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By the beginning of October, INSYS was back to even for the year but it's now down 30% year to date after it released third-quarter earnings and a plan for its opioid-related assets earlier this month.
Monetizing a declining asset
INSYS' claim to fame is Subsys, a very strong opioid called fentanyl that's delivered via a spray. Unfortunately, sales peaked in 2015 and have rapidly declined as the opioid crisis has caused doctors to crack down on prescribing the drug and other opioids, especially outside its approved purpose.
INSYS notes that it's capturing half of new patients, but without the previous off-label sales, use of the drug mostly is limited to patients with breakthrough cancer pain who are tolerant of weaker opioids (the FDA-approved label).
Rather than collect the revenue that's dribbling in, INSYS has decided to sell off Subsys and a pair of opioid sprays that are in development. The company is gussying up Subsys to make it as attractive as possible. It signed a licensing agreement with Lunatus to sell the drug in the Middle East and is working on deals for other regions, including Europe and Asia.
Even though the market has contracted, Subsys might be valuable to another company, especially if there are synergies -- which would be the case if the other company already has a sales force selling drugs to cancer doctors. If INSYS can find a buyer at a decent price, the sale will bring in much needed cash to fund the rest of its pipeline. INSYS ended the third quarter with just $113 million in the bank.
In addition to the aforementioned epinephrine nasal spray, INSYS has an oral solution cannabidiol, one of the compounds in marijuana, that it's testing in a phase 3 study for infantile spasms and a pair of phase 2 studies for childhood absence epilepsy and a rare genetic obesity disorder called Prader-Willi syndrome.
INSYS also is using its nasal-spray technology to develop a naloxone product for use in opioid overdose. Since naloxone already is approved as a treatment for opioid overdose through other forms of delivery, the clinical pathway to approval is relatively simple and the clinical studies already are complete. This puts INSYS on track to file for an approval in the first quarter of next year. Unfortunately, the easier pathway to approval also means there will be plenty of competition with other naloxone products once INSYS hits the market.
Value or value trap?
At a market cap of $490 million, INSYS is relatively cheap, but it's certainly not insanely undervalued, either. The company's near-term value likely will be determined by how much INSYS can get for its opioid business, but valuing it is tricky because it isn't clear exactly how much another company might be willing to pay for the declining asset.
At five times Subsys' third-quarter run rate, INSYS' opioid business could be worth around $350 million, giving little value to the company's pipeline. But it'll likely be hard for INSYS to find a buyer at that standard valuation.
At a more realistic and perhaps not even conservative enough two times the third-quarter run rate, the assets are only worth about $140 million, making the company's pipeline look substantially more expensive. That's especially true since much of the cash INSYS would get in the sale will be used up before the company can get to profitability. The company could even have to go back to the well for additional capital through a secondary offering, diluting shareholders.
The best strategy for investors likely is to take a wait-and-see approach until they know the price INSYS receives for its opioid business. They then can decide on a valuation. If the company gets a good price, investors may miss a big move but they'll avoid the risk if a big sale doesn't materialize.
Even if the company's stock has a nice run up, there still may be an opportunity to buy at a decent price down the line, given how volatile the stock has been in the past,
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