As many of you who follow my short term bio pharma stock pick opinions on a regular basis know, I am almost always on the money with my short term price targets. I use many factors to arrive at my short term price target opinions. These factors include: supply and demand, charts, potential catalysts, value per market cap, and accumulation verses distribution, just name a few. Huge percentage long term stock price appreciation relies on top-line product revenue, profit, and management's ability to execute its long term goals correctly.
In this article I want to focus on a long term investment that I feel has these factors going for it, and should provide up to 1000% return in the next 3 years or so according to my due diligence.
Antares Pharma (AIS) 5/31/12 pps: $2.72. Market cap: $283.62M
Antares focuses on self-injection pharmaceutical products and technologies and topical gel-based products. The company's subcutaneous injection technology platforms include the Vibex MTX and Vibex QS disposable pressure-assisted auto injectors, Vision reusable needle-free injectors, and disposable multi-use pen injectors.
Big deal, another company offering medical devices, right?
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 for 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. 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.
Boston Scientific recently received FDA approval of its Ingenio and Advantio pacemakers and Invive cardiac resynchronization therapy pacemakers. The Ingenio pacemaker's first U.S. implant was performed on May 3 at the Cleveland Clinic. We can see Boston Scientific is still moving ahead full steam with earnings up and FDA approvals coming in at a fast and furious pace.
Using Boston Scientific as an example, we can see a successful medical device company can make investors a lot of money in the long term. It is my strongest opinion that Antares will eventually have the same success, if not better, for its long term investors who take a position in the company now and hold the stock for at least 3 years. However, Antares is not quite a medical device maker in the purest sense; Antares is more of a medical device marriage maker, joining drugs with subcutaneous 'do-it-yourself' injectors.
I want to focus on Antares's top line product in this article because it is the top line success that will ultimately take Antares from a little under $3 a share to in my opinion, $50 + a share in the next 5 years.
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, as well as integrated reconstitution systems for lyophilized drugs, 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 as well as integrated reconstitution systems for lyophilized drugs.
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 T.V 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.
- 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.
What also has me very bullish about Antares's future are the recent comments the company's CEO, Paul Wotton made at a Roth Capital investors conference in California. He flatly stated that Antares will not be engaging in anymore royalty deals. He went on to state that Antares is looking for partnerships along the lines of a 50/50 split, notwithstanding that the company plans to market and commercialize most of their top line products in the future.
You can find Wotton's remark concerning Antares no longer seeking royalty deals at the 25:19 mark on the recording of The Roth Capital investor's conference linked above.
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 +
- May 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. In my opinion, Antares will not need to conduct any significant additional share dilution based on its current cash position and estimated profitability in 2H 2012.
$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)
Nestragel: The true wild card factor that deal for it this year can potentially double the Antares stock overnight. Paul Wotton can be heard commenting on Nestragel at the 23:20 mark of The Roth Capital California investor's conference.
As I remarked earlier, CEO Wotton has stated Antares is not interested in royalty deals anymore, but partnerships. Nestragel is a rub-on-gel Female contraception product, which I project will be a massive money maker in 5 years, potentially bringing Antares up to $500M A year in peak revenues, if the deal involves a true partnership and not a royalty/licensing deal.
Wotton remarked that talks are ongoing for a partnership for Nestragel. Personally I believe Pfizer is interest in the product and might acquire Antares mainly because of this product. Nestragel has been thru phase 1 and phase 2 clinical, and now is ready for Phase 3 clinical. My first article I wrote for Seeking Alpha covered Nestragel's market potential and various other factors involved in the female contraception market.
The Antares-Teva (TEVA) partnership:
Tev-Tropin® Tjet® (reusable) hGH-
- Growing franchise for Teva, Tjet launched August 2009
- Antares receives strong margins on device sales, and mid-to-high single digit % royalty on overall product sales.
Two Vibex (auto injector, single shot disposables) products:
- Filed with FDA - litigation settled - launch June 2015
- Epinephrine (N.A. rights) & an undisclosed product (U.S rights)
- $250+ million markets
- Antares receives margins on device sales, and mid to high single digit % royalty on overall product sales.
Two pen injectors (disposables) products - Global programs:
- One Generic (ANDA) and One Branded (505B2) product - $1.5 billion in current sales.
- ANDA filing anticipated WITHIN 12-18 months
- 505B2 program has completed PK work
- Antares receives transfer price + margin on device sales, single digit to-mid teens % royalty on overall product sales.
Along with the growth in royalty based partnerships and the potential for exponential growth as a top line company with the products Antares will be offering as demonstrated above, there is perhaps a larger reason to be invested in the Antares Future; it has very strong management which is evident by their cash management. I recently worked on some ratio analysis to see how AIS stacks up against some of the best companies in the sector. The ratios I looked at which are an interesting summary of cash and working capital management, have to do with the cash conversion cycle (CCC). This basically determines how fast you are turning your inventory into cash.
There are three "D" components to the cash conversion cycle; days sales outstanding (DSO), days of inventory (DOI), and days payable outstanding (DPO). I found an interesting article in Forbes Magazine that references what positive working capital management has produced for Amazon.com (AMZN) in relation to their competitors. Although the relationships are different in the pharmaceutical industry, the business thought still remains consistently the same, as Antares management demonstrates a similar DPO. Amazon does a masterful job with all 3 of the "Ds."
The first component in the cash conversion cycle we will go through is average days sales outstanding. So, how fast are you getting the money in the door after making a sale? When a company collects their money fast it shows that their customers are getting a good product. It also shows you are in business with reputable companies and are doing a good job negotiating deals. If we look at Antares compared to some huge companies in the sector, there is a vast difference in numbers. All of these calculations are based on the most recent quarterly results.
Days Sales Outstanding | |||
AIS | Antares Pharmaceuticals | 18.5 | |
BCR | C.R. Bard | 62.3 | |
BSX | Boston Scientific | 63.5 | |
MDT | Medtronic | 79.8 | |
Next, we have days of inventory. It is calculated by taking inventory/cost of sales*days in the period. Similar to DSO, it is pretty much how long your products are on the shelves before being turned into money. Again here, Antares has an excellent number compared to giants in the industry.
Days of Inventory | ||
AIS | Antares Pharmaceuticals | 59.3 |
BCR | C.R. Bard | 104.5 |
BSX | Boston Scientific | 127.6 |
MDT | Medtronic | 154.7 |
Finally, we have days payable outstanding. In this scenario, the longer you can wait to pay on contracts or inventory the better.
Days Payable Outstanding | ||
AIS | Antares Pharmaceuticals | 132.3 |
MDT | Medtronic | 48.6 |
BSX | Boston Scientific | 41.3 |
BCR | C.R. Bard | 24.8 |
So, if we combine all of the pieces of the puzzle, we can see AIS is in unique territory having a negative cash conversion cycle.
DSO+DOI-DPO | |
AIS | -54.5 |
BCR | 141.9 |
BSX | 149.7 |
MDT | 185.9 |
They have a negative 54 days CCC, which means that their sales are converted in hard cash 54 days before AIS needs to pay for invoices to vendors.
What I see a lot of times looking at some pharmaceutical companies is management using cash like it is 'their money;' rather than being concerned with their shareholders, many of these companies' management teams take excessive salary and frankly live off their investors backs, with many companies to date executing little to nothing to increase share holder value.
What I see from AIS is them using the company cash as though it is the shareholders money which is how it should be. The cash balance of AIS has remained around the thirty-three million dollar mark for about a year. The reason is how they are managing that money and the ratios above created from managing their financials. There is a very small cash burn if any and now that they are starting to bring in significant revenue and create partnerships with companies such as Pfizer (PFE), in which I speculate the undisclosed deal with Pfizer is likely to do with an Ibuprofen fast melt tablet.
The management is not paying themselves lavish salaries relative to other similar size organizations in this industry. When they perform and increase shareholder value, they may receive extra shares as encouragement which is how it should be. When we see insiders not willing to part with these shares, it adds further confidence with investors as to the direction of Antares in the next few years. Antares may not be one of the big dogs as compared to above- yet, but if they keep moving forward like this, they will become one in my opinion.
The current Antares management team since taking over the company from the prior management has done an excellent job to date as we can clearly see. I have no reason to believe that they will not continue their solid management in the future, turning Antares into a top line mega revenue producing company, and away from a royalty based one as is their stated future course of action.
Antares Cash Position:
- As of March 31st 2012 cash and investments of $33.2 million withno debt
Growing Revenue Base:
- 2008 total revenues $4.6 million
- 2009 total revenues $8.3 million (47% over 2008)
- 2010 total revenues $12.8 million (54% over 2009)
- 2011 total revenues $16.5 million (28% over 2010)
- Q112 total revenues $6.9 million
- 2012 revenue expected to grow 30% - 50%
As we can see from above, Antares management is executing nicely in yoy growth as well. My bet is that the revenue projection numbers from the Vibex system will be met or exceeded by management as I predict it will.
My 2015 revenue projections and earnings:
12.5M....HgH global royalties and margin from device and component sales
$8.1M.....EpiPen U.S. royalties and margin from device sales
$10M......Vibex2 U.S. royalties and margin from device sales
$6M........Pen1 royalties and margin from device sales (EU only in 2015)
$12.5M....Pen2 U.S. & EU royalties and margin from device sales
$9M........Gelnique/Anturol global royalties
$1.5M......Elestrin royalties
$277M.....Vibex MTX U.S. sales and EU royalties and margin from device sales
$100M.....QS1 U.S. sales and EU royalties and margin from device sales
$0..........QS2
$0..........QS3
??...........Pfizer deal
$0?..........NestraGel
$476.6M...Total Revenues 2015
As I mentioned before, I also believe Pfizer may have interest in acquiring Antares at some point. When I consider this along with the new hiring of Jack Howarth, I start to speculate that a possible buy-out offer might be coming in the next year or so. Taking a look at Howarth's employment history shows a clear pattern to me:
- Oct 2007 Alphapharma hires Howarth VP of Investor Relations
- Nov 2008 King acquires Alphapharma
- June 2009 King hires Howarth VP of Investor Relations
- Oct 2010 Pfizer acquires King
- Feb 2012 Antares hires Howarth VP of Investor Relations
Howarth was hired by Antares around the same time it made a deal with Pfizer for the undisclosed product I mentioned above. Coincidence, or something more? The answer to this one is up to those reading this article to speculate and do the due diligence on this potential factor.
In more ways than not, Antares reminds me of Boston Scientific when they first were listed on the stock market exchange. This is why I have personally made a large investment in Antares. I am willing to wait 2 to 4 years to get that potential 1000% multi-bagger and more. The question in my opinion for investors who read this article and do the due diligence, who have come to a similar conclusion as I have is, "am I willing to tie up the money needed for a huge long term gain and be patient enough to wait for the huge gain?"
I strongly encourage fund managers reading this article to do hard due diligence on all of the factors I mention here in this article. I consider Antares to be the best long term small cap investment around because the risk is very low and the reward very high in the longer term.
My long term price target opinions:
2 to 4 years: $17 to $23 a share
5 to 7 years: $50 to $80 a share.
Buyout price per share opinion (if sold in the next year): $13 a share.
Disclosure: I am long AIS.
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