InSite Vision: Shareholders Seeking Clarity

| About: InSite Vision, (INSV)

Our activist group of shareholders is writing to petition for the immediate hiring of an investment bank to explore strategic alternatives for InSite Vision (ISV), including the potential sale of the company. Despite FDA approval for AzaSite, a marketing agreement with Inspire (NASDAQ:ISPH), a patent agreement with Pfizer (NYSE:PFE), and a promising pipeline that includes AzaSite Plus, Otic, Xtra, and the DuraSite technology platform; shares of our company have continued to languish near their yearly low price of $1.50 per share. Our group feels that exploring strategic alternatives would be a useful investment at this juncture; since Wall Street continues to ignore the value and future prospects for our company.

Financial Model: $3 per share net present value & fully-realized value of $5
Action: Hire investment bank immediately to explore strategic alternatives

An open letter to Kumar Chandrasekaran and Joyce Strand:

Investors and analysts continue to ignore shares of our company since FDA approval for AzaSite in late April and plans for an upcoming domestic product launch by its partner Inspire. Recent events at our company seem to be a day late and about $3.60 short of InSite’s full potential value of $5 per share, given the company’s pipeline, DuraSite technology platform, and recent marketing approval for AzaSite. The following petition will present a conservative financial model which yields a present value for InSite of at least $3 per share; as well as fully realized potential of $5 per share.

An overview of the market for AzaSite and the follow-on antibiotic/steroid combination product AzaSite Plus yields an annual domestic ocular antibiotic market of approximately $360 million for the single-entity market (AzaSite) and $245 million in the combination products (AzaSite Plus). The total number of prescriptions written for this market in 2006 was about 15 million, representing a healthy 7% growth rate from the previous year. The advantage for both AzaSite products over existing competitors is two-fold -- a total dosing regimen that requires 60-75% fewer drops in the eye and a novel mode of antibiotic action to reduce chances of bacterial resistance. AzaSite has the potential to be the Z-PAK of anti-infective eye drops and should be marketed as such, as it represents a more convenient dosing regimen for patients as compared to competing products while maintaining effectiveness as an antibiotic.

AzaSite is expected to launch within the next month and Inspire has provided full-year 2008 sales guidance of $30-$45 million. A reasonable peak domestic sales estimate for AzaSite is $100 million in 2010 or roughly 25% share of what should be a $417 million market, assuming just 5% compounded growth in this market. The estimated royalty stream through 2010 for InSite includes the following: $9 million in 2008 for an EPS of $0.08, $12 million in 2009 for an EPS of $0.10, and $31 million in 2010 for an EPS of $0.26. Royalties are based on 20% for the first two years and 25% thereafter for domestic AzaSite sales, as previously agreed to with Inspire and are also applied here as an estimate for AzaSite Plus, since that deal is still pending, but will likely have similar terms. Estimated AzaSite sales for the three year period of 2008 to 2010 include the following: $45 million, $60 million, and $100 million; with the first year of sales ($30 million) for AzaSite Plus occurring in 2010.

If one applies a 20 multiple to InSite's EPS estimate of $0.26 in 2010, this yields a future price target of $5.20 during the first year in which both products are estimated to be on the market. Discounting the 2010 price target back three years by 20% annually produces a fair present value of InSite of $3 per share, using the high estimate of Inspire's conservative sales figures for AzaSite in 2008 and assuming rapid market share growth for AzaSite because of its advantages and familiarity among physicians. For AzaSite Plus, all assumptions are based on a market that has two-thirds the sales potential of AzaSite and a product launch by 2010.

The assumption of a 20 multiple to 2010 earnings is based on sustainable, future earnings growth for InSite of at least 20% once both products are on the market and other sources of revenue begin to contribute meaningfully -- such as AzaSite Otic and international royalties from sales of both eye drop products. The two largest, concentrated ocular anti-infective markets outside of North America include Western Europe and Japan, which represent about $320 million combined in total sales for this category.

Our company’s pipeline carries a very low risk of clinical development based on its proven ability to achieve FDA approval with AzaSite and the well known attributes of the drugs that are in its product formulations. The financial model presented in this petition is intentionally conservative, with major upside possible from pending international royalties and sales agreements, AzaSite Otic, and other applications of the company's DuraSite delivery technology leading to a fully-realized potential of $5 per share for our company.

Disclosure: Author has a long position in ISV

ISV 1-yr chart


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