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Executives

S. Kumar Chandrasekaran - Chairman, President and CEO

InSite Vision Inc. (ISV) Wall Street Analyst Forum September 10, 2008 2:00 PM ET

Moderator

Good afternoon, ladies and gentlemen. I like to introduce the next company in this afternoon’s biotechnology and specialty pharmaceutical program. I have mentioned earlier in the day that all the forty minute presentations and Q&A sessions are webcast and they are live but they are also retrievable, so if there is a meeting you would like to re-attend or our PowerPoint presentation you like to re-access, they are all retrievable for full 30 days from the live event. They are all easily accessible through the individual company website. 99% of the companies have link directly to the webcast and Merck will leave those links up for at least a month.

The next company in this afternoon’s program is InSite Vision. They develop novel ocular pharmaceutical products using their DuraSite bioadhesive polymer core technology to enable topical delivery and sustained release of existing drug molecules for reduced frequency of treatment and improved efficacy. This approach is designed to enable the company developed products at a lower cost or at lower risk in cost and a new chemical entity and is intended to provide patients with product alternatives that will encourage compliance for better treatment outcomes.

Our formulated and well established antibiotic azithromycin in DuraSite, InSite developed the lowest-dosing ocular antibiotic available to the U.S. ophthalmic market. AzaSite, 1% was launched in the United States in August 2007 by Inspire Pharmaceuticals for the topical treatment of bacterial conjunctivitis, pink eye. InSite is also building a network of international partners for the commercialization and distribution of AzaSite outside the United States. InSite continues to expand its portfolio of ophthalmic antibiotic products based on the DuraSite product platform.

For further introduction, let me introduce the company. We have with us both the Chairman and the Chief Executive Officer of the company as well their Senior Director of Investor Relations.

S. Kumar Chandrasekaran

Good afternoon. It is always a challenge to be the last speaker in a symposium especially on a wonderful New York afternoon and I say it is wonderful New York because these are the days we would normally have in California all the time. With your kind information what I would like to do is to try and make this presentation as interactive as possible. We do not have to go into another separate breakout room and so you can just interrupt me if you have any questions during the presentation and I will try and make it as user friendly as I possibly can.

Now the company's focus is in ophthalmology. In ophthalmology, you either look at surgical intervention or you will try and look at drugs for the treatment of ophthalmic disease. Our company here is primarily focused on the development and the commercialization of drugs to treat ophthalmic disease. Now you have seen that before so I can just skip that slide.

Now if it is all right with you I just try and work with you if I possibly can. Have any of you at anytime used an old Pfizer compound or product called Zithromax for the treatment of systemic infection? Now, Zithromax you have. Now Zithromax, which is still sold by Pfizer, when it was under patent a couple or few years ago, absolutely, was touched by just somewhere round about $2 billion.

The whole focus of the Zithromax was it changed the whole paradigm for the treatment of systemic infections. So rather than taking tetracycline for example, four times a day for seven days, the anti biotic azithromycin, which was the main component in Zithromax, all you had to do was to take a total of six tablets; two tablets for the first day and one tablet for the next four days. Changing the whole paradigm with a very effective antibiotic essentially revolutionized the whole treatment of systemic disease, infections and they commercialized it extremely well, and the results we have seen on their balance sheet X years ago.

Our efforts, if you would, was to try and see if we could duplicate the whole scenario in the Ocular space and for the treatment of ocular infections normally and I do not know if many of you have siblings, you have children, whatever it is, or yourselves, you may have treated yourself with ocular antibiotics. By nature they have to be administered very frequently, sometimes as much as eight times a day for seven days.

The terminology that is normally used how people follow dosing regimen when they call it compliance. People usually are not very compliant when it starts to go much beyond once or maybe twice a day. So, we felt this was a real opportunity, especially if we could come up with a dosage form for the treatment of systemic infections. The disease that we primarily focused on was the most common which was what called bacterial conjunctivitis, but in the normal vernacular, it is pink eye and not many of us get pink eye. Children get pink eye and our goal really was to see if we can now treat pink eye and try and come up with the first once-a-day dosage form that could be delivered as an eye-drop if you would.

So the efforts really focused on two parts. One is, if you normally look at ocular medicine that you put in the eye, whatever it maybe of EyeScene Murine or any dry eye-drops. They normally reside in the eye only for a couple of minutes, assuming you get it in correctly and if you do not, that is a different story.

So the question then becomes is, you know for a couple of minutes if something resides in the eye and one wants to now make this big leak but he wants to deliver it once a day, you had to somehow extend the duration in which the eye-drop remain in the eye and this is where we really came up with our platform technology which I will refer to in a few moments which we call DuraSite. So it is really the use of polymers, safe polymers that are excreted, unchanged within your system. Thereby, we were able now to really formulate normal eye-drops to remain in the eye for about four to six hours instead of two to four minutes.

So using this platform, as I call it, we put azithromycin and over the years formulated it. Even though we had a small biotechnology company in the San Francisco Bay area, we were able to take it through all the requirements for the Food and Drug Administration and for all practical purposes, this is the product that we finally have. It is called AzaSite. It was approved in August, in fact the middle of last year for the treatment of bacterial conjunctivitis, pink eye, the first once-a-day dosage form.

To give you some idea is last year about 17 million prescriptions were written for pink eye. A good 11 million prescriptions were written by pediatricians, general practitioners and especially at this day and age when school nurses really cannot administer medicine during school time. It is really a godsend if you would, if you can now send the children to school, administering it in the morning or in the evening when they come back.

This is a pink eye bacterial conjunctivitis. This is painful. It is contagious and it needs treatment even though in many cases, it is self-limiting, self limiting meaning, if you do not get it then you bear up with the pain, eight to ten days later (inaudible).

The product is sold. We do not ask as a small company. We thought this primarily in good product development. We do not have commercial efforts of our own. So in the United States, the product is being commercialized by Inspire Pharmaceuticals company located in the Research Triangle of North Carolina.

Later on, you may want to come and see. This is some of the PR material that they are using to sell the product and presently the product is in many of the shelves of drug stores around the country.

Even though it was launched, just now, I will repeat myself in couple of slides later, even though it was launched just less than a year ago, just about a year ago. It is now the third largest branded selling product in the United States. Its percentage is going up and presently it is round about 3.5% market share.

Now, Inspire has the license to sell the product in the United States and Canada and as this is the worldwide product or has worldwide opportunity what we have been now working on is license agreements in territories outside the United States. Presently, we have AzaSite in eight such countries and we fully anticipate by the end of 2009 next year AzaSite clearly should be a worldwide revenue generating product for InSite Vision.

Now I would describe some of the licensing terms to you in a couple of slides which I show you that is really very attractive terms and the market opportunity significantly large. What I will also address to you in a few moments is there are not simply one product company and now it really becomes a whole focus for what should be our next product and our next product now is also in very late stage development, late stage meaning from an FDA point of view it is in phase III clinical trials and the first of the clinical trail should be completing at the end of this month. That is for a product what we cal ISV-502.

ISV-502, unlike AzaSite is used primarily for the treatment of lid margin diseases. Lid margin diseases are more resident in an older population 20s, 30s, 40s what have you and many of us could suffer from indications such as your lower lid start to swell. You may get frustration on the lids, some of your glands meibomian glands on the lids may not function appropriately and people may use terms that you know if you do go to a eye doctor that maybe the Blepharitis or you have blepharoconjunctivitis and so for the treatment of such diseases you need both an antibiotic as well as an anti-inflammatory agent namely you need something to reduce the swelling.

Our anticipation at the present time is if we follow the timetable as I would show you in a couple of slides that ISV-502, should follow the same path of AzaSite and has the potential baring anything unforeseen to be commercially available in the United States in the beginning of 2010.

The normal process, you know when you look at these clinical trials for AzaSite, it was about the trial had to be done in about 120 clinical centers. Almost 2000 subjects, our youngest subject was one, our older subject was 96 then the two trails just to make certain that the agency it makes sure that we are not unduly biasing the results one beyond the other.

All of these take a certain amount of time, and that is really and it takes time for the agency to review the documentation. We would ask for priority review for ISV-502 as I will describe shortly to you mainly because there is no product, presently in the market that is approved for lid margin diseases. So it is a total unmet need, under those circumstances you can ask and request. Certainly it is granted but you can request what they call a priority review because this was the need that has to be filled.

When we focus of all of this off course is for a small company, do you have the financial resources to move these things forward. At the present time you know we have in excess of $50 million in our bank and without any money’s coming in from license fees, milestone payments that is all going to happen. This gets us when towards the later part of 2010.

What we normally operate even though to small enterprise, somewhere in the vicinity about $20 million per annum, plus minus on our expense guidance if you would.

We are presently about 53 people and the people that we have, have good management and scientific expertise required to move us from a one product to a multi product enterprise.

The purpose of this slide is simply to show you that we believe very strongly, on meeting expectations and objectives that we create to you as potential investors to the company and other investors who are presently within the company, and just if you look at the last 12 months or so then you look at the accomplishments for the product AzaSite, it is received approval, maybe initiated from the time we started the clinical trials and we find it, it was less than two years which by any standards is very rapid.

As I mentioned here it is been licensed. We have good licensing deals with Inspire Pharmaceuticals. Of course whenever you commercialize you need manufacturing capabilities. We have been working with Cardinal Health which is now called Catalin outside Chicago for our contract manufacturing and we have partnership agreements and we have applied also for approval in Canada that we expect to get in the early part of 2009.

As I mentioned to you, we use this whole platform of DuraSite to expand from AzaSite to 502 as well as other products. We do have a financial way to facilitate this drought. Most importantly, in this whole segment of the pharmaceutical market, you need to be certain that your intellectual property, your patents, your coverage is strong, and we have not many license agreements with Pfizer down the street but we do have a number, very significant patents and many of the AzaSite patents do not expire to 2019. As it does (inaudible) if you would, there will be no generic competition for AzaSite and our patents are so strong that even if someone came up with a slightly better mouse trap, they would fall within our teachings, mainly we have both used composition of patent and so forth. Of course we have the management strength to move all of this forward.

Now if you just simply look at this slide, I gave you a little picture before hand. The top part of the slide, that is really bacterial conjunctivitis, the eye becomes inflamed, it becomes very red, it is painful; worldwide market for treatment of such diseases in excess of $1 billion. The market in the United States roughly is about half the U.S. market and our goal is to attract and address both those market opportunities.

If you start looking at ISV-502, I use the term mid-margin diseases; blepharoconjunctivitis is a part of mid-margin disease. We are now in Phase 3 trials and again it is a totally unmet need. The market for these combination products is equally robust. So if you just follow the logic for a moment, we have created a wonderful platform technology which is very user friendly going with some known medicaments that you have, making improved dosage forms that are well covered by patents. The whole element of risk and the development, we are trying to minimize the cost of development we are trying to minimize but we are not doing anything to try to minimize the market opportunity much to the contrary, because you now create that differentiating factor that is key to address some of these market sectors.

Now, if you look at bacterial conjunctivitis in a little more detail and look at AzaSite, you will have some notation on this slide for you. I am not going to go through the whole thing except to focus on a couple of significant points as a take-home message for you.

The product superiority, it is the first application of azithromycin. We are delivering microgram quantities in the eye. Pfizer were delivering gram quantities systemically. It is a safe drug. No problems of toxicology. It is an effective drug. This is on a lower dosing regimen. Is it the first once a day and it is covered by strong patents.

Now financially if you focus on the last bullet, which is something I would like you will to focus on is even though this is a small establishment, we were able to license the product for milestone and license fees totaling $32 million in the United States. The royalty payments on net sales are 20% to InSite Vision for the first two years followed by 25% thereafter. Then this comes directly to the bottom-line because the cost of selling, the cost of manufacture is all borne by Inspire Pharmaceuticals today.

Now, what we are also actively working on is how can we help our partner because Inspire Pharmaceuticals is also a smaller company and so you do have the opportunity to work closely with them to see if you could try and create all the necessary elements that is required to fully differentiate the product both to the physician as well as the patient. So we have a close business relationship with them.

Now in FDA terminology, normally when the product is submitted for approval, you do what is called Phase 3 trials. They are pivotal trials. Once the product is approved, the company is usually embarking what they call Phase 4 trials. Phase IV trials are primarily designed to differentiate yourself from the other medicines that maybe available in the market to create the required brochures and publications that would differentiated to the eye care practitioners as well as the pediatricians. That is what is called Phase 4 trials, which we are working very closely with them, number of these have been published. You can see that in our website for those of you who maybe scientifically inclined or to give [Lisa Vincent] or myself or Joyce Strand a call and we can provide that.

The other is to increase the awareness. We are not advertising it on television today, but we are advertising and Inspire is advertising it in scientific and trade journals. Their educational programs for the physicians, their marketing activities and most important later on is the whole reimbursement.

The product is today premium priced with the market leaders. What we are now gaining which is also taking time is gaining coverage through normal review cycles. It is now covered by Medicaid and in a number of areas its tier-2 status in various targeted health care plans. This becomes very important because directly influenced the co-pay if you would that we would have to encounter when you fill the prescription.

So we fully anticipate and we have done a number of marketing studies for AzaSite. We fully anticipate that three, five years after launch, this should be significant product and capture at least maybe 20%, 25% of the overall marketing landscape.

Now if you switch gears and start to look outside the United States, something you must be quite familiar with is pricing is different outside the United States. The pricing pressures out there, the same medicament sells for less in Canada, less in Europe and the same thing now happens when you are now looking at ocular medicine.

Notice here even though the pricing pressures, the market size outside the United States is as significant as the US and to make that arithmetic, you essentially have to do it all by volume. So most of our deals that we be now setting up is what you may call in the normal vernaculum distribution type of deals, approved product that giving them the dossier, the company has a responsibility of reformatting it as necessary, receiving approval in the territory and to sell.

Pricing pressures are mentioned to you. The partner will manage and fund the approving process. Then they would subsequently commercialize AzaSite. So InSite is concerned, we are not bearing any other financial burden or financial responsibility. It really becomes the partner’s.

The interesting part is to augment it. We have also come up with what is called AzaSite Xtra. Now that may or may not have a market in the United States depending upon how the food and drug seeks such a product, but AzaSite Xtra now instead of this being 1% azithromycin dose after a loading dose of twice a day for the first two days, once a day for the next five days. AzaSite Xtra has the potential of being dosed once a day for three days. Now the climate in the US may or may not commit approval for that, but clearly it is an opportunity in ex-US.

Our agreements, as I told you, cover at least eight countries and we hope before the end of this year to have additional regions in Europe and also Japan taken care of and presently in this stream of our territories shown on this slide. As I mentioned to you, Inspire has the responsibility for US and Canada. We now have China. We have parts of South America, Korea, Turkey and we are now working other parts of Southeast Asia and so forth. So I fully expect that before the end of 2009, AzaSite really with a few exceptions should be available on a worldwide basis. As you notice in all of this, the royalty terms are good double-digit numbers, again same logic on net sales revenue comes back to ISV to the bottom line.

The risk in all of this is relatively small from the standpoint the product has already been approved. In many cases, the dossier simply has to be reformatted. In some cases they may have to do what they call bridging studies with the resident population simply to show that what worked in the United States does works, using population of that particular country.

So before I leave AzaSite and then go to the ISV-502, may I just ask of you to say any points of clarification, any questions you may have that I could attempt to answer before I go to the next product sir, would you like to speak to the mike?

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

The point you have raised is a good one sir, so if you start to look at market segmentation on a world wide basis, United States clearly by itself is the largest market by itself. After the United States come Europe, comes Japan, China and then the other segmentations.

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

So and that is what we expect to have before the end of this year.

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

Yes so by the end of this year to have license agreements, that is our anticipation so if you can get Europe, Japan, China, you essentially start to cover a significant part of the rest of the worlds, that is the intent. Does it answer your question sir?

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

That is correct.

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

I mean those are the present existing sales, the markets are always opened for growth and additional opportunities and whenever you create something innovative things like to happen sir.

So if you look at ISV-502 for a moment as we talked about it is Blepharoconjunctivitis and this is just some testimonials with given by Dr. Mark Abelson and he works closely with the company at the present time as a professor in Harvard but this is again and total unmet need today. There are no approved treatments. Most important it is a chronic disease, its just like psoriasis so other any forms of arthritis if you would you do have these periods where you, the disease exacerbates so you come in to remission, it comes back and so you need constant treatment some more during times where it really comes up some less.

I hope you are not unduly skirmish about some of the slides but that is how the eyes start to look, the lids start to swell and there’ll be some discoloration on the cornea sometimes the eye lids start to, eye lashes start to grow inwards rather than outwards. Those chronic pains it is an unmet need and today believe it or not the only treatment there is what I would call [eye hygiene] you have it. That is why you are sitting on the first row.

No you are lying, and so how do you treat it sir? If I may ask how do you treat it?

Unidentified Audience Member

(Question Inaudible)

S. Kumar Chandrasekaran

That is right and it is painful. That is why that I said before it requires both a treatment for the swelling as well as for the infection. That is what you call inflammation as well as infection.

So our approach to this was even though a normal antibiotic slightly azithromycin do have a small inflammatory effect. It is not sufficient to encounter the symptoms of this disease. So we physically added a corticosteroid called dexamethasone into this formulation. The dexamethasone clearly is many-many-many more times more effective than the antibiotic itself or the small anti-inflammatory effects of the antibiotic.

Now what you also have to encounter and ensure it did not happen as we minimize the rays of intraocular pressure it normally happens when you start to administer corticosteroids. As I had said to you before, they are what you call both signs and symptoms, some signs and symptoms meaning certain things that the patient can express and certain things that the physician essentially determines. The logic of all of this was to try and use many of these as endpoints for the clinical trials.

In and all of this as we go through various phases of development, we did some pilot studies where we compare the combination product to azithromycin by itself to try and differentiate the anti-inflammatory effects and so forth. On the basis of these pilot studies, we designed the Phase 3 clinical trial, one of which should be completing at the end of this month. The second one is starting in India next month and our goal is to complete that in a period of about seven plus months, submit the, what they call the new drug application, the NDA to the Food and Drug in the early part in the third quarter of 2009, ask for a priority review as I had mentioned earlier.

So if you really look at the efforts and some of the accomplishments that we have made to ISV-502 over the relatively short period of time is it will be a new combination product, it addresses an unmet need, it is in Phase 3 clinical trials and we will be enrolling approximately about 800 subjects in these trials, and we anticipate to announce publicly that a source of the first trial, the top-line results in the first half of next year, it could be the first quarter but early part of next year. As I have indicated earlier, the whole thought process here is to make it available commercially in the early part of 2010.

Now the obvious question that maybe going through your minds is, is they overlap between one product, and the other product is one going to Shanghai, the market opportunity of the other et cetera. This simply shows you in this slide and you can read it whenever you want. It is also on the website that the degree of overlap is small. It is small because A, it addresses, one address a more younger population, one addresses an older population and more importantly the symptoms between the two diseased states are quite different. So when you now look at both AzaSite and 502, essentially the market opportunity I described earlier is going to be augmented and going to be more additive than otherwise.

Now the question that you may have as well, we have talked about AzaSite, we have talked about ISV-502, is there anything else? Now even though we are small company we are trying to build up the product portfolio and the logic that we are using here is explained in this slide. Now I would just take you through some highlights and take-home messages.

What we are trying to do initially is to see if we can develop products that are compatible with the platform technology because that is the main element if you would, the engine that is keeping these drugs in the ice space for a long period of time.

We have been trying to examine azithromycin in combinations of azithromycin and what we hope to announce before the end of this year or early next year is really these three key other categories, because our thought process here is now when you start to look at the timetable, we have talked about AzaSite being available today internationally in 2009, early part of 2010, ISV-502 coming in 2010. The goal is to try and see what would come out in 2011 and move that forward. So the elements are single, already established molecules that we have been examining and looking at combinations.

We are also looking at higher risk activities in that new chemical entities if you would and presently, we are going through a very rigorous examination of these opportunities and I anticipate by the end of this year, early part of next year we would have some of these opportunities formalized that we could present to you really as additional products beyond ISV-502.

I talked briefly in the earlier slides about money in the bank. We recently completed the 60 million, non-dilutive, non-recourse financing. The placement was arranged by Morgan Stanley. It relates to the royalties from AzaSite in the United States and Canada. We anticipate that that note will be paid back in a certain period of time after which the royalty will revert back to ISV and essentially the $60 million in the bank etcetera gives us the financial strength to move these additional products through the pipeline.

A quick snapshot of the financial position today, our revenues as we had talked about in August is about $11.2 million. The net loss is $4.8 million and the cash and cash equivalents presently at the end of August or at the beginning of August will be announced, this was the end of June, forgive me, $53 million and the financial guidance as I talked about was generally in the vicinity of about $20 million plus minus and the breakdown between R&D expenses and G&A is also shown on this slide.

So the revenue sources through 2010, this is additional augmentation towards already on the balance sheet will be the out-licensing of ISV-502, remember this is an unencumbered product today. No one has the license to this product. The goal here would be is once top line results become available in the early part of 2009. That is when we would rigorously start partnership discussions.

The revenue from Asia side beginning in the second half of 2009, as I had indicated to you and the revenue then subsequently from ISV-502 coming in 2010 and that is how we see if you would the revenue stream augmenting for the company over the next couple of years.

The question is do we have the resources to get all of this done? The short answer to you is yes. The longer answer is shown in this slide that we have the scientific expertise, we have the management expertise, and we also have the engaged and independent Board expertise that really become an engaged Board and collectively, even though the company only has about 53-55 people today between the financial resources and the strength of the Board and the Management. We feel fully confident that we will accomplish all these various milestones that I described to you with the exception that we are now looking at partners for the commercialization of the products in respective territories.

So in our opinion, in our humble opinion we feel that InSite Vision today is well positioned. To become a successful company, our goal is to become a leader in the treatment of ophthalmic disease with differentiated products. We feel we can execute our strategy and preserve the growth and there by enhance stockholder valuation, there is a strong management team and the key catalyst if you would over the next 18 months just to reiterate to you is additional agreements for AzaSite. As we have talked about looking at Phase 3 data from ISV-502, the filing of new drug application for 502 out licensing opportunities for 502 and most importantly then additional revenue coming in from international partners and also from 502.

So with that I do thank you for kind attention and we are around to answer any questions you would have, but really do appreciate your attention and your interest in InSite Vision. Thank you very much.

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