As a contributor who published five focus articles on Antares Pharma (NASDAQ:ATRS), I received quite a few requests from Seeking Alpha readers to analyze early Otrexup sales data and model its trajectory. Being a modeler, I have had the chance to build numerous predictive models and have seen how important they are to various stakeholders. It is also critical for investors to have a sales trajectory model for Otrexup so that they can judge whether the pace of actual sales keeps up with the projections as periodic sales data become available. By comparing projected sales with actual sales, one can reliably predict whether and when peak sales target can be achieved.
Antares Pharma received the approval for Otrexup by the U.S. Food and Drug Administration (FDA) on October 14, 2013. Otrexup is the first FDA-approved sub-cutaneous (SC) methotrexate (MTX) injection for once-weekly self-administration. It is indicated for adults with severe active rheumatoid arthritis (RA) or children with active polyarticular juvenile idiopathic arthritis. The FDA also approved the adult use of Otrexup for psoriasis.
Prior to the approval of Otrexup, MTX was approved only to be given orally or through a painful intra-muscular (IM) injection. Although IM injection is clinically more effective than oral tablets, the disadvantage of the IM injection is that it has to be given by a healthcare professional in an office or hospital setting. Antares is combining the advantages of oral tablets and IM injection with its Otrexup product, because Otrexup has the same clinical effectiveness of an IM injection, yet it can be self-injected at home by the patients, as easy as taking an oral tablet. As a result, Otrexup will be grabbing market share both from IM injection of MTX and oral MTX tablets. Before constructing the Otrexup sales model, let's briefly summarize the demand drivers for its adoption as to why a portion of the existing users of MTX will switch to Otrexup.
The main reason for Otrexup to gain market share against the IM injection of MTX is that Otrexup can be self-administered by the RA patients at home, as opposed to the IM injection that needs to be given by a healthcare professional during an office visit. Otrexup is specifically designed to be used by RA patients who have moderate-to-severe hand function impairment, which is evidenced by the "Human Factors Usability Study" and "Actual Human Use Study" conducted by Antares. Another important advantage of Otrexup against the IM injection is the pre-filled syringe, which eliminates dosing errors, accidental human contact with MTX, and risk of needle sticks. Finally, we have to mention that the medical community favors the SC injection (e.g., Otrexup) over the IM injection. In a seminal paper published by Brooks et al., the researchers concluded that the pharmacokinetics of MTX administered by IM and SC injections in patients with RA are similar, yet SC administration may be a more convenient and less painful way than IM.
The largest demand for Otrexup is expected to come from RA patients who use oral MTX tablets. In this famous paper, Braun et al. studied the very same topic (oral vs. SC administration) by comparing the clinical efficacy and safety of SC versus oral administration of MTX in RA patients. They found that SC administration was significantly more effective than oral administration of the same MTX dosage. Antares did its own pharmacokinetic study comparing the two, and established that when MTX is administered orally, the systemic availability plateaus between 15mg and 20mg, whereas SC administration with Otrexup maintained availability up to 25mg. In other words, when patients take oral tablets at doses higher than 15mg, they don't get the clinical benefit of MTX, because the body doesn't absorb it. Increased systemic bioavailability, which drives better efficacy, is by far the most significant benefit of Otrexup over oral tablets. CEO Wotton mentioned that more than 50% of patients who receive oral MTX are on doses greater than 15mg, which is great news, because that's where Otrexup shines against the oral route. Otrexup will compete strongly against oral MTX tablets due to the combined benefits of better efficacy, fewer side effects, and accurate absorption into the blood stream. Interested readers can read an extensive analysis of Otrexup demand drivers as discussed in a prior article.
Otrexup Sales Model
Before constructing the sales model for Otrexup, we have to understand the difference between lifestyle drugs and life-saving drugs. When we classify drugs with respect to their health benefits, there are lifestyle drugs at one end of the spectrum and life-saving drugs at the other end. Lifestyle drugs are medications that are designed to improve a person's quality of life by treating less serious conditions that are not life-threatening. Examples of lifestyle drugs include treatments for sexual dysfunction, smoking addiction, obesity, skin aging, and hair loss. At the other extreme, there are life-saving drugs that are necessary for the survival of the patient.
Obviously, the statistical model designed for the sales trajectory of a lifestyle drug would be much different than the one designed for a life-saving drug. Considering that Otrexup has clear clinical advantages over oral MTX tablets and increases the quality of life for patients who have to take IM injections, we can classify Otrexup as a medication closer to a lifestyle drug than a life-saving one. This classification has a very important implication in terms of market adoption and sales trajectory. Otrexup sales model should be based on a construct similar to those of new products, rather than a sharp step function, which would apply to the sales trajectory of life-saving drugs. A significant amount of literature in marketing research strongly demonstrates that new product sales follow an S-curve pattern (i.e., sigmoid function). A sigmoid function implies that new product sales start off slowly, and then the rate of growth accelerates as adoption picks up, after which the growth eventually tapers off. Studies have shown that the sigmoid pattern is the most common pattern observed in the sales trajectory of such products as they are adopted gradually by different segments of population over time.
If we are to set up a sigmoid function-based model for the sales trajectory of Otrexup, we need to set certain mathematical parameters. I will set the saturated sales level at $75 million per quarter, since Antares guided the peak sales of Otrexup as high as $300 million per year to be achieved about 4 years into the launch. CEO Paul Wotton mentioned that they would need at least two quarters to see a ramp-up in the prescriptions, because many RA patients visit their rheumatologist once every 3 months, and the drug reps need to visit physicians multiple times to have sufficient visibility and to create awareness of Otrexup. Consequently, my model assumes that the acceleration of the sigmoid function starts around the fourth quarter into the launch. Based on these parameters, the sigmoid function-based sales model can be constructed as given below:
Antares Pharma has already reported Q1-2014 Otrexup sales data in its latest 10-Q form filed with the SEC. The company recognized $212,845 in Otrexup revenue for Q1-2014, which is net of all discount and rebate programs. Note that my model is designed to predict gross sales, while Antares reported net sales. The second factor that needs to be taken into account is that currently, Antares is most likely under-reporting the Otrexup revenue, as it recognizes only the portion of sales that is captured and tracked in a database maintained by a private health solutions company. Antares' CFO mentioned that this under-reporting would end when the shipments to distributors are more aligned with the level of prescription sales, which he estimated would be towards the end of 2014. At the least, we know that the reported prescription data don't include medication that is dispensed by VA or specialty pharmacies. Many analysts in the field inflate the reported sales by 20% to account for under-reporting. Once I adjust the official reported number based on the above factors, I end up with $0.3 million in gross Otrexup sales for Q1-2014, so the sigmoid function-based model has been satisfactory in its prediction of $0.3 million for Q1-2014. Furthermore, as of late May, Antares seems to be on track to achieve at least $1.5 million of gross Otrexup revenue for Q2-2014, which further validates the sigmoid function-based sales model.
Such a model is invaluable to investors, because one can track the actual quarterly Otrexup sales data against the above sales trajectory to judge whether $300 million peak sales can be achieved. Furthermore, model parameters can be adjusted after every quarter as the actual sales data become available.
Antares' CFO mentioned that Otrexup would break even if the annual sales hit $23 to $25 million level, which is about $6 million per quarter. The sigmoid function-based model suggests that we should see about $6 million of Otrexup sales in Q4-2014, which is my expectation as to when Antares would break even on Otrexup.
Most importantly, the sales model suggests that Antares should become profitable around Q2-2015 as Otrexup sales hit $21 million. According to its last 10-Q report, Antares has a net loss of $8.8 million per quarter, which can easily be covered by high gross margins. Otrexup's gross margins are stated to be around 90% in the Q1-2014 earnings conference call, so any reasonable increase in Otrexup sales and marketing should be easily absorbed. Depending on the research and development expenses associated with the testosterone quick-shot device and other pipeline projects, the first profitable quarter may be later than Q2-2015, but this is all welcome for shareholders, as it would indicate a rapidly-growing business.
Risks to Achieving Peak Sales
Although the model suggests profitability around Q2-2015, investors should closely monitor the risks involving Otrexup, especially the level of actual sales and the adoption by the marketplace. The successful launch of Otrexup depends on positive momentum created by multiple players, such as physicians, patients, insurers, and the marketers.
Insurers need to understand the value proposition of the drug from a cost point of view. Antares is highlighting how Otrexup delays the switch from MTX to expensive biologics, as it extends the clinical utility of oral MTX at higher doses. It would be interesting to see if Antares can get more favorable coverage by insurers over time.
Physicians need to see a clear clinical benefit before prescribing any new medication. Antares has just published a peer-reviewed article in the journal Annals of the Rheumatic Diseases to highlight the clinical benefits of Otrexup over oral MTX tablets. Although this is a very positive step to better engage with rheumatologists, more work can be done to point out advantages of Otrexup regarding fewer side effects and accurate absorption when compared to oral MTX tablets.
When it comes to new drug launches, patient engagement is as important as the one with physicians. Antares needs to successfully address the discrepancy between the number of written versus dispensed prescriptions, as the prescription data show that some of the patients who are written an Otrexup prescription actually end up not completing the purchase. Antares designed a co-pay assistance program to offset the out-of-pocket cost of Otrexup to patients. Successful execution of this assistance program should help minimize the drop-out rate between written and dispensed prescriptions.
The second risk to achieving peak sales is the litigation surrounding SC injection of MTX. There has been litigation first initiated by Antares against Medac Pharma regarding patent infringement. Consequently, Medac Pharma counter-sued Antares Pharma for the same reason. Antares also filed a Citizen's Petition against Medac Pharma, targeting its New Drug Application (NDA) filed with the FDA, as Medac is seeking to gain approval for its version of the SC injection of MTX. In its petition, Antares clearly shows that Medac failed to list Otrexup as the "Reference Listed Drug" (NYSE:RLD) in its NDA filing. FDA regulations mandate that any NDA submitted after October 11, 2013 seeking approval for SC injection of MTX must list Otrexup as the reference drug, but Medac reportedly failed to do that. Although Antares is strengthening its legal capability by the recent hire for an SVP General Counsel position in its strategic team, litigation involves risk and cost.
In a March 17, 2014 article in Bloomberg Brief, Medac's CEO, Terri Shoemaker stated, "there is room in the market for Medac's subcutaneous injectable methotrexate and Antares Pharma's Otrexup". I interpret this statement as a sign that Medac is willing to settle this issue out of court. Looking at the success of SC MTX in Europe, it is clear that there is more than enough room for several players in the market for SC MTX. Antares' market research indicates that SC MTX injections have captured 20% of the unit volume of the MTX market in Europe, and its higher price point results in it accounting for 80% of sales for all MTX formulations in Europe.
I would like to conclude my article by pointing out the recent heavy insider buying by Antares' VP of Corporate Affairs, Jack Howarth. Mr. Howarth bought 44K shares in October 2013, with an additional 18,600 shares on March 26, 2014. This increases his total ownership of Antares to 568,916 shares, all bought with his own personal money, not through company grants or options exercises. Let me remind readers that Mr. Howarth is not an official insider, according to the SEC guidelines, so his massive purchases have not been reported to the SEC, and none of the insider tracking websites list his activity. I have this knowledge based on my personal communication with Mr. Howarth.
Additional Disclosure: This article is intended for informational use only, and should not be construed as professional investment advice. They are my opinions only. Nothing in this article should be taken as a solicitation to purchase or sell securities. No warranty of accuracy or reliability is given and no responsibility is accepted for errors and omissions. Reliance upon information presented here is at the sole discretion of the reader.
Disclosure: I am long ATRS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.