Expert Financial Analysis and Reporting

Conclusion

I believe that the settlement on the EpiPen litigation is a positive for Antares. It pushes the launch date for the generic epinephrine injector from 2013 to 2015. However, during this time, EpiPen sales are expected to grow rapidly increasing from $600 million in 2012 to $1.3 billion in 2015. Based on calculations shown later in this report, I estimate that a launch in 2013 would have resulted in $32 million of annual manufacturing revenues for Antares and $18 million of annual royalties. My estimates for 2015 are $46 million and $31 million respectively.

When Teva enters the market with generic epinephrine, promotion of EpiPen is likely to be withdrawn and the sales of the product could flatten or even decline. By waiting and letting EpiPen continue to be promoted, the economic return will be substantially enhanced for Teva and Antares. The settlement also takes away the risk (probably small) of losing the litigation with Pfizer (PFE). Also, Pfizer will likely pay a meaningful amount of cash to Teva; if the generic epinephrine is approved with an AP rating, Antares will receive a portion of this settlement.

There remains a slight chance that the FDA will not give the Teva/Antares device an AP rating allowing for substitution with EpiPen. In this case, there would be only a very small economic opportunity. However, I expect that the FDA will grant an AP rating.

I continue to recommend purchase. This situation is just one component of a very strong pipeline story.

Overview

Teva and Antares announced a settlement with Pfizer resolving patent litigation on Teva’s epinephrine auto-injector application that would be the first generic to EpiPen. Teva has sued Pfizer challenging the validity of patents protecting EpiPen and concurrently has filed an application with the FDA for an AB rating on the Teva/ Antares product that would allow the pharmacist to substitute it for EpiPen.

There have been two key risks for Teva/Antares. The first is that they could lose the litigation and be blocked from the market. This case was tried in court and ended in March, 2012, but this settlement was reached before the judge rendered the decision. Such settlements between companies often occur when the outcome is uncertain. They usually give the brand name company some further extension of exclusivity and grant the generic challenger the right to market the product at a specified future time.

The litigation is a separate issue from the application to the FDA seeking an AB rating. In the case of EpiPen, the FDA is dealing with a device that is used in a life or death situation. To approve the Teva/ Antares auto injector’s AB application the FDA must have a high level of confidence that the products can be safely interchanged. The FDA has approved two other epinephrine auto-injectors through the 505 (b) 2 pathways. These products are not interchangeable with EpiPen and have done little in the market. For Teva and Antares, the meaningful commercial opportunity comes from getting an AB rating.

The settlement with Pfizer allows Teva to introduce its auto-injector on June 22, 2015. It obviously has no impact on the pending FDA application. No terms were announced, but these settlements usually involve a payment from the brand name manufacturer (Pfizer) to the generic challenger (Teva).

In a separate agreement, Teva has agreed to provide Antares with device orders of an undisclosed amount in the years 2013 and 2014 and to make a milestone payment to Antares upon FDA approval of epinephrine auto-injector, and to assume all litigation costs related to the patent litigation between Teva and Pfizer.

Will The Teva/ Antares Auto-Injector Receive an AB Rating?

I think that the probability of receiving an AB rating is very high. Certainly, Antares has been guiding investors to this expectation and the actions of Pfizer in settling suggest that they agree. Teva and Antares have completed a user study in a simulated emergency situation whose endpoint was to show interchangeability with EpiPen. It is about to submit this study to the FDA suggesting that the results were positive. Importantly, the FDA has not requested that Teva follow the 505-b-2 pathway suggesting it is on track to grant an AB rating. In 2009, there was a transition from an older version of EpiPen to a newer version and the two did have some differences. This indicates that the FDA is going to be satisfied with highly similar products and will not require them to be absolutely identical. Finally, while I have not seen the Teva/ Antares device, others have told me that they are virtually indistinguishable.

EpiPen

Pfizer and Mylan are very secretive about exact sales levels of EpiPen and don’t release exact numbers. Based on Mylan statements, I estimate that EpiPen could have worldwide sales of $600 million in 2012 with $450 million in the US and $150 million abroad. Sales are currently increasing at about 35% to 40% and should continue to grow rapidly through 2015. My projections for sales and unit growth are as follows:

Calculating the Difference Between a 2013 Launch for Teva/ Antares and a 2015 Launch

The following tables show the difference in economics between Teva launching in 2013 and 2015. I anticipate that Teva will discount their product by 20% and will gain 40% of the unit market. Based on this I have calculated Teva revenues and unit sales for two scenarios, a launch in 2013 as compared to 2015. This is shown below:

I estimate that Antares will receive $5.00 for every injector sold by Teva and a royalty of about 7% on Teva sales. This allows me to calculate the economics of a 2015 launch as compared to launching in 2013. This is as follows: