Insmed Is Well Positioned to Make a Good Deal

When you look hard enough and turn over enough stones, you are bound to find something sooner or later. One company I found and purchased recently is Insmed, Inc. (INSM).

Before going into what it does, the company is a pure Benjamin Graham net net stock, without including any long term assets or intellectual property, as well as a negative enterprise value stock. It is exactly the type of stock I like.

Quick Background

The company is a biopharmaceutical company with expertise in recombinant protein drug development.

I know I’ve said many times that I don’t invest in pharmaceutical companies, let alone biopharma, but I felt this company was too cheap to pass and I would use it as a learning experience.

On February 12, 2009, the company sold all of its assets related to its follow-on biologics (“FOB”) platform to Merck (MRK) for $130m. The manufacturing facility and equipment went with the sale. Insmed’s only remaining source of income is from its Myotonic Muscular Dystrophy treatment called IPLEX, but since the manufacturing facility was sold off, production has been ceased. Insmed only has enough inventory to last at most 2 years with 70 patients worldwide.

However, the company is involved in researching the use of IPLEX for an Extended Access Program (EAP) for Amyotrophic Lateral Sclerosis (ALS). They obviously have to go through the different phases of testing and so far they are preparing for phase II to treat ALS patients. When is totally up in the air.

Benjamin Graham Net Net Working Capital Valuation

Some points to correct with the above image.

Going through the latest 10Q, it shows that the cash and equivalents of $122m is not all 100% cash. $86.5m is in short term investments. I bring this up because there is a section which states the following:

We also hold an investment in NAPO Pharmaceuticals, Inc. (“NAPO”) which is currently valued at $0. During 2008 we recorded an other than temporary impairment of this investment of $392,000. This amount is reported as a loss on investments in our statement of operations for 2008.

Makes me wonder whether this management knows how to use its cash and whether the recent investments are going to be beneficial.

Company has no long term debt and the $4.6m are its current liabilities. This puts INSM in a great position to be acquired or to make very sly and calculated acquisitions. At a time when bio or pharma firms are craving money to continue their research, INSM has the potential to get some great deals.

As long as it isn’t a company like NAPO Pharmaceuticals…

Things I Do Not Like

• I’m playing with fire by trying to go outside of my circle of competence…
• Company could easily waste its money
• The liquidity section of the quarterly report states: Even though we currently have sufficient funds to meet our financial needs for the upcoming year, our business strategy also contemplates raising additional capital through debt or equity sales. We also plan to enter into agreements with corporate partners in order to fund operations through milestone payments, license fees and equity investments.
• Dilution of shares
• Huge long list of risks in the reports
• Long history of losses and horrific fundamentals

Why Did I Buy?

Despite all the things I don’t like above, I asked myself about the possibility of losing everything.

And I just don’t see the company going under or me losing money in the short term with the company in its current position.

INSM is below Graham’s definition of net net working capital, negative enterprise value, plenty of cash and has slowed down its cash burn.

They sold off a big part of assets and equipment but they still have their main research facility. The current supply of IPLEX should be able to provide some income while they keep looking into other strategic alternatives.

Now I’m not hoping the company creates another drug or even passes its phase testing. It sure would help, but my thesis for the investment is that someone or some company will see the value and the quality of assets (highly liquid assets). This way the company could sell out or try to return value to shareholders in another form.

We have also engaged the services of RBC to act as financial advisor in evaluating other options for use of these proceeds which could include acquisitions of complimentary businesses or technologies, product licensing, mergers, share repurchase and the distribution of a portion of the proceeds to shareholders.

With plenty of cash, there are plenty of possibilities Insmed can pursue. This is a company I’ll have to monitor closely for sure though. If I see that management is trying to somehow beat a dead horse back to life by making overpriced acquisitions and going on spending sprees, I’ll be selling out immediately.

As an investment, I’m seeing this at around the $1.40 mark and due to my lack of industry knowledge, I’ve a little under 2% of total capital.

Disclosure: I hold shares of INSM at the time of writing.

Comments

[advalorem:]

Jae, what is the catalyst for the share price to go up?

Sep 28 09:26 PM

[Jae Jun:]

I don't really invest for the catalyst. I know that many people invest only when a catalyst exists but to me a catalyst will come along.

Sep 29 12:00 AM

[RTN:]

From RTN:

Correction:

the NAPO ' investment ' was not an investment as such, rather NAPO licensed an insmed compound for further study and the cash involved in that deal was given in the form of a stake in NAPO.

Currently skeleton crew of 17 staff total after biogenerics sale to merck and an unsuccesfull trial in mmd.
No new CEO named since the summer, chairman of the board Melvin Sharoky in charge since that time.
Iplex still a natural key component in the human body with a lot of literature on growth and repair potential. the bp3 part has promising apoptotic properties. Insmed owns the patents on the igf1-bp3 combination as well as bp3.
Iplex is fda approved for use in short stature, removed from market for that indication due to a settlement agreement with former Genentech over partial production patent on free igf1.(partial buildstone of iplex)


Catalyst for INSM:
- ALS expanded acces program in italy, revenue last year in excess of 10million dollar (11-12mln), fully reimbursed by the italian government . And insmed commented this summer they had two years of stockpile of iplex for their current uses.
-per 2009: free iplex for a limited number of US ALS patients who went to battle against the FDA after denial of compasionate use based on italian increased survival data of 20-25% (keep in mind ALS is fatal). they are closely monitored and have video records of how they are doing. This is not an official trial, but a result of a compromise between fda and the als patients.

The ALS community in the USA has been deafening silent since that time, even though very few were in the passionate use compromise. Where before that time they even has a washington DC demonstration planned.

Insmed has a big pile of cash and no cash burn.(cash flow positive this quarter? )
Iplex still has value for
a) its stockpile seeing italian prices
b)many reported uses in the human body where it allready naturally occurs
c)bp3 also reported to increase effectiveness of drugs like herceptine when used in combination. (apoptotic properties)
www.medicalnewstoday.c... and combine with this cancerres.aacrjournals...
(just one example)

Should there be no ALS trial or takeover by merkc/roche or ipsen (their business partners per earlier legal agreements, and merck with the buying of the insmed facility this year):

In current market conditions a lot of biotech have to give huge discounts to get cash in dilution deals since it is hard to get for them. If insmed were to partner there i am quite sure they would get a very good deal on amount of value for their money should they invest in return for royalties.

Not sure which scenario will unfold, but definately back in again this summe.

Sep 29 03:40 AM

[Jae Jun:]

Thanks for those key facts. You obviously know more than me about INSM. Didn't realize the NAPA situation as well.

Either way, to me its a net net, cheap, has cash, no cash burn since the sale with 2 yrs supply.

Don't need a catalyst to see it is cheap anyways.


On Sep 29 03:40 AM RTN wrote:

> From RTN:
>
> Correction:
>
> the NAPO ' investment ' was not an investment as such, rather NAPO
> licensed an insmed compound for further study and the cash involved
> in that deal was given in the form of a stake in NAPO.
>
> Currently skeleton crew of 17 staff total after biogenerics sale
> to merck and an unsuccesfull trial in mmd.
> No new CEO named since the summer, chairman of the board Melvin Sharoky
> in charge since that time.
> Iplex still a natural key component in the human body with a lot
> of literature on growth and repair potential. the bp3 part has promising
> apoptotic properties. Insmed owns the patents on the igf1-bp3 combination
> as well as bp3.
> Iplex is fda approved for use in short stature, removed from market
> for that indication due to a settlement agreement with former Genentech
> over partial production patent on free igf1.(partial buildstone of
> iplex)
>
>
> Catalyst for INSM:
> - ALS expanded acces program in italy, revenue last year in excess
> of 10million dollar (11-12mln), fully reimbursed by the italian government
> . And insmed commented this summer they had two years of stockpile
> of iplex for their current uses.
> -per 2009: free iplex for a limited number of US ALS patients who
> went to battle against the FDA after denial of compasionate use based
> on italian increased survival data of 20-25% (keep in mind ALS is
> fatal). they are closely monitored and have video records of how
> they are doing. This is not an official trial, but a result of a
> compromise between fda and the als patients.
>
> The ALS community in the USA has been deafening silent since that
> time, even though very few were in the passionate use compromise.
> Where before that time they even has a washington DC demonstration
> planned.
>
> Insmed has a big pile of cash and no cash burn.(cash flow positive
> this quarter? )
> Iplex still has value for
> a) its stockpile seeing italian prices
> b)many reported uses in the human body where it allready naturally
> occurs
> c)bp3 also reported to increase effectiveness of drugs like herceptine
> when used in combination. (apoptotic properties)
> www.medicalnewstoday.c... and
> combine with this cancerres.aacrjournals...
>
> (just one example)
>
> Should there be no ALS trial or takeover by merkc/roche or ipsen
> (their business partners per earlier legal agreements, and merck
> with the buying of the insmed facility this year):
>
> In current market conditions a lot of biotech have to give huge discounts
> to get cash in dilution deals since it is hard to get for them. If
> insmed were to partner there i am quite sure they would get a very
> good deal on amount of value for their money should they invest in
> return for royalties.
>
> Not sure which scenario will unfold, but definately back in again
> this summe.

Sep 29 06:12 PM

[ari5000:]

Jae -- did you realize they received a Non-Compliant Letter a few weeks ago for share price under $1?

Not sure if you did.

I would think this is actually a positive sign as a recent blogger suggested. It means management is going to have to kick it into high gear and push that price up soon (within months) or they're going to lose everything. I bought some today. I've also seen another 'value guy' mention this on another site.

I think this just keeps trending down under the 20 day MA and then makes up for months of dead money with a one day rip as soon as whatever catalyst occurs that gets big pockets to buy in.

Sep 29 08:19 PM

[Jae Jun:]

Yes I did know about that and I take all delisting notices as noise. It never has really affected any of my previous investments where they received delisting notices.

In fact, it went up more often than not.


On Sep 29 08:19 PM ari5000 wrote:

> Jae -- did you realize they received a Non-Compliant Letter a few
> weeks ago for share price under $1?
>
> Not sure if you did.
>
> I would think this is actually a positive sign as a recent blogger
> suggested. It means management is going to have to kick it into
> high gear and push that price up soon (within months) or they're
> going to lose everything. I bought some today. I've also seen another
> 'value guy' mention this on another site.
>
> I think this just keeps trending down under the 20 day MA and then
> makes up for months of dead money with a one day rip as soon as whatever
> catalyst occurs that gets big pockets to buy in.

Oct 03 04:38 AM

[ari5000:]

My point is that the delisting is counter-intuitively a GOOD thing. It means management has to act NOW, to save their own jobs, and get the share price up. If INSM stays under $1 too long, it's game over for a steady salary and job perks.

See FNM, FRE, AIG, AXL for how delisting notices can suddenly light a fire under a ticker.

Oct 03 10:12 AM

[Jae Jun:]

Oh I see. I hope you're right though!
I wouldn't mind seeing this baby go back to where it should be.

Oct 05 04:22 PM

[RTN:]

From ALS worldwide
(not completely verified yet, this is from the small group of US pals patients who currently receive iplex for ALS and are being monitored)

"Dear Scott ,

The Iplex Saga:
Many want to know what's happening with Iplex. How are the ALS WORLDWIDE patients who have access to this medication doing, is it ever going to be released to others and is it still being distributed in Europe? There is, at this time, no indication that the numbers of patients who currently have access to Iplex will be expanded or continued past a total period of 24 months as was stated in Insmed's last press release. Whereas we wish we knew more, we have very little information to release. Many patients we monitor have experienced a range of improvements including reductions in choking, greater ease with chewing and swallowing, improved speech and respiration, and some increased limb strength. What we do know is that any gains experienced can only be maintained while Iplex continues to be used. Greater details will be released on or after November 30, 2009, by which time a report will have been submitted to both Insmed and the FDA."

Oct 08 10:13 AM