Generic EpiPen Could Give These 2 Stocks A Jolt Of Adrenaline

| About: Antares Pharma (ATRS)

Summary

Potential generic EpiPen launch date of June 22, 2015, assuming FDA approval.

Analysis is provided using a comparable exclusive generic launch.

It's unclear if another generic may enter before patents expire in 2025.

While most analysts covering Teva Pharmaceuticals (NYSE:TEVA) have been focusing their attention on Copaxone patent issues and the conversion of patients to the 3TW formulation, there is another important FDA action that may be coming for the company. That would be the potential approval of an AB rated generic EpiPen, which based on the legal settlement with Mylan (NASDAQ:MYL) and Pfizer (NYSE:PFE), could be launched on June 22, 2015. But since Teva management was not asked about the FDA submission on the latest conference call, you have to go to their partner that supplies the injector, which is Antares Pharma (NASDAQ:ATRS).

On the Q3 2014 conference call, Antares management stated:

Vibex Epi Program is progressing well. As [Teva] had stated publicly, they will file the final amendment to their application in December. We're prepared to manufacturer substantial device quantities and anticipate that we will begin shipping the devices to TEVA early next year. We believe that TEVA is on track for a 2015 FDA approval and an AB rating to the Epi pen.

And then later on the call:

We expect to start shipping additional generic Epi auto-injectors to TEVA early next year.

The part of these statements that really struck me was that a substantial amount of devices would be shipped early next year. This indicates to me that Teva is looking for FDA action in the Q1 2015, as I doubt they would order a substantial amount of injectors from Antares without FDA approval. But if their ANDA gets approved with an AB generic rating, exactly how much of a windfall could this provide?

Similar Exclusive Generic Launch

It's typically difficult to get a precise read on how much revenue and profit an exclusive generic launch generates, but Actavis' (ACT) - through its Watson subsidiary - launch of a generic to Endo's (NASDAQ:ENDP) Lidoderm appears to be a pretty good comparable. On May 29, 2012, Watson and Endo announced a settlement in the Lidoderm patent challenge which specified (among other items):

  • Watson may launch exclusive generic Lidoderm on September 15, 2013, assuming FDA approval
  • Endo will receive 25% of the gross profit generated on Watson's sales of its generic version of Lidoderm during Watson's period of exclusivity
  • Watson will receive and be able to distribute equal amounts of branded Lidoderm® product from Endo valued at a total of up to approximately $96 million during the first eight months of 2013

According to Endo's Q4 2013 earnings release - the first full quarter after generic Lidoderm launch - Endo recognized $30 million of royalty revenues from Watson. Knowing that Endo received a 25% royalty from Watson, this calculates to about $120 million in gross profit for Watson (which for simplicity I am going to use revenue as equal to gross profit). Add in the $36.4 million that Lidoderm still contributed to Endo, and the total Lidoderm market shrunk from $270 million in Q4 2012 to $156 million in Q4 2013. This represents a 42.4% drop in market sales with the generic taking 77% market share.

Generic EpiPen Impact

According to Mylan's latest earnings release, Mylan expects EpiPen to become a billion dollar product in 2014. Add in the $300 million in revenue that the EpiPen brings in for Pfizer, and the total market equates to about $1.3 Billion per year. Therefore, if an exclusive AB rated generic EpiPen was introduced by Teva, the EpiPen market would shrink to $750 million with Teva taking $575 million, assuming the same market reduction and market share as seen by Lidoderm.

But since Teva relies on Antares for the injector, it must pay Antares a royalty on net sales along with a pre-arranged price per injector. The exact royalty rate has not been disclosed, but Antares has stated the rate to be in high single digits. Assuming an 8% royalty rate, Antares would receive a yearly royalty of $46 million, or about $11.5 million quarterly. As for the injector, I estimate that Teva will pay about $8 per injector. But here comes the difficult part - trying to figure out the difference in market share based on sales versus volume.

It's unclear whether Mylan would try to compete on price with the generic, or maintain current pricing due to its strong brand recognition. For simplicity, I'm going to assume that market share for sales will equal volume. According to Symphony, there were about 1.27 million total EpiPen and EpiPen Jr prescriptions in Q3 2014. Since the prescriptions are for 2 prefilled injectors, approximately 2.54 million injectors were sold in the quarter. Assuming 77% market share again, then Teva/Antares would sell about 1.95 million injectors in the first quarter after launch, which equates to an annualized amount of 7.8 million. Therefore, Teva would owe about $62 million to Antares for the injectors, bringing the total portion due to Antares to about $108 million. This means that Teva would still recognize about $467 million in high margin generic EpiPen sales in the first year.

Not All Generic Launches Are The Same

Although I used another recent exclusive generic launch as a guide, I do believe that Mylan will be able to maintain a much greater market share with EpiPen than Endo did with Lidoderm. My reasoning is that EpiPen is used in emergency situations that can often be life-threatening, and many users may push-back against using a "generic" - even if the FDA gives an AB rating. In order to be on the conservative side, investors may choose to discount the potential sales for Teva and Antares.

Risk Discount

Potential Yearly Generic EpiPen Sales - Teva

Potential Yearly Generic EpiPen Sales - Antares

10%

$420 million

$97.2 million

20%

$374 million

$86.4 million

30%

$327 million

$75.6 million

For my personal investing preference, I feel that the 20% discount rate is appropriate, which still represents a very good haul for both Teva and Antares. Also, given that the full terms of the settlement with Pfizer have not been disclosed, it's possible that Teva may be required to pay a royalty that would reduce sales as well.

Conversely, it may be possible that Teva surprises on the upside with a worldwide launch, given that the market size I used in my analysis was based on the combined net sales for Mylan and Pfizer. But given that Mylan has licensed the EpiPen marketing and distribution rights to Meda in Europe, Meda's net sales would not be accounted for in my analysis. With Teva's strong generic presence in most worldwide markets, I think this is definitely something to keep in mind.

Competition

Most of my analysis has assumed the potential for an exclusive launch on an annual basis. This implies that another generic does not enter after the typical 6 month first-to-file exclusivity expires. According to Pfizer's latest 10-Q, however, patent litigation is still ongoing with Sandoz:

King Pharmaceuticals, Inc. (BATS:KING), which we acquired in 2011 and is a wholly owned subsidiary, brought a patent-infringement action against Sandoz, Inc., a division of Novartis AG (Sandoz), in the U.S. District Court for the District of New Jersey in July 2010 as the result of its abbreviated new drug application with the FDA seeking approval to market an epinephrine injectable product. Sandoz is challenging patents, which expire in 2025, covering the next-generation autoinjector for use with epinephrine that is sold under the EpiPen brand name.

Therefore, it's not clear if Sandoz may end up launching at risk after any exclusivity afforded to Teva has expired, assuming Sandoz is able to get FDA approval. I have doubts that Sandoz will be able to get an AB rated generic approved by the FDA (based on patent filings), but given the tremendous value that a generic EpiPen may bring to a company, I don't expect the competition to give up easily.

Conclusion

FDA approval of a generic EpiPen would likely provide a boost to Teva and Antares stock, as is should be a high margin product with potentially long-term exclusive status. It would help fill in the gap left by a potential generic launch of Teva's own Copaxone product, and I will be looking to use any weakness in Teva's stock (such as a sell-off due to a negative supreme court decision on Copaxone) to start a position.

Disclosure: The author is long ATRS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here