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Investment Opinion

I am recommending purchase of Antares (AIS) at the current level of $2.90. My 2015 price target is $6.70. In the near term, Antares has a binary event pending; this is the PDUFA date for Anturol on December 8, 2011. I am anticipating approval, but this cannot be guaranteed and if for some reason approval is not gained, there could be some meaningful downside in the stock.

Antares has a broad array of products based on its self-injection and gel formulation drug delivery technologies. Its partners are currently marketing four Antares products and there are eight more in development. I am estimating sales of this business can increase from $23 million in 2011 to $54 million in 2015 and that the EPS contribution could reach $.22 per share. I cannot detail all of the assumptions underlying these estimates in this note, but I will try to do so in upcoming reports that you may want to watch for.

The partnering strategy of Antares for its self-injection and gel formulation technologies greatly reduces the risks of development and commercialization, sharply reduces the cost of development and increases the number of projects that it can move forward. However, this comes at the price of giving up the majority of operating profits to its partners. I think that because of the sheer number of product opportunities, Antares can build a good business in drug delivery. However, what really draws my attention is a potential home run product that can change the character of the company. I believe that the injectable methotrexate product that Antares is developing for its own account has that potential.

I am projecting approval and sales of injectable methotrexate of $15 million in 2014 with rapid growth to $50 million in 2015. I estimate that the addressable market for this product is about $650 and I think that in the 2015 to 2020 period that injectable methotrexate could dominate overall sales of Antares and be the primary driver of growth. If Antares decides to market this product on its own, the cost of building a commercial sales force would likely reduce EPS from the $0.22 attributable to the drug delivery business that I have projected for 2015.

My price target for 2015 is based on applying a 20x price earnings ratio to my $0.22 EPS estimate for the drug delivery business which results in a price target for that business of $4.40. I then value the injectable methotrexate product at 5x sales ($250 million) or $2.30 per share. This is based on a study of market capitalization to sales ratios for a representative group of biotechnology companies which indicates that the average company sells at about 3 to 4 times sales and fast growing ones sell at as much as 10 times. This leads me to a combined target price of $6.70 for 2015.

A summary of my sales and royalty projections is shown below.

Sales Projections for Antares Pharmaceuticals 2011-2015
All numbers are in ($000) 2011 2012 2013 2014 2015
Proprietary products
Injectable methotrexate 15,000 50,000
Self-injection product sales
Human Growth Hormone
Injector and consumables sales
TevTropin 4,145 5,918 8,107 10,802 13,344
Ferring HGH product 3,595 3,865 4,154 4,466 4,689
RJR HGH product 381 410 440 473 497
Sub-total 8,121 10,193 12,701 15,742 18,530
Vibex epinephrine injector 0 0 10,000 10,200 10,404
Vibex sumatriptan injector 0 0 2,493 2,543 2,542
Pen injector (NASDAQ:ANDA) product sales 0 0 0 0 0
Pen injector 505 (b) 2 product 0 0 0 0 0
Sub-total 8,121 10,193 25,195 28,485 31,476
Royalties from self-injection products
Human Growth Hormone
TevTropin 1,930 2,758 3,196 3,658 3,768
Ferring HGH product 174 178 181 185 189
RJR HGH product 23 24 26 28 30
Sub-total 2,127 2,960 3,404 3,871 3,986
Vibex epinephrine 0 0 1,800 1,836 1,873
Vibex sumatriptan 0 0 792 792 776
Pen Injector (ANDA product) 0 0 0 0 0
Pen injector 505 (b) 2 product 0 0 0 0 0
Sub-total 2,127 2,960 5,996 6,499 6,635
Royalties from gel technology
Elestrin 450 488 512 537 564
Anturol 0 2,000 4,000 5,500 7,500
Libi-Gel 0 0 900 1,800 3,600
Sub-total 450 2,488 5,412 7,837 11,664
Overall sales summary
Self-injection and gel formulations
Product sales 8,121 10,193 25,195 28,485 31,476
Royalties 2,577 5,448 11,408 14,336 18,300
Development revenue 3,626 3,500 3,500 3,500 3,500
Licensing revenue 8,728 1,000 1,000 1,000 1,000
Sub-total 23,051 20,141 41,102 47,321 54,276
Injectable methotrexate 15,000 50,000
Total Revenues 23,051 20,141 41,102 62,321 104,276

Source: SmithOnStocks.com estimates

Antares’ Self-Injection Business

In its self-injection business, Antares entered into a transforming business relationship with Teva Pharmaceuticals (NYSE:TEVA) in 2009. Teva was struggling to make headway in the human growth hormone market with its proprietary product TevTropin and turned to the reusable needle free injector technology (Vision, Tjet) of Antares to differentiate its product from a host of older, well-entrenched competitors. This led to significant acceleration in TevTropin sales and this highly positive experience opened the way to a much broader collaboration combining Antares’s self-injection technologies and Teva’s expertise in proprietary and generic drug development.

Prior to the Teva relationship Antares had licensed its reusable needleless self-injector to the Danish company Ferring in Europe and RJR Pharmaceuticals in the Far East to use with human growth hormone manufactured by Ferring; both products are commercialized. Teva sources its human growth hormone from Ferring so that each of these products is essentially the same.

Teva’s and Antares’ skills mesh very well. For each product, Antares will exclusively provide its injector technology to Teva. The three types of Antares injectors have long patent lives while many of the drugs being developed with Teva have limited or no patent protection. Another company wanting to market a generic to Teva’s product will not be able to use the Antares self- injection device. In order to gain approval, the competitor will have to demonstrate that its injection device as well as its drug is interchangeable. This makes development more complex and in many cases could require long clinical trials and in the end the FDA might conclude that the products are not interchangeable.

The advantages of the collaboration for Antares are that it brings a partner that has expertise in obtaining regulatory approval, payor acceptance and commercialization. It also reduces the risk of development failure or a disappointing launch and provides capital that allows for the development of a much broader array of products.

The companies have announced that they are working on four additional products. Two of these use Antares’ Vibex disposable pressure-assisted auto-injectors. Both have been filed as ANDAs which means that Teva hopes to market them as generics. One has been disclosed to be an epinephrine injector that would be a generic to Pfizer’s (NYSE:PFE) Epic-Pen which is used to prevent anaphylaxis. The other hasn’t been disclosed, but is widely speculated to be Glaxo’s (NYSE:GSK) sumatriptan injector for migraine.

Teva was the first to file an ANDA in 2008 against Epi-Pen which does about $270 million of sales in the US. This caused King (subsequently acquired by Pfizer) to sue Teva for patent infringement and the court trial is scheduled to begin in July of 2012. If the trial goes in Teva’s favor, it could launch its generic in 2H, 2012, but there are other possibilities. It could launch at risk before the court decision is made, launch as an authorized generic or reach cash settlement in which it would agree not to market the product until a much later date. If introduced as a generic, I estimate that Teva could capture 40% of the unit market and roughly 20% of current Epi-Pen sales in the first year of introduction, consistent with many other generic launches. In regard to the second generic product, Glaxo launched a disposable needle device in the 1990s which has sales of about $220 million per year. Again, I estimate that Teva might be able to capture 40% of the unit market and 20% of the current sales level of Glaxo’s drug.

In addition, there are two other product development efforts underway using Antares’ disposable pen injectors. The two products haven’t been disclosed other than to say that one product will be an ANDA filing (generic) and the other a 505 b 2 filing (proprietary). The ANDA product launch could occur following a 30 month stay which ends is in 2013. The innovator product has annual sales of $500 to $700 million. The second product is a 505 (b) 2 filing of a protein that is produced through synthesis rather than by recombinant production technology. The FDA will require a safety study.

Beyond the five current products, there is a long list of drugs that Teva and Antares can eventually team up to market including drugs for hepatitis C, multiple sclerosis and so on. High on Teva’s list is likely to be a formulation of Copaxone that will provide a life extension to that product. Other product categories and key drugs that might eventually be targeted are diabetes (Humalog, Novalog), rheumatoid arthritis (Enbrel, Humira), multiple sclerosis (Avonex), hepatitis C (PEG-Intron, Pegasys) and anemia (Epogen, Aranesp and Neulasta).

Antares’ Legacy Transdermal Gel Drug Delivery

Antares entered the transdermal gel drug delivery business through a merger in 2000, but in 2009 a decision was made to divest this business to Ferring and focus resources on self-injection products. However, there are two late stage legacy products that have significant potential. The first is Anturol which is a gel formulation of the generic drug oxybutynin that is extensively used to treat overactive bladder. It has a PDUFA date pending on December 8, 2011. U.S. rights were licensed to Watson Pharmaceuticals in July 2011.

Watson’s decision to license Anturol raised eye brows because it already marketed a gel formulation of oxybutynin called Gelnique. It plans to remove Gelnique which has current sales of about $35 million from the market after Anturol is approved. Watson thinks that it can quickly replace Gelnique with Anturol on managed care formularies. In these days of slow product launches, this is a major plus as it could lead to rapid commercialization.

The second drug is Libi-Gel, a testosterone replacement product that is licensed to and under development by BioSante for the treatment of certain forms of female sexual dysfunction. Results from two phase III trials are imminent and the gating factor for approval is a large cardiovascular safety trial that will report results in 2H, 2012. If the efficacy and safety trials are successful Libi-Gel could be introduced in 2013.

Libi-Gel is viewed by both BioSante and Antares as potentially a blockbuster drug. There is significant proof of concept that testosterone replacement can successfully treat hypoactive sexual desire disorder (HSDD) in some women. In 2004, an FDA advisory committee concluded that the Intrinsa testosterone patch of Proctor & Gamble was effective. However, they believed the product should not be approved without a long term cardiovascular safety study. P&G decided not to do this expensive safety study and BioSante seized the opportunity. It undertook two phase III efficacy studies that will report shortly and the safety study which will report meaningful results in 2H, 2012.

The market opportunity for Libi-Gel could be significant. IMS estimates that about $300 million per year is spent on off-label use of testosterone for HSDD. The addressable market is comprised of meaningful segments of surgically and naturally menopausal women that is potentially billions of dollars. These factors suggest that testosterone replacement is effective and that there is a big market. While there is more risk in Libi-Gel coming to the market than Anturol, the chances for success still appear to be very good.

Elestra is a third product which is already marketed. It is an estrogen replacement product that achieves about $10 million per year in sales and is sold by Jazz Pharmaceuticals. There are two drugs in earlier stage development. The first is a combination of nestosterone and estradiol for use as a contraceptive and the second is an undisclosed product being developed with Ferring.

Sales Prospects for Self-Injection and Gel Formulation Products

With each of the self-injection products, Antares sells the injector and in the case of the needleless device it also sells consumables; it also receives a royalty on Teva’s end market sales. The revenues from the gel transdermal products are based only on royalties. A quick summary of my estimates on the end market sales potential of each are as follows:

1. Teva is doing very well with TevTropin in the U.S. and I estimate that its sales will increase from around $65 million in 2011 to $149 million in 2015. Antares sells the needleless injector and consumables to Teva and receives a royalty.

2. Ferring sells human growth hormone to Teva and also uses the Antares needless injector for a product which it sells in Europe; it is the same product as TevTropin. It has sales of about $65 million in Europe and while unit sales are doing well, price erosion is limiting sales growth.

3. The company JCR Pharmaceuticals also sells the same human growth hormone product in Asia. I am looking for modest sales growth.

4. I am assuming that Teva is successful in launching a generic to Epi-Pen. However, as I previously pointed out there are other outcomes that would reduce the potential sales for Teva and Antares. Epi-Pen has current sales of about $250 million in the U.S. based on sales of about 5 million injectors. I would expect Teva to capture 40% of unit sales and 20% of current Epi-Pen sales.

5. Glaxo’s sumatriptan injector has current sales of about $220 million. Again, I would expect Teva to capture 40% of unit sales and 20% of current sales.

6. I am not making any sales estimates for the two products under development that use pen injectors until I know what the products are and have a better sense of when they will come to market. This is conservative as I think that they could create significant sales before 2015.

7. I am not assuming the introduction of other self-injection products before 2015 although again I think that this might prove conservative.

8. Replacing Gelnique sales with Anturol could provide a jump start. I am estimating that Watson achieves peak sales of $100 million in 2015.

9. Libi-Gel is potentially the largest opportunity of the licensed product portfolio. Although it is substantially de-risked by the experience with testosterone, it has still not completed phase III trials and the all-important safety study. I am estimating Lib-Gel sales of 20 million, $40 million and $80 million in 2013, 2014 and 2015 respectively. I think that BioSante views the assumptions I use to arrive at these estimates as conservative.

Injectable Methotrexate is the Home Run Product

Methotrexate is a disease modifying drug that is considered gold standard therapy for moderately severe rheumatoid arthritis. It is estimated that methotrexate is used in 70% of rheumatoid arthritis patients. It is also used in psoriasis and other autoimmune diseases. Methotrexate is a very effective agent but has some troubling side effects. The most common side effect is severe nausea which is troublesome for around 50% of patients and can often lead to discontinuation of therapy or under dosing.

Over the last five years, injectable methotrexate has increased its unit share of the U.S. methotrexate market from 5% to 8%. Current products are only available in vials and must be given as intramuscular injections which require a longer time to administer and are deeper and more painful than subcutaneous injections. Patients usually have to go to the physician’s office once a week to be injected by a doctor or a nurse. Antares is developing a subcutaneous injection dosage form that would be less painful, could be self-administered and would offer a much better side effect profile as compared to orals, especially in regard to nausea.

There is proof of concept for a subcutaneous dosage form of methotrexate. A company in Europe has successfully developed a once a week subcutaneous formulation that is viewed as being as effective as intra-muscular injections. It has captured 20% of the unit market and 80% of sales for all methotrexate formulations in Europe. Antares intends to develop a subcutaneous formulation using Vibex technology in the U.S. and use the 505 (b) 2 regulatory approval pathway. The European company is also looking to market in the U.S. but is behind Antares in development timelines. In the best case, Antares believes that it may be able to file an NDA in 2012 and potentially receive approval in 2013. Of course, this depends on what the FDA requires.

Antares has a strategic alliance with a privately held Canadian company, Uman Pharmaceuticals, to jointly develop Vibex methotrexate in the U.S. and Canada. Antares will be responsible for clinical development, regulatory submissions and manufacturing the Vibex injector while Uman will develop the formulation and provide prefilled syringes. Uman has rights for commercialization in Canada while Antares has U.S. and rest of the world rights.

Oral generic dosage forms of methotrexate used to treat rheumatoid arthritis cost about $100 per year while biologicals like Humira and Enbrel are priced around $20,000. Antares thinks that the potential price point of its device could be $50 per weekly injection or $2,600 per year. This is the price of the subcutaneous dose sold in Europe. There are potentially 250,000 patients who might benefit from this drug so that the addressable market may be $650 million. Antares believes that 50 sales representatives could successfully target the 50,000 physicians who account for most of U.S. methotrexate prescribing. The company might elect to form its own sales force and market the product on its own or might elect to form a partnering agreement.

Source: Antares Pharmaceuticals: A Buy Based On Exceptional New Product Outlook