Tuesday, March 8, 2016

46th AIM Student Equity Update by Dan Kralovec. Insys Therapeutics (INSY): "Shareholder class action complaint adds uncertainty to this exciting, innovative firm"

 Insys Therapeutics (INSY, $18.05): “This Innovative Specialty Pharma Company is Challenging to Understand, but Offers Huge Upside”

By: Daniel Kralovec, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Insys Therapeutics, Inc. (NASDAQ:AIG) develops and commercializes supportive care products to address the clinical shortcomings of existing pharmaceutical products. They provide innovative drugs and novel delivery systems for therapeutic molecules. Their main revenue generator Subsys and promising pipeline candidate Syndros are discussed in more detail below.

• INSY’s lead revenue generator is expected to see declining prescription rates during FY16.

• Management expects to gain FDA approval for the firms newest supportive care drug by 2H16 – the expected market could generate $300 million annually.

• Recent investigation and lawsuits accuse the company of using manipulative marketing practices and kickback schemes to boots drug sales.

• INSY could be heading to new 52-week lows on the back of any negative investigaition announcements. Current shorted positions account for 80% of float – something else to keep an eye on going forward.

Key points: Insys Therapeutics has had a bit of a rough go over the past few months. The company has commercialized two products with many more potential candidates throughout the various stages of clinical development process. Currently, the company derives the majority of its revenue from Subsys; an opiate based sublingual spray used to manage severe breakthrough pain in cancer patients. Since approval in 2012, Subsys has been the most prescribed product in its class, servicing around 46% of the overall market. Insys recently reported that they will no longer be contracting with OptimumRx, represent a 7% loss in total volume. Though many believe this product is maturing, recent 4Q15 sales were up 38% over the previous fiscal year. This may be due to the fact that the company increased prices by 10% across the board for all dosage types. In the most recent earnings call, management noted that prescription trends for 1Q16 are projected to decline when compared to previous quarters. It’s too early to decide whether this drug is nearing maturity. Given it’s effectiveness and slightly increasing market share, many project that the drug will continue achieving mid level growth in the coming years. Yet, we’ll have to wait and see how Rx level trends quarters affect their only real revenue generator over the next few quarters.

Looking forward into 2016, the firm expects FDA approval for Syndros, a drug used to combat some of the side effects of chemotherapy. Several hundreds of millions of dollars are spent annually on drugs to combat chemotherapy side effects such as CINV (Chemotherapy Induced Nausea and Vomiting). Insys expects this drug to hit the market with momentum, similar to the release of Subsys. Management claims the drug will be a long-term growth driver with the potential to generate upward of $300 million in revenue per year. With that being said, successful implementation would diversify their revenue base, which may prove to be beneficial if the market for Subsys continues to decline.

Recently, a class action lawsuit accusing the company of securities fraud was recently filed. Multiple U.S. State regulators have been investigating the company’s past sales and marketing practices for some time. It’s believed that the company operated a lucrative kickback program, including prescribing physicians and sales reps, to boost the sale of Subsys. A few doctors have been arrested and charged with fraud, the former CEO stepped down last fall following the initial investigation, and one former sales representative pleaded guilty to conspiracy to commit health care fraud. Despite solid revenue growth, much of the future success of the company is hinged upon successful commercialization of product candidates. No new products are scheduled to release until later this year, pending FDA approval. Given these circumstances and recent investigations, management will need to rethink their strategy to regain investor confidence.

Past Year Performance: INSY has decreased about 36% over the past year. The stock bottomed out at $14.18, now trading at $18.05, but still within the lowest bound of the 52-week range. Over the past month, the stock has been on the up and up, with returns of about 16% (6mo ~ -47.24% return). Much of the volatile performance during the past year already reflects the multitude of pending investigations and overall negative press surrounding this company. Additionally, 80% of floating shares have been shorted with an average 21 days to cover. 

Source: FactSet

My Takeaway

The recent developments with regards to investigations have definitley been somewhat factored into the stock price. The firm is no doubt feeling the heat from all stakeholders. Dismissing allegations, realigning business practices, and successfully commercializing their chemotherapy drug may be this firms keys to success. Looking forward, achieving these feats could push INSY back into meaty part of the 52-week trading range. Yet, I still worry the company’s main product is maturing. The newly forecasted decrease in prescription trends accomnpanied with a ridiculous short interest figure reinforces the negative believes felt by investors over the past several months. While the addressable market for cancer pain drugs is vast, we still cannot accurately predict the success of INSY’s product candidates. The future of this company is rather unclear at the moment. That being said, I recommend we cut our losses and close out this position within the AIM Equity Portfolio.

Source: FactSet

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