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