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Introduction

Antares Pharma (NASDAQ:ATRS) identified low hanging fruit therapeutics like the gold standard MTX and testosterone, both generic drugs, and vastly improved these treatments by using a new application route (subcutaneous). Taking MTX orally exposes the patient to significant damage to the gastrointestinal tract. Applying testosterone gels to your skin, where the testosterone does not transverse the outer layers of your skin leaves the male hormone exposed to other parts of your body and other people in your household. By identifying reliable market potential, as is observed with MTX treatment for rheumatoid arthritis (NYSE:RA), combined with evident improvement to drug efficacy and side effect reduction, Antares Pharma has created a "next generation" of MTX treatment with Otrexup.

Favorable market conditions

RA is expected to grow at a steady rate of 2% annually, with population growth and aging. In 2014, there will be ~1.5 million cases of RA in the US, of which ~60% will be drug treated. There are only 3000 rheumatologists in US in large urban areas which are easy to reach markets. This points to favorable market conditions for the sales of Otrexup, if approved.

Weapon of choice

MTX inhibits cell proliferation, and this makes the drug an effective chemotherapeutic to treat cancer. Although it is possible that MTX has a unique mechanism of action in RA, it is likely that the drug is an effective anti-inflammatory because pathogenic (self-damaging) T cells, the primary driver of RA, are sensitive (stops T cell proliferation) to the drug. Since the drug is clearly effective at inhibiting cellular proliferation, it does not make sense to take this drug orally, and it is within the patient's and doctor's best interest to reduce drug exposure to the gastrointestinal pathway. The lining of the patient's mouth, esophagus, stomach, and intestine are highly proliferative. Cells in these organs are constantly dividing to replenish, since these organs are exposed to extreme factors (e.g. high acidity and diverse symbiotic bacteria that enhance digestion, absorption, metabolism, and our survival). Exposing these tissues to an anti-proliferative agent in order to treat a T cell-based disease in the patient's periphery (e.g. hands, arm, leg joints) is not ideal for medical treatment. It is not surprising that 20-50% of the patient's that receive MTX orally develop severe side effects that cause the discontinuation of the drug. The oral treatment can induce diverse side effects such as ulcer formation from the mouth throughout the entire gastrointestinal tract. The current alternative to the oral treatment is outlined here, and I recommend that you evaluate the current method thoroughly. Self-injecting is a dangerous and elaborate process, and the FDA should approve Otrexup as a safe, feasible, and cost-effective replacement. The Otrexup easy-to-use subcutaneous application mitigates side effects by obviously bypassing the gastrointestinal tract, and the doctor should discuss this benefit with all potential users of MTX for RA. The Otrexup application will also enable a tighter control of blood concentration of MTX, which will increase drug efficacy for RA patients at all stages of the disease. Lastly, patients can administer Otrexup at home. Patients with severe arthritis have limited ability to go to doctor for treatment. Having the ability to apply treatment at home will be a major benefit for the patients, and it will save the healthcare system by reducing patient visits to the hospital.

Profitability and revenue increase

Based on Antares estimates, there is currently 1.5 million people in U.S. with RA. Between 50% and 70% of these are being treated with MTX. In the graph below, I choose the conservative, 50% (750,000 patients).
(click to enlarge)
I provide a further breakdown of MTX useage between oral (50% at 375,000) and parenteral (50% at 375,000). In red, you can see the potential market capture for Otrexup from the oral group (20% at 75,000 patients) and from the parenteral group (15% at 56,250). This puts the total patient market at 131,250. With one injection per week at $125/injection, each patient will generate $6000 in revenue for Antares annually. This is very reasonable for reimbursements and inexpensive compared with the price of $20,000 or more for biologics. This brings total potential annual revenue to be (131,250 X 6000 = 787.5M).
Based on previous experience estimating new product market entry for pharma companies, I expect Antares Pharma market capture projection to be as follows:
Year 1: 5% of reachable market share

Year 2: 10% of reachable market share
Year 3: 25% of reachable market share
Year 4: 40% of reachable market share
Year 5: 60% of reachable market share

In the graph below, I show the revenue capture of Otrexup from year 1 through 5.
(click to enlarge)

In the first year, I project revenue of ~30M, which is a little more than 100% of 2013 expected revenue. With the sales and marketing force that they have been building up, increasing their 2014 revenue yoy by 100% is a reasonable expectation.

To find profitability, we estimate that the ingredients required to make an oral pill of MTX is 20 cents based on this analysis/report. We also assume a cost of $10/injector. Therefore, the gross margin per injection is ~90%.

The company may not be profitable currently but there is a clear path to profitability with the approval of Otrexup. They currently have gross margins on ~50%, but with the sales of Otrexup, they will boost their gross margins and eventually their net margins. Moreover, Antares Pharma is well poised for growth as they have zero debt and 68M cash on hand as of August 2013, and thus will not be affected by headwinds like the increase in interest rates triggered by upcoming economic headwinds. Furthermore, their cash burn rate in the previous quarters have been ~9M and this means that they can last about 8 more quarters without extra funding.

Conclusion

If Otrexup gets FDA approval and is marketed, it will be a very profitable step forward for Antares Pharma and the RA market. Otrexup is a safer and more effective application method for patients. The current market potential for Otrexup is not extremely large (could explain why larger pharma companies have not pursued this route), but the market is very accessible (3000 rheumatologists in the U.S.). Additionally, the market demand for MTX/Otrexup will continue to grow. MTX is a low-cost drug and our revenue and profit estimates indicate that the addition of Otrexup to the Antares Pharma portfolio will enable a new higher trajectory of growth for the company.

Moreover, Otrexup could potentially be used for larger disease markets such as psoriasis. Stay tuned for my article on companies with potential or existing psoriasis treatments.

Source: Antares Will Change RA Treatment With The Introduction Of Otrexup