Back in April, InSite Vision
Earlier this month, InSite reported uneventful first-quarter results, highlighted by a current cash and investment position of a little more than $4 million and a net loss of $2.6 million. Meanwhile, there's been speculation about the possibility of a buyout by Inspire, InSite's larger drug-development partner. (I mentioned the logic behind such a move in a previous commentary.) On May 8, InSite announced an agreement that would provide severance benefits to Chairman, CEO, and CFO Kumar Chandrasekaran in certain circumstances, including a change in control at the company. Chandrasekaran has been with the company since 1987.
On the upside, the company's balance sheet got a boost before the end of the first quarter by way of a $19 million milestone payment from Inspire in response to the FDA approval of AzaSite. Over at CAPS, opinion on the company is decidedly bullish, with 107 outperform ratings versus only three bearish ones.
To get a grasp on where InSite might be heading, let's start by looking at the market for AzaSite and the follow-on antibiotic/steroid combination product AzaSite Plus.
The products
The annual domestic market for ocular antibiotics, based on IMS Health data for 2006, is approximately $360 million for the single-entity product (AzaSite) and approximately $245 million for combination products (AzaSite Plus). About 15 million prescriptions were written in this market in 2006, a healthy 7% growth rate from the previous year. The advantage for both AzaSite products over existing competitors is twofold -- first, the dosing regimen requires 60%-75% fewer drops in the eye, and the novel mode of antibiotic action reduces the chances of bacterial resistance.
As for marketing estimates, AzaSite is expected to launch in the late third quarter of this year, and Inspire has provided full-year 2008 sales guidance of $30 million to $45 million. My peak domestic sales estimate for AzaSite is $100 million in 2010, or roughly a 25% share of what should be a $417 million market, assuming just 5% compounded growth.
On the clinical-development front, AzaSite Plus is about two years behind. Its launch will probably happen some time in late 2009, with peak sales of about $65 million likely in 2013 (since the market is smaller for combination products). We'll get more details on AzaSite Plus' future when InSite presents on the morning of May 23 at the Citigroup Annual Health Care Conference. Until then, keep in mind that Inspire has the first option at licensing the combination product. That seems like a logical approach to leverage sales-force costs.
The numbers
From these assumptions, I have constructed the following financial model for InSite:
|
Year |
AzaSite Sales |
AzaSite Plus Sales | Total Royalties* | EPS** |
|---|---|---|---|---|
|
2008 |
$45 million |
$0 | $9 million | $0.08 |
|
2009 |
$60 million | $0 | $12 million | $0.10 |
|
2010 |
$100 million | $30 million | $31 million | $0.26 |
**Earnings-per-share calculations are based on 117 million fully diluted shares of stock.
Next, I applied a 20 multiple to InSite's EPS estimate of $0.26 in 2010, arriving at a future price target of $5.20 during the first full year in which both products will probably be on the market. I then discounted the 2010 price target back three years by 20% annually, calculating a fair present value of $3 per share. I used the high estimate of Inspire's conservative sales figures for AzaSite in 2008 and assumed rapid market-share growth for the drug because of its advantages and familiarity among physicians. For AzaSite Plus, I made my assumptions based on a market with two-thirds the sales potential of AzaSite.
My assumption of a 20 multiple to 2010 earnings is based on sustainable future earnings growth for InSite of at least 20% once both products are on the market and other sources of revenue begin to contribute meaningfully -- such as AzaSite Otic and international royalties from sales of both eye-drop products. The 20% discount rate is about twice the rate of return of the stock market over the long term, to reflect the increased risk of owning a micro-cap biotech stock.
However, InSite's pipeline actually carries a very low risk, based on its proven ability to achieve FDA approval with AzaSite and the well-known attributes of the drugs that are in its product formulations.
The conclusion
After 2010, InSite should have more than enough revenues from operations to cover future expenses while maintaining profit growth. My financial model is intentionally conservative, with a major upside possible from international royalties and sales agreements and other applications of the company's DuraSite delivery technology. The bottom line is that InSite Vision could be on the verge of an eye-opening surge in its value.
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Pfizer is an Inside Value selection.
Fool contributor Mike Havrilla, R.Ph., B.S., Pharm.D., is a Rite Aid pharmacist who lives, writes, works, and enjoys running on the streets and trails in the small Pennsylvania town of Portage. He invites your comments and feedback. Mike owns shares of InSite Vision, but does not have a position in any other company mentioned in this article. The Fool has a disclosure policy.
