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Insmed, Inc.
(INSM5,6,7,8,9 $1.18) Buy
2Q:06 Results - Impressive Launch
We believe 2Q:06 results are an early indication of the drugs superiority and marketability over its competitor. Arguably the most remarkable point is that the 2Q:06 IPLEX sales of $210,000 represent only 5 weeks of sales given that the drug was first shipped on May 25, 2006. Recall that Tercica’s Increlex was able to log a full quarter of sales following its January 1, 2006 launch but only achieved $85,000 in drug sales for 1Q:06.
One factor that makes this quarter’s numbers all the more impressive is that children who had been involved in the clinical trials are still receiving free drug. Insmed has committed to providing free drug to these patients for at least 2 years meaning that a sizable number of these patients are still not yet reflected in the revenue stream and most likely will not be for several quarters. Additionally, company management stated that in its effort to boost goodwill among the prescriber base, the company shipped a significant amount of free drug during the quarter as well. Though they believe this will not continue following the initial launch effort, we believe this could also turn into real revenue numbers in coming quarters.
We recommend that investors seeking to garner substantial long term returns from INSM investments focus on opportunities for IPLEX beyond its initial indication, rather than hyperanalyze what will likely turn out to be a modestly sized initial opportunity. Of note, Insmed’s HIV lipodystrophy program is progressing and we expect to see topline from the trial in 4Q:06. The trial will enroll 12 patients for 3 months at UCSF. One of the advantages of IPLEX for this indication is inclusion of patients with insulin resistance in the trial who may have previously been excluded from enrollment. Recall IPLEX has the unique ability to be used in those patients who are insulin resistant thereby opening up a variety of new indications for it including myotonic muscular dystrophy and HIV lipodystrophy.
We point out that the company continues to move forward with its plans to reformulate IPLEX into a refrigeration-stable form. Though we believe the thawing aspect of IPLEX has not hindered use among patients, the added convenience of not having to thaw drug every night could potentially be a feather in Insmed’s cap should they be successful.
If we take our 2009 revenue forecast of $125MM and apply a 6-7x multiple, generally in-line with the 2009 revenue multiple of INSM’s peer group of biotech companies in the early stage of launch, and apply a 25% discount rate, which we feel is appropriate given the litigation risk association with the company as well as the competitive nature of the rhIGF-1 market, we arrive at a fair value for INSM of in the range of approximately $4-5/share. We continue to believe that a worst-case-scenario outcome for the ongoing litigation with Tercica, is INSM being forced to pay a royalty, which on the high end may measure 10%. Given the likelihood of success of IPLEX in substantially larger indications such as HIV lipodystrophy, as well as the preference that we believe will further manifest itself over time in the short stature indication, we believe INSM shares are substantially undervalued even if one factors in this royalty payment.