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Executives

Louis Drapeau - CFO

Timothy Ruane - CEO

Analysts

Scott Henry - ROTH Capital

InSite Vision Incorporated (OTCQB:INSV) Q4 2013 Earnings Conference Call March 27, 2014 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the InSite Vision Q4 and Year End 2013 Financial Results Conference Call. My name is Jasmine, and I'll be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Lou Drapeau, InSite's Chief Financial Officer. Please proceed.

Louis Drapeau

Thank you, operator, and good afternoon, everyone. And welcome to InSite Vision's conference call to discuss our 2013 results and current operations. As the operator said, I'm Lou Drapeau, InSite's Chief Financial Officer. Also with me today is Tim Ruane, our Chief Executive Officer.

Before beginning our prepared remarks, I'd like to remind you that the comments made during this conference call may contain forward-looking statements that involve risks and uncertainties regarding InSite Vision's operations and future results. I encourage you to review the company's filings with the Securities and Exchange Commission including without limitation the company's Form 10-K and Form 10-Qs, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

The content of this conference call contains time-sensitive information that may be accurate only as of the date of this broadcast, March 27, 2014. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

Now, I'll discuss our 2013 financial results. Total revenues for 2013 were $30.8 million compared to $21.6 million for 2012. Included in our 2013 revenues was $15.5 million from the sale in April 2013 of our right to receive royalty payments on net sales of Besivance, and an additional $1 million milestone earned in Q4 2013 after certain Besivance net sales targets were met.

We also recorded $0.5 million of Besivance royalty revenue in the first quarter of 2013 prior to the sale of the royalty rights for a total of 16 million from Besivance in 2013. In 2012, we recorded $2.1 million of Besivance royalties.

We continue to be encouraged by the growth of Besivance royalties, and look forward to the return of some or all of those royalties as provided in our sales agreement before the exploration of Besivance patents in 2021.

Our 2013 royalty revenues included $3.8 million of earned royalties from Merck on net sales of AzaSite in the United States compared to earned AzaSite royalties of $7.6 million for 2012, which reflects the declining net sales of AzaSite over the past year.

On August 2013, Merck announced that it ceased sales representative promotion of AzaSite in the United States, which had a significant impact on the net sales of AzaSite. The sales decline was exacerbated by a supply shortage about the time that Merck sold AzaSite to Akorn, Inc. in November 2013. Only recently was Akorn able to make the drug available in the United States.

During 2013, we received $10.5 million from the minimum royalty true-up payments from Merck versus a $11.9 million in minimum true-up payments in 2012. The minimum AzaSite royalties ended September 30, 2013, going forward we will only receive earned AzaSite royalties of 25% of net sales subject to the probable events of default on our AzaSite notes on May 15, 2014, which I will discuss shortly.

Also included in revenue in 2013 were $500,000 from Merck in settlement of a couple of longstanding contractual issues between the two companies.

Now, turning to expenses, research and development expenses for 2013 were $11.6 million compared to 15.5 million for [2002] (ph). Our program expenses in 2013 were largely related to the confirmatory BromSite Phase 3 clinical study which ended in early November.

For 2012, program expenses were primarily related to the first BromSite Phase 3 study and the AzaSite Plus/DexaSite DOUBle Phase 3 study in 2002.

General and administrative expenses were $5.8 million for both 2013 and 2012. In early August, we signed a new amendment to our facility lease in Alameda, California, which extends our lease term by seven years and reduces our existing space cost by about $300,000 a year compared to the prior lease rate.

Interest expense and other were $7.9 million in 2013 compared to $9.5 million in 2012 due primarily to $10.6 million of principal payments made in 2013 on the AzaSite notes.

Our net income for 2013 was $5.8 million or $0.04 per share compared to a net loss of $8.3 million or $0.06 per share in 2012. The swing from a loss in 2012 to income in 2013 was largely due to the sale of our Besivance royalty rights in 2013 as I discussed earlier.

At December 31, 2013, InSite Vision had cash, cash equivalents and short-term investments of $8.3 million. Our net tax usage in 2013 was $1.1 million, of that included the 14.5 million of cash received from the Besivance royalty sale in 2013, and was partially offset by the $10.6 million principal payments on the AzaSite notes.

The year end cash balance will only be adequate to fund our operations in total about September 2014. Tim Ruane will speak more about this in his comments.

Lastly, I would like to give you an update on our non-recourse AzaSite notes, which are solely serviced by the North American AzaSite royalties from Akorn and are not secured by any other asset of InSite Vision. The notes accrue interest at 16% payable quarterly and have a principal balance of $41.3 million at the end of 2013.

With the AzaSite’s earned and minimum royalties from Merck in 2013, we're able to fully pay all of the 2013 interest due on the notes, and make the $10.6 million principal payments on the notes. However, the minimum royalty period ended on September 30, 2013 and going forward we are only eligible to receive earned royalties of 25% on net sales of AzaSite.

For the first quarter of 2014, the earned royalty paid to the note holders based on the fourth quarter 2013 net sales was less than $20,000, which resulted in a differed interest carryover of more than $1.6 million. Net AzaSite earned royalties for the first quarter of 2014 is greater than the differed interest carryover and interest on that carryover at 16%, a total of about $1.7 million and a denser default will be triggered, and note holders may foreclose on our ability to receive further royalties from AzaSite in North America.

Akorn's net AzaSite sales for Q1 2014 would need to be almost $8 million for that quarter in order to fully pay the approximately 1.7 million due for the deferred interest and interest on the deferred interest when required on May 15, 2014.

As noted, Akorn has been hindered since buying AzaSite from Merck in November of 2013 by a supply shortage, and only recently has been able to make AzaSite available again in the United States. The focus on the perspective, net sales of AzaSite in all of 2013 under Merck were about $15 million, but we are not privileged to Akorn’s first quarter 2014 sales results. We believe it is highly probable that November default will occur on May 15, 2014.

Importantly, the situation impacting our note holders has no effect on our operations or on our ability to advance our late-stage product candidates in their development.

Now, I’d like to turn the call over to Tim Ruane, our CEO. Tim?

Timothy Ruane

Thank you, Lou. We continue a busy pace here at InSite Vision during the fourth quarter as we close up 2013. Let me first address the ongoing late-stage pipeline pursuits we are engaged in. I’ll start with the Blepharitis program, which continues to be top of mind with investors, potential partners and of course, our internal team.

As we all July of 2013 we released the top line results of our landmark DOUBle study evaluating AzaSite Plus, DexaSite and AzaSite, moderate to severe Blepharitis. This study did not meet its primary endpoint. Since that time we have been engaged with the FDA in an ongoing dialog to determine if there is indeed a path forward, specifically if a endpoint achieved in the first Phase 3 trial data is acceptable for use of a confirmatory Phase 3 study. This is an ongoing and iterative process which we are continuing to move forward, and with a subsequent follow up meeting with FDA on June 16.

As discussed previously, our plan is to limit further spending and investment on the Blepharitis program other than supporting the ongoing endpoint dialog. We remain optimistic today that a path forward with the FDA can be reached given the depths and breadths of our landmark Phase 3 data package in the ongoing discussion. Our plan is to follow a similar path with the European health authorities as priorities allow.

At this time we re have no further updates to provide on the Blepharitis program. No final decisions have been made to either terminate or advance AzaSite Plus and our DexaSite with regard to the Blepharitis program at this time. The next update we have on this later will be our regular quarterly release to update on the endpoint.

Now, let me address our BromSite program. Since we are now turning our positive confirmatory Phase 3 results last year in completing our post Phase 3/pre-NDA teleconference with FDA on January 13. Our internal teams have been quite busy deep in the process of translating all of our raw clinical, preclinical and manufacturing data into reports in formats acceptable for the NDA file, and obviously produce some support during ongoing partnering discussions. We have requested similar post 3/pre-MAA meetings with European health authorities during May.

Also at the end of last year we were finally liberated from our partnership with Merck as Merck finally exited the ophthalmology space selling their ophthalmology assets to Akorn at the end of November. In somewhat of a perfect storm scenario, while Merck assured InSite Vision in the ophthalmology marketplace with AzaSite would continue to be commercially available to prescribers and patients, will it disband at its sales force earlier in 2013. Merck completely failed to maintain inventory planning for AzaSite resulting in a backwater situation from sometime in October through what we understand as early February.

Accordingly as Lou pointed out, earned royalties during the fourth quarter were essentially negligible. And as the AzaSite royalty reversed to the 25% organic will be on October 1, on the February 15, subsequent payment on the interest level on the debt. And while Akorn has re-established supplies, we are managing them to essentially re-launch the product to prescribers.

AzaSite was essentially out of the marketplace for four months allowing previously loyal prescribers and users to be forced to select other products as therapeutic substitutes. Thus we have no idea what this will mean for the future revenue stream of AzaSite. Accordingly we fully expect, as Lou stated, an even of default or current release notes in May 15 when the next payment is due.

So, what we now plan -– what’s next and where we think the company is heading. Obviously given our cash position we are going to continue to aggressively manage our expenses and continue forward with our ongoing partnering discussions. I feel kind of like where we were last year, we are trying to get the royalty monetization over the finish line.

Clearly, we think there is a substantial and logical clinical, regulatory and commercial path forward to build with the right partner. Our franchise approach around cataract surgery and we are made active in these discussions and supporting for due diligence.

We think the opportunity is strong in the U.S., also attractive in Europe, and given the realities of pricing pressure in Europe. In addition, we're not through with our Blepharitis programs. We continue the ongoing dialogue and iterative process with the FDA.

I appreciate your patience and your support of InSite Vision. And operator, please open now the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Scott Henry from ROTH Capital. Please proceed.

Scott Henry – ROTH Capital

Thank you, and good afternoon.

Timothy Ruane

Hi, Scott.

Scott Henry – ROTH Capital

I’ll start with a couple of just accounting ones, that 1068 in revenues; were those AzaSite revenues or was that something else?

Timothy Ruane

No. It’s AzaSite revenue, Scott.

Scott Henry – ROTH Capital

Okay. And how come there were no COGS associated with, are there very little COGS associated?

Timothy Ruane

So, we pay a royalty to Pfizer and that is what the cost of revenue includes. It’s the royalty pay to -- we pay to Pfizer.

Louis Drapeau

Pfizer.

Scott Henry – ROTH Capital

Okay. So, it will be that low going forward as well, I would gather?

Timothy Ruane

That is a constant low single-digit -- we disclosed right on that?

Louis Drapeau

I don’t think so.

Timothy Ruane

Low single-digit royalty that expires -- I want to say November 2018’ish.

Louis Drapeau

Correct.

Timothy Ruane

And then the remaining royalty would just flow to the bottom line.

Scott Henry – ROTH Capital

Okay. I guess I probably spent too much time talking about it already giving its pending future. Shifting gears, what if -- any thoughts on guidance for R&D or G&A next year, if not specifically just relative to 2013?

Timothy Ruane

Not at this point, Scott.

Scott Henry – ROTH Capital

Okay. Then I guess, moving to the pipeline, and I missed a couple of things, but with regards to the Blepharitis program, what is your next data point with FDA? I mean, are you waiting a minute, are they going to get back to you, where does that stand?

Timothy Ruane

We have a -- it’s an ongoing process. Our next real move with them is on June --

Louis Drapeau

Sixteenth.

Timothy Ruane

Sixteenth, which will be a face-to-face meeting in D.C. Obviously, lots of discussions are ongoing and analysis are ongoing, but we’re pressing as we said on the R&D day to get them to agree with us and how landmark body of data, but first and foremost, hygiene and BID lid margin wipes alone cannot be considered a community standard of care.

The results of our study show that the endpoint of complete resolution of all clinical science and symptoms is not a realistic and achievable endpoint. And that the industry with us in the lead needs a starting point, similar to the way (indiscernible) for storing additional investment by us and others in finding a way to get the first drug approved for Blepharitis and then moving on from that first approval to continue to improve treatment of the disease as a chronic disease.

Scott Henry – ROTH Capital

Okay. So, that meeting is for Blepharitis only?

Timothy Ruane

Correct.

Louis Drapeau

Correct.

Timothy Ruane

Any other meetings we would have the FDA around BromSite, would be the typical meetings, like we already have the one on clinical and preclinical, which is the standard post Phase 3 pre-NDA meeting, which you start the discussions about labeling and other issues. And we actually have that downgraded to a teleconference on the 13th. And I believe there is one further meeting; I don’t know whether they will want it face-to-face, it will be around CMC matters. These are very standard kind of meetings around the process.

Scott Henry – ROTH Capital

Okay. And then BromSite, are you looking for a Q3 filing?

Timothy Ruane

We’re still getting to that. We’re obviously going to be discussing the European Health Authorities what their take is on the filing as well, in terms of both labeling as well as a potential timing. So, we’re still done in clearly for -- if not getting in under that end of Q3 right into Q4.

Scott Henry – ROTH Capital

Okay. And then I guess the final question. Obviously, with cash running till September 2014, I know your target has been in the past non-dilutive financing. Are you looking to partner any or do you expect to partner to a partnership in the next six months? Is that the game plan?

Timothy Ruane

That is obviously our sweet spot, and as we've discussed before we think the best way to do that is to create as we have a post-cataract surgery franchise that is not just one single product. That is a conglomerate of not only BromSite, but also DexaSite as a follow on and then the BROMDEX as the first successfully formulated drug in DuraSite 2.

Scott Henry – ROTH Capital

Okay.

Timothy Ruane

We also think that it would be best if we could find a partner. We continue to be actively involved in the clinical and regulatory development of the drug. Obviously, AzaSite could not prove any worse of an example of what happens if you just straight license a drug to somebody like Inspire, who does a great job of it. The next thing you do, you find out your partnering with Merck, and what has happened as a result of this damage to this drug. It's really very sad.

Scott Henry – ROTH Capital

Okay. All right, guys, thank you for taking the question.

Timothy Ruane

Thanks, Scott.

Operator

(Operator Instructions) And there are no remaining questions at this time. I'd like to turn the call over to Tim Ruane. Please proceed.

Timothy Ruane

Thank you all for your time. We will be in the office for the balance of today and tomorrow of course if there are any further follow-up questions. Thank you all.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. All have a great day.

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