It has not been a pleasant week for Insys Therapeutics (INSY), as it has announced poor first-quarter 2019 results, along with a news release providing a liquidity update in which it is stated that there is substantial doubt about the company's ability to continue as a going concern. In the wake of that news, INSY collapsed to under $1, representing roughly 75% cut off its market capitalisation. In this article, I will discuss INSY's latest earnings and financial situation, as well as evaluate the risk of a potential bankruptcy and whether it seems likely that the company will remain solvent in future.
INSY's Q1 Earnings and Financials
INSY reported just $7.6 million in net revenue, compared to $23.9 million for the first quarter of 2018, attributed to a decline in its primary Transmucosal Immediate-Release Fentanyl (TIRF) market. Even more worrying on an immediate basis, however, are the legal-related expenses the company has endured as a result of its legal battle with the US Department of Justice (DOJ). INSY's legal expenses increased to $25.7 million from $10.3 million, while accruing $73.9 million for potential contingent losses related to outstanding legal matters. That added up to a huge loss from operations of $122.1 million versus $20.2 million in the first quarter of 2018.
Cash and cash equivalents and investments for INSY were $87.6 million as of March 31 2019, with the bulk of that being in short-term investments. Comparing that to the loss from operations in just the first quarter of 2019, one can easily see the immediate financial risks should the company's high legal-related costs continue. INSY estimates liabilities of approximately $240.3 million as of March 31, 2019, for proposed settlements (keeping in mind that is only an estimate and one that could be inaccurate), and is unsure of its ability to complete a final settlement with the DOJ - failing which, it is entirely possible we will see a filing of Chapter 11 bankruptcy.
At this stage, the total legal expenses that the company will endure in coming quarters can only be estimated. Given the declining trend in the TIRF market, however, and the reputational damage suffered by INSY, I believe the company will be facing an extreme uphill long-term battle even if it somehow manages a relatively amicable settlement with the DOJ and is able to manage its legal expenses. Subtracting INSY's legal costs from its operating expenses for the first quarter of 2019 leaves operating expenses at around $25.6 million (125,168,000 - 73,863,000 - 25,677,000), still vastly greater than the mere $3.1 million in gross profit reported, and representing a large portion of INSY's cash and cash equivalents and investments.
A Breakdown of Legal Issues
INSY has a history of legal issues relating to bribery, as well as misleading doctors and patients about its Subsys drug (a fentanyl-based spray intended for cancer patients which accounts for the vast majority INSY's revenue). Most recently on May 2, the DOJ announced a conviction of racketeering conspiracy for the founder and four executives of INSY relating to a long and ongoing trial in which the company was accused of bribing medical practitioners to prescribe Subsys. INSY executives went to great lengths to get Subsys into the hands of patients who had no medical need for it, with their bribery taking many forms, including “speaker programs” or setting up the so-called “Insys Reimbursement Center” (in which employees posed as doctors' assistants and reported false diagnoses that they believed were more likely to result in a Subsys prescription); that is in addition to various questionable sales tactics where salespeople were encouraged to push doctors to continually increase the strength of Subsys prescriptions (in one case, through a comical rap video).
While INSY has been found guilty of the charges pressed by the DOJ, it's unclear at this stage whether the company will be permitted to collateralize the payments it owes, which would allow it to manage the expense over a reasonable period of time and stay afloat (at least for the immediate future).
Risks versus Reward
We can see that there is enormous risk for any INSY investment - at this stage, it is a gamble whether the company will avoid bankruptcy by reaching a settlement with the DOJ. And even in the event that it does somehow manage to pay its legal obligations, the major fundamental issues of the company remain. INSY will almost certainly continue to burn through cash and suffer major operating losses with or without added legal expenses, and with the decreasing TIRF market it relies upon and disappointing earnings, it is hard to see any way in which the company will turn itself around. I believe a bankruptcy (either in the immediate or long-term future) is the most likely outcome for INSY, with only a small possibility of the company staying in business over the next few years.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.