Why I Sold Antares Pharma

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About: Antares Pharma Inc. (ATRS), Includes: AMAG, LPCN, TEVA
by: Mark Chapman
Summary

FDA approval of Xyosted means that Antares is now a full fledged commercial pharma.

There are several risks that need to clear before I will reconsider going long the stock.

Near-term catalysts will likely move the stock one way or another.

For the first time in over 6 years, I no longer own shares of Antares Pharma (ATRS). It's certainly been a wild ride and I'm grateful for the many investors I've gotten to know and converse with. But with the decision to sell all my shares - in lieu of just reducing as I've done in the past - I've been getting a common question: "Why are you selling now when the company is finally getting FDA approvals and on the verge of massive upswing".

To answer that question, there are 4 main risks that I'd like to clear before I'll likely reconsider going long the stock again.

#1: Valuation

In many of my previous articles, I've used various methods to try and value Antares. Valuing a company is never easy, and depending on the situation, I have preferred methods. While Antares was primarily in the clinical stage, a simple sales multiple may suffice; whereas when the company was reporting data from pivotal trials or from partner programs, the beginnings of a DCF model can be developed. Or when there is major uncertainty as to product approvals and/or market opportunities - such as last year after the Xyosted CRL - a sum of the parts analysis might make sense to determine an asset price floor. But ultimately for investors, it always comes down to risk and reward.

The reward part is generally easy. You can look up a sell-side analyst reports with price targets typically 50% higher (or more for most pharma/biotech stocks) than the current price. You could also look up a company presentation where they will likely give you a total addressable market where you can assume X% market share capture, and then derive a valuation. But the one thing I've learned investing is that things rarely go according to plan.

For this reason, I'm focusing on what the market is currently pricing in for future earnings expectations. Said another way, what is currently priced into the stock. With the company having roughly the same amount of cash and debt at the moment, the market cap and enterprise value are more or less the same. So with a current market cap of ~$570 million, this equates to the necessary earnings with the following multiples:

Earnings multiple

Implied Earnings

(millions)

Discounted at 15% for 2 years

(millions)

Discounted at 15% for 3 years

(millions)

Discounted at 15% for 4 years

(millions)

10x

$57

$75.4

$86.7

$99.7

20x

$28.5

$37.7

$43.3

$49.8

30x

$19

$25.1

$28.9

$33.2

For an investor assuming peak sales would be hit in 4 years, the table shows that Antares would need to deliver earnings between $33.2-99.7 million, depending on the assumed multiple. Given that a large portion of the company's revenue will be derived from royalties which go away upon patent expirations, I tend to lean toward the 10x multiple for my risk/reward scenarios. However, I understand that the earnings multiple is driven by factors like investor sentiment, lifecycle management, new pipeline items, and partnerships, so it's definitely fluid.

Operating expenses are obviously going to rise as the company launches Xyosted with its own sales force, which I project as being $75 million, $80 million, and $90 million for the respective 2, 3, & 4-year time periods in the table above. This means that Antares would need to deliver gross profit of $150 million, $167 million, and million in 2 to 4 years at a 10x earnings multiple to support the current stock price.

Even using the very aggressive 30x multiple, it would take gross profit of $123 million ($33.2mm earnings + $90mm opex) in FY 2022 to justify the current valuation. Assuming gross margins are 80%, this equates to revenue of $154 million, which represents approximately $90 million growth from the $60-65 million FY 2018 guidance recently issued by Antares management.

That level of growth is certainly possible given the recent launch of Teva's (TEVA) Gx EpiPen, the expected launch of Gx Forteo in Europe late 2019, and, of course, Xyosted. However, a more conservative view using the 10x multiple would require FY 2022 revenue of $237 million. This is where the situation starts to look a little murkier. Even assuming that Makena SC revenue from partner AMAG (AMAG) defies gravity from additional launches in the IM version, an additional source of $175 million in revenue needs to be found. Using back of the envelope type numbers, I can assume:

  • $20 million from Gx EpiPen
  • $50 million from Gx Forteo, assuming AB rated Gx approval in the US

This leaves Xyosted to cover the additional $105 million. With its best in class efficacy profile, $105 million in revenue after 4 years on the market appears downright conservative for Xyosted. However, the black box labeling for blood pressure monitoring is a little unnerving as to how prescribing doctors will react.

Will they be willing to switch patients from a gel (now fully generic) and start monitoring for blood pressure, in accordance with the label? Or in a similar vein, if blood pressure requires monitoring and an office visit, will the doctors just stick with the IM versions of testosterone given that there is not as much of a convenience factor for Xyosted now? Therefore, even though I personally believe that the efficacy profile of Xyosted will end up outweighing any safety issues (perceived or real), I see the road to $100 million in revenue as a little bumpy. Which gets me to the next risk…

#2 Cash Position

As of the end of Q3 2018, Antares reported cash of $28 million after almost hitting the elusive cash flow breakeven mark. The October approval of Xyosted and the hiring of a sales team mean that the company will return to a quarterly cash burn, at least for a few quarters.

With the infrastructure for a sales team already in place due to Otrexup, it's my expectation that a full sales team of 90 (Otrexup reps will be cross-trained) would add an extra $25 million in yearly selling costs. Based on the current run-rate, this equates to about $73 million in opex, or about 50% growth.

As typical for all new drugs entering a mature and competitive segment, Xyosted revenues will be highly impacted by payor coverage. Management aggressively priced Xyosted - a positive in my view - at a WAC of $475 per monthly supply. Adding this to my assumption that discounts will be offered to PBMs for preferred coverage, and the 66% of covered lives that management is targeting by the end of 2019 appears feasible, but it will take time. Therefore, I estimate 2019 Xyosted revenue of $15 million, with most of that coming in the second half of the year.

But this is where the cash position starts to become a risk. Management will surely want to avoid a "going concern" statement in its 10-k to be filed next March, which means that significant revenue contributions will need to be projected from Gx Epi, Xyosted & Gx Forteo. Gx Epi appears headed for a slow ramp up with Teva indicating "limited" supplies for the near-term, but maybe this clears well before the busy summer season and becomes a major contributor.

Or maybe Gx Forteo is approved in the US and the whole "synthetic peptide vs. recombinant protein" debate is determined to be insignificant, and the product can be fully substituted at the pharmacy allowing a quick ramp. But one way or another, if the company is going to properly invest in selling and marketing Xyosted, it needs to shore up its cash position. For this investor, that means raising an additional $25-30 million before March.

I'd personally like to see the company work out a deal to sell convertible notes, but management may not want to see the short interest in the stock rise as those note holders hedge by shorting the stock. Even a pure equity offering wouldn't be that bad if the offering price was near today's price, however, investor fatigue is already ripe in the stock and the stigma of dilution may take awhile to recover.

#3 Closing Asset Sale with Ferring

In October 2017, Antares announced that it would sell its ZOMAJET needle-free injector to Ferring for $14.5 million. The deal was - and is still - expected to close before the end of 2018. So why is this a risk? Per the company's third quarter 10-Q (p. 10), the second and third installments that Ferring paid to Antares totaling $7.5 million are refundable to Ferring "under certain circumstances if completion of the transaction does not occur within a specified timeframe."

Although I don't know exactly what the "specified timeframe" for the transaction to occur is, this starts to become a major risk as the end of the year draws closer without an announcement. Needless to say, an additional $7.5 million hit to the company's cash balance would not be welcoming to investors.

#4 Xyosted Competition

After the January Adcoms for oral testosterone replacement therapy drugs Jatenzo & TLANDO, from Clarus (privately held) and Lipocine (LPCN) respectively, the near-term approval and launch of new drugs to compete with Xyosted went away. However, this doesn't mean the longer term competition from an oral drug has gone away.

Lipocine is due to report data on a definitive phlebotomy study by the end of the month, and more importantly, report results from its Ambulatory Blood Pressure Monitoring (ABPM) clinical study in Q1 2019. Investors will surely be scrutinizing the ABPM to determine the likelihood of TLANDO also receiving a black box warning for blood pressure, should the phlebotomy results be positive and the NDA for TLANDO is resubmitted. Therefore, both of these events will serve as a near-term catalyst or risk.

Additionally, it's been quiet on the Jatenzo front, which is unsurprising given that Clarus is a private company. However, it's probably safe to assume that Clarus is on a similar timeframe as Lipocine and will likely put out a press release when Jatenzo is resubmitted to the FDA. Therefore, this serves as another near/mid-term risk, with the potential launch of these oral TRT drugs possible before the end of 2019.

Conclusion

For the first time in over 6 years, I am not a shareholder in Antares Pharma. In discussions with other shareholders/investors familiar with the company, it seems that expectations are running way too high for Xyosted and the risks are being too easily minimized. This is reflected in the current stock price, which appears to have priced in fairly aggressive assumptions into the valuation. Therefore, I've decided it's best to wait on the sidelines until some near-term risks clear or the valuation improves.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.