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.
Summary
• 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
