Antares Pharma: A Lower Risk Small Cap With Larger Cap Potential

In this article, I would like to talk about a company I own a substantial amount of shares in. The company's name is Antares Pharma (AIS) and is listed on The AMEX exchange. It's current closing price as of 4/10/12 is $2.98 a share, with a market cap of $309.01M. At first glance, Antares appears to be over valued, but in this article, I will give my opinion why I believe the stock is actually grossly undervalued, considering its strong potential moving forward, to be an eventual larger cap company.
 
First off, if we valuate Antares on what the company earns now, the stock would certainly appear to be again, over valued. Antares will likely bring in around $25 million dollars in revenue this year, with most of this revenue as profit. 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), Teva (TEVA), and Pfizer (PFE). Antares does not have much capital expenditures in these deals, so again, the company will see mostly profit from the $25 million number.
 
Antares focuses on self-injection pharmaceutical products and technologies, and topical gel-based products. It offers injection devices, which include Zomajet 2 Vision, Zomajet Vision X, Twin-Jector EZ II, and Tjet for human growth hormone; Medi-Jector Vision for insulin; Vibex disposable pressure assisted auto injectors that enables a controlled pressure delivery of drugs into the body utilizing a spring power source; and disposable pen injectors, which are needle-based devices designed to deliver multiple injections from multi-dose drug cartridges.
 
Antares also is in a strong position to take advantage of the eventual emergence of the biosimilar and biobetter market. Rather than me going on about every specific detail about what Antares offers in specific detail, I encourage readers to visit its company website and download the investor presentation PDF file.
 
What excites me about Antares 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, but full partnerships at the 25:19 mark on the recording of The Roth Capital investor's conference linked above.
 
One such product Antares plans to "go-it alone" is VIBEX MTX, a self injector that will be pre-filled with doctor prescribed doses of Methotrexate. Clicking on the VIBEX MTX link will bring you to a prior article of mine where I lay out some revenue projections for VIBEX MTX.
 
In collaboration with a fellow Antares investor, our Vibex MTX U.S. market earnings formula is as follows:

• 2 Million patients in U.S.+
• 10-15% market share +
• $50 per injection +
• 52 weeks +
• 52% margin +
• May 2014 commercial launch (possibly earlier).

Our equation produced the following high/low MTX earnings projections for 2014 and 2015:
 
2014 - $203M ($1.70 eps)/$135M ($1.13 eps)
2015 - $405M ($3.24 eps)/$270M ($2.16 eps)
 
Now, when we look at the total projected revenue for all Antares product sales in 2015, we come up with the following numbers:

• $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
• $140M VIBEX QS1 U.S. sales and EU royalties and margin from device sales
• Pfizer deal unknown, Guess is $7M
• NestraGel, the wild card factor I will comment more on later in this article.

$476.6M ... Total Revenues 2015
 
Nearly $500M in revenues is what we believe Antares will bring to the table in 2015, placing the fair value low end estimate of Antares Stock at around $20 a share, in roughly 3 years from now.
 
All of this would not mean a lot if management does not execute. The number one factor for me to take a risk on a small cap is confidence in competent management. When Dendrean gained approval a couple of years ago for its Prostate cancer drug Provenge, the stock went from $10 all the way up to over $57 before crashing back down to under $8. This happened because management failed to inform insurance companies of the cost for the drug. This is a case of a good product, but poor management execution. In fact, most all small cap companies that fail, do so because of poor management execution, money mismanagement, and other various issues involving incompetence.
 
I encourage those interested in Antares to do due diligence on Dr. Paul Wotton, The Antares CEO. I find him conservative, smart and very focused, without offering B.S hype in conference calls. On The Antares website, you can listen to the company's conference calls and investor conference presentations.
 
Antares expects to file an NDA for VIBEX MTX in 2012 and is seeking a licensing partner for territories outside of the U.S. and Canada. Antares will go it alone without a partner for the U.S. market. This product has a high profit margin rate with reasonable capital expenditures.
 
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 rub-on Female contraception, which I project will be a massive money maker in 5 years, potentially bringing Antares up to $500M A year in 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. 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. Being my first article for Seeking Alpha, it reads a little bit like an infomercial, so it can be a little funky to read.
 
Many investors have been wondering why there has not been a deal yet for this product. I believe the answer for this is contained once again, in Paul Wotton's comments from Antares's last investor conference presentation. It is also my belief that Pfizer is the main suitor for Nestragel, and originally contacted Antares for it.
 
I believe this because the undisclosed deal with Pfizer appears to be for an insignificant product that Pfizer, according to Wotton's comments in the investor conference, " had this product in their inventory for some time." This indicates to me that Pfizer did not originally contact Antares for this undisclosed over the counter product that was shelved away in Pfizer's inventory.
Why would Pfizer seek out Antares for a small over the counter product that has been sitting on the shelf for some time?
 
Antares and Pfizer were talking about something else in my opinion, and I believe that something else was Nestragel. I also believe Pfizer may have interest in acquiring Antares at some point, and this undisclosed deal is a kind of 'feeler' Pfizer has laid out. When I consider this along with the new hiring of Jack Howarth, I start to sniff out a possible buy-out offer coming. 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 2011 Antares hires Howarth VP of Investor Relations

Howarth was hired by Antares at the same time it made a deal with Pfizer for the undisclosed product I mentioned above; coincidence or something more? I do not believe the Howarth hire is a coincidence when factoring in what I mentioned above.

A shorter term cup and handle formation occurred beginning in January, then a continuation of a symmetrical triangle. We can see the confirmation of this as the stock had a decent break-out occur after the handle was confirmed as I crudely mark above in black. I made a mark on where I feel is a key MACD point from January in conjunction with the beginning of the last cup and handle, and make the same mark on the MACD at the end of March. I see the beginning of the same cup and handle and continuation of a symmetrical triangle forming again. The recent pull back in the pps I feel has been in conjunction with the recent overall market correction that I feel is near or finished with its correction.
 
I strongly encourage fund managers reading this article to do hard due diligence on all of the factors I mention herein. I consider Antares to be the best long term small cap investment around because the risk is very low for a small cap, and the reward very high. Again, I want to point out, because the company carries less risk, do not expect an explosive move upwards overnight.
However, a deal for Nestragel would likely double the stock price overnight, if the deal is a major one.
 
I also wrote an article for Seeking Alpha the mentions The recent FDA directive received from The Obama Administration. I feel what I wrote about in that article is a major factor that should help Antares be in a good position to capitalize on; the article can be found here.
 
I bought Antares because I believe in the long term prospects, fundamentals, and management of this company. I believe once any savvy investor does the deeper DD on Antares, they will agree with me and buy and hold it for the long term.
I have written other articles on Antares for your consideration;

• Article about Nestragel (Female gel contraceptive) is here.
• Article about Teva and AIS is here.
• Another article is here.

Key points of interest:

• Management growth plan on target - I am expecting Q1 2012 earnings to be Antares' first profitable quarter ever. I estimate 2 to 4 cents a share profit. The company has no debt, and around $32 million in cash and investment.
• Antares has strong insider and institutional ownership - For a stock that has not been over $5 a share since 1999, 40% institutional ownership is very unusual. See my article here on these two potential pps drivers.

Potential negatives:

• Lack of market acceptance for VIBEX MTX.
• Over all weak stock market means risk off trading and safer investments, namely Treasuries.
• A buy-out offer accepted that is too low per the potential market value of The Antares product line.
• Management changes course and gets too aggressive, too quickly.

While I certainly do not feel any of the negatives above will occur with Antares, they are always possible to occur as we are dealing in factors that are never certain.
 
Good things come to those who wait, or so we are told. Antares Pharma is definitely a good thing, and buying it around its current price range now will yield a huge long term reward in my strong opinion. As of 4/10/12, Antares sells for $2.98 a share. If the company is not acquired, I believe the stock price on 4/10/15 will be north of $20.00 a share.
 
Disclosure: I am long AIS.

Additional disclosure: DISCLAIMER: This article is intended for informational and entertainment use only and should not be construed as professional investment advice, but rather my opinions as a writer only. Always do you own complete due diligence before buying and selling any stock.