales, the contribution to Antares EPS will be $0.05; at $200 million, $0.11; at $300 million, $0.17 and at $400 million, $0.24.Please refer to the body of the text for assumptions underlying these estimates.

Partnering with AMAG Pharmaceuticals on Makena SC (progesterone)

AMAG just received a long anticipated approval for a subcutaneous dosage form of Makena (hereinafter referred to as Makena IM), an injectable progesterone product that is indicated for the prevention of pre-term birth for women who in an earlier pregnancy delivered prematurely. It is currently given as a deep intramuscular injection that can be quite painful. Antares collaborated with AMAG to develop a subcutaneous dosage delivered with the same injection device used with Xyosted. This device was specifically engineered to deliver highly viscous solutions like testosterone and progesterone using a fine gauge needle.

Makena IM sales have grown rapidly since AAMG acquired the product in 2014. Sales for only a part of the year were $23 million in 2014.From there sales rapidly expanded to $252 million in 2015, $334 million in 2016 and roughly $385 to $390 million in 2017. In 2017. Makena IM had about a 50% share of treatments in its market. Formulations of progesterone prepared by compounding pharmacies had 20%. The remaining 30% was from patients treated with therapies not in accordance with guidelines and untreated patients. Makena IM market share was 33% in 2015, 42% in 2016 and 50% in 2017. AMAG’s objective is to switch all patients from a weekly intramuscular injection to a weekly subcutaneous injection. Let’s look at some of the issues that will be important in the conversion.

Patients Will Much Prefer Makena SC over Makena IM

This device used with Makena SC was developed by Antares. It allows the use of a small 27 gauge needle so that the care giver can inject just beneath the skin. The current weekly injections of Makena IM require a deep intramuscular injection with a larger 21 gauge needle that is quite painful. The average pregnant woman now on average injects about 14 times.  The auto-injector used with Makena SC is virtually pain free. In one user test that ranked pain on a scale from 0 (lowest) to 100, the auto injector came in at about 4. I have tried the injector (using saline) and can assure you that injection is innocuous when compared to intramuscular injections.

Makena SC Viewed from a Caregivers Standpoint

From the caregiver/ physician standpoint, the simpler administration procedures involved with Makena SC will reduce costs and time involved in administering the drug. Administration of Makena IM takes up a lot of office staff time and is not a high value reimbursement for the physician. They are likely to welcome Makena SC. Another interesting possibility is that Makena SC could potentially be given at a pharmacy instead of a physician’s office.

Potential Generic Competition to Makena IM

Makena IM has been protected from potential generic completion by Orphan drug exclusivity; this expires in February 2018. At the JP Morgan conference in early January 2018, AMAG management said that it does not expect generic completion until late 2018 at the earliest. Prior to 2017, Makena was sold in a five pack formulation and used a preservative. Since then the Company has converted much of its sales to a single dose, preservative free vial which is a purer formulation. It is probable that generic completion will be to the five pack, preservative containing formulation. If and when a generic version to Makena IM is launched, AMAG will counter with an authorized generic.

AMAG also says that there really isn’t any reason from the perspective of the patient and physician to move from Makena IM to a generic. Reimbursement procedures are established and this is not a hassle for physicians. Also, AMAG’s co-pay assistance programs aim to make out of pocket expense (if any) affordable for patients.

No Generic Competition to Makena SC for Many Years

Makena SC is protected by patents covering the injector that was developed by Antares; the last of these lasts until 2026. Other companies can develop a subcutaneous dosage form if they can develop an effective device that doesn’t infringe Antares patents. They would then have to go through a 505 (2) b approval process requiring pharmacokinetic studies. If approved, this potential competitor would be marketed as a branded product, not a generic. There is almost no chance for a generic competitor until the Antares patents run out and I think a branded competitor would be several years away if at all.

Reimbursement Issues

Based on physician surveys, AMAG believes that Makena SC can potentially capture a very large share of the market if it is priced at parity on a per dose basis with the single use Makena IM vial. Management believes that it will immediately be reimbursed by most payors. It will not have to go through the slow process of gaining reimbursement that plagues almost all new product launches. This should be a big positive for conversion of Makena IM sales into Makena SC

As long as there is no generic available, payors would likely be indifferent to Makena IM or Makena SC assuming price parity. The question is when a generic to Makena IM is available, how hard will managed care push physicians to use the generic. My guess is that because this is a small market in terms of sales, managed care will not push hard to make pregnant women go through the greater pain associated with the intramuscular injection. However, cash strapped Medicare programs might be more inclined to go with the generic.

Issues on the Launch

There are a lot of questions covering the launch that will be coming up later this quarter. I can frame the questions, but not as easily the answers.

• Will current patients now receiving the IM dosage form switch to Makena SC? Probably not. Physicians would be hesitant to switch midway through treatment with Makena IM. It is hard for me to imagine that switching to Makena SC would have any negative effect. However, this is unproven and if a switch were made and something happened to the pregnancy, the physician could be vulnerable to a lawsuit.
• The patient population for Makena SC in 2018 will be patients beginning treatment. The challenge for AMAG is to make physicians and patients aware of the availability of Makena SC and its meaningful advantages. This is something that AMAG is very good at.
• Are there any reimbursement issues that would slow the launch? Probably not, but payors can definitely put up hurdles if they choose to.
• When will a generic be launched? The FDA has been very slow at generic approvals so approval could be later than late this year. No idea.

Potential for Antares

Without being specific, Antares has indicated that the deal with AMAG is quite similar to the Teva transactions. I think that Antares will get a high single digit to low double digit royalty on sales. In addition, Antares is making the device and will package the product to provide a fully commercial product. This will be done at cost plus a markup which I estimate will amount to 3% of Makena sales. I further estimate that the gross profit margin on these sales will be roughly 50%. The economic terms are summarized in the following table.

The following table calculates the contribution to EPS for Makena SC sales levels of $100, $200, $300 and $400 million. The royalty rates and gross profit contribution to Antares are in accordance with the above table. Other key assumptions are:

• Antares will not incur any costs other than for manufacturing the injector
• Royalties and manufacturing profits drop straight to pretax income
• Because of tax loss carry forwards, ATRS will probably not pay any taxes for some time. However, in this calculation I am assuming a 21% tax rate