12:00 AM
Mar 03, 2008
 |  BioCentury  |  Finance

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.

In response to an analyst query about what would happen were the AzaSite royalties to dry up entirely, CFO Louis Drapeau said "we have $50 million in our bank account and that we would not owe anything else."

InSite plans to use part of the proceeds to fund its pipeline, including AzaSite Plus and AzaSite Xtra to treat ophthalmic infections and AzaSite Otic to treat ear infections, as well as for potential acquisitions of complementary businesses, products or technologies.

The company said it expects to license AzaSite Plus and AzaSite Otic and form international collaborations for AzaSite and/or AzaSite Xtra. It hopes to be receiving royalties for AzaSite Plus by the end of 2010.

Drapeau said InSite hopes to repay the debt in five to six years, well before the note comes due in 2019.

The company said it will terminate a shelf registration for a public equity offering that it filed in May 2007.

InSite shares added $0.15 (20%) to $0.76 last week. The stock is still well below the $1.77 it reached following AzaSite's approval in April 2007.

DNA makes good

With the approval of Avastin in breast cancer, Genentech has added more than $10 billion in market cap since the Oncologic Drugs Advisory Committee voted on Dec. 5, 2007, that the treatment had not demonstrated a favorable risk-benefit ratio.

Last week, Genentech (NYSE:DNA) closed with a $79.8 billion market cap, up 14% from $70 billion following the ODAC vote, when it had shed almost $7 billion in market cap.

The committee had expressed concern about the progression-free survival (PFS) data in the company's pivotal E2100 study, as well as concern about an absence of overall survival data (see BioCentury, Dec. 10, 2007).

In February, Genentech reported positive data showing Avastin plus docetaxel met the primary endpoint of a significant improvement in PFS vs. docetaxel plus placebo in the international Phase...

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