InSite Vision (INSV.OB) occupies alone a small niche with its DuraSite delivery system that administers topical eye drugs much more efficiently. The eye blinking usually causes drugs to wash out and the common remedy is administration of drugs four to eight times a day. Such a schedule must be maintained since missing doses reduce drug effectiveness, especially in ophthalmology. In this respect, drugs used in ophthalmology differ from other types of drugs, most of which have a simple dosing schedule with once or twice a day dosing. The DuraSite delivery system can reduce dosing to one to two applications a day for proven drugs.
InSite Vision applies its own business strategy. It utilizes ophthalmic drugs already approved by the FDA and improves them using DuraSite. DuraSite is a mucoadhesive technology that reduces the number of drops a patient needs through more efficient delivery of the drug. Even though this is a very small niche market, there are no known competitors for this mucoadhesive technology. In this way, InSite accelerates FDA approval of its products. When the FDA approves the new enhancement, InSite outsources marketing and development to other companies. Thus, it minimizes risk, speeds development time and reduces operating costs. Another key advantage is that InSite deals only with effective and safe drugs.
The application of this strategy led to approval of two drugs - AzaSite and Besivance - based on incorporating an antibiotic in the DuraSite drug delivery system for bacterial conjunctivitis. AzaSite, approved in 2007 is a DuraSite enhanced treatment for pink eye, developed and commercialized by Merck (MRK). Potential market for AzaSite is at least $45 million through 2019. The other drug, Besivance, was approved in 2009, developed and commercialized by contact-lenses maker Bauch and Lomb (Warburg Pincus plans to sell Bausch & Lomb for more than $10 billion - the second-biggest private equity disposal since the start of the financial crisis).
Bausch & Lomb is launching Besivance worldwide. For the third quarter of 2012, royalties from Besivance increased by $0.3 million to $0.6 million. However, the royalty rate is only about 6% versus the current 25% for AzaSite, and that explains the modest income from royalties, whereas total sales of Besivance reached $10 million in this quarter. Currently, most of InSite's revenues are royalties for AzaSite and Besivance that reached more than $12.1 million in the third quarter of 2012 with net profit of $5.1 million.
In addition, InSite already has three products in phase III development that can be approved by the FDA sometime from 2014 to 2016: AzaSite Plus and DexaSite for blepharitis and BromSite for relief of pain and inflammation after cataract surgery - the most frequently performed ocular surgery in the U.S. with more than three million procedures annually. There are no approved drugs for blepharitis, so if approved, AzaSite Plus and DexaSite have a clear first mover advantage. AzaSite Plus alone has more than $150 million of sales potential in the U.S. five years after introduction, and $90 million in the rest of the world.
BromSite uses DuraSite to deliver the non-steroidal anti-inflammatory agent, bromfenac. It is an improved version of ISTA Pharmaceuticals' (part of Bauch and Lomb) BromDay whose sales only in the U.S. exceeded $85 million. Bromday is the leading product in the topical ophthalmic anti-inflammatory market of $370 million. In Phase II of clinical trial, BromSite achieved more than twice the tissue penetration in the eye as compared to Bromday. Now InSite enrolled more than 240 patients undergoing cataract surgery in a trial designed to evaluate BromSite against the DuraSite. At 15 separate sites, patients were administered drugs twice a day for two weeks after surgery. If Phase III of the trial will be successful, an NDA for BromSite could be filed in 2013 and within three years after introduction, Bromsite can capture from 30% to 50% of the Bromday market. Both Bromsite and DexaSite have $25 to $50 million market potential.
Taken together, InSite's five current products can reach $412 million of revenues in 2018. At this stage, much depends on Merck's strategy. The guaranteed royalty from Merck is $17.0 million in 2012 and $19.0 million in 2013. If AzaSite sales will be at current levels or less, royalties will not be sufficient to repay the $60 million debt on which InSite has to pay 16% interest. In this case, InSite doesn't have an obligation to repay the debt, but it could lose ownership of AzaSite in the U.S.A. in 2014.
If Merck decides to market AzaSite aggressively, then sales could reach $85 million by 2015 and $150 million by 2018 with annual royalties for InSite of $22.5 million. In this case, InSite would be able to repay all of the royalty debt and regain full ownership of AzaSite in 2018. Since InSite likely will follow its standard strategy and will partner development and marketing of these three products. It should receive royalties that can reach $54 million in 2018 with earnings per share equal to $0.10. These earnings indicate a price earnings ratio of 17 to 25 times with a corresponding share price of $1.70 to $2.50 in 2018 in comparison with the current price of $0.36. Thus, InSite has very high upside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
