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Insys Recovers From Stock Hit Tied To Fed Probe

By: Investor's Business Daily
Posted: 2/12/2014 1:24:00 PM
Referenced Stocks: INSY;TEVA

Insys Therapeutics ( INSY ) went public less than a year ago, but it has already seen the good, bad and ugly of Wall Street.

The company develops supportive care products for breakthrough cancer pain.

Its stock has rallied 37% this year, recovering from negative publicity surrounding its Subsys sublingual spray, which is the target of an investigation by federal regulators.

Before news of the investigation hit, Insys was riding high. It posted triple-digit sales growth during each of its first three quarters in 2013. It also turned its first profit last year and watched its stock rise nearly 600% from its May 2 initial public offering price.

Insys' success is due almost exclusively to Subsys, one of the firm's two marketed products and its main revenue generator.

Subsys Sells

Subsys treats pain in opioid-tolerate cancer patients. It had third-quarter sales of $28.4 million, helping boost total revenue more than 500% from a year earlier to $29.2 million.

"We exceeded our own expectations prior to going public," CEO Michael Babich told IBD in December. "We've come a long way to being able to achieve profitability. As a Specialty Pharma company, showing profitability was an important goal for us."

Subsys' rapid growth is partly the result of an aggressive marketing strategy, which has helped it grab market share from competing products such asTeva Pharmaceuticals ' ( TEVA ) Actiq and Fentora.

However, on Dec. 12, Insys announced that it received a subpoena from the inspector general's office of the Department of Health and Human Services over Insys' sales and marketing practices for Subsys.

Insys has said in statements that it intends to cooperate with the investigation. The company has made no further statements, and the investigation is ongoing.

Management would not discuss the subpoena with IBD. The inspector general has not provided further details on the matter either. Neither the inspector general nor Insys has said exactly what types of sales and marketing practices are being investigated.

However, financial news outlets have pointed out that Teva's Cephalon unit was investigated for promoting Actiq for off-label use after the drug was launched in 2008.

Cephalon wound up paying $425 million in fines and pleading guilty to a misdemeanor violation of the Food, Drug and Cosmetic Act.

In addition to the subpoena, Insys was hit with class-action lawsuits from law firms alleging that the company made false and misleading statements regarding its business and operations.

The suits were filed on behalf of investors who bought Insys stock from May 1 to Dec. 12.

Those suits are still pending even as Insys' shares have bounced back in a big way. News of the subpoena was reported after the close on Dec. 12. The next day, Insys shares sank 16% to 38.06.

Since then, the stock has moved much higher. It reached a record high of 59.99 on Feb. 3 and currently trades near 52.

Investors may have grown more comfortable with Insys' growth prospects even as it faces scrutiny from regulators.

The company's business model combines the sales and marketing prowess of Big Pharma firms with the research and development focus of smaller biotechs.

Strategic Approach

The current incarnation of Insys was formed in 2010, when it merged with NeoPharm (not to be confused with Israel's Neopharm Group). Since then, Insys has put its focus on profitability as well as drug development.

"We run our company with very specific goals on an annual basis," CEO Babich said. "We view profitability as goal number one."

This strategy starts "all the way at the top with senior management," he said. "We keep a low cost structure and make sure all employees are doing multiple jobs. We continue to keep our lean and mean philosophy going forward."

During its third quarter, Insys reported earnings of 51 cents a share, reversing a year-earlier loss. Results easily topped consensus estimates for 31 cents a share. Q3 revenue rose 515% to $29.2 million, above views for $27 million.

In a report last year initiating coverage on Insys, Oppenheimer analyst Rohit Vanjani said Subsys has certain advantages over competing products.

"With its faster onset of action and more convenient administration, we believe Subsys can continue to take share from the competitive products in the breakthrough cancer pain market, Actiq and Fentora," Vanjani noted.

Among the products Insys is developing is Dronabinol oral solution. It is an updated version of its Dronabinol SG capsule, a generic version of the Marinol drug used to treat nausea and vomiting caused by cancer chemotherapy.

Insys is also completing preclinical work on three products that utilize its proprietary sublingual spray technology to expand its supportive care franchise.

"When we launch our next product we would anticipate 200-plus sales staff," Babich said. "We also look to triple our research and development staff and put out as many products as can moving forward."

Insys has not announced a date for its fourth-quarter earnings report. Analysts polled by Thomson Reuters expect EPS of 55 cents a share, up from a loss of 33 cents a year earlier, when the company was still privately held.