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When is a biotech actually worth less after their drug is FDA approved? Answer: When the new drug means there is a lawsuit from Genentech (DNA). The market has already factored into Insmed’s (INSM) stock price the worse case scenario. This is a potential blockbuster drug with definitive advantages over its competition.

Here is my thesis as to why I believe it's time to go long with this stock:

a. Insmed has a once a day injectable drug approved by the FDA. It is called Iplex. The drug is a combination of igf-1 and bp3. It is approved for small indication - a treatment for very short children that aren't helped by growth hormone. It has Orphan Drug Designation.

b. Tercica (TRCA) is a company with a competing drug called Increlex. It is a free igf-1 drug that needs to be injected twice a day. It is approved for the same indication.

c. Essentially the difference between the two drugs is that in all humans there isn't a lot of free igf-1 floating around in our bodies. Almost ninety seven percent of igf-1 is packaged together with binding protein 3. Insmed worked out how to synthesize the binding protein with the igf-1.

d. The Iplex combination of igf-1 and bp3 increases the half life of the drug (from one hour to twenty four hours) and decreases the side effects. The main side effect of pure igf-1 and the combination Iplex is hypoglycemia. The difference lies in the levels which one can give the pure igf-1 as against the Iplex drug before the drugs lead to hypoglycemia.

e. In practical terms Iplex only needs to be injected once a day as against Increlex which is injected twice a day. If this drug is injected into a child for five years then the Implex drug saves 1,500 injections. Anyone who has injected a child regularly understands this competitive advantage.

f. Insmed is currently in a trial using the drug for myotonic muscular distrophy. It should work for this indication given that free igf-1 was tried many years ago, and it actually showed efficacy. However patients couldn't take the side effects. Insmed should be able to deliver even higher doses, if needed, due to the binding protein. Currently, there is nothing approved for this indication. There are about 40,000 people in the US with this condition and about the same number in Europe.

g. Insmed also has current trials using Iplex in AIDS Lypodystophy and Severe Insulin Resistance.

h. Insmed intends to begin a trial for Noonan’s syndrome and other conditions. There are 270,000 potential patients covering conditions which Insmed can target to deal with including short stature, AIDS, muscular dystrophy and noonans.

i. Two simultaneous battles are occurring between Insmed and Tercica – one in the sales field and one in the courts. Both companies are ramping up salesforces to sell their respective drugs. There is no injunction currently outstanding.

j. Infringement case bought by Genentech and Tercica against Insmed revolves around three patents. Trial before a jury is set to commence on November 6, 2006.

k. It has rarely happened that a safer drug for children would give rise to a total injunction on the product and force it to be withdrawn from the market. Most likely a royalty agreement would be reached. In the interim period, Insmed might have to pay a royalty into escrow until all appeals are completed.

INSM Financials:

Price: $1.04
Year End: Dec
Shares O/S: 120m (fully diluted)
Market Cap: 134m
Cash: 59m
Net Debt: 6m (ex convert)
Cash Burn: 4m per month

INSM 1-yr chart:

INSM 1-yr chart

Full disclosure: I hold a long position in Insmed.

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Author's update, 7/18/06:

Some people have emailed me and asked why INSM has been getting hit in the market. Let me opine as to four possible reasons:

1. Recent marksmen hearing, and what that means for the november trial.

2. Concerns that patient populations may a)be smaller than originally thought and/or b) penetration for both TRCA and INSM could be much slower than projected.

3. TRCA is supposedly making a 1x/daily drug, while INSM is supposedly making a room temperature stable version. Depending on which trick is harder, the convenience actor might be swapped or neutralized next year.

4. Analysts coverage on TRCA is greater than ISNM, and remains generally bullish.

INSM-TRCA 1-yr comparison chart:

INSM-TRCA 1-yr comparison chart

Source: Insmed's Stock Already Has Worst Case Scenario Priced In (INSM)