Expert Financial Analysis and Reporting

Investment Thesis

At Last, Three Major Product Approvals in 2018

It has been a torturous wait for Antares’ very promising pipeline to advance to commercialization, but the time has finally come. Antares and its partner Teva received approval for an AB rated generic to EpiPen on August 16, 2018 and Antares and its partner AMAG received approval for the subcutaneous dosage form of Makena on February 14, 2018. And most recently, on October 1, 2018, Antares’ wholly owned Xyosted was approved. Each of these were delayed by FDA actions which are difficult to understand:

• Xyosted originally had a PDUFA date of October 20, 2017, but received a complete Response Letter. It was then approved one year later without performing any new clinical trials.
• Investors originally were looking for the AB rated generic to EpiPen to be approved in 2015 or 2016. Its subsequent approval again did not seem to have required significant additional data.
• The approval of the subcutaneous dosage form of Makena was delayed from 3Q, 2017 to February 14, 2018 due to the FDA questions on interpreting the clinical data.

The stock has been severely hurt by these seemingly capricious actions by the FDA. Investors have blamed Antares for these delays, but it was really out of their hands. In retrospect, one has to admire Antares and its partners for keeping their cool, staying the course and getting these products to market. But enough of this regrettable history. Antares’ time has come. It now is in the early stages of three major new products launches. In my opinion, the potential of any one of these three justifies buying the stock at this current price. That is how explosive this investment situation is.

Stock Declined on Announcement of Xyosted Approval

Amazingly, the stock declined upon the announcement of Xyosted’s approval. One can point to several things that caused or may have contributed to this. The package insert for Xyosted contained an extensive black box warning about the potential for an increase in blood pressure in some patients. This is a modest increase in an absolute sense, can be easily managed, does not affect the majority of patients and is no doubt due to the effects of testosterone supplementation and not specific to Xyosted. This warning on blood pressure is contained in the label of all testosterone supplementation products and one can argue strongly (as I do later in this report) that the superior pharmacokinetics of Xyosted might make this less of a risk for Xyosted than competitive products. Importantly, many testosterone products require a REMS. One can argue (and I do) that the lack of a REMS for Xyosted gives it a very meaningful labeling advantage in the testosterone supplement class. I go into this in detail later. On balance, I do consider the label of Xyosted to be a positive, not a negative.

Next we can perhaps be concerned that virtually every new product launch is slower and more disappointing than the one before due to the tedious and lengthy process required to gain reimbursement from private payors and Medicare. This could be a near term negative for the stock. Adding to this, the Company is adding 60 new reps and will incur considerable expenses in launching the product. Antares hasn’t indicated the expected cost of the launch but based on experience with other comparable products, I would guess that it could be somewhere between $25 and $40 million.

Both the Makena subcu and the AB rated generic to EpiPen should experience quick penetration of their markets and should each be quite profitable in 2019. How this balances out against the probable losses associated with the Xyosted launch is difficult to forecast and at this point in time, I am waiting for more information before trying to project total corporate sales and earnings in 2019 and beyond. We will probably have to do a sum of the parts analysis for each of the three estimating the contribution of each to the share price in order to come up with a target price. I am very confident that it is going to be very much higher than the current share price of $3.77.

I am also certain that some investors will be concerned that Antares may have to do an equity offering as the current cash position is only about $25 million and probably needs bolstering. An overhanging equity offering can be a perceived by investors as a dilution of stock if the use of the cash can’t be seen as having an identifiable, productive function, but is just keeping the Company going. It is quite a different proposal if the cash can be invested in a very high return opportunity which is the case with Xyosted. If this product can achieve 10% of its market in four years, it would have sales of over $250 million in 2022.

Xyosted on Its Own Has the Potential to Contribute $9 to $12 to the Share Price in 2022

Experience with other products having strong competitive positions would suggest that Xyosted revenues could be capitalized at six to eight times revenues. Let’s assume that Antares sells in the near future some 13 million shares at $3.75 in order to raise $50 million. The current share count is 157 million so this hypothetical offering could increase the share count to 170 million. Four years out, the market capitalization of Antares due to Xyosted alone could be $1.5to $2.0 billion (60 to 8 multiplied by $250 million) and dividing by 170 million shares suggests a per share price contribution of $9 to $12 from Xyosted alone. It is possible that Antares might reach some kind of a co-promotion arrangement with a larger company if it thinks this would maximize shareholder returns. This could reduce or obviate the need for an equity offering,

Pipeline Prospects Continue to be Exciting

Finally, investors must consider that Antares continues to have an exciting pipeline. The most valuable identifiable asset is an AB rated generic to Forteo being developed in partnership with Teva. Forteo had US sales of $965 million in 2017 and 1H, 2018 US sales of$748, up 75% from 1H 2017. This AB rated generic could come to market in 2H, 2019. I estimate that an AB rated generic to Forteo should capture perhaps 40% of the market at a 20% price discount (initially). Let’s assume that Forteo sales are running at a rate of $1 billion at that time. The AB rated generic could achieve peak sales (probably in 2020 or 2021 of $320 million.

Based on the royalty due Antares and profitability on making injectors (combined comes to about 12% of sales) the pretax contribution to Antares could be about $38 million. Assuming a tax rate of 21% and 170 million shares outstanding, this would contribute $0.18 per share. Assuming a P/E of 15 times for Antares, this could add $2.70 to the share price in 2020 0r 2021. Unique to Forteo, Teva will also be selling this product in Europe where 2017 sales were $787 million. This could produce additional profits beyond those generated in the US.

Recently there was also a deal announced with Pfizer on an unnamed product that should begin to enter into investors’ thinking in 2019 and there are likely to be more such deals with big pharma announced in 2019 and beyond. Antares will announce a new product to be developed on its own like Otrexup and Xyosted by year end. There is also a modest opportunity with an AB rated generic to Byetta. The pipeline prospects continue to be impressive.

Investors Breathe a Sigh of relief with Xyosted Approval

The approval of a new product is always a landmark event for any company. Given the rigors and hazards of the clinical trial and regulatory process, there are great uncertainties all along the way from test tube to approved product. We certainly saw the regulatory risk driven home a year ago (just before the PDUFA date for Xyosted) when at the eleventh hour and fifty ninth minute, the FDA issued a Complete Response Letter. Xyosted looked to have excellent clinical data and this was a shock. Now a year later, Xyosted has been approved with the same clinical data in the application that received a CRL.

The FDA is a law unto itself that answers to no one. Also, there is no such thing as an irrefutable data package. If someone in the agency, for whatever reason, decides they want to consider other ways of looking at the data or more data there is almost no recourse. This can lead to situations like Xyosted in which most reasonable people would agree that it should have been approved a year ago. The takeaway point is that there is always considerable risk right up until the point at which the FDA approves a new drug. Hence the FDA approval can only be taken as an extremely positive event for Antares.

Can Xyosted be a Meaningful Product for Antares?

It is sometimes the case that an FDA product approval is not that meaningful to a company because the commercial potential is limited or small in relation to the scale of the Company. This is certainly not the case with Xyosted whose commercial potential when weighed against the small commercial scale of Antares should be considered as a blockbuster. The testosterone market in the US consisted of about 6.5 million prescriptions in 2017 and is growing at about 5% this year and on track to reach 6.8 million. About 70% of this market is comprised of injectable dosage forms with the remaining 30% almost entirely gels.

There are two key attributes about Xyosted. The first and most important is that testosterone therapy is all about pharmacokinetics as obviously each product in the market is based on delivering testosterone. The relative effectiveness of a product is determined by the extent to which testosterone blood levels do not exceed an upper bound (1100 ng/dl)which can lead to side effects or fall below a lower bound (300 ng/dl) in which efficacy is impaired. In addition, the levels of testosterone should remain between the lower and upper bounds for the period between administrations which in the case of Xyosted is one week. In fact Xyosted in its clinical trials showed a mean level of testosterone of 553 ± 127 ng/dl which is well within the bounds looked at by the FDA. Xyosted based on its clinical data has excellent pharmacokinetics which probably is best in class of available products.

The other important aspect is that current injectable products are delivered every two weeks with a deep intramuscular injection in the buttocks using a 19 gauge needle that is painful. Clinical data indicated that 99% of patients said they experienced no pain with the subcutaneous injector used in Xyosted. Also, IM injections usually must be administered by some trained medical person. This may require the patient to go frequently to the physician’s office for an injection. With Xyosted, the patient can administer the drug in their own home.

With best in class characteristics for an injectable product, Xyosted should capture a very meaningful part of the addressable market. Antares has not officially declared a price for Xyosted, but has indicated a potential list price of $450 to $500 per prescription. After discounts and rebates the price is likely to be lower, let’s guess $400. Currently, generic injectable products are sold at $100 to $200 and the leading, branded gel product AndroGel has a list prices of $615 but after discounts and rebates may have an actual selling price of about $450. The addressable market for Xyosted at a price of $400 per prescription is $2.6 billion. If Xyosted were to get just 10% of this market it would be a $260 million product and40% would make it a billion dollar product. By the way, AndroGel had sales of about $570 million in 2017.

Approved Indication for Xyosted

Like all testosterone supplementation products, Xyosted is approved for the treatment of primary and secondary hypogonadism in men. This is a condition in which the body doesn't produce enough testosterone which is the hormone that performs an essential role in masculine growth and development during puberty. Hypogonadism in adult males may include the following symptoms:

• Erectile dysfunction,
• infertility,
• decrease in beard and body hair growth,
• decrease in muscle mass,
• development of breast tissue (gynecomastia),
• loss of bone mass (osteoporosis),
• fatigue, decreased sex drive,
• difficulty concentrating,
• hot flashes

Black Box and Side Effect Warnings for Xyosted

All testosterone supplementation products carry black box warnings.  Let’s look at the example of Aveed, an injectable product that was approved in May of 2014. It carries a black box warning about pulmonary oil embolism and anaphylaxis. The FDA says that this can occur with any injectable testosterone product. The FDA also requires a risk evaluation and mitigation strategy (REMS) that requires a patient to remain at the health care setting for 30 minutes after each injection to watch for such reactions.

The FDA chose to put the following black box warning on Xyosted.

• XYOSTEDâ„¢ can cause blood pressure increases that can increase the risk for major adverse cardiovascular events (MACE), including non-fatal myocardial infarction, non-fatal stroke and cardiovascular death, with greater risk for MACE in patients with cardiovascular risk factors or established cardiovascular disease.
• Before initiating XYOSTEDâ„¢, consider the patient’s baseline cardiovascular risk and ensure blood pressure is adequately controlled.
• Starting approximately 6 weeks after initiating therapy, periodically monitor for and treat new-onset hypertension or exacerbations of pre-existing hypertension in patients on XYOSTEDâ„¢.
• Re-evaluate whether the benefits of XYOSTEDâ„¢ outweigh its risks in patients who develop cardiovascular risk factors or cardiovascular disease while on treatment.
• Due to this risk, use XYOSTEDâ„¢ only for the treatment of men with hypogonadal conditions associated with structural or genetic etiologies.

This black box warning apparently stems from a growing  FDA concern about the need to warn physicians about the risk for a blood pressure increase in not only testosterone supplementation products but across all drug classes. The increase in blood pressure for Xyosted is modest as the majority of patients have no increase in blood pressure. Generally, for those who do experience an increase, it is a modest increase of 4 mm Hg. An increase of this magnitude would probably not be treated. It appears to me that the FDA wants physicians to be aware of this issue and treat any outliers who might require control of their blood pressure with drugs.

One of my subscribers is very knowledgeable about Antares and often has insightful comments. He chooses to remain anonymous, but he had some cogent comments on the Xyosted label that I thought I would repeat here. He wrote.

As expected, the focus of the Ladenburg Thalmann conference call was primarily the approval of Xyosted.  All systems go, though no details yet about the funding of the launch or if there's a marketing partner in wings.  I'm feeling we won't have to wait long to get an answer on either front.

I was a little surprised that no mention was made about the "black box" noise as all TRT products carry this warning on the label per the FDA directive in spring 2015.  Smart money knows this, but still I thought it would come up.   The gels started carrying a black box warning in 2009 due to transference, then the second piece (the bogus cardio noise that has since been debunked but still remains on all TRT labels for now), was added in 2015.

Of much greater significance, Xyosted has no REMS.  The black box warning MUST be on every TRT label per the FDA directive previously mentioned.  A REMS plan isn’t mandatory for testosterone therapy, though looking at the pre-Xyosted FDA list of testosterone therapies, it sure appeared that way.  When the FDA requires a drug to have a REMS, that means the MD must read through all the warnings and so forth with a patient, then have the patient sign a document agreeing to the risks presented before that drug could be prescribed.  If you look at the FDA REMS link below, you'll see no less than 17 approved TRT products that required a REMS.  All the gels, branded and generic, plus solutions (vial base TRT) and the "other" including the most recent TRT approval prior to Xyosted (Aveed back in 2014) carry a REMS.   Simply, a REMS used to be standard "rubber stamp" warning from the FDA when testosterone therapies were involved.   But, no more as Xyosted is not on that list!  The FDA feels comfortable enough with Xyosted to give it a REMS "pass".  Simply, for a testosterone replacement therapy, this makes it as clean of a label as possible for the TRT class of drug.  This strikes me as very significant, and a unique and relevant competitive advantage vs. virtually all other testosterone therapies   The FDA appears to really like the PK of Xyosted as well as the safety profile, A LOT.

All in all, the label of Xyosted seems to be quite favorable when viewed within the class of testosterone supplementation therapies.

Administration of Xyosted

The initial dose given to all patients is 75 ng/dl. After six weeks of weekly injections, the doctor may adjust the dose upward or downward to better control symptoms of hypogonadism. In the clinical trials of Xyosted, about 60% of patients remained on 75 ng/dl while about 20% were titrated down to 50 ng/ml and about 20% were titrated up to 100 ng/ml. Generally, upward titration occurred in more obese patients and downward titration in thinner patients. This titration occurs at about five weeks at which time, physicians should also be looking at any change in blood pressure.

The Upcoming Launch

Antares has had offers out to 60 reps that were contingent on approval of Xyosted. These offers will now be made formal and it is anticipated that most of these reps will be on board by mid-November and that the launch will occur in December 2018.

The list price of the market leading product AndroGel is about $615 per prescription, but after rebates and discounts is meaningfully less. Antares plans a list price of $450 to $500 per prescription and will offer discounts and rebates off this price as required to gain tier 3 status on formularies. They will help patients pay their co-pays. In the case of injectable testosterone products which sell for $100 to $200 per prescription, the co-pay is generally $25 to $50 per prescription. Antares in many cases will buy down such a co-pay so that the patient pays little or nothing out of pocket. From the patients viewpoint there will be little to no incentive to use a generic. There are major disincentives because of the painful injections and probable need to go to a physician’s office every two weeks of so.