Why Wasn't Insys Therapeutics' Bounce Bigger?

By Keith Speights Markets Fool.com

Insys Therapeutics (NASDAQ: INSY) finally got the news it has been waiting on for a long time. The company announced on Thursday that the U.S. Drug Enforcement Agency (DEA) completed its scheduling of Syndros after thecannabinoid drug won approval by the Food and Drug Administration (FDA) nearly nine months ago.

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At the market open, Insys stock soared by double-digit percentages. However, that spike quickly fizzled out, with the biotech's shares ultimately gaining less than 4%. Why wasn't Insys' bounce bigger?

Image source: Getty Images.

Process of elimination

Let's first rule out the reasons that didn't cause Insys' jump to be relatively low. Was there a surprise in the DEA's scheduling decision? Nope. Insys had prepared to receive a schedule II classification for Syndros -- and that's exactly what it got.

Neither was there any other bad news hidden in the announcement. Insys interim CEOSantosh Vetticaden said that the company will work with the FDA to finalize labeling and launch Syndros in the second half of this year. That time frame shouldn't be a shock to anyone.

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What about something else going on in the world that could impact Insys? Again, there was nothing obvious that should hold back the stock. The U.S. House of Representatives was initially scheduled to vote on a potential replacement plan for Obamacare, the American Health Care Act, on Thursday. However, it would be a stretch to speculate that uncertainty about the outcome of the vote had even a minimal impact on Insys.

Most likely culprits

One possible reason why Insys didn't enjoy a bigger bounce could be concerns about the company's delay in reporting its fourth-quarter and full-year 2016 results. On March 15, Insys announced that it would push back on filing its 10-K with the Securities and Exchange Commission while an internal review by its board of directors' audit committee wrapped up.

That internal review focused on the company's processes for estimating and increasing sales allowances and on extended payment terms granted to some customers in the third quarter of 2016. Insys stated, however, that it expected to submit its 10-K filing by the end of March and that the financial impact of changes resulting from the review shouldn't exceed $5 million.

Another potential reason why Insys' share price increase was relatively small could be that many remain skeptical about the potential for Syndros. Insys thinks the drug could generate sales of more than $200 million. If that estimate becomes reality, the stock should be valued much more highly than it is right now.

Insys' market cap currently stands near $750 million. Even though sales of the company's sole drug on the market, Subsys, are declining, Insys still should be on track to post revenue of around $235 million for 2016.

If you assumed that the company could continue making roughly this amount going forward and that Syndros achieves its potential, Insys could be looking at annual revenue topping $500 million in the not-too-distant future. Based on this, the stock could easily trade at double its current price -- even allowing for the fact that Syndros won't hit the market until later this year.

A prediction

My hunch is that the reason Insys' initial spike faded was a combination of both of the aforementioned factors -- uncertainty about its internal review and some degree of skepticism over Syndros. I predict that both issues will be gone by the end of 2017.

The internal review question will probably be answered very quickly. It will take a few months for Insys to launch Syndros, but I won't be surprised if the drug gets a fast start out of the gate.

Even before the DEA scheduling for Syndros was announced, I argued that Insys Therapeutics was the best marijuana stock on the market right now. Despite the stock's somewhat lackluster response to the recent news, I still think Insys is destined to head higher. Potentially much higher.

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.