Seeking Alpha
, stockmatusow (1,015 clicks)
Long/short equity, deep value, value, research analyst
Profile| Send Message|
( followers)  

In this article, I will discuss why Antares Pharma (ATRS) (Pps: $3.67 Market Cap: 383.71M) is one of the best small cap long investment opportunities in the entire stock market that could provide huge returns in the next 3 to 5 years, according to my due diligence (dd).

I would first like to address a recent downgrade to the stock done by a well known online publication. Last Friday, The Street.com downgraded Antares to a sell using a metrics only computer based report. Based on this system, at least 3 out of 4 small cap biopharmas would be a strong sell. I find it curious as to why Antares was singled out from among the hundreds of small cap biopharmas.

Key points The Street.com mentioned to downgrade the stock is in bullet points. My reply follows each point.

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Health Care Equipment & Supplies industry. The net income has significantly decreased by 80.6% when compared to the same quarter one year ago, falling from -$1.55 million to -$2.81 million.

Antares is not about performance in earnings now--in fact, the company is focused on re-investing its royalty earnings back into top line proprietary growth, so less net income is to be expected. If it just focused on net income now, without any top line future plans, then Antares would be worth under $2 a share. If Antares is going to be a top line focused company, it needs to invest in this future growth now. Two earnings calls before the current one, the company mentioned that R&D expenses would be on the rise, which CEO Dr. Paul Wotton called " an investment."

  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Health Care Equipment & Supplies industry and the overall market, ANTARES PHARMA INC's return on equity significantly trails that of both the industry average and the S&P 500.

Current ROE is moot, notice how the downgrade focuses only on 'the now.' In order for Antares to reach $20 a share in 3 years, again, it has to focus on top line investment. Antares will never reach $20+ a share on its current royalty drive revenue, and this is not the company business plan - to remain a royalty base company.

  • 44.10% is the gross profit margin for ANTARES PHARMA INC which we consider to be strong. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, ATRS's net profit margin of -62.10% significantly underperformed when compared to the industry average.

The Street again is focusing only on current fundamentals as if the company is only about its current business model--which clearly it is not. Notice there is no mention of the Vibex injector line, no mention of the NDA filing expected soon for Vibex MTX, Vibex QS-T, management's stated long term goals, etc.

  • ANTARES PHARMA INC's earnings per share declined by 50.0% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ANTARES PHARMA INC continued to lose money by earning -$0.05 versus -$0.08 in the prior year. This year, the market expects an improvement in earnings (-$0.04 versus -$0.05).

The Street's thesis does not mention top line growth, top line plans, top line potential which is what small cap growth investment is all about - getting the company to eventually become a mid to large cap.

  • Compared to its closing price of one year ago, ATRS's share price has jumped by 125.55%, exceeding the performance of the broader market during that same time frame. Regarding the future course of this stock, we feel that the risks involved in investing in ATRS do not compensate for any future upside potential, despite the fact that it has seen nice gains over the past 12 months.

Did The Street consider the upcoming Vibex MTX NDA filing, which is virtually assured FDA approval, and do they assume there will be no catalyst run-up for this?

Have they done the dd on top line proprietary products which include Vibex QS-T, QS2, and QS3? Do they know about the regulatory easing many are proposing - foregoing efficacy as long as the data shows complete safety? Have they run the numbers and modeling on revenue and profit on these future products?

The Street feels that investing in Antares now "does not compensate for any future upside potential." Ok, let's see if what they say holds water.

The VIBEX self-injector system:

The VIBEX system is designed to economically provide highly reliable subcutaneous injections comfortably and conveniently in conjunction with the enhanced safety of an integrated shielded needle. VIBEX employs a proprietary coil-spring power source to rapidly deliver the prescribed medication. This spring is combined with a tiny hidden needle in a disposable, single-use injection system compatible with conventional syringes. After use, the device can be disposed of without the typical "sharps" disposal concerns. Antares and its development partners have successfully tested the device in patient preference and clinical bioavailability studies. Antares continues to explore product extensions including multiple dose and variable dose applications, integrated reconstitution systems for lyophilized drugs, and is designed to provide highly reliable subcutaneous injections comfortably and conveniently in conjunction with the enhanced safety of a shielded needle.

VIBEX MTX:

Used in an estimated 70% of patients alone and in combination with biological therapies, methotrexate (MTX) is a foundational disease-modifying anti-rheumatic drug for RA. Generally initiated orally at lower doses and titrated up, published studies have reported as many as 30% to 60% of patients experience gastrointestinal side effects with oral MTX. This can prevent further dose escalation or require discontinuation in some patients, which can be avoided by subcutaneous administration.

The extent of oral absorption of MTX varies considerably between patients and has been shown to decline with increasing doses. Studies have also reported that switching patients from oral to parenteral MTX improves absorption, providing superior therapeutic response, resulting in longer duration of use. The VIBEX MTX system is designed for rapid subcutaneous self-administration of MTX in three simple steps.

Market research to date shows MTX, which can be self-injected, is preferred by patients and caretakers. As a promising pre-biologic treatment, it is anticipated that the VIBEX MTX system could play an important role in lowering healthcare costs in RA by delaying the use of biologic agents and expanding the use of MTX. The availability of the VIBEX MTX system would give patients and physicians a new option before making the jump to expensive biologics, which are associated with serious and increased safety risks for RA patients.

VIBEX QS T for Testosterone Replacement Therapy:

QS T is potentially the first self-injectable testosterone product for men suffering from symptomatic testosterone deficiency (Low T). Most of this market currently is made up of gel treatments, which most men really do not like. I am sure many of you have seen the commercials on TV advertising these testosterone gels.

Rx's for current treatment options equal two-thirds topical gel testosterone and one third intramuscular injections, and according to recent reports, U.S. sales of testosterone replacement therapies exceeded $1.6 billion* in 2011- 5.6 million Rx's. Studies have shown that gel patients do not achieve adequate absorption or therapeutic response; injection patients bear the cost and inconvenience of in-office injections every 2 to 4 weeks.

  • Physicians surveyed believe self-injection will improve patient compliance and deliver sufficient serum testosterone levels--according to the company.
  • The New VIBEX QS is particularly well-suited for use with highly viscous drugs such as testosterone- Novel spring mechanism - up to a 1 ml capacity - highly compact device.
  • This combination drug/device product is in pre-clinical development, expected to go to market in 2015/2016.

Projected future earnings:

The following numbers have been calculated by me and an analyst who posts on my stockboard.

VIBEX MTX:

  • 2 million patients in U.S.+
  • 10-15% market share +
  • $100 per injection +
  • 52 weeks +
  • 52% margin +
  • 30% tax rate
  • March 2014 commercial launch (possibly earlier).

The equation produced the following high/low MTX earnings projections for 2014 and 2015 assuming 120M shares outstanding in 2014 and 125M in 2015, the increase in shares based solely on share-based compensation.

$203M-$406M ($1.70- $3.40 eps)/$135M-$270M ($1.13- $2.26 eps).
$405M-$810M ($3.24-$6.48 eps)/$270M -$540M ($2.16-$4.32 eps).

VIBEX QS T:

Assuming 15% market share, I believe Antares (and its domestic QST partner) will earn combined revenues of up to $374M in 2015 (mid-year launch) and $1.7B in 2016 for QST sales in the U.S. Here is the breakdown:

Based on the limited information available and my relatively conservative market and market capture estimates, I am assuming QS will capture 4% of the testosterone therapy market in 2015 (assuming mid-year launch) and 8% in 2016. Accordingly, here are my QST U.S. revenue estimates for 2015 and 2016:

2015: 1.85M patients X 4% X $2,500 (cost for 6 months of weekly QST injections) = $185M.

2016: 2.25M patients X 8% X $5,000 (cost for 12 months of weekly QST injections) = $900M. Considering the global market for LowT therapy in 2016 will be approximately $4B (half of which likely would be attributed to the U.S. market), I believe $900M in annual QST revenues is too high. Perhaps 4% U.S. market penetration is a more appropriate estimate for now. I'm willing to endorse $450M for now.

Also, assuming a 50/50 partnership with big pharma, 60% pre-tax profit margin, 30% effective corporate tax rate, and 120M total outstanding shares (due to exercise of remaining warrants and annual stock-based employee compensation), my earnings/EPS projections related solely to sales of QST in the U.S. are as follows:

2015 -- $72.9M / $0.61 eps (PPS ~$9.15 with conservative PE of 15)
2016 -- $357M / $2.98 eps (PPS ~$44.70 with conservative PE of 15)

Total pps on both Vibex products, 2015-2016-- $30 to $70 a share. I am estimating lower on purpose when I say $20 a share in 3 years. I can back up my estimates with market studies, modeling, etc - why doesn't The Street even mention these products?

Boston Scientific (BSX) started out listed on the market as a somewhat obscure medical device company back in the early '90s at a price around what Antares is selling for today. Boston Scientific went public in May 1992 with an IPO of 23.5 million shares priced at $17 a share. Comparing this to Antares with 103M shares, cutting roughly 1/4th off the IPO price of $17 and adding about 75 million shares to BSX's original IPO, would equate to an IPO price around $4.50 a share if BSX had 103M shares outstanding as Antares currently does.

In 1993, BSX's sales reached $380 million, while net income rose to nearly $70 million, and in-between 1994 and 1995 sales rose from $449 million to $1.2 billion. In this article, I will try to show why I believe Antares could eventually surpass BSX's 1993-1995 in roughly the same time period.

After a few forward stock splits, BSX currently has 1.43B shares outstanding with a market cap of $8.20B, and a stock price of $5.74 a share. If BSX currently had 103M shares outstanding, its stock price would be over $80 a share. Antares is just beginning the move to become a top line company, and I feel in 10 years or less, if it is not bought out, Antares will be another Boston Scientific.

It is my strong opinion that 5 years from now, Antares will be at least a $5B dollar company--$50 a share.

If we valuate Antares on what the company earns now, the stock would appear to be overvalued which is what The Street and others seem to want to focus on.

Antares will likely bring in around $25 million dollars in revenue this year. These revenues will primarily come from royalty deals the company has made in the last few years with larger pharmas such as:

  • Watson Pharma (WPI), which licenses from Antares Gelnique 3%™ (oxybutynin) gel 3%, for the treatment of overactive bladder (OAB) with symptoms of urge urinary incontinence, urgency and frequency. Gelnique 3%™ is a clear, odorless topical gel that has been shown to be an effective and safe treatment for OAB. The product is available in a metered pump dispenser, offering patients convenient dosing.
  • Teva (TEVA), for Tev-Tropin® Tjet® reusable hGH -- launched August 2009, in which Antares receives strong margins on device sales, and mid-to-high single digit % royalty on overall product sales. Two Vibex auto injectors, single shot disposable products. Epinephrine (N.A. rights) & an undisclosed product (U.S rights) in which Antares receives margins on device sales, and mid to high single digit % royalty on overall product sales. Antares also has a royalty deal with Pfizer (PFE), for an undisclosed product in which my due diligence along with many other investors seems to point to either a fast melt Advil tablet product, or an Advil gel formulation. I also believe Pfizer will eventually Acquire Antares at some point, as early as within 1 year.

I've made the long term future stock appreciation case here; The Street has not. Obviously, its computer system did not factor in top line growth and the business model for Antares before stating, "Regarding the future course of this stock, we feel that the risks involved in investing in ATRS do not compensate for any future upside potential."

My YouTube Audio below explains why I believe The Street chose to single out Antares out of the 100s of small cap biopharmas. Give it a listen, do your own dd, and decide for yourselves if investing in Antares now is wise for future upside potential.

It is up to investors to do the proper due diligence with Antares, but let's say my estimates are too high, does what The Street says really hold water?

The system The Street used on Antares should only be used on fully developed larger cap biopharmas who have already established themselves as top line companies, not on a smaller cap company who is just about to begin its trek into a top line growth company from a royalty based one.

I consider this downgrade from The Street to be unwarranted along with the stock being oversold. However, this happens in the market because investors these days tend to be apathetic, don't do their own dd, and listen to whoever barks the loudest. Furthermore, many investors get too aggressive with small cap stocks, over-margining their positions which bring in unnecessary risk and inviting a coordinated short sell manipulative attack. It is my opinion that large short positions got caught off-guard with the strong move to over $5 in the stock, and turned to someone to help them out of the position while making money short in the process. This will have no effect on the Antares long term story - only a misstep by management can affect Antares from becoming a multi bagger in the years to come.

I have seen these same types of short attacks in Spectrum Pharma (NASDAQ:SPPI), Ariad Pharma (NASDAQ:ARIA), and Jazz Pharma (NASDAQ:JAZZ) when they were in the price range of Antares. Short sellers frequently get themselves upside down in growth stocks when they underestimate the long term potential. The one advantage longs have over shorts in Antares is if they are cash positions they can wait it out while shorts are 100% on margin - they cannot wait it out.

Conclusion: Antares presents a great opportunity at its current price level to return long term multi bagger gains, but it will take time and patience. Those reading this and wanting to make an investment in Antares have to decide whether they want to make the investment now, and can afford to tie up money for the long term, or wait until the company is actually bringing in the large revenues that I foresee by 2015. Investing in a small cap like Antares is not about current fundamentals, but future ones.

Consider a stock like Microsoft (NASDAQ:MSFT) in the late 70s - $2 a share. Microsoft was barely an idea back then without the fundamentals at the time to support what it later became - a mega tech monster. If you bought 10,000 shares of Microsoft back then and held it to now, the position would be worth tens of millions. I can support the long thesis for Antares to be a $20 stock by 2015, and clearly have done so in this article.

Source: Antares Pharma Explained: Why It's The Best Small Cap Long Term Investment In The Market

Additional disclosure: Disclaimer: This article is intended for informational and entertainment 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.