Seizing The Blockbuster Opportunity Buried In Conservative Modeling At Antares Pharma

| About: Antares Pharma (ATRS)

As a modeler who routinely develops valuation models for various products, I often find myself trying to decide which valuation methodology to employ, especially when the financial projection is to be done for products that have no to little similarity to existing ones. In such cases it is a well-known fact that there would be significant deviations between projected numbers versus the actuals, which motivates the modeler to be conservative in his estimates. Although any deviation, positive or negative, means that prediction was not accurate, I have witnessed many cases where the stakeholders question and criticize strongly whenever the deviation is disappointing in nature; e.g., when predicting future revenues if actuals come higher than projected figures few stakeholders have questions, if any; whereas if the actual revenues come lower than projected levels then the modeler faces harsh criticism. Along the same lines my due diligence led me to believe that Antares Pharma (NASDAQ:ATRS) is being overly conservative when they are guiding peak sales for their transformational product Otrexup, which has a PDUFA date of Oct 14, 2013. In this article, I would like to present the perspective of a valuation modeler with regards to the blockbuster market potential of Otrexup.

Before delving into Otrexup related discussion it would be helpful to briefly cover the four widely used valuation methodologies by practicing professional modelers. I will use a revenue prediction framework for the sake of clarity and applicability to the Otrexup discussion. In any valuation methodology the first step is to predict what the future demand for the product would be. Demand predictions can be as simple as one single quantity, which can be calculated from market research or demand from a proxy product that already exists in the market; or it can be as complicated as a random variable modeled from a discrete or continuous probability distribution. Although I have several academic papers published on this very subject in conference proceedings and journals, I refer technically advanced readers to my paper published by IEEE for an excellent review of the topic, which presents a framework to price a multi-product bundle where demand is modeled to follow a multi-variate normal distribution. Once the future demand is modeled, the modeler needs to decide which one of the four valuation methodologies to employ. All these methodologies can be considered as degradations of conservatism. On the one extreme, worst-case scenario represents the most conservative approach; whereas the best-case scenario represents the opposite extreme. In between, the third approach is the most likely scenario as derived from the statistical expectation of the demand's probability distribution. The common point of the aforementioned three methodologies is that the modeler eventually represents demand as a single numeric quantity. However, the fourth and the most advanced methodology reflects the full knowledge of the demand's probability distribution, where the demand is represented as a random variable from the hypothesized probability distribution, not as a single numeric quantity. Even in this most advanced methodology the modeler can inject any level of conservatism by setting the parameters of the probability distribution as needed. One of the most widely used demand probability distributions is the normal distribution, which is famous for its bell-shaped curve. The point of the discussion from these four valuation methodologies is to give the reader the understanding that no matter how complicated a valuation methodology is it is up to the modeler to factor in a level of conservatism. Having briefly discussed the four valuation methodologies, now we can turn our attention to as to why I believe that Antares modeled Otrexup peak sales somewhere between the worst case and the most likely scenario.

Many Antares investors are already familiar with the under-promise and over-deliver culture at Antares. Most recent example of this culture is the earlier-than-expected NDA filing of Otrexup in Dec 2012 despite the management consistently guiding for a time frame of Q1 2013. My due diligence makes me believe that we have a similar under-promise over-deliver situation regarding the peak sales of Otrexup as guided by Antares. During the RBC Capital Markets' Healthcare Conference which was held in February of this year Antares reiterated their guidance on peak Otrexup sales as $100-200 Million. This is the same number that has been mentioned several times back in 2012 whenever the issue was brought up on Vibex MTX, which is how it was named back then. Admittedly, Otrexup is a product whose demand is in the category of difficult-to-predict ones; and, thus, the demand distribution would have wide tails; i.e., worst case would almost be a zero demand scenario while the best case lies in the multi-billion dollar blockbuster territory.

So, what is the most likely scenario in terms of Otrexup demand? To answer such a question we need to know the details regarding what already exists in the market for rheumatoid arthritis and how Otrexup is different. Otrexup™ is a combination product for the subcutaneous (SC) self-administration of methotrexate (MTX) for the treatment of rheumatoid arthritis (RA) and is the first product seeking FDA approval of SC administration of MTX. RA is a systemic inflammatory disease, which manifests itself in multiple joints of the body and is believed to be the result of a faulty immune response. Treatment for most people starts with non-steroidal anti-inflammatory drugs (NSAIDs) including over-the-counter painkillers such as Ibuprofen and aspirin, then slowly progressed for fewer people to non-biologic disease-modifying antirheumatic drugs (DMARDs) like MTX and finally progressed for even fewer people to biologics if people had not responded to the previous drugs. Antares's Otrexup uses MTX, which is a DMARD. The good news is that today a much more aggressive treatment approach is advocated for RA, with prescription of MTX within three months of diagnosis to reduce disease activity and prevent joint deformity. Although both NSAIDs and DMARD agents improve symptoms of active RA, only DMARD agents have been shown to alter the disease course and prevent further damage, which is the target as there is no cure for RA. MTX is considered the first-line DMARD agent for most patients with RA

According to CEO Wotton MTX is approved in the US to be given orally and intra-muscularly (IM), which has to be given by a healthcare professional in an office or hospital setting. Antares is changing the route of administration from IM to subcutaneous (SC) with their Otrexup product while making it easier to self-administer MTX. So, what does Otrexup exactly compete against? The answer to this question is critical as we transition to the discussion of Otrexup's market potential; because the demand for Otrexup will be comprised of RA patients who currently use other products. As I outline in the remainder of this article Otrexup will be grabbing market share from three categories of treatments, which are (1) IM injection of MTX, (2) Oral MTX tablets, and (3) biologics drugs. Now, let's analyze each of them with reasons as to why a portion of the existing users of these treatments will switch to Otrexup.

As discussed by CEO Wotton, the IM injection of MTX has to be given by a healthcare professional during an office visit. This makes the IM injections as the first category of treatment from which Otrexup is expected to capture a massive market share. Otrexup provides the following benefits over the IM injections of MTX:

1. Otrexup is easy to teach to self administer to RA patients, which is evidenced by the "Human Factors Usability Study" conducted by Antares and submitted as part of the NDA

2. Otrexup is designed to be comfortably used by RA patients who have moderate to severe hand function impairment, which is evidenced by "Actual Human Use Study" conducted by Antares. 98% of the patients in the study found Otrexup easy to use, which is also submitted as part of the NDA

3. Self-administration with Otrexup is virtually painless as discussed in a previous article.

4. Otrexup's hidden needle reduces patient apprehension and increases compliance. Spring mechanism used in Otrexup injector eliminates the need for a human pushing the needle into the body, which alone makes Otrexup much user-friendly.

5. Dosing errors are eliminated as Otrexup comes pre-filled with MTX.

6. Another benefit of pre-filled cartridge is that any accidental human contact is also eliminated as MTX is a cytotoxic agent

7. Accidental needle sticks is eliminated since Otrexup has a locking needle shield mechanism. It is also easily disposable reducing the sharp disposal concerns.

8. Otrexup will allow massive cost savings to insurance companies and payers as the weekly office visits to receive the IM shot will be eliminated.

9. Increased quality of life for RA patients who need to be physically present once a week in their doctor's office, which will eliminate transportation costs, commuting time, and inconvenience during day hours

10. Medical community favors SC injection over IM injection. In a seminal paper published by Brooks et al., the researchers concluded that 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 of administering than IM.

Second category of treatment, which is expected to create the largest demand for Otrexup, is the oral MTX tablets. Oral MTX is used by a much larger group of patients than the IM injections. Why would a patient who is on oral MTX bother with Otrexup? Here are the reasons:

1. In his 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 patient. They found that SC administration was significantly more effective than oral administration of the same MTX dosage. Antares did their 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 oral route.

2. Antares's research demonstrates that 30-60% of the patients taking oral MTX tablets don't tolerate it due to side effects. SC administration reduces side effects. In a related study Wegryzn et al. reports that when they switch patients from injection to oral administration they observed increased disease activity, exacerbation of morning pain and hand stiffness, duration of morning stiffness, increased joint pain, and increased joint swelling, and a greater frequency of gastrointestinal symptoms.

3. SC administration through Otrexup removes the variable absorption problem seen with oral tablets. Since oral tablets have to go through the gastrointestinal tract the amount absorbed from tablet to the blood stream varies from patient to patient.

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.

Third category of treatments where we can expect to see Otrexup market share gains is the biologics, which is slightly more difficult to grasp. Biologics are very effective and very expensive drugs used in the treatment of RA. Otrexup will not compete directly against the biologics but in an indirect way. As I discussed above, the treatment for RA usually starts with painkillers and progresses with DMARDs (like MTX). When patients stop responding to DMARDs, they are transitioned to biologics drugs. Otrexup is targeting to carve out a space for itself right at the intersection of DMARDs and biologics; because Otrexup will extend the clinical utility of MTX, which means a delay into the transition to biologics. By replacing the oral route with SC administration, patients will be able to get the benefit of higher doses of MTX since Otrexup bioavailability doesn't plateau at 15mg; and it is better tolerated than oral tablets. Delaying the switch to biologics by just one month saves $1000 per patient as explained by LeRoux Jooste during RBC Healthcare Conference held in Feb 2013. Needless to say cost savings will be the major driver for Otrexup to capture demand from biologics by delaying the switch from MTX to biologics.

After establishing the drivers of demand for Otrexup we can start discussing how to calculate the peak sales by employing a most likely case scenario. RA affects 1.5 to 2 million people in the United States; but, most of these patients are not diagnosed and treated. According to IMS Health there are over 5 million prescriptions for MTX. Antares reports that there are 0.4 million prescriptions of IM MTX injections per year, which corresponds to roughly 1.6 million IM MTX injections annually. Larry Smith calculates 18.2 million oral doses of MTX prescribed for RA annually in the United States.

Market Capture Analysis:

Four separate sources of Otrexup demand along with an explanation of how many doses each are expected to generate are given below:

1. MTX IM Injections: Due to the 10 reasons I outlined above at its peak sales the most likely scenario is that Otrexup will replace the IM MTX injections capturing 1.6 million injections per year.

2. Oral MTX Tablets: Assuming Otrexup will be priced higher than oral MTX tablets the portion of the oral MTX market that can be captured is limited to the 30-60% of the patients who don't tolerate oral MTX. Since we don't want to speculate on the level of oral MTX intolerability of such patients, a conservative estimate is well warranted. Cowen reports that 20% of patients experienced gastrointestinal side effects associated with oral MTX; so, most likely scenario would be that Otrexup will capture 20% of the oral MTX patients, which corresponds to 3.64 million doses annually. 20% is a number that is also corroborated by the physician surveys that Antares conducted by interviewing 156 rheumatologists. These surveys revealed that rheumatologists are willing to triple the number of injection prescriptions if there is a more convenient alternative to traditional vial and syringe. Since vial-syringe injections correspond to 8% of the MTX prescriptions today, we can expect an additional 16% as the physicians triple their prescriptions for injectable MTX. One can argue that another 4% demand can be easily created from patients who don't tolerate oral tablets; so 20% of oral route switching to Otrexup is more than likely.

3. Delaying the switch to biologics: American College of Rheumatology (ACR) guidelines recommend that DMARDs, such as MTX be used as first-line therapy before initiating treatment with one of the biologics. One study found that average total direct costs for a patient treated with a biologic was $19,016 per year compared with $6,164 per year for a patient treated without a biologic. In one survey, 68 percent of managed care medical directors said they consider managing the cost of biologics a high priority. The greatest impact of the high costs of biologics is on un-insured or underinsured patients, especially senior citizens, who comprise approximately 50% of RA patients and often cannot afford to pay the entire out-of-pocket cost of RA medications. Even though Medicare now covers several biologics under Part D, copayments, deductibles, premiums, and the "doughnut hole" leave Medicare beneficiaries responsible for about half of their catastrophic medication costs. All these factors favor for strict payer and patient preference to make sure that patients are kept on MTX as long as possible before the switch to biologics occur. Although Otrexup will not directly move patients from biologics treatment to MTX, we can assume that by keeping the patients longer on MTX the steady-state population size on biologics would shrink fractionally. Although MTX had a higher retention rate compared with other DMARDs, as many as 50% of patients taking MTX discontinued because of lack of efficacy or toxicity within 5 years of therapy. This means that at the steady-state the flow rate from MTX to biologics can be cut at most 10% annually due to Otrexup; however, the exact number would be a fraction of the 10%; because there would be patients who poorly respond to MTX in any form. By using Cowen's 20% number who doesn't tolerate oral MTX, let's assume that 20% of that 10% are switching to biologics due to intolerance to oral MTX. Thus, at the steady-state distribution Otrexup should retain 2% of the oral MTX patients that would have been switched to biologics otherwise. This would create an additional annual dose of 0.36 million units.

4. Market capture from psoriasis: During the meetings between FDA and Antares FDA suggested that the Otrexup NDA includes psoriasis in the labeling. If approved Antares expects the drug label to include this new indication. MTX treatment for psoriasis is most often administered weekly either orally or as an injection. MTX is used to treat severe psoriasis as it suppresses the immune response that triggers the disease, which is a similar mechanism of action for RA. Antares research indicates that in the United States 9% of MTX prescriptions are given for psoriasis, while 70% goes to arthritis, which gives us a ratio of 9/70. Since we calculated the RA market potential from oral tablets and IM injections as 5.24 million doses per year, my most likely scenario for Otrexup demand from psoriasis indication would be 0.67 million doses per year, which is obtained by multiplying 9/70 with 5.24 million

Adding up all four sources of demand gives me the total number of Otrexup doses in the most likely scenario, which comes out to be 6.27 million units. Based on my discussions with Jack Howarth (VP of Antares Pharma) Otrexup is expected to be priced close to the cost of IM injections. IM injections cost at least $125 per week, which is mainly the result of the office visit to receive the shot. Although this sales price is lower than the $150 amount assumed by modelers at Cowen & Company (when they modeled Otrexup sales), it serves as a reasonable and conservative estimate. Antares has not finalized the sales price of Otrexup as they are currently conducting distribution channel and rebate studies with payers. Market research consultancy ZS Associates says that the size of the rebates average about 30% of medicine sales, and can be as low as single digits or higher than 50% of gross sales. In my most likely scenario, I will assume that Antares gives 30% rebate to payers to make Otrexup even more attractive.

Finally, we have all the inputs to calculate the peak sales for Otrexup in my most likely scenario, which is based on 6.27 million units being sold annually at $125 per unit with 30% payer discount, resulting in $549 Million in annual revenue. Although we used a bottoms-up approach as we derived our estimate from individual sources of Otrexup demand, a similar penetration has been observed when SC MTX injection was first introduced in Europe by Medac International, despite their injector being much less advanced than Otrexup; which increases my confidence that our most likely scenario is indeed most likely. Cowen and Company states that cost of goods sold for each Otrexup dose has been guided to be $10. This means that Antares will enjoy extremely strong gross profit from Otrexup sales; i.e., discounted sale price of about $87.5 with $10 COGS gives $77.5 in gross profit for each unit of Otrexup sold.

Before concluding my article, I would like to point out that there are several unaccounted sources of upside in my most likely scenario. Although Otrexup label will include RA and psoriasis, it can be prescribed off-label for several other indications, especially other autoimmune diseases like Crohn's disease and inflammatory bowel disease, any indication where MTX is injected. Secondly, we assumed 20% of oral tablets to be switched to Otrexup but Antares claims that 30-60% of oral MTX patients have tolerability problems. Thirdly, we only considered US market ignoring the vast opportunities in the rest of the world. Antares made it clear that they will pursue rest of the world Otrexup opportunities through partnerships.

As the name implies my revenue expectation is based on the most likely scenario, which has the highest chance of realization among possible demand scenarios. One always needs to keep in mind potential worst case scenarios too such as ((i)) approval delays or rejection of the Otrexup NDA by FDA, (ii) a competitor entering the US market earlier or before the peak sales, ((iii)) commercial launch problems associated with new drugs, (iv) possible resistance by healthcare providers, payers, or patients in adopting Otrexup.

Considering all possibilities I have half a billion in peak sales expectation for Otrexup. I believe that Antares's stated range of $100-200 million in Otrexup sales excluding psoriasis indication is overly conservative, which is very consistent with the under-promise over-deliver culture at Antares. In this case such conservatism gives a unique window of blockbuster opportunity to savvy investors to buy Antares at $3.50 before actual sales starts coming in next year. Indeed, Jack Howarth (VP of Antares) stated that he bought 86,000 additional ATRS shares on the open market in Nov. 2012 bringing his total ownership to over 506,000 shares. However, many investors didn't know this, as Jack is not considered to be an official insider from an SEC perspective and his massive purchases didn't need to be reported on SEC forms or insider tracking websites.

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. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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