Wall Street analysts expected Insys Therapeutics (NASDAQ:INSY) to report dismal third-quarter results. But they didn't know just how bad those results would actually be.

Insys announced its third-quarter financial performance prior to the market open on Thursday. Analysts figured sales for the company's opioid drug Subsys would be way down, but Insys is attempting to transform itself into a cannabinoid-focused biotech. Despite the recent launch of cannabinoid drug Syndros, Insys posted a huge loss that was much worse than expected. But here's why this bad earnings miss had little effect on the marijuana stock. 

Arrows missing target.

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What happened in the third quarter

Insys reported third-quarter net revenue of $30.7 million. That's a whopping 47% decline from the prior-year period. It's also well below the consensus analysts' revenue estimate of $36.7 million.

The company's bottom line looked even worse. Wall Street expectations were for Insys to lose in the neighborhood of $0.15 per share in the third quarter. Instead, Insys announced a net loss of $166.3 million, or $2.30 per share. In the third quarter of 2016, the biotech earned $2.9 million, or $0.04 per share. 

What was the problem? Not only were prescription volumes for Subsys down, Insys also had higher product returns. These issues were connected to each other. Lower prescription volumes meant that the company's channel partners and wholesalers had more inventory on hand. Some of that inventory hit expiration dates, and some of it was returned to Insys as part of inventory rebalancing. Insys calculated that its net revenue was negatively impacted by around $5 million due to the product returns.

The biotech did a get little help from the launch of Syndros -- but only a little. Insys reported that third-quarter sales for the drug, which treats chemotherapy-induced nausea and vomiting, as well as AIDS patients with anorexia-associated weight loss, totaled roughly $700,000. That wasn't nearly enough to offset the decreased revenue from Subsys.

The rest of the story

Insys stock fell initially after the company's third-quarter earnings release but quickly recovered. Investors realized there was more to the story.

First, the huge loss was primarily due to Insys setting aside $150 million in connection with an ongoing Department of Justice (DOJ) investigation into the company's past marketing practices. Insys doesn't have a deal yet with the DOJ, but resolving the investigation and moving forward remains the company's top priority. The $150 million sum is the minimum liability the company thinks it will have over a five-year period to resolve the issue.

Excluding this big accrual, Insys' net loss would be around $15.5 million, or roughly $0.21 per share. That's still worse than what analysts expected, but it's much closer than the actual reported net loss for the third quarter.

There was also something of a silver lining in the dark cloud hovering over Subsys. While sales of the drug again dropped dramatically, in the conference call with analysts Insys CEO Saeed Motahari said that the decline in the third quarter was somewhat slower than prior quarters. He added that sales for Subsys in October were higher than they were in September, even adjusting for an extra day in the month.

And while Syndros isn't generating a lot of revenue yet, Motahari stated that the initial results for the first two months of sales were in line with the company's expectations. Motahari also noted that so far Syndros' launch appears to be going well in comparison with other recent launches of drugs with class II narcotic scheduling.

Looking ahead

Context matters when a company announces any news, whether good or bad. In Insys' case, the news from the third quarter was certainly bad, but it was set in a context of a future that looks more encouraging. That's why the stock didn't plunge on Thursday.

Insys still faces challenges related to the DOJ investigation. And President Trump's recent declaration of the opioid crisis as a public-health emergency could result in more headwinds for Subsys. 

However, if sales for Subsys stabilize in the fourth quarter as Motahari expects, it would go a long way in making investors more confident about Insys. Next year could be much better, especially since Subsys will be the preferred TIRF (transmucosal immediate-release fentanyl) product on the formularies of two of the largest pharmacy benefits managers and one of the largest insurers beginning in 2018.

Regarding Syndros, Insys had warned in the past that the launch would initially be slow. That's par for the course for class II drugs. However, the company still projects peak annual sales of around $200 million for Syndros.

Insys is also making progress toward its goal to file for one drug approval each year over the next five years. The biotech has several candidates in its pipeline, including an oral cannabidiol solution in a phase 2 study targeting treatment of infantile spasms.

Will Insys become "the top cannabinoid company in the U.S." as Motahari hopes? Maybe, maybe not. But the company just weathered a tough third quarter and came out looking relatively good. Better days could be in store. I still think Insys just might be the biggest comeback story of 2018