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Expert Financial Analysis and Reporting

Antares: An In-Depth Look at Otrexup and Re-iteration of My Buy Recommendation (ATRS: $4.45) (Paid Subscribers Only)

Investment Overview and Thesis
Antares has carved out an interesting niche in the pharmaceutical industry through building a drug delivery business based on sophisticated injection technologies. Large pharmaceutical companies have always been “oral dosage centric” in their development of dosage forms for their drugs. Their goal has almost always been to find a once a day oral dosage form for their products, which are generally small molecules. Biological companies by the nature of their products have been forced to rely on injection technology, but their innovation focused mostly on the molecules and not the delivery device.

This conventional thinking is not surprising as it seems obvious that most people would prefer to swallow a pill rather than sticking themselves with a needle. Antares has thought outside the box on this issue. They recognized that there are some characteristics of injecting drugs that can provide advantages. The effect of the drug is felt more quickly, a smaller amount of drug is needed, it bypasses the digestive system reducing the potential for side effects like nausea and cramps and avoids first pass metabolism in the liver which again reduces the potential for side effects. This can translate into better efficacy and lesser side effects than oral and other forms of drug delivery such as gels. The Company focused its innovation on developing well-engineered injection systems that are to easy to use and less painful upon injection than needles that we all remember.

New management came into the Company in 2008 and turned around the operations of the business primarily through a business model that focused on licensing its products to larger companies. At the time Antares also had a business that was focused on gel delivery of drugs that has since been divested. In the injection business, the Company formed a key relationship with Teva that gave it the resources to hone its products and develop its manufacturing and engineering capabilities. Because its technology is based on drug delivery it could use proven existing drugs with its injection systems. This allowed the development of an extremely robust pipeline. The market recognized the turn around and the stock price rose from $1.00 in early 2008 to around $2.20 to $2.50 in the second half of 2011. It was at this point that the market began to become aware of an important new element of the Company’s strategy.

A study of the history of the pharmaceutical industry shows that the great success stories for emerging companies are due to making the transition from licensing drugs to larger partners for a share of the profits to becoming fully integrated marketing companies. This strategy can lead to sharply higher profit returns on new products and is rewarded with a premium price to earnings ratio. The market began to be aware of this new fully integrated strategy in mid to late 2011 as the company began to discuss its new drug for rheumatoid arthritis, Otrexup. This product uses a well-designed auto-injector system that allows a patient to administer the drug at home. Antares announced that it would market this product in the US with its own sales force.

Otrexup uses methotrexate which is the gold standard therapy for moderate to severe rheumatoid arthritis. In some cases, Otrexup offers meaningful efficacy advantages over oral methotrexate. This was then followed by the announcement that Antares was developing a new product, currently referred to as QS T, for testosterone replacement that has compelling advantages over the gel and injection systems now. These internal development efforts caught the market’s attention and the stock traded up to a high of $5.30 in July 2012. As often happens after a period of sharp appreciation the stock has traded off and currently sells at about $4.50.

On the licensing side of the business Antares has several products on the market and a plethora in the pipeline. It currently has two gel based products that are marketed and two others under development from this legacy business. It has one marketed injection product and has announced five pipeline products under development (there are likely several others that are unannounced). My models suggest that product revenues from licensing will reach $11 million in 2013 and soar to over $45 million by 2018. Royalties in the same time frame could increase from $4 million to over $30 million for total licensing derived revenues of $75 million in 2018. Based on peer companies, I think that 2018 combined product revenues and royalties could be valued at four to five times revenues suggesting a market capitalization of $300 million to $375 million in 2018.

Using a discount rate of 10% to 15% suggests that the licensing part of the business has a net present value of about $150 to $230 million ($1.18 to $1.81 per share). Antares is currently valued at a market capitalization of $580 million. Obviously, the market is valuing the prospects of Otrexup, QS T and future pipeline prospects very highly. Management has issued guidance that Otrexup will achieve peak sales of $100 to $200 million. Let’s use the midpoint of that range and say that that peak sales occur in 2018 and are $150 million. I would use the same four to five times revenues analysis to suggest that Otrexup sales of $150 million in 2018 would result in a market capitalization of about $600 to $750 million in 2018 and using the same discount rate of 10% to 15% would result in net present value of $450 to $650 million ($3.54 to $5.12 per share).

This analysis suggests that the net present value in 2013 of the licensing business and Otrexup is $600 to $900 million or $4.70 to $7.00 per share. For those who prefer to think about future values, the share price in 2018 under these assumptions would be $7.10 to $8.88. This compares to the current stock price of about $4.50. At this point, I want to caution readers that while these numbers appear to have great precision which is obviously not the case. There are many assumptions on product revenues that can be in error. I also know that some will argue with the discount rate assumptions as being too low. Recognizing the inherent errors in this analysis, I still think that the suggestion that the stock is reasonably valued and attractive at the current price based on the licensing business and the prospects for Otrexup is not that far off.

It is the potential for QS T and additional pipeline products that provide substantial additional promise to the stock and I might also add that peak sales of Otrexup could be better than $150 million. I think that peak sales of QS T could reach $150 million in 2020 and discounting this at 10% to 15% rate leads to a net present value of $225 to $385 million or $1.77 to $3.03 in addition to the $7.10 to $8.88 that I calculated for the licensed products and Otrexup. Moreover, Antares has said that it has the goal of bringing one proprietary product to the market each year in the 2016 and beyond time frame and recently announced that it is beginning work on a new neurology product, referred to as QS M, that could be introduced in 2017. My analysis can be summed up by saying that Antares is attractive at this price based on the licensing business and Otrexup. QS T and the pipeline then add significantly more potential.

There is one other aspect of Antares that could add value to Antares in the 2015 and 2016 time frame. The Company and Teva (TEVA) are collaborating on developing a generic equivalent to Pfizer’s drug for anaphylactic shock EpiPen. Pfizer reached a settlement with Teva that allows a generic launch in May of 2015. If Teva receives an AB rating from the FDA allowing for generic substitution, I estimate later in this report that this could result in $7 million of pretax profits in 2015 and $25 million in 2016. Because there will be no corporate taxes paid, this could drop straight to the bottom line and result in EPS contributions of $0.06 and $0.20 respectively in 2015 and 2016. Further, I think that it may be difficult for other generic companies to develop AB rated products so that Pfizer and Teva would have an oligopoly which I think would allow continued revenue and profit growth for both companies beyond 2016.

The Company is in a good financial position as it ended the second quarter with $75 million of cash. The Otrexup launch should not be a major impact as management has guided that all sales and marketing expenses of Otrexup will total $12 to $14 million. Assuming a 30% gross margin, Otrexup could be cash flow positive at a sales level of about $20 million. I am projecting Otrexup sales of $11 million in 2014, $45 million in 2015 and continued rapid growth with sales estimates of $82 million, $135 million and $150 million in 2016, 2017 and 2018 respectively. I think that the Company will end 2014 with $45 million of cash and will become cash flow positive in 1H, 2015. It should not have to return to the capital markets if these assumptions are correct.

Report Overview
Since my first report on the Company “Antares Is Initiated as a Buy Based on Broad, Promising Pipeline (AIS, $2.59)”, I have written extensively on the Company as is shown on my website. I am not going to go over every aspect of the Company in this report and would refer readers to past reports if they are looking for more detail on other components of the Company.

Otrexup is the most important aspect of the Antares story because of its commercial importance and because it has a PDUFA date of October 14, 2013 and a product launch planned for 1Q, 2014 if it is approved. For those reasons, I have made it the focus of this report although I do discuss briefly QS T and some other product issues. I believe that understanding the technology that gives rise to Otrexup’s product characteristics and the regulatory development strategy gives an insight into the Company’s product development capabilities.

Otrexup Product Description
Otrexup is a disposable single use auto-injector intended for once weekly administration of methotrexate. It is injected sub-cutaneously (under the surface of the skin) using Antares’ Vibex Medi-Jet auto injector device in one of four dosages of 10, 15, 20 and 25 mg/mm2/week. (mm2 refers to the estimated skin surface area of the patient being treated). These dose volumes are small and can be comfortably injected in the leg or the abdomen. Otrexup delivers the dose in about half a second, but patients are told to hold the device on the skin for about 3 seconds to make sure that they complete administration of the dose. There is minimal pain on injection. Antares ran a study in which patients were asked to evaluate the pain of injection on a scale of 0 to 100 where 0 represented no pain and 100 represented maximum pain. The Vibex Medi-Jet device used with Otrexup was ranked between 2 and 3.

The clinical program had to show that patients with moderate to severe impairment of their hands-which commonly occurs in rheumatoid arthritis patients- could safely administer Otrexup. Antares conducted a usability study which showed that 98% of RA patients were able to effectively use it in a home setting. The instruction for use manual provided with each injector was found by 100% of patients to correctly instruct them on how to use the device as intended.

Self-administration of Otrexup is a three step process that takes about three seconds. Patients self-administer the drug by first removing a cap and unlocking the safety by flipping it up. They then touch the collar of the device to the skin to trigger the injection; there is no button to push or any other action required by the patient. The patient never sees the needle which reduces patient apprehension and therefore improves compliance. Otrexup is a well-designed system and contrasts with currently used injectable devices in the US that require removing the drug from a vial with a needle and syringe and then injecting intramuscularly. With intramuscular shots, it is possible to hit a major blood vessel leading to some form of embolism, but there is little risk of this with a subcutaneous injection.

Safety is an important issue as methotrexate was originally developed as a cancer drug with some potentially dangerous side effects and physicians don’t want to inadvertently expose other members of the family to the drug. This injection device is self-contained and delivers 99.99% of the dose of methotrexate leaving little drug residue in the device. In addition, a locking needle shield reduces the risk of any accidental needle sticks following usage.

Methotrexate Is a Very Important Drug
Methotrexate (hereinafter referred to as MTX) is considered to be the gold standard therapy for rheumatoid arthritis patients who need a disease modifying agent (hereinafter referred to as a DMARD). It is the most important and valued drug in the rheumatologist’s drug armamentarium. I have listened to numerous presentations at conferences by key opinion leaders in rheumatology and am always struck by the confidence that they have in this drug.

Rheumatoid arthritis patients generally start on drugs such as aspirin, naproxen and ibuprofen that treat the pain and inflammation symptoms of the disease. As the disease worsens, they progress to DMARDs that treat the cause of the disease and the first drug used is almost always MTX. If patients fail to respond to MTX, physicians turn to newer biologic agents such as Enbrel, Humira and Remicade. MTX may be used alone or in combination with anti-inflammatories and biologics. In total, it is estimated that methotrexate is used in 70% or more of rheumatoid arthritis patients who need disease modifying agents. It is also used to treat psoriasis and other autoimmune diseases.

MTX was first developed as an anti-cancer agent in the late 1940s. In cancer, its mode of action causes the same effect as many chemotherapy drugs; it inhibits the synthesis of DNA in rapidly dividing cells. It has a different mode of action in autoimmune diseases like rheumatoid arthritis in which it blocks the proliferation of T-cells that play an active role in these diseases. This activity was ignored for many years, but beginning in the mid-80s, this effect became more broadly recognized and MTX began to be used widely for the treatment of autoimmune diseases.

MTX for rheumatoid arthritis is most commonly given as oral tablets once a week. It is started at 7.5 mg/mm2/week and then titrated up to as much as 20 to 25 mg/mm2/week. The absorption of methotrexate can be erratic as the dosing is increased and this can be a problem getting patients titrated to the right dose.

Gastrointestinal side effects such as is nausea are troublesome for somewhere between 20% and 50% of patients when initially treated and can prevent dosing to the appropriate level. In some patients these side effects disappear on their own or may be controlled by lowering the dose or spreading the dose out over the course of a day. Some patients take their dose on Saturday so that the side effects do not interfere with the work week.

The Therapeutic Rationale for Otrexup
Several studies have concluded that the efficacy of oral MTX used as monotherapy is comparable to the new biologic agents. A controlled randomized study conducted by Braun et al concluded that subcutaneous MTX is more effective than oral MTX. Results from the Braun study are described in more detail later in this report. Using the logical progression that oral methotrexate is as good as biologicals and that subcutaneous MTX is superior to oral, one could make the argument that Otrexup potentially could be the most effective DMARD. However, this has not been established in clinical trials.

The probable reason for subcutaneous MTX being more effective than oral is that it is delivered more reproducibly. There are significant variations in the way patients metabolize oral MTX so that as many as one-third of patients don’t reach the intended dose. Injectable MTX enters the blood stream before being metabolized and altered by the liver which makes for more predictable blood levels. It may also be the case that when patients are titrated to higher doses of oral MTX that they may not consume all of their dosage due to side effects. With an injectable, it is virtually certain that the patient will get the intended dose.

The general opinion among rheumatologists is that injectable MTX causes less gastrointestinal side effects than oral MTX. In Europe where a subcutaneous injectable MTX is approved, it is promoted as being more effective than oral MTX and causing less gastrointestinal side effects. Antares believes that its injectable MTX causes less gastrointestinal side effects and often cites this in their presentations.

I believe that in future clinical practice, physicians will continue to start with oral MTX because it is cheaper and more convenient. They will then turn to injectable MTX when patients don’t respond well or can’t tolerate the side effects. Currently, patients who fit this description are switched to a biologic agent or a biologic is added to the oral MTX regimen.

In addition to the therapeutic argument that can be made for switching patients who are performing poorly on oral MTX to injectable MTX before turning to a biologic, there is also a cost argument. Vibex MTX will cost about $6,000 per year versus $20,000 or more for the biologics. These factors could combine to introduce a very important new therapeutic step in treating rheumatoid arthritis patients either in reducing the role of biologics or at least delaying their implementation.

Clinical Data for Otrexup
Methotrexate is a generic drug with extensive clinical studies. Antares was able to take advantage of the 505 (b) 2 pathway to gain regulatory approval for Otrexup. With this regulatory route, Antares was able to reference in its NDA all of toxicology, safety and other data on file with the FDA. The main requirement for approval was a pharmacokinetic study showing that Otrexup was safe and delivered comparable blood levels of methotrexate as the current intramuscular formulations. It did not have to conduct clinical trials that showed efficacy against rheumatoid arthritis in humans.

Meetings with the FDA gave Antares reasonably clear direction for developing this drug.
Antares conducted animal studies of Otrexup pharmacokinetics and then preceded into human bioequivalence studies; it dosed the first human in February of 2011. In August 2011, Antares reported results from this bioequivalence study that evaluated four dosage strengths ranging from 10 mg/mm2/week to 25 mg/mm2/week. Antares showed that the subcutaneous injections produced a similar pharmacokinetic profile to intramuscular dosage forms which demonstrated bioequivalence.

Meetings with the FDA helped Antares determine a clear path forward to regulatory approval. An additional requirement of the FDA was for a user study to make sure that the device can be safely self-administered by rheumatoid arthritics who suffer from joint inflammation and deformities that might interfere with self-injection. The results showed that 98% of rheumatoid arthritis patients with impaired hand function could self-administer the drug.

The Company has also done another study that compared 10, 15, 20 and 25 mg/mm2/week of Otrexup to comparable doses of oral MTX. This study showed that blood levels of oral methotrexate level off at doses of 15 mg/mm2/week and as the dose is increased to 20 and 25 mg/mm2/week, there was no increase in blood levels. Importantly and in sharp contrast to oral methotrexate, blood levels with Otrexup increased as the dosage was increased to 20 and 25 mg/mm2/week proportional to the dose. Better blood levels suggest better efficacy through extending the dose availability of methotrexate and keeping patients on MTX for a longer period of time as the disease progresses.

This paper was presented at the European League against Rheumatism, or EULAR, conference in June 2013. The acceptance for presentation by EULAR does support Antares’ belief that Otrexup can optimize methotrexate therapy with weekly injections. Antares believes that this demonstrates that Otrexup has significantly greater bioavailability over oral methotrexate in rheumatoid arthritis patients. This bioavailability data is part of the NDA package and Antares feels confident that this data will be included in the label.

The Braun Study Comparing Oral and Subcutaneous Methotrexate
While Antares has conducted no clinical trials comparing Otrexup to oral MTX there have been some studies in Europe where another subcutaneous dosage form has been approved for a number of years. In a literature search, the best paper that I came across that looked at the clinical use of subcutaneous MTX was a study done by Braun, et al in 2008 called “Comparison of the Clinical Efficacy and Safety of Subcutaneous Versus Oral Administration of Methotrexate in Patients with Active Rheumatoid Arthritis.” This study assigned 194 patients to a group which was given subcutaneous MTX plus an oral placebo and compared to 190 patients given oral MTX and a subcutaneous placebo injection.

The authors concluded that subcutaneous MTX using a dosage of 15 mg/mm2/week that was allowed to be titrated up over a period of 24 weeks was superior to oral MTX based on ACR scores. They also said that the superior clinical efficacy of subcutaneous administration of MTX in this study was not accompanied by a significantly higher rate of adverse events.

The ACR or American College of Rheumatology scale is a composite of rheumatoid arthritis symptoms. ACR 20 indicates a 20% improvement in symptoms comprising this scale. ACR 20 is the lowest plateau for effectiveness while ACR 50 and ACR 70 are associated with more dramatic efficacy. In the Braun trial the ACR 20 response for subcutaneous MTX was 78% as compared to 70% for oral MTX; ACR 50 was 62% versus 59% for the oral and ACR 70 was 41% versus 33% for the oral.

The gastrointestinal adverse events were similar between the two routes of MTX administration. The authors said that this was a surprise since other studies have shown a reduction in side effects, particularly gastrointestinal. A possible explanation is that the physicians were able to titrate to a higher dose of injectable MTX than with oral MTX because of compliance issues. If so, the higher dose of injectable MTX might have produced the same side effects as a lower dose of oral MTX.

In conclusion, the authors stated that subcutaneous administration of MTX is significantly more effective than oral administration of MTX at the same dosage and does not lead to an increase in side effects. The most interesting quote from the study was, “The results of our study support the use of subcutaneous MTX as rheumatoid arthritis monotherapy in patients as being the best of the currently available monotherapy agents for this condition.”

Injectables Competition in the US to Otrexup, Current and Future
In the US, the only approved injectable MTX products must be given intramuscularly. A sub-cutaneous form of methotrexate is widely used in Europe, but. Antares will be the first to gain approval in the US. In the US, there are already injectable versions of MTX available which are used in roughly 8% of treated MTX patients. The current versions require intramuscular injections which are deeper and more painful than Otrexup and require a weekly clinic visit for the injection. With Otrexup, the patient applies the collar of the device to the skin which triggers the injection and counts to three. There is almost no pain with the procedure and the needle in the device retracts so that a “needle-phobic” patient never sees it; the device is then thrown away.

There is a subcutaneous MTX product currently marketed in Europe and Canada, and its owners will be seeking and gaining approval in the U.S. However, Antares has first mover advantage and appears to have a development lead of one to three years. While Antares cannot patent methotrexate, it does have a patent on the injector that lasts until 2027. This means that any company developing a competitive product can’t use the Antares injector. This should be a barrier to generic competition because the FDA requires that a generic challenger must show that both its drug and device are interchangeable with the innovator product.

Potential competitors will have to use different injector device designs and this may prevent them from being deemed to be generic equivalents and prevent substitution by the pharmacist. If so, this means that Vibex MTX will be competing with innovator products judged to have different characteristics that are not interchangeable. This is a very different and more favorable competitive dynamic than is seen with generics and is important for extending the life cycle. Also, a recent issued patent covers the use of Antares’ injectable device to deliver cytotoxic agents like MTX; this is a potential blocking patent.

Experience with Sub-cutaneous Methotrexate in Europe
There is commercial proof of concept for a subcutaneous dosage form of methotrexate. In Europe and Canada, Medac International and its licensees market a prefilled syringe containing methotrexate. Antares’ market research indicates that it has captured 20% of the unit volume of the MTX market and its higher price point results in it accounting for 80% of sales for all MTX formulations in Europe.

I did an internet search to find out what was being said about subcutaneous MTX in Europe. In Spain, the product is marketed as Metoject by Gebro Pharma. Theirs is the only such approved product in Spain. It is available as 7.5, 10, 15, 20 and 25 mg/mm2/week syringes and is indicated in the treatment of rheumatoid arthritis, psoriasis, psoriatic arthritis and juvenile idiopathic arthritis.

They make the following promotional points on their website:

  • According to the Spanish Society of Rheumatology, MTX is the first line disease-modifying anti-rheumatic drug (DMARD), addition,
  • Metoject® provides more effective control of RA than oral methotrexate,
  • MTX administered parenterally has fewer gastrointestinal side effects
  • Metoject® allows the dose to be adjusted to meet SER (Spanish society of rheumatology) recommendations
  • Metoject® is the ideal complement for anti-TNF therapy

The Rheumatoid Arthritis Market in Which Otrexup Will Compete
The worldwide market for disease modifying agents used in rheumatoid arthritis is valued at $17 billion. MTX is the foundation of rheumatoid arthritis treatment that is used alone and in combination with biologics. The ACR guidelines advocate that treatment begins with MTX monotherapy. MTX is compatible with the use of biologicals as it prolongs the usefulness of some of the biological agents and actually reduces the likelihood of some of them having immunogenicity issues. Biological agents such as Enbrel, Humira and Remicade account for most of dollar sales but only about 30% of unit volume. MTX accounts for 70% of unit volume, but because it is generic accounts for only a small amount of sales. This suggests that if MTX were sold at the same price as the biologicals, it would be a $40 billion drug.

Based on market research which it has commissioned, Antares estimates that there are about 2.5 million cases of rheumatoid arthritis in the U.S. of which 60% or 1.4 million patients with moderate to severe rheumatoid arthritis receive DMARDs. Of these patients, about 50% or 700,000 receive methotrexate and in turn about half of these patients or 350,000 are on oral doses of 15 mg/mm2/week or more. The same research suggests that 22% of patients given methotrexate discontinue usage because of gastrointestinal side effects such as diarrhea.

Prior to an injectable drug shortage which started in 2009 and has continued, parenteral methotrexate administration accounted for 8% of methotrexate prescriptions. Antares believes that Otrexup can increase this to 15% to 20% of prescriptions. There are about 5.7 million methotrexate prescriptions written annually in the US so this translates to about 900,000 to 1,140,000 prescriptions for Otrexup.

Pricing of Otrexup
The US price point for intramuscular formulations of MTX is about $125 per week. This includes the cost of the weekly administration that is usually administered in a clinic or physician’s office. If Antares were to price on parity with these products, it could be priced at $125 per injection and figuring four injections per month this would be $500 as there is no administration fee. They intend to price all strengths the same.

However, Antares feels that they could potentially price at a premium and have suggested that the price per month could be $500 or less or $6,000 or less per year. The pricing in Europe, which for almost all products is lower than the US, is about $50 per injection of $200 per month. Antares is still assessing the final pricing decision as it continues to assess and evaluate the current managed care and access and coverage reimbursement markets. They are trying to determine price sensitivity that might be employed to restrain use against oral MTX and could increase use against the biologicals which are priced at $20,000 per year.

The US Sales Potential for Otrexup May Be Bigger Than Antares’ Guidance
The injectable MTX market is estimated currently at approximately 400,000 Rxs per year. This is all with intramuscular MTX, of course, and each Rx consists of four injectors. Multiplying 400,000 Rxs by four injectors per Rx and using a price of $125 per injector results in an addressable market of $200 million based on current usage of intramuscular MTX. Given the superior product characteristics of Otrexup and a similar price to intramuscular MTX (if you include the administration cost), it seems reasonable to expect Otrexup to claim a significant percentage of market, perhaps on the order of 75% or $150 million. Management’s guidance of $100 to $200 million of peak sales is in line with this.

There are two primary reasons for patients to move from oral MTX to injectable MTX or a biologic. One is that the patient is unable to stand the side effects. The other is that the disease has progressed and the physicians are forced to move the dosage above 15 mg/mm2/week and because of the pharmacokinetics of oral MTX, the patients can’t reach therapeutic blood levels. It is estimated that there are 700,000 patients who are on oral MTX therapy each year and 22% or 154,000 drop treatment because they are unable to tolerate the side effects. It is also estimated that 50% of these 700,000 patients or 350,000 patients are being dosed at or greater than 15 mg/mm2/week of MTX and may be receiving sub-optimal therapy. These two patient subsets of 154,000 and 350,000 respectively are dropping out of therapy (unlikely for moderate to severe rheumatoid arthritis), enduring sub-optimal therapy, moving on to injectable MTX or progressing to a biologic.

Currently, the average length of time that a patient is on intramuscular MTX therapy is 10 months before they presumably move to a biologic. There are 400,000 prescriptions per year and market surveys suggest that patients remain on injectable MTX for 10 months. Going through the math, this indicates that that there are only about 28,000 patients on injectable MTX. This seems quite low in comparison to the 154,000 patients dropping oral MTX therapy due to side effects or the 350,000 that may be receiving sub-optimal therapy. Also, to the extent that Otrexup can keep patients on therapy for more than 10 months, it could expand the current market for injectable MTX.

One reason for the seemingly low number of patients being treated may be that physicians are moving from oral MTX to biologics before trying injectable MTX. This could be due to the requirement for weekly administrations by medical professionals and the inconvenience of the patient having to travel to a health care facility once a week. The pain of administration could also be a factor. These are issues which Otrexup would eliminate. To the extent that these are factors, Otrexup could take significant market share from the biologics based on cost. It will cost about $6,000 per year versus $20,000 or more for the biologics. If efficacy is comparable, this is a powerful incentive to give Otrexup a try before moving on to biologics.

I think that all of the above arguments suggest that Otrexup can expand the market significantly beyond 28,000 patients and that management’s guidance of peak sales of $100 million to $200 million could be low. If Otrexup is used by 50,000 patients annually the peak sales could be $180 to $350 million and at 100,000 patients the range would be $360 to $700 million. This is well above management guidance of $100 to $200 million.

Otrexup Launch Issues
The sales and marketing expenses associated with Otrexup are very affordable for a small company like Antares. There are about 3,000 rheumatologists in the US who are concentrated in large urban areas. Antares believes that it can effectively market to physicians who account for 80% of prescriptions for disease modifying drugs with just 25 sales representatives. Management has estimated that it marketing and sales expense including the cost of the sales force will be about $12 to $15 million. If so, Otrexup could be profitable with about $20 million of sales.

The launch plans for Otrexup is the primary focus of our activities at the companies right now. Antares has hired 6 national account managers who are already communicating with managed care. They have recruited an eight person sales and marketing team that are built with individuals who have had extensive experience in marketing biological agents for rheumatoid arthritis. They are recruiting six medical liaison professionals and will hire 25 sales reps in the 4Q, 2013.

Antares is expecting approval of Otrexup on the PDUFA date of October 14 and plans to launch in 1Q, 2014. It has manufactured validation batches of Otrexup which can be used in the launch of the product. The experience gained from successfully scaling up and making Vibex devices for Teva is directly applicable to the commercial manufacture of Otrexup.

Antares has a strategic alliance with a privately held Canadian company, Uman Pharmaceuticals, to jointly develop Otrexup in the U.S. and Canada. Antares will be responsible for clinical development, regulatory submissions and manufacturing the injector while Uman will develop the formulation and provide prefilled syringes. Uman has rights for commercialization in Canada while Antares has U.S. and rest of the world rights.

I am assuming that the product is introduced in 1Q, 2014. It takes about six months to a year to go through the formularies and reimbursement process during which sales are restrained and I am looking for only $11 million of sales in 2014. I am then looking for a rapid ramp in 2015 to $45 million and continued rapid growth beyond with sales estimates of $82 million, $135 million and $150 million in 2016, 2017 and 2018 respectively.

Xeljanz, a New Oral DMARD from Pfizer
In thinking about Otrexup, investors need to consider the recent approval of the new oral disease modifying agent from Pfizer (PFE). Xeljanz (tofacitinib) is an inhibitor of the protein kinase JAK-3, a key molecule in the intracellular activation cascade that occurs when various cytokines bind to T-cells. In large phase III trials in rheumatoid arthritis, it has shown efficacy comparable to that of Humira, Enbrel and Remicade. Side effects may be the result of tofacitinib not being 100% specific for JAK-3 as it also blocks JAK-2. This can lead to neutropenia, thrombocytopenia, and anemia. Other observed side-effects have been gastrointestinal symptoms and elevations of blood pressure and of serum lipids in some patients.

I think that it will take a long time to determine how Xeljanz will fit into the drug treatment of rheumatoid arthritis. I do not see physicians even considering it as an alternative to oral MTX for many years. There is as yet not enough data to judge its efficacy relative to MTX and as I have pointed out this is a high hurdle to jump. Also rheumatologists are a very conservative bunch and I think that they will need to see a lot of clinical usage, time passage and data before they might consider it as an alternative to methotrexate. I think that in coming years, Xeljanz will be competing primarily with the injectables biologics, where its oral administration might be seem as an advantage in some cases.

Otrexup in Psoriasis
Psoriasis is a chronic skin disorder that affects men and women, equally, beginning at any age between 20 and 30 or later at 50 to 60. In general, psoriasis patients are probably going to be a lot younger rheumatoid arthritis patients. Mild to moderate cases of the disease can be adequately managed with topical agents such as steroids.

Patients with a severe disease often use DMARDs like methotrexate which has been used in the treatment of psoriasis for over 30 years. It is estimated that the global market for biologicals used in psoriasis is about $5 billion or one third the sales level in rheumatoid arthritis. MTX is given weekly and at the same dose levels as in rheumatoid arthritis. The American Association of Dermatology actually suggests using injectable MTX in the treatment of MTX.

This could be an additional opportunity for Otrexup. However, the initial focus of the 25 rep sales force will be on rheumatologists who treat rheumatoid arthritis. It will not be calling on dermatologists who are primarily involved with psoriasis treatment.

QS T for Testosterone Replacement
The second proprietary drug candidate is currently referred to as QS T; it is a once a week testosterone auto injector. Testosterone replacement therapy has now been popularized as “the low T” market and as a result of direct to consumer advertising sales are surging. Current annual sales in the US are about $2 billion and are increasing at 25+% per year so that sales could surpass $4 billion by 2017.

Wolters Kluwer estimates that there are 7.2 million prescriptions written each year of which about 5.1 million are for gels and 2.1 million are for injectable formulations. Over the last five years oral Rxs have increased from 2.7 million to 5.1 million for a compounded annual growth rate of 25% and injectable Rxs have increased from 0.9 to 2.1 million Rxs for a compounded annual growth rate of 24%. This is clearly a large and growing market with injectables accounting for about 30% of Rxs.

Owing to the high viscosity of testosterone, current injectable products are administered by intramuscular injections using a huge 20 gauge needle and it takes 30 to 45 seconds to administer the product. Because of this, patients must be pain tolerant and the product is usually administered by a physician, nurse or other qualified medical personnel. QS T could successfully address the shortcomings of the current injectable formulations. It can be self-administered subcutaneously with a smaller needle in about five seconds.

QS T as a one a week formulation will compete with intramuscular products that are used on a bi-weekly or monthly basis. Because the half-life of testosterone is about a week, QS T’s formulation should provide less peaks and valleys in blood level and this could translate into better efficacy. It also has an advantage against current gel formulations that may inadvertently transmit testosterone to a wife or children through contact. The gels actually have a black box warning of this.

Antares plans to file the NDA in 2015 and a launch could occur in 2016. I don’t expect a huge market share, but even a 1% share of this giant market could translates into $40 to $50 million of sales and I judge that this product could reach a peak market share of 5% suggesting $200 to $250 million of peak sales. I view it as a comparable commercial opportunity to Otrexup. I think that 2016 sales could be on the order of $15 million and 2017 sales might reach $50 million.

Other New Proprietary Products
Antares has indicated that it has a third program in a neurological indication; it is referred to as QS M.. Announcement on what the active ingredient is and the characteristics of the product will await the completion of intellectual property work. The Company also plans to add a fourth product in the near future.

Generic Version of Epipen
Otrexup and Vibex QST are major catalysts for the 2014 to 2017 period. They will be complimented by a product that arose out of the older licensing business model and the Teva collaboration. This is the potential launch of an auto injector which is a generic version of EpiPen; Mylan (MYL)/ Pfizer’s (PFE) self-injected epinephrine product for anaphylactic shock. Teva has reached a patent settlement with Pfizer that will allow the launch of this product on June 15, 2015. Teva is trying to obtain an AB rating from the FDA which allows pharmacists to substitute Teva’s generic for EpiPen. With an AB rating, the Teva generic could quickly capture a significant share of the market. Without the AB rating, Teva would be forced to market it as a new product and would have to devote considerable resources to establish sales; the commercial potential would be much less.

Antares will receive an undisclosed amount of orders for its Vibex auto-injector from Teva in the years 2013 and 2014, as well as a milestone payment upon FDA approval. I estimate that in 2016 that EpiPen will have US sales of $830 million and by mid-2015 could reach a sales run rate of $1+ billon. Pfizer is raising prices at 20% per year and continues to aggressively market the product. EpiPen is priced at a wholesale acquisition price of about $265 for a pack of two injectors. A substantial amount of the product is thrown away after two years without being used.

Mylan has said that if the Teva product obtains an AB rating that it believes that the generic can obtain 40% of the market. This is based on the anticipation that Teva will be the only entrant in the market for some time and will not aggressively cut price. I think that Teva may come in only at a 20% discount to EpiPen. With these assumptions, I think that Teva could achieve an annual sales rate of $320 million by year end 2015. Because of the difficulty in obtaining an AB rating versus EpiPen (indeed it is not a given that Teva will be successful), it may be the case that Pfizer and Teva could be the only entrants in this market for some time. In this event, I would see the Teva product as having sustainable double digit sales growth for some time beyond 2016.

Antares has given guidance that through sales of the auto-injector to Teva and royalties that it will achieve sales equivalent to roughly 10% to 12% of Teva’s sales or roughly $32 to $38 million. Antares has not given guidance, but I estimate that 60% of these revenues or roughly $22 million will be due to product sales and 40% or $14 million will come from royalties. Assuming a gross margin of 50% on product sales would result in a gross profit of $11 million which along with the $14 million of royalties would bring perhaps $7 million to the pretax line in the latter half of 2015 and about $25 million in 2016.

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