Tuesday, December 20, 2016

A previous AIM Fund holding: Insys Therapeutics (INSY) “by Joe Mungenast, graduating AIM student.

Insys Therapeutics (INSY, $9.09) “This stock was sold earlier in the year from the AIM Fund”
By: Joe Mungenast, AIM student at Marquette University

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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.

Summary

Insys Therapeutics, Inc. (NASDAQ: INSY) is a commercial-stage specialty pharmaceutical company, which develops and commercializes supportive care products. It focuses on utilizing its proprietary formulation technologies to address the clinical shortcomings of existing commercial pharmaceutical products (Factset).

The company markets Subsys, a proprietary sublingual fentanyl spray for breakthrough pain in opioid-tolerant cancer patients; and Dronabinol Oral Solution, a proprietary orally administered liquid formulation of dronabinol. It offers its Subsys through its incentive-based commercial sales force (Factset).

A recent lawsuit involving former executives at the company has been the primary force driving this stock down in the fourth quarter.

Insys is currently trading at its 52-week low with seemingly few drivers to help drive this stock move upwards. Insys does have a drug in pre-registration and two more in Phase I and II testing respectively, but their primary source of income is generated by their main drug, Subsys. Subsys contributes nearly 100% of sales by product segment, and is the drug involved in the lawsuit.

Key Points: Insys has suffered from a gradual decline in its stock price over the past two quarters, with a brief uptick due to President-elect Trump. Most recently, however, the company has been embroiled in a significant ethical debate, aimed at former Insys executives.

According to a WSJ article,* former CEO Michael Babich and 5 other officers “were charged with conspiracy to commit racketeering, conspiracy to commit wire and mail fraud, and conspiracy to violate the anti-kickback law.”

Mr. Babich had been trying to defraud health insurers and bribe doctors to prescribe Insys’ Subsys, the sublingual fentanyl spray. Fentanyl, a Scheduled II drug in the United States, is a synthetic opioid that is 50 to 100 times stronger than morphine. As a result, this drug is far more addictive than the already very addictive morphine, and yet is still legal to be prescribed. While doctors would normally be hesitant to prescribe such a powerful drug, Mr. Babich used his influence as CEO of Insys to indirectly and unlawfully push his product onto unsuspecting patients.

What has this stock done lately?
After a brief rise to $14.53 under the announcement of a Trump presidency in November, Insys has since declined down to $9.09, primarily due to the antics of Mr. Babich and other former executives. There are currently few positive catalysts for this stock aside from their product in pre-registration.

Past-Year Performance: Insys has closed out the past three quarters at $15.99 for Q1, $12.94 for Q2, and $11.79 for Q3. While the stock has rallied twice in the past year (up 27% in the first week and a half of August ($15.20-19.38) and up 45% in the first two weeks of November ($10.02-$14.53)), INSY is down over 69% from the end of last year ($29.38-9.09).



My Takeaway
It is my personal belief that this stock should not have been held within the portfolio for two reasons. One, this stock has not given any quantitative reason for AIM to again hold it. Cash Flow from Operations is expected to decline 15.7% from last year. EPS is expected to be down to 0.35 from last year’s 1.38, and thusly Insys’ P/E is up to 26.2x for 2016 estimates from 20.7x in 2015. The relatively high P/E coupled with poor stock performance in 2016 leaves little room for interest from a value perspective.


Secondly, this company’s products succeed on the fact that they are potent and extremely addictive opioids. Fentanyl has been creeping into the limelight in the United States as more research shows the possibility of a fentanyl outbreak, especially in areas of high heroin use. (http://www.wsj.com/articles/former-insys-ceo-arrested-in-opioid-prescription-kickback-case-1481228056) To conclude, we would be holding a company who sells a highly addictive product. 

As the analyst for the healthcare sector I urge that we should not add this holding because of the addictive nature of their business and because of lagging financial performances!

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