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Expert Financial Analysis and Reporting

Antares: Reiteration of My Buy Recommendation (ATRS, $4.00)

Investment Thesis

It has been some time since I have written on Antares (ATRS); in fact my last note was in September 2012. My lack of writing shouldn't be interpreted as a decline in interest. Antares remains one of my favorite biotechs and one of my largest personal biotech holdings. This is a brief update on the fundamental drivers for the stock over the next few years.

Antares' management has done an excellent job in building a business based on developing and licensing products in return for a royalty. This can be a good business as indeed Antares is proving. However, the truly great stock successes have been with companies having fully integrated business models that go the further step and bring new products to market on their own. It is the transition from the royalty based to fully integrated business model that is the most important fundamental driver for my recommendation.

Antares has shown an unusual ability to create new products for partners and it is now doing the same with proprietary products for its own account. Its first proprietary product is the injectable methotrexate product Otrexup which could be approved late this year. The second is an injectable testosterone product Vibex QST, which could be approved in 2016. I see both of these products as having peak sales potential of around $200 million. The Company has also indicated that it will be developing two additional proprietary products, one in neurology, that will be disclosed later this year. This is an extraordinary pipeline for a company of Antares' size.

There is also a strong pipeline in its partnering business. The most important of these is a generic competitor for Pfizer's blockbuster Epipen, which Antares is developing in partnership with Teva. If an AB rating (allows the pharmacist to substitute for the original brand name product) is granted by the FDA for this product, it could be the most important profit contributor in the 2015-2016 time period. There may also be an introduction in 2014 of an AB rated generic sumatriptan product for migraines. There are other drugs in addition to this.

Antares is in a strong financial position to launch Otrexup and to develop its promising pipeline as it ended the first quarter with over $80 million of cash. I project a cash burn of $15 million in 2013. Adjusting for the anticipated launch expenses associated with Otrexup and the hiring of the new sales force, I project a burn rate of $10 million in 2014. If this is correct, the cash position at the end of 2014 would be $55 million. I see no need for financing in 2013 or 2014 and the Company could turn profitable in 2015.

Otrexup (injectable methotrexate)

Otrexup is a self-injected product that first got me excited about Antares. Methotrexate used in an oral dosage form is the gold standard treatment for rheumatoid arthritis. Because of side effect and efficacy issues that are in part related to limitations of the oral dosage form, rheumatologists are sometimes forced to move patients to biologics like Enbrel, Humira and Remicade. See my report. These are effective drugs although they have their own side effect issues and they are quite expensive, costing perhaps $20,000 per year; oral methotrexate costs $200 or so. The biologics have worldwide sales of about $15 billion. The Otrexup NDA has now been submitted to the FDA and the PDUFA date is October 14, 2013.

Injectable methotrexate may offer a step between oral methotrexate and the biologics. Physicians would be anxious to do this as it would keep patients longer on the trusted methotrexate. Also, I have never heard a rheumatologist speak without complaining about the high price of the biologics. I expect Otrexup to be priced at about $2,500 per year as compared to $20,000 or so for the biologics and this could be well received by physicians. Managed care will also embrace this cost advantage versus the biologics, but at the same time it will worry that physicians might inappropriately switch from the oral to the injectable.

The universe of rheumatologists in the US is quite small, well defined and can be reached with a small sales force of 25 to 30 reps. The marketing job of these salesmen is to help physicians determine the appropriate place to begin Otrexup therapy which is somewhere between the oral methotrexate and the biologics. Sales reps will have the challenge that there is no head to head efficacy data versus oral methotrexate. They will have to sell on the basis of pharmacokinetic data.

There are estimated to be 1.5 million rheumatoid arthritis patients in the US. There is no good data on the part of this market that Otrexup addresses. I have seen estimates that current injectables are about 1% of the market. This translates into about 15,000 patients and at my expected Otrexup price of $2,500 represents an immediate addressable market of $38 million. I think that Otrexup can quickly take over much of this segment of the market and can expand significantly beyond that. I am estimating an introduction in 1H, 2014 and have a sales estimate of $15 million in 2014 and $50 million in 2015. Some Street analysts that I respect have peak sales estimates of $150 to $250 million and this seems reasonable.

Vibex QST

The second proprietary drug candidate is Vibex QST, a once a week testosterone auto injector. Testosterone replacement therapy has now been popularized as "the low T" market thanks to direct to consumer advertising and it is surging. Current annual sales in the US are about $2 billion and are increasing at 30% per year so that sales could surpass $4 billion by 2017.

Most of the current market is served by topical gel formulations, but there is a small component that is addressed by long acting injectables. 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, only the most pain tolerant of patients can self-inject and the product is usually administered by a physician, nurse or other qualified medical personnel.

Vibex QST should successfully address the shortcomings of the current injectable formulations. It can be self-administered subcutaneously with a smaller needle in about five seconds. I expect that the gels will continue to dominate the market. However, there will be a meaningful number of patients who don't like the messiness of the gels and the problems they cause if the dose of testosterone is inadvertently transmitted to a wife or children through contact. It also holds the promise of better pharmacokinetics.

The NDA will be filed in 2015 and the 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. 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 old business model and the Teva collaboration. See my report. This is the launch of an auto injector which is a generic version of Epipen, Pfizer's 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. However, Teva has 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 as much as 20% to 40% of the market. Without the AB rating, Teva would be forced to market the product as a new product would have to devote considerable resources to establish sales. 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 $1 billion and international sales of $300+ million. I usually model that the first generic entry will be priced at a 40% discount to the brand name product and will capture 80% of the unit market. I think that the unit penetration will be much less in this case. Epipen is used in a life threatening situation and confidence in the proven efficacy will be more important to many patients and their families than saving money. They may refuse to let the pharmacist substitute for Epipen and pay a higher price, at least initially.

I have produced a model that assumes Teva captures 40% of the market in its first full year of marketing, which would be 2016; I estimate that in this case Antares would realize revenues from manufacturing the product of $46 million and royalties of $30 million. I would not be surprised to see a lesser market share of 20% which would reduce these estimates by 50%. 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 growth for some time beyond 2016.

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