A Deep Dive Into Antares Pharma's Buyout Thesis

| About: Antares Pharma (ATRS)

Recently, Scott Matusow wrote about companies he believes will be acquired this year, based on his own speculation and chatter from sources who originally brought Obagi buyout to his attention. One of those companies was Antares Pharma (NASDAQ:ATRS), on which I have been conducting due diligence for some time.

Before delving into the circumstantial evidence surrounding a possible buyout, it is helpful to understand the background of the company. Antares Pharma is a specialty pharmaceutical company that focuses on self-administered parenteral pharmaceutical products and topical gel-based products. Antares has been generating revenue that has been increasing year over year since 2008. In fact, the annual compounded rate of revenue increase is 49% per year; i.e., annual revenue increased from $4.6M in 2008 to $22.6 in 2012.

This revenue increase is evidence of their successful partnerships model, which includes (1) their reusable needle-free injection device for use with human growth hormone to Teva Pharmaceutical Industries, Ltd. (NYSE:TEVA), Ferring Pharmaceuticals BV in Europe and JCR Pharmaceuticals Co., Ltd. In Japan; (2) Elestrin gel marketed by Meda; (3) Gelnique 3% marketed by Actavis (ACT) and Daewoong South Korea. In addition to the marketed products Antares generates revenue from product development relationships established with many big players including (1) 10mg version of TevTropin with Teva, (2) Vibex devices being developed for Teva for the injection of epinephrine and sumatriptan, (3) two pen devices being developed for Teva which has $1.5 Billion in sales, (4) undisclosed Pfizer (NYSE:PFE) OTC product, and finally (5) Nestragel being developed in collaboration with Population Council.

Despite the success of the above partnerships Antares made a strategic decision to expand from a royalty driven revenue model to a specialty pharmaceutical company that develops it own products. As a result of this decision Antares is working on several internal projects including (1) Otrexup, self-injection device for rheumatoid arthritis patients, (2) QS-T for self-injection of testosterone, (3) QS-M for self-injection of a neurologic medication, (4) 60 other candidates that they identified that fit to their development platform. If one to summarize the story of Antares in a single short sentence, they focus on self-administered injectable drugs. Given this very specific focus why a potential big pharma suitor might be interested in Antares?

Part of the answer comes from several secular trends that are sweeping the pharmaceutical and managed care industry. Now, let's take a deep dive on some of these trends and how they relate to Antares.

Cost containment pressure by government and managed care: Injectable drugs are often used in managing chronic medical conditions, which mean that there is a need for repeated injections over time. Some examples of such chronic conditions are anemia, diabetes, multiple sclerosis, human growth deficiency, rheumatoid arthritis, hepatitis, and migraine. Patients usually visit the office of a healthcare provider to receive their injections. Repeated visits to a healthcare provider results in high costs as each office visit is charged separately. Government and managed care providers are increasingly looking for ways to contain the higher costs associated with such chronic conditions. It is not only the monetary cost that is involved here. One needs to take into account the inconvenience, lost productivity of the patient while going to doctor's office, and transportation costs too. These pressures create a demand for self-administration of such injectable medications; however, this can become more likely if devices can be developed that are easy to use by lay persons; unlike the traditional vial-syringe.

This is where Antares devices come into the picture with their pressure assisted injectors, which are manufactured with and without needles. Having no needle in sight reduces patient apprehension and improve compliance. These devices are spring-action that can inject at the click of a button as opposed to pushing slowly. Even the versions that have a needle incorporate a smart idea by hiding the needle from the patient's sight. Antares analyzed how painful it is for a patient to use their injector as part of the NDA for Otrexup. They used a VAS scale, where the patient puts a mark on a 100 mm scale with zero as no pain and 100 as extremely painful.

According to Paul Wotton, Antares CEO, the average reading was 3.6 while most of the readings were below 2. This shows that the application of Otrexup injector is virtually painless for the patient when they self-administer the medication. On top of eliminating patient apprehension, Antares injectors are designed to be taught easily to lay persons with increased safety profile with shielded needle. Accidental contact and dosing errors are also minimized by the use of pre-filled syringes in their injectors.

Growth of biologic and biosimilar drugs: Biologic drugs are among the most powerful trends in recent years affecting the pharmaceutical industry. Industry analysts project that biologics will account for 50% of the 100 top selling drugs by 2014. A biologic is manufactured in a living system such as a microorganism, or plant or animal cells. The difference between biological drugs and normal prescription drugs is that biological drugs can accurately search out the diseased organs or cells that need to be treated. Most biologics are very large, complex molecules or mixtures of molecules. Many biologics are produced using recombinant DNA technology. On the other hand normal prescription drugs are typically manufactured through chemical synthesis, which means that it is made by combining specific chemical ingredients in an ordered process. Biologics have become important profit drivers for big pharma; e.g., Novartis' (NYSE:NVS): a quarter of their pipeline is composed of biologics. They state that biologics is the fastest-growing area of the global pharmaceutical market.

One may wonder why biologics are important for Antares. The answer lies in the fact that biologics have to be injected. They can't be taken orally because the human digestive system would disrupt their complex structure. As biologics become more widespread one can expect self-injector manufacturers, like Antares, would become major players in the delivery of these medications. However, most important reason as to why Antares might be a buyout target within the framework of biologic drugs is something to do with the competitive advantage Antares gives in regards to patent protection. As biological drugs lose patent and market exclusivity, they become prime targets for follow-on biologics, also known as biosimilars. IMS Health forecasts that the worldwide biosimilar market will grow from $693 million in 2011 to $6.0 billion in 2016. Since, biosimilar molecules will be nearly identical to the original biologic, both the innovator and biosimilars manufacturers will seek other ways to differentiate their products in the market. Manufacturers will look to proprietary self-administration devices as a key way to compete as the biosimilar market begins to emerge over the next few years.

Antares is already at the forefront of product-device combination based arena with their Otrexup product as their learning ground in addition to years of experience with Teva. This is evidenced by their earlier than expected submission of the NDA to the FDA, which is already accepted by FDA in late February. Coupled with strong patent protection, Antares Pharma's regulatory and manufacturing experience in drug-device combination products can provide the necessary know-how to a big-pharma competing in biosimilar and biologics segment.

M&A Activity in Injectables: Mylan (NASDAQ:MYL) agreed to buy Strides Arcolab Ltd.'s injectable-medicine unit for $1.6 Billion late Feb. 2013. According to Mylan's CEO this will help them to push into copies of expensive biotechnology drugs. According to Bloomberg, Mylan, the second-biggest generic-drug maker, will gain Agila's manufacturing plants that can be used to make cheaper versions of expensive biotechnology medicines including insulins and blood-boosting treatments. Couple of days after Mylan's acquisition of Strides' injectable unit, Bloomberg reported that Hikma Pharmaceuticals Plc is considering a possible sale of its injectable-medicines business, the second-biggest by volume in the U.S., after receiving unsolicited expressions of interest.

Another Bloomberg article, published on Mar 15, reported that Claris Lifesciences Ltd. may be the next takeover target among Indian injectable-drug producers. The report continued by mentioning that likely buyers of Claris are either generic drug makers, including Teva Pharmaceuticals, or drugmakers like Pfizer that have exclusive rights to products. The market for injectable medicines will grow 13 percent annually from 2011 to 2017, according to Mylan, the world's second- biggest generic drug maker. Claris, Hikma, and Arcolab are in the business of manufacturing the medication itself; whereas, Antares is in the business of manufacturing the injector devices. It is possible to see that increased focus in injectable medications would bring increased demand for manufacturers of injector devices, like Antares, at some point in the near future.

Pfizer is already a partner for Antares as the two are working together for an undisclosed OTC product. According to Jack Howarth (VP, Antares), Pfizer had a good look in their pipeline and is familiar with what Antares is all about. There is growing evidence regarding the fit between Antares and Pfizer when one considers the following points along with the above secular trends:

Pfizer is getting strongly into the biosimilars and biologics business as David Simmons, who runs Pfizer's established products business unit, told Bloomberg that the pharma company is planning to sell a copy of biologic blockbusters like Amgen's Epogen and Sanofi's Lovenox. The Pfizer biosimilar pipeline could eventually include 10 to 15 biologics, and the company is hunting for new partners or buyout deals that can help it meet its goals. Pfizer's $68 billion Wyeth acquisition, expanded its ability to make biologic drugs. Coupling biologics and biosimilars with Antares' customized injection devices can be used to create exclusivity, competitive differentiation, and market protection. Antares has built considerable expertise in developing such drug-device combinations and progressing those through the FDA regulatory approval process, thanks to many such projects that they undertook for Teva.

Pfizer is facing with the chance of losing billions of dollars to generic competitors as it is nearing a patent cliff. When a drug loses patent protection, the branded version of the drug typically faces competition from generic alternatives. It may be possible to preserve market share by altering the delivery method. Antares states that branded and specialty pharmaceutical companies will continue to seek differentiating device characteristics to defend against generic competition and to optimize convenience to patients. The new device may offer therapeutic advantages (bypassing the digestive track), convenience (easy and self-administration at home) or improved dosing schedules (e.g., some medications are not absorbed into the system when taken orally). Recently a trend has emerged where companies are now focusing on "branded generics" wherein an established drug is coupled with a device technology in order to improve the drug utility to the patient or improve the ease of use of an injectable drug, which is where Antares shines in terms of its know-how both from a technological and regulatory point of view.

Pfizer has an injectables division of its own, which manufactures the injectable medications. The last medication that was added to their list was Methotrexate injection in late 2012. That was the first time Pfizer has secured rights for methotrexate (MTX) in the United States. Note that Antares' transformational product is Otrexup, which is a self-administered MTX injector.

Pfizer might be interested in some of the potentially blockbuster and under the radar products that Antares has. The two products that come to mind are Nestragel and Libigel. Nestragel is targeting contraceptives market, and potentially a blockbuster. According to IMS Health, the U.S. contraceptives market in 2012 was $5.5 billion. This product has superior tolerability and safety profile compared to other commonly used hormonal contraceptives. It has been on the shelf after completing successful Phase 2 studies. Antares and its partner Population Council is working to find a commercial partner to complete Phase 3 trials. Libigel is a testosterone gel for women suffering from female sexual dysfunction. Although Antares sold US rights to Biosante Pharmaceuticals (BPAX), they still have the rights for most of the remaining world. According BPAX, market potential for FSD is $2 Billion in US. Both Libigel and Nestragel need Phase 3 studies to progress.

Although there are logical reasons and circumstantial evidence as to why Pfizer might buy out Antares, one needs to note that such a buyout may never happen. Given Scott Matusow's speculation regarding a possible buyout based on information he gathered including his credible sources, this article is intended to analyze evidence that are complementary in nature but from a business and strategic perspective.

Disclosure: I am long ATRS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for informational use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.