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SmithOnStocks Mailbox

April 28, 2015

A Quick Take on Recent Events

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Purpose of this Note

I have written extensively on Antares, Agenus, Cytokinetics and Discovery Laboratories. I have Buys on Antares, Agenus and Cytokinetics. I have a Hold on Discovery (what a troubled history), but I may upgrade the stock at some point based on the clinical development of and commercial potential for Aerosurf. ZS Pharma is a new name for me and it is one I believe that I will be involved with for a very long time. I consider it as having one of the best fundamental outlooks of any emerging biotechnology company. On each of these companies, there are extensive reports that subscribers can turn to for background. The purpose of this SmithOnStocks Mailbox note is to comment on some recent news events for these companies.

Things to Know About SmithOnStocks

I was a Wall Street analyst specializing in pharmaceutical and biotechnology companies for over 30 years which provides me an extensive background against which to analyze companies. The basic business model of SmithOnStocks is to provide detailed fundamental analysis that helps investors gain sufficient information to make an independent judgement on companies they are considering investing in. I try to be balanced and give the positives and negatives of each company. I only derive revenues from subscriptions to my website so that my only business motivation is to provide value to my subscribers.

I do give my opinion on the stock potential of companies I write on. I never trade against that opinion and when I change opinions, I wait 48 hours before acting on the change in my own account. While I try very hard to be correct in my projections for companies, there are so many uncontrolled variables that I do make mistakes and subscribers should understand and expect this. I strongly discourage anyone from relying on my opinion alone. Use my reports to gain a foundation of knowledge, seek information from other sources and then make your own decision.

Agenus (AGEN, Buy, $7.24)

Agenus has been on a tear in April. It started the month at a price of $5.13 and by April 22, the price had increased to $5.87. On April 23, the Company held its conference call discussing 1Q, 2015 results and on April 24 the final results for the phase 3 trial of Glaxo’s malaria vaccine were published in the medical journal Lancet. The stock is currently at $7.43; so far in the month of April the stock is up 45%.

I think that the news on the malaria vaccines was a major catalyst for the stock move. If so, the stock price move seems excessive given the modest economic impact on Agenus. I am projecting that Glaxo’s sales of the malaria vaccine will reach $350 million in 2018 and that Agenus will receive $6 million from Glaxo for the use of Agenus’s QS-21 Stimulon adjuvant which strengthens and broadens immune responses to the vaccine. The reasoning behind my projections are summarized in a report I wrote on October 9, 2013 called Agenus and Glaxo: Sizing Up the Potential for the RTS,S Malaria Vaccine.

I am quite positive on Agenus longer term, but I am a little puzzled by the strength of the current price move which seems based on the malaria vaccine news. My thinking on Agenus is summarized in my report of January 9, 2015. Agenus: The Collaboration with Incyte is Transformative and Creates Great Shareholder Value (AGEN, Buy, $4.99). The link is

Agenus has announced that it is having an R&D day for analysts on May 14, 2015. I will attend and report back. You may want to put this event on your calendar.

Antares (ATRS, Buy, 2.63)

Recent Update

I just wrote an update on Antares in which I made projections for Otrexup sales and sales of an AB rated generic to EpiPen, which is a $1.2 billion product in the US. I am expecting a launch of EpiPen in July of 2015. My sales model projects that 2015 revenues of Antares will increase by 85% over 2014 to $49 million and that 2016 revenues will increase by 89% over 2015 to $93 million. I present an argument in that report that suggests that based on a comparison to peer emerging biopharma companies, Antares could sell at 5 to 10 times revenues. This results in a price target of $6 to $12 in 2016.

Teva Bid for Mylan

Just as I was publishing that report Teva (TEVA) announced it was making an offer to buy Mylan, which markets EpiPen in the US. Some investors are concerned that if Teva is successful that it might choose not to market the AB rated generic to EpiPen. I wrote in an article on this which was published on April 23 that concluded that because of FTC issues, if Teva is successful in acquiring Mylan MYL), it would not affect the launch of the AB rated generic. I might add that Mylan seems very opposed to the offer.

End of Marketing Agreement with LEO for Otrexup

On April 27, Antares announced that it was ending the agreement with LEO pharmaceutical to market Otrexup in the US to dermatologists for the treatment of psoriasis. LEO’s US operation is not running smoothly and Antares was not happy with the sales performance of LEO. According to Antares, the decision to end the marketing agreement was mutual.

In an 8-K release, Antares stated that prescriptions written for psoriasis account for less than 5% of Otrexup prescriptions. Antares knows which doctors are prescribing for psoriasis and will try to maintain this level of prescriptions through phone contact while it looks for a new marketing partner. It will not divert time or resources from its rheumatoid arthritis marketing effort. This will probably enable Antares to roughly maintain the prescription base established by LEO or hold the decline to modest levels.

I was asked if I intend to adjust my sales estimates for Antares in 2015. Given the modest contribution of the psoriasis market and the broad confidence interval around my $17 million sales estimate for 2015, I won’t do so based on this news.

Recent Prescription Trends

Total prescriptions written for Otrexup were 2,140 in January and were flat to down in February and were up 7% in March. The national sales meeting was held in March and may have affected prescriptions written in each of those months. Hopefully, the increase in March stemmed from impetus from the sales meeting.

Based on the total prescriptions written for the latest reported week, the annualized sales run rate for Otrexup is $13 million. My estimate for 2015 is $17 million with the Street being in the $15 to $20 million range. I am hopeful that my estimate proves conservative. My recent report deals extensively with

ZS Pharma (ZSPH, Hold ,38.87) and the Hyperkalemia Market

I am quite optimistic on the hyperkalemia market as I wrote in my March 31, 2015 report Effective Treatment of Hyperkalemia Promises to be a Multi-billion Opportunity .There are two small companies that are poised to introduce new products for hyperkalemia in the next year or so; these are Relypsa with patiromer and ZS Pharma with ZS-9. I wrote an extensive initiation report for subscribers on ZS Pharma explaining why I think that ZS-9 is a better product than patiromer. I see ZS Pharma as having excellent long term stock potential but I am cautious near term on a valuation basis.

Discovery Laboratories (DSCO, Hold, $1.17)

Surfaxin Marketing Ceased

DSCO has ceased marketing efforts for Surfaxin and will focus all resources on Aerosurf. It will seek a partner, but if one is not found Surfaxin will be put on the shelf. The hand writing was on the wall as Surfaxin sales have been dismal since the launch a year ago. This is a personal disappointment for me, but I concur in the decision. The Chief Operating Officer lost his job after the disappointing Surfaxin launch and the Head of Research and Development previously lost his job because of delays in the phase 2a trial of Aerosurf. My thoughts on the investment thesis for DSCO are spelled out in the recent report.

Aerosurf is the Whole Investment Story Now

There is some encouraging news on Aerosurf. Management stated during the recent conference call covering 4Q, 2015 results that Aerosurf in combination with nCPAP has the same safety and side effect profile as nCPAP alone. This is highly encouraging. In the third quarter conference call last year, management told investors that the rate of occurrence of pneumothoraxes in the Aerosurf arm of the phase 2a trial was higher than in the control arm although not statistically significant. However, with greater patient enrollment the incidence of occurrence in both arms is now the same; I meet this news with a sigh of relief. Management also states that it is seeing very encouraging signs that Aerosurf is having a therapeutic effect as Aerosurf babies have higher oxygen saturations in their blood and less carbon dioxide in their lungs; these are both indicators of improved lung function. They also report that the delivery device is working well according to investigators.

I think that Aerosurf is one of the most exciting products in biotechnology. The phase 2a trial of Aerosurf has just completed enrollment and full results should be out in a month or so. The phase 2b proof of concept trial should start shortly and we could see topline results in mid-2016. If the phase 2b trial is successful, there is enormous upside. I wrote a detailed analysis of Aerosurf on December 2, 2014  for those who need a refresher on Aerosurf.

Cytokinetics (CYTK, Buy, 6.83)

The Company has announced that it is having an R&D day on May 12. I will be in attendance and report back. This would be the perfect occasion to lay out detailed plans for the phase 3 trial of tirasemtiv in ALS and if so, this could be a catalyst for the stock.