If you saw the movie Flash of Genius, then you know the story of Bob Kearns. He's the guy that invented the intermittent windshield wiper you have in your car. The technology was stolen from him by Ford and Chrysler, who claimed that since the technology contained no new parts, the patents he had on them were invalid. Kearns eventually won the case, winning $30 million and netting $20 million in damages.
Kearns was one man who had one idea that changed the entire auto industry. He of course did not have the capital or resources to start his own car company. He just had one product that he basically applied to every car in existence today. He went $10 million into debt defending it in legal fees, and eventually it paid off. The lawsuit per se is beside the point, but the model of Bob Kearns is not.
InSite Vision (INSV.OB) is the ophthalmic drug market's Bob Kearns in potentia. A small company without the major capital and resources of the huge behemoth drug companies, yet armed with a small product that can be applied to the entire industry and, like Kearns, in debt.
Its main product is called DuraSite, an eye drop additive that makes topical drug delivery to the eye more effective and efficient. DuraSite has already been successfully fused with two existing FDA approved drugs to create AzaSite and Besivance. The former is the company's chief money maker, a treatment for pink eye, and is marketed and distributed by Merck (MRK). AzaSite's royalties for Merck's licensing of AzaSite will total $17 million this year and are estimated to rise to $19 million in 2013.
But given that the company has total liabilities of 3.5 times that amount, it'll need more than AzaSite to start being profitable, especially given the fact that it only subsists off of relatively small royalty payments.
That's why this news is so interesting. In short, InSite has introduced its next generation DuraSite 2 drug delivery system. To continue the Bob Kearns no-new-parts analogy, DuraSite 2 is based on the commonly used cataract surgery drug ketorolac. (InSite's advantage over Kearns's situation is that InSite is not busy defending its patents in court. They are pretty much uncontested.) But it is not the heralding of DuraSite 2 itself that interests me. Rather, it's the last paragraph of its press release that reveals the company's direction:
Additionally, InSite will be finalizing and announcing a broad and novel licensing program with the intent of making DuraSite 2 a standard drug delivery technology in the ophthalmology industry, and provide access to industry partners through both exclusive and non-exclusive licensing and/or commercialization agreements.
Before we start going wild and picturing the big boys like Pfizer (PFE) and Allergan (AGN) clamoring for first dibs at DuraSite 2 and throwing their money at InSite (both companies have popular glaucoma drops on market and Pfizer's Xalatan alone rakes in $1.6 billion in annual sales), first and foremost this development will most likely stabilize and cement InSite's partnership and revenue stream with Merck, since the success of DuraSite with AzaSite will lead to talks on licensing DuraSite 2 for the next generation.
But let's get back to Bob Kearns for a moment. His patent on the intermittent wiper is what saved him. Nothing essentially new, just a novel combination of parts. And we all know the problems Pfizer has been having with generic copies of its drugs eating into its market share, most notoriously Viagra. Pfizer's patent on Xalatan expired in 2011. Mylan Pharmaceuticals (MYL) has since successfully marketed latanoprost, the generic name for Xalatan, available for much cheaper and hurting Pfizer's Xalatan sales. Aside from enhancing Xalatan as a drug in itself, InSite could offer Pfizer much more than just a better Xalatan. By teaming up with InSite and combining Xalatan with Durasite 2, Pfizer may even be able to renew its patent on Xalatan and grab market share away from Mylan's generic latanoprost customers.
Or how about playing Mylan off of Pfizer and dangling DuraSite 2 in front of both of them? Now that's a fun thought. I wonder if the InSite board of directors is thinking what I'm thinking. I wonder if the directors have ever heard of Bob Kearns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.