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Ebb & Flow

Ophthalmology company InSite Vision managed to get its non-dilutive financing done last week, but it will pay a pretty penny: the interest rate on the $60 million non-convertible note deal is 16%.

Chairman, President and CEO S. Kumar Chandrasekaran acknowledged the steep rate on InSite's earnings call: "Granted the coupon rate on the notes is 16%. It is a little higher than we would have liked, but given today's market condition we believe it is fair based on similar transactions and is certainly preferable to a dilutive equity financing at this time."

The handful of convert deals this year all have interest rates in the 3-5% range. But last year, there were at least two non-convertible deals that were tied to royalty payments with somewhat similar coupons: $60 million forEncysive(NASDAQ:ENCY) in February backed by Argatroban royalties at 12%, and $100 million for NPS(NASDAQ:NPS) in August backed by Sensipar royalties at 15.5%.

InSite's notes are secured by royalties from U.S. and Canadian sales of AzaSite. The topical 1% azithromycin, which uses the company's DuraSite polymer-based eye drop formulation, is licensed to Inspire (NASDAQ:ISPH) and sold to treat bacterial conjunctivitis.

At Dec. 31, InSite (AMEX:ISV) had $11.5 million in cash. It had an operating loss of $5.6 million in 2007. In 4Q, InSite reported $264,000 in royalties on sales of AzaSite. For the first four months the product had been on the market, it garnered $701,000 in royalties. Royalties were front-loaded as Inspire made initial product shipments to pharmacies.

InSite receives a quarterly royalty payment that is 20% of AzaSite sales for the first two years and 25% of sales thereafter.

On the call, Chandrasekaran underscored that payment on the non-recourse loan will come only from AzaSite royalties and a $10 million interest reserve. He said the reserve is sufficient to support the note payments until Sept. 15, 2010. Any unused reserve at that date would go toward the note principal.

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