Expert Financial Analysis and Reporting

Investment Thesis

Antares (ATRS) common has been hit with a storm of concerns that has caused the stock to decline from about $4.50 in March of this year to a low of $1.94 in August. This note addresses these issues and how they affect my investment thinking.

In almost every investment situation I have been involved with unexpected negatives and positives arise. Things never go exactly as hoped. This has certainly proven true for Antares in 2014. However, my basic view is that the investment situation is not significantly different from what I have perceived in the past. It has an extremely broad product pipeline and could become profitable and cash flow positive if Otrexup reaches $6 million of sales in a quarter; this should occur in 2015. I also think that the free fall of the stock has probably run its course.

Of the key events that will drive the stock over the next year, the success of the Otrexup launch is most important and we should get a much better read on this by late 2014 or early 2015. There has been uncertainty about the prospects for its next major product candidate Quick Shot Testosterone (QST) because of the concerns about the possible link of testosterone replacement to heart attacks. A September 17, 18 FDA advisory committee will discuss this and will be key to assessing the potential for QST. As I discuss later in this report, I think that investors will regain confidence by yearend that QST has significant commercial potential. Finally, I think that if Teva receives an AB rating for its generic to EpiPen-which was developed by Antares- it would be a major positive for Antares, but it is difficult to gauge the outcome as Teva is saying little. The situation could be clear in early 2015.

There is much more to Antares than Otrexup, QST and the AB generic equivalent to EpiPen. We may also hear on new products to come after QST that are based on the Antares auto-injector and its ability to develop formulations of highly viscous drugs and potentially biologics. There are at least three such products on the drawing board. The Company has suggested one new product approval per year starting in 2016 with QST. The Company has said that QSM, a product targeted at a neurological indication, is in pre-clinical development and this is probably a product that could be launched in 2017.

The Company also has a legacy business based on a broad number of licensing agreements with Teva (TEVA) and some with other companies. It is very hard to get a handle on all of these products as licensors are larger companies that don’t like to telegraph their development and marketing plans. Teva is hoping for approval of an ANDA for sumatriptan and a 10 mg dosage form of TevTropin and is in phase 3 development with two pen products-one a generic and the other a proprietary product. There are also two products in clinical development with two other entities using the older gel technology. These are the Population Council’s oral contraceptive Nestrogel and a branded OTC product with Pfizer. Beyond this there are likely other products.

Investors can make reasonable assumptions and projections for Otrexup, QST and the generic to EpiPen. It is harder to get a handle on the potential of the out-licensed products that I just discussed and to value them. Product sales of these other products could reach $7 to $8 million in 2014 and royalties could reach $4 to $5 million so that this part of the business has current sales of $11 to $13 million. (Note that royalties are pure profit.) Again making product sales and royalty forecasts for known as well as not yet disclosed products is highly conjectural, but I would think that 10% to 20% growth seems reasonable and the intellectual property position is solid. So how do we value this legacy part of the Antares business .I think that we could place a multiple on this business of 5 to 7 times sales suggesting a market valuation of $55 to $91 million or $0.40 to $0.70 per share.

Significant Correction in Emerging Biotechnology Stocks

Let’s start with what may be the most important issue related to the Antares price drop and this is substantial weakness in emerging biotechnology stocks as a group that began in March. The trigger was Gilead’s (GILD) launch of the hepatitis C drug Sovaldi at what was considered to be an extremely high price by critics. This triggered a media firestorm and a general correction in both large and small biotechnology stocks that began in early March and lasted until late April. Subsequently, the large biotechnology stocks began a sustained upturn that drove most of them to new highs by August,

The small biotechnology stocks corrected like the large companies, but have not recovered and some like Antares are near lows for the year. Looking back, this divergence between large established biotechnology and emerging technology is not unprecedented. I think that small biotechs over react on both the upside and downside to moves in the overall stock market in general and biotechnology stocks as a class. Early this year, there was a lot of exuberance with small biotechs and they were doing very well. Hence, the March correction followed on the heels of a period of exuberance. This exacerbated the down move.

I wish that I had been smart enough to foresee the correction in small biotechnology stocks in general and Antares in particular and had told investors to take profits and then get back in. However, I have learned from long experience that I can’t predict the timing and magnitude of price fluctuations. My experience is that most investors, including me, tend to get carried away by recent stock price movements. If the stock moves up, we become more optimistic and as it goes down we become more pessimistic. This means that when we trade, basic human instincts cause us to buy high and sell low.

My own approach to investing in small biotechnology stocks tries to avoid getting caught up in trading calls. I ask myself the question if this company is successful in executing its business strategy, what could be the price some years down the road. Hence, I usually focus on the potential future price rather than trying to catch trading moves. Over this period of time, the stock price may get out of line on both the upside and the downside. My greater fear is that I let market fluctuations drive me out of a position in a company in which I believe in the fundamentals. This investment approach can be painful as it has been for the past half year with Antares, but that’s my approach and I am sticking with it.

There Are Other Issues Specifically Related to Antares

Of course, the correction in Antares is only partially due to broader market trends. There are issues specific to the company.

• At this point in time, it is too early to get a good fix on how the Otrexup launch is going. However, as a rule of thumb most new product launches take longer to ramp up than in prior years because of procedures used by managed care to control costs. In general, most recent new product launches have been disappointing and there is a strategy among many hedge funds to short into a new product launch.
• There has been concern about the approval of Medac’s similar product Rasuvo which will compete with Otrexup.
• The departure of Paul Wotton came as a surprise and a shock. Since he announced his departure on June 24, the stock declined sharply from $3.00 to a low of $1.94 in early August.
• Finally, there has been a great deal of concern about the potential link of testosterone replacement products to cardiovascular risk and raised concern about the potential for QST, the next big product after Otrexup.

How Is the Otrexup Launch Going?

I must start by reiterating that I think that Otrexup fills a very important role in the treatment of rheumatoid arthritis. It allows physicians to keep patients on methotrexate, the gold standard therapy for rheumatoid arthritis, for a longer period of time before switching patients to the higher priced biologics that have more side effect issues. This provides both clinically meaningful therapeutic benefits and also provides economic benefits to payors by postponing use of biologics that are priced at three times the level of Otrexup. I strongly believe that Otrexup is a very important new product.

Sales of Otrexup in 1Q, 2014 and 2Q, 2014 were $0.2 million and $1.7 million respectively. In a recent report, I estimated that 2Q sales could reach $2.4 million. At such an early stage of the launch, I am not inclined to classify this as a miss. The launch is still at a stage that we can’t get a good read on the potential for this year. The Company has said that we could see an inflection in 2H, 2014. We are just going to have to wait for 2H, 2014 results to get a clearer read on potential sales for 2014 and 2015. The Street consensus for Otrexup is about $12 million of sales in 2014.

The Company did make a potentially important move on co-payments. Physicians have been prescribing Otrexup at a much greater rate than it is being dispensed from pharmacies, which probably reflects resistance to the patient co-pay. In response, they have implemented a $0 patient co-pay that is similar to that for most biologics. This change to the patient assistance program should enable more patients to access Otrexup and should boost the rate of uptake. The Company also reports that about 10% of prescriptions written for Otrexup are from Leo Pharmaceutical’s promotion activities for psoriasis.

What Impact Will Rasuvo Have on Otrexup’s Sales Potential?

Early this year, it was unclear as to whether Rasuvo would gain approval in 2014 and/or Antares could block the launch. As the year progressed it became clear that Rasuvo would probably gain approval on its July 10^th PDUFA date and that the product would be launched in late 2014. This was what happened.

Obviously, it would be better if Otrexup were exclusive in the market, but I do not see Rasuvo as a major negative. Otrexup has first mover advantage and in most pharmaceutical categories, there are generally two or more similar products competing. The market opportunity in rheumatoid arthritis and psoriasis is large and oftentimes having two or more companies promoting a particular type of product can expand the market to the benefit of all participants. It is quite common for small firms to select other firms to co-promote a product and give up some of the profits on the presumption that the increased promotion will expand the market opportunity.

Some investors have raised the concern that there will be price competition. However, in virtually every situation in which I have been involved with in competitive situations in which there are two or more similar products in a category, companies do not compete on price. If Rasuvo came in at a significantly lower price than Otrexup, it would force Antares to match the price, At best, Rasuvo might achieve a slight and probably temporary market share gain in terms of units, but it would not maximize potential revenues. It also would run the risk of a downward price spiral. Since Otrexup has only a small unit market right now, this is not a compelling strategy. I would expect Rasuvo to be priced at the roughly the same price as Otrexup, but we will have to wait and see.

In looking for a reason why my argument on Rasuvo pricing might be wrong, the best that I can come up with is that Medac concludes that Otrexup is dramatically over-priced and a lower price is needed to get physicians to prescribe. Actually, this argument is not quite right. Physicians prescribe on how they see the merits of a product. It is payors who make decisions based on price. However, it seems that payors are not bulking at putting Otrexup on tier 3 formulary status at current prices. As for those very few who fear generic pricing of Rasuvo, there is no chance.

It seems to me that Medac will try to differentiate Rasuvo on the basis of product characteristics and the one noticeable differentiation is on titration. With Rasuvo, physicians can titrate in 2.5 mg/ mm2/ week increments while Otrexup is titrated in 5.0 mg/mm2/ week increments. Here is what one of my consultants had to say about this. With initial treatment using oral methotrexate, patients are usually started on an oral dose of 2.5 to 5.0 mg/mm2/week and initially titrated up at 2.5 mg/mm2/week increments. However, as the dose gets to 10.0, 12.5 or 15.0 mg/mm2/week they are more likely to increase by 5.0 mg/mm2/week. Increasing the dose from 5.0 mg/mm2/week by a 2.5 mg/mm2 increment is a 50% increase in dose. Increasing from 12.5 mg/mm2/week to 15.0 mg/mm2/week is a 24% increase. Antares expects that most of the dosing of Otrexup to be in the 15.0 to 20.0 range and this is what has been seen so far. The point is that at these ranges, it is more likely that titration will be in 5.0 mg/mm2/week increments.

Management had given guidance that Otrexup could achieve $200 million of peak sales. However, this estimate was made before the potential for approval of the Medac product in 4Q, 2014 was taken into account. For the sake of illustration, let’s assume that this is now to be split 60/40 between Otrexup and the Medac product. With this back of the envelope logic, Otrexup would achieve $120 million of peak sales. In a recent report, I have suggested that the US addressable market may be $600 million.

Antares has estimated that Otrexup breaks even at about $24 million of sales per year or $6 million per quarter. I think that Antares could begin to have profitable quarters in 2015 based on growth of Otrexup sales. This would be big psychologically. At $120 million of sales, the pretax profits could be $95 million or so. Applying a tax rate of 30% to $95 million of pretax profits and dividing by 130 million outstanding shares, results in a $0.50 EPS contribution from Otrexup when it reaches peak sales in perhaps 2019. Then putting a 15 P/E on these EPS suggests that the stock price solely due to Otrexup in 2019 could be $7.50. I hope that you take these numbers for what they are intended to be, i.e. giving magnitude and trend and not being ball bearing precise.

Paul Wotton Leaving

I thought that Paul Wotton did a very good job in setting the strategic direction of the Company and I hated to see him go. It will take a while to get a read on the new CEO Eamonn Hobbs. However, the Company seems to have a clear strategic focus based on bringing a continual flow of new injectable products to the market under the 505 (b) 2 process. Moreover, the first new product after Otrexup has been selected-this is the QST testosterone replacement product and I think several others have been selected. Mr. Hobbs’ challenge will be implementation of the established strategic plan.

An Overview of Quick Shot Testosterone (QST)

Competitive Advantages

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

QST 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, QST’s formulation should provide less peaks and valleys in blood level and this could translate into better efficacy. The current IM products can cause spikes in testosterone levels above normal levels after injection causing side effects and drop over time to sub-therapeutic blood levels.

Over the last decade, the injectable market has continued to grow, but there has been an enormous expansion on the market due to the introduction of topical gels. These require daily administrations and carry a black box warning for risk of transfer of testosterone to women and children. This is a competitive advantage for QST.

Testosterone is a much more viscous drug than methotrexate and it will probably be harder for competitors to develop and bring to market roughly equivalent products than was the case for Otrexup.

Phase 2 Trial Results for QST

Antares reported results earlier this year on a phase 2 study of QST in 29 adult males which looked at pharmacokinetics and safety. Patients were given a once weekly testosterone injection. They were separated into two groups with one given 50 mg of testosterone and 100 mg of testosterone administered subcutaneously. Normal testosterone blood levels would be expected to be in a range of 300 to 1100 nanograms per deciliter. In this group the baseline mean blood level was about 244 nanograms per decliter of blood. The study showed that testosterone levels normalized within hours of the first dose and after six weekly injections, the average testosterone levels in both groups were returned to the normal range.

Phase 3 Study of QST is Underway

Antares met with the FDA in May, 2014 to finalize a phase 3 registration plan for QST. The phase 3 study is a 52 week double-blinded study in adult males with. Patients entering the study must have testosterone levels < 300 ng/ml. The primary outcome measure is the percentage of patients whose testosterone levels are returned to the normal range of 300 to 1100 ng/ml over a 12 week time frame.

A secondary outcome will look at the percentage of patients whose peak blood levels are (1) <1500 ng/ml, (2) 1800 to 2500 ng/ml and (3) >2500 ng/ml after administration. It is the spiking of blood levels after administration beyond the upper range of normal (1100 ng/ml) that cause side effect concerns, particularly on myocardial infarctions which I will talk about later. Other secondary outcome measures include incidence of adverse events and injection site reactions. Patient satisfaction with sexual functioning will also be assessed during this 52 week period.

The study is planned to enroll 150 patients although there may be some dropouts. It began in July 2014 as the first patient was dosed. According to ClinTrials.gov the final data collection for the primary outcome should be completed by February 2015 and the study will be completed in November 2015. The study allows for titration to higher or lower dose levels during the study using three dose strengths, 50, 75 and 100 mg. Patients initially will receive QST once weekly for six weeks. At week seven, the dose may be titrated up or down based on the dose level at week six prior to that injection.

The efficacy of QST and dose adjustment to regulate testosterone levels will be evaluated after 12 weeks of treatment. Upon completion, patients will remain on their optimized QST dose and will be followed for an additional 40 weeks which should complete by November 2015. Antares estimates that approximately 100 patients will complete collection of 26 weeks of safety data and approximately 50 patients will complete a collection of 52 weeks of safety data. The hope is to file with the FDA in 2016 and gain approval in time to allow a launch in late 2016 or early 2017.

Cardiovascular Side Effect Issues with Testosterone Replacement Products and Implications for QST

As I mentioned earlier in the investment thesis, a September 17, 18 FDA advisory committee will discuss the potential tie of testosterone replacement products to heart attacks and other cardiovascular risks and this will make it somewhat easier to get a read on the potential for QST. Here is some background information.

Studies Showing Cardiovascular Risk

There have been a number of reports in recent years that have linked testosterone therapy to increased risk of myocardial infarction. A study called Testosterone in Older Men with Mobility Limitations Trial was a randomized, placebo-controlled study funded by the National Institute of Aging. It was stopped in 2010 because of a higher rate of cardiovascular events in the treatment than placebo arm.

A meta-analysis of 27 trials involving 2,994 men who had received testosterone replacement therapy was published in April 2013. This study identified 180 cardiovascular events in this group which it attributed to testosterone replacement therapy. The authors concluded exogenous testosterone increased the risk of cardiovascular-related events,

A retrospective study examining a VA population was published in the January 2014 edition of the Journal of the American Medical Association. It also concluded that testosterone replacement was associated with increased risk of heart attack. It compared the incidence rate of heart attacks in the 90 days following an initial prescription with the rate in the one year prior to the initial prescription. It concluded that there was an increased risk of heart attacks in men older than 65 and in younger men with a history of heart disease.

Some Studies Suggest Just the Opposite; That Testosterone Protects Against Heart Attacks

There are a number of conflicting studies on the effects of testosterone replacement some showing and others not showing a relationship between testosterone therapy and risk of heart attacks. This is generally been my experience with meta-analysis on other products- estrogen replacement products are a good example- and it is hard to make regulatory or investment decision based on them. Prejudices on the part of authors and how they set up the analysis often pre-ordain the outcome.

An example of a positive study is one that was published in In the July 14, 2014 edition of the Annals of Pharmacotherapy study. This retrospective study examined the risk of myocardial infarction in older men receiving intramuscular testosterone. The study looked at 6,355 Medicare patients treated with at least 1 injection of testosterone between January 1, 1997, and December 31, 2005. These were matched to 19,065 testosterone nonusers on the basis of a score that predicted risk of heart attacks. Patients receiving the therapy had an average of 8.2 injections over the study period, including 4.4 injections in the first year, and were more likely to have a high degree of comorbid disease compared with nonusers.

For men in the highest quartile of the heart attack prognostic score and presumably at greatest risk, testosterone therapy was associated with a reduced risk of heart attack. In the other three cohorts, there was no difference in risk. The authors concluded that older men who were treated with intramuscular testosterone did not appear to have an increased risk of heart attack. For men with high attack risk, testosterone use was modestly protective against heart attacks.

Because the treatments were all given before 2005, testosterone was administered in the form of intramuscular injections. Gel, patch, and oral formulations of testosterone therapy are now more commonly used than during the study period. This is important because if anything, the risk with IM injections would be expected to be higher due to a greater peak/trough effect. Testosterone levels after injection may be super normal with IM formulations. Hence, the gels are considered to be more physiologic and safer.

The lead author hypothesized that the biological basis that testosterone for testosterone being cardio protective is that it decreases fat mass, increases lean body mass, and decreases insulin sensitivity and improves the lipid profile. He also felt that testosterone possesses anti-inflammatory and anticoagulant properties. However, he acknowledged that that there are plausible pathways whereby it could increase cardiovascular risk.

The FDA is Looking into Cardiovascular Risk

Obviously, the issue is by no means clear cut with studies coming up with diametrically opposed conclusions. The FDA announced in January, 2014 that it is reviewing approved testosterone products regarding their potential to increase the risk of serious adverse cardiovascular outcomes. In April, the European Medicines Agency also began an investigation into the issue of testosterone containing medicines and cardiovascular risk.

Canada’s version of the FDA issued a warning that cardiovascular problems may be linked to the use of testosterone. The agency noted that it had completed a safety review of testosterone replacement products and found evidence for serious and possible life-threatening heart and blood vessel problems such as heart attack, stroke, blood clot in the lungs or legs; and increased or irregular heart rate with the use of testosterone replacement products.

The FDA denied a citizen’s petition filed by the Public Citizens Group, which requested that FDA add a block box warning about increased risk of heart attacks and other cardiovascular dangers to the label of all testosterone products. It also asked that manufacturers issue a “dear doctor” letter warning of serious adverse cardiovascular events. The FDA denied the petition in its entirety and stated that it will continue to assess the cardiovascular safety of testosterone products on a product-by-product basis.

The FDA announced in June that it has convened an advisory committee meeting for September 17 and 18^th to discuss the appropriate indicated population for testosterone replacement therapy and the potential for adverse cardiovascular outcomes associated with this use. Based on its action in denying the Citizen’s petition, it seems that the FDA is not inclined to take the harshest measure of requiring a black box warning for testosterone replacement products. However, it seems to be sufficiently concerned to take some action.

What might that action be? It is generally well know that the testosterone products are prescribed broadly off label to improve muscle mass and increase sexual virility in men with low levels of testosterone. This is not an indication in the label so perhaps there could be some addressing of this issue. It also appears that it will be taking a hard look at maximum drug levels achieved just after administration. This could work to the competitive advantage of QST. The cardiovascular risk if any is probably due to a spike in blood levels just after injection and the goal of QST is to reduce this spike relative to other injectables and other dosage forms. Panel members may also introduce new concerns into the discussion. It is very difficult to guess at just what action the FDA will take.

Market Potential for QST

Testosterone replacement therapy was popularized as “the low T” market and as a result of direct to consumer advertising sales were surging. 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.

The controversy over cardiovascular side effects has taken its toll. In April, 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. Antares has not offered guidance as to the anticipated penetration of QST given the uncertainties in the market. However, it does feel that within the injectable part of the market it has substantial advantages over the IM product in causing less pain, the ability to inject at home and potentially less peaks and trough excursions.

I think that what comes out of the FDA advisory committee meeting will obviously be critical to assessing the potential of the US testosterone replacement market and how QST will fit into it. However, my guess at this point is that it will remain a large market with perhaps 30% of sales accounted for by injectables and that QST will potentially be the best of the injectables. I will have more to say after the September 17, 18 meeting.

Tagged as Antares Pharmaceuticals, ATRS, otrexup, Quick Shot Testosterone + Categorized as Company Reports