Expert Financial Analysis and Reporting

• The FDA does not appear to be concerned about cardiovascular risk with testosterone replacement products so this is a major positive.
• The FDA is asking the panel to consider if these products are used too much in unapproved indications.
• The testosterone replacement market has shrunk significantly in 2014 due to the cardiovascular safety issue. There could be continued shrinkage in 2015.
• This market is not going away and I see opportunity for injectable testosterone product sales reaching $400 million and Antares’ QST accounting for $50+ millions of product sales by the latter part of this decade.
• QST is a major product opportunity for Antares and I remain a buyer.

FDA Briefing Documents Released

The FDA briefing documents were released for the September 17^th FDA advisory panel meeting on testosterone replacement products. Testosterone replacement gel products like AbbVie’s (ABBV) Androgel and Auxilium’s (AUXL) Testim became huge sellers in the last decade and there have been a number of new competitors, both gels and injectables, entering the market and in the pipeline stage. Antares’s (ATRS) QST is one of the injectable products in the pipeline and is important to the investment outlook for Antares.

The meeting was called to discuss issues about cardiovascular safety as I discussed in my last report on Antares. Prior to the meeting the FDA had signaled that it was not that concerned with cardiovascular issues and the briefing notes confirm this. The agency said that recent studies suggesting cardiovascular risk do not provide convincing evidence of risk. This is obviously a substantial positive for these products

However, the FDA also asked the panel to consider whether testosterone products are being used appropriately. Testosterone replacement is approved for hypogonadism, which is abnormally low testosterone resulting from illness or injury. However, most of their use is for boosting testosterone levels which begin to decline as men reach 40 to 50 years of age. Much of the usage of testosterone products is used in men of this age and older, in the belief that this will improve muscle strength, virility and weight gain and reduce fatigue. The FDA states that there are no reliable studies that demonstrate testosterone replacement is of benefit in these conditions and asks the panel to consider whether use for these conditions is appropriate. One of the questions asked the panelists is whether prescribing information should be tightened to reflect this.

Testosterone Replacement Market

Testosterone replacement therapy was popularized as “the low T” market and as a result of direct to consumer advertising sales were surging until recently. In 2012, sales were about $2 billion and were increasing at 25+% per year suggesting that sales could surpass $4 billion by 2017. Injectables accounted for about 30% of the market. Since then, the controversy over cardiovascular side effects has taken its toll.

In April 2014, Auxilium (AUXL) reported very disappointing sales for Testim, one of the market leading gel products, and warned that prescriptions for testosterone gel products could decline 25% in 2014. AbbVie’s category leading product Androgel is also showing this type of sales decrease. These declines have primarily been caused by the cardiovascular safety issue and the FDA now seems to be saying that this is not a  concern based on recent studies. However, the FDA may still ask manufacturers to perform a long term study to resolve this.

The issue as to whether testosterone replacement products are being inappropriately used has been a hot issue in the medical community for some years. The cardiovascular risk issue appears to have been the catalyst to cause a significant decrease in off-label prescribing. Investors must now figure out the significant reduction in the concern of cardiovascular safety balances out against the concern that the FDA has raised that the products are used significantly off-label in unapproved indications such as improving muscle strength, virility and weight gain and reducing fatigue. Let me take a stab at the possible effect.

While testosterone replacement products do not have clear and objective evidence that they are effective outside of treating hypogonadism, there is certainly a lot of conviction among physicians and users that this is the case. While unquestionably, aggressive advertising has had a major effect on the growth of the market, I think that this could not have been the sole reason. The market believes that based on real life experience that the products are effective for improving muscle strength, virility and weight gain and reducing fatigue. I think these products are effective in these unapproved indications.

So what is the near to intermediate term outlook for the market? I think that the FDA may take some action that results in much less aggressive advertising that can have a negative effect on the overall market. I do not think that the FDA’s firmly expressed lack of concern on cardiovascular safety will offset this. Hence, I think that we will see a continued shrinkage in the market in the near term.

US sales of Androgel were $1.1 billion in 2012, $1.0 billion in 2013 and are projected to decrease to $725 million in 2014. US sales of Testim were $291 million in 2012, $206 million in 2013 and are projected at $144 million in 2014. These are the two dominant gel products and their combined sales are decreasing from $1.2 billion in 2013 to $870 million in 2014. I do not have good numbers on the injectables part of the market, but I estimate that sales were about $400 million in 2013 and are somewhat flattish in 2014.

I think that there may be continued shrinkage in the gel part of the market in the remainder of 2014 and into 2015. I would guess that we will also see shrinkage in the injectables although not nearly to the degree as the gels. However, I do not think this market will go away. As I said, the market does believe that these products are effective in improving muscle strength, virility and weight gain and reducing fatigue.

Implications for Antares’ QST

What does this mean for QST? Clearly the market opportunity has been diminished from what was expected in 2013. However, it has not vanished. We are likely looking at an injectable market of $300 million to $400 million in 2016 when QST enters the market. I would think that the market would have stabilized by then and might even be growing. So often in my career I have seen product categories meet challenges such as these and recover and grow and I think this will be the case with testosterone replacement drugs. This feeling is based on my judgment, which is not supported by objective clinical trial data, that these products do help older men improve muscle strength, virility and weight gain and reducing fatigue and that there will be a continuing demand.

I look at QST as a $50 to $100 million opportunity for Antares in the latter part of this decade. This constitutes a major product opportunity for a company the size of Antares. There was a time when expectations reached as high as $200 million or more, but this is not likely. I believe that these lower expectations have been priced into the stock and I continue to recommend Antares. Please follow this link to a more detailed discussion of Antares.