Expert Financial Analysis and Reporting

Introduction

I have heard encouraging comments on my recently announced approach of doing shorter, less pedantic reports on new companies. This is so much so that I am extending this approach to companies that I have actively covered for some time and in this case Antares Pharma.

For a Martian with no knowledge of Antares, just reading the press release on 2Q, 2019 would perk their outer worldly interest. Revenues in the second quarter increased by 91% to $$27.1 million and full year sales guidance was increased from a range of $95 to $105 million to $100 to $110 million. This implies an increase of 53% to 73%  in full year sales and a 35% to 63% increase in 2H, 2019 sales. This is attention getting momentum for both Martian and non-Martian investors.

One striking thing about the 2Q report is that the pretax operating income loss in the quarter was only $1.6 million. Antares is investing heavily in the Xyosted launch as evidenced by SG&A expenses of $15.2 million in 2Q, 2012 versus $7.5 million last year’s 2Q. All or more of this $7.7 million increase is due to Xyosted launch expenses that could have reduced operating income by $4 million or more. I expect this Xyosted associated loss to diminish and then turn to a profit in the not too distant future.

Turning to Xyosted

Xyosted sales in 2Q, 2019 were $$4.623 as compared to sales of $703,000 in 1Q, 2019 which was the first quarter for commercial sales. In my published report of June 12, 2019 that contained my detailed model on Xyosted, I had estimated that sales would be about $3.1 million so this was better than I and Wall Street analysts expected. However, information provided by Antares suggested that my model has major flaws that need to be corrected.

First of all, my assumption for the realized price of Xyosted is too high. The list or WAC price is $475 per Rx and I had been assuming that the actual price after discounts and rebates would be about $300. Wrong. Management is suggesting that the net price is a little greater than 50% of the WAC price or $238+. Importantly, the net price is negatively affected by free drug that sometimes accompanies the first prescription; this will eventually be phased out. Management didn’t give guidance, but remarks during the call suggested that the net price could eventually rise to perhaps $285 or 60% of WAC. I am going to drop the price assumption in my model to $250 for the balance of the year.

But even with my too aggressive price assumption, the revenues were better than expected. The obvious conclusion is that my prescription assumptions based on estimates from the prescription audit service Symphony might have been too low. Management confirmed this and explained that it is difficult for Symphony to accurately capture Rx trends early in the launch as their estimates are based on a sample of drug stores, not the entire universe. Management says that its sales to distributors are better than what is indicated by the Rx numbers.

Aside from prescriptions being understated, another possible reason for the better than expected sales number could have been that distributors’ inventories built in the quarter. Management nixed this possibility by saying that distributor inventories relative to the sales run rate were higher at the end of the first quarter than the second. If so, distributors might have to increase stocking levels relative to sales in the third quarter. At some later date, I will update and publish a new sales model for Xyosted.

Street estimates for Xyosted for FY 2019 have been about $16 to $17 million. First quarter sales were $703,000 and second quarter sales were $4.623 million. Even with no increase in sequential sales for 3Q over 2Q and 4Q over 3Q full year sales would come in at $14.6 million. Of course, I would be expecting strong sequential growth for both 3Q and 4Q. I only raise this issue to make the point that Street estimates for Xyosted sales in FY 2019 are likely to go up from $16 to $17 million. I am working on a new sales model for Xyosted and I am pretty sure that the sales estimate will be greater than the $16 to $17 million where I have been.

One question asked by an analyst was where are the sales coming from? I would have assumed that most of the sales were coming from patients switching from the painful intramuscular formulations. Wrong. Management says that about 50% of Rxs are from patients not previously on a testosterone supplement product. This suggests that doctors view Xyosted as a first line therapy which is quite positive.

Another analyst question related to step edits in which managed care requires that patients first try a generic intramuscular or transdermal product and only be switched to a new drug like Xyosted if these products are ineffective or can’t be tolerated. Management pointed out that the majority of treated patients are already on a generics. Hence, if Xyosted is prescribed the step edit has already been gone through.

The early signs of the Xyosted launch are very encouraging and points to this being a big product. Street consensus estimates are that peak sales (perhaps five years out) will reach $200 million. Take the over on this.

AB Rated Generic to EpiPen

Royalty sales in 2Q, 2019 were $5.754 million versus 1Q, 2019 royalties of $$3.953 million. Almost all of these royalties come from Makena subcu and the AB rated generic to EpiPen. Royalties for each were not broken out but most of the sequential increase was attributed to EpiPen. AMAG reported that Makena subcu had sales of $41.0 million in 2Q, 2019 versus $35.1 million in 1Q, 2019. I estimate that Antares received Makena royalties of $3.6 million in 2Q versus $3.0 million in 1Q. If so, EpiPen royalties were about $2.0 million in 2Q versus $827,000 in 1Q.

I would expect EpiPen royalties to increase significantly on a sequential basis for 3Q versus 2Q. Teva’s was not in a full launch mode because of supply issues until sometime later in the 2Q so that its market share at the end of the second quarter was 29% and Teva has predicted that it could reach 50% by year end. If so, 4Q royalties from EpiPen could perhaps double from 2Q to $6.0 million.  I would point out that these royalties have no associated costs and drop right to the pretax line. Since ATRS pays no taxes, they also drop straight to net income as well.

It looks like Epi Pen will show very strong year over year  increases in 3Q and 4Q, 2019 and also 1Q, 2020. Year over year increases will moderate in 2Q, 2020 and flatten in 2H, 2020.

Makena Subcu

AMAG Reported that Makena subcu reached sales of $41 million in 2Q versus $35.1 million in 1Q. Its market share increased to 63% of the market with the remainder going to intramuscular generics.  It has done a good job of fending off the generic threat. There is uncertainty with Makena subcu because of the failure of the PROLONG trial as reported in March to show superiority over placebo. Please refer to this link for a discussion of that trial.  There will be an advisory committee meeting in 4Q, 2019 to discuss this. Some bears argue that Makena will be pulled from the market and this can’t be totally ruled out. However, I expect it to remain on the market and look for modest continued growth in sales in 2H, 2019 and flattish year over year sales in 2020. The PROLONG results were announced in March and this did not seem to impact physician usage shown by the sequential increase in sales of Makena subcu in 2Q over 1Q.

AB Rated Generic to Forteo

As was the case with EpiPen, Teva filed an ANDA to Forteo which means that its generic to Forteo can be substituted for a Forteo prescription at the discretion of the pharmacist. There are other Forteo generics being pursued though the 505 (B) 2 pathway, but these cannot be substituted at the pharmacy level for Forteo. Their marketers must persuade physicians to prescribe their products in place on Forteo. This is a huge competitive advantage for Teva’s product.

In the US, Forteo is likely to represent somewhat more potential than EpiPen. Forteo has comparable US sales and the royalty rate is somewhat higher. Teva has said that it expects to begin US marketing before yearend 2019. This could be a powerful profit driver in 2020. In addition, Teva has received approval to market its product in 18 foreign countries unlike EpiPen which is a US only product. I don’t know how to model these foreign sales and royalties, but they could be a meaningful percentage of US. Currently, I have no royalty estimates for foreign sales in my model.

The Pipeline

Antares has three products in development for its own account. We do not know what ATRS-1701 Neurology is, but it is in phase 1. Methotrexate for ectopic pregnancy is in pre-clinical. Remember that Otrexup is methotrexate used to treat rheumatoid arthritis. These products are not being developed by the 505 (b) 2 pathway and will require human efficacy trials which should begin in 2020. My guess is that if these products are successfully developed we could see sales in 2022 at the earliest. I have no estimates on sales potential at this time. Pre-clinical development is also progressing on another potential proprietary product that focuses on an unmet need in neurology space. No meaningful details were presented.

A Rescue Pen is being developed in collaboration with Pfizer and is also in pre-clinical. We don’t know what this product is. However, management said that this product is being developed for the proprietary business of Pfizer and not the generics Upjohn business that is being spun out and combined with Mylan. This is important information because the size of Pfizer’s drug business is such that new products must have something like a billion dollars of sales potential to warrant development. If so, this is a major opportunity for Antares.

Financial

Antares ended the second quarter with $40.2 million of cash. The sale of ZOMA Jet to Ferring brought in an additional $2.5 million and an extension of a loan agreement added another $15 million of cash. ATRS cancelled its ATM agreement, which is a strong sign that it believes that it will not need to raise more equity capital and can begin to finance operations out of cash flow. Given the heavy spending on the launch of Xyosted, this is an encouraging signal that there is no need for any equity offering this year.

Investment Thesis

This story is really developing nicely. The Xyosted launch is exceeding Wall Street expectations and this is the heart of the investment story. Royalties from partnered products should be exploding over the next six quarters led by the AB rated generics to EpiPen and Forteo. The greatest uncertainty is what will happen to Makena subcu sales after the advisory committee meeting in 4Q, 2019 on the implications of the PROLONG trial. This has not hurt prescribing since the results were announced in March and I am not expecting any draconian action by the FDA that would have a sharp impact on sales, but………….. However, even the absolute worst case outcome of withdrawal of Makena from the market would only be a bump in the road.

The pipeline has four products that have not yet begun clinical trials and it is not possible to judge their potential, but they could be important to the story beyond 2022. Another potential major positive is that Antares now has an effective sales force that may enable it to in-license meaningful products. This could add a new dimension to its prospects. We have waited patiently for the fundamentals to come together and it looks like our time has come. I continue to believe this will be a big stock over the next several years.