Last Updated on April 25, 2019 by Sultan Beardsley
The downtrend started following INSY’s fourth-quarter 2018 earnings report where the company cited decreased Subsys sales and substantial ongoing legal expenses. Then on Wednesday last week, an audit of the company’s finances raised concerns about ” generating sufficient cash to meet its legal obligations and settlements and sustain its operations“- taking INSY down another 30%. The stock price closed at $4.05 on Friday.
Despite this, I believe INSY will recover over the next few weeks, and potentially continue to do so over 2019. Several factors should be considered critically by investors which I will discuss here. Along with all the bad, there are some really exciting things going on with INSY that could help the company redeem its valuation.
The two most immediate catalysts are phase 2 data from a clinical trial in childhood absence epilepsy and an NDA filing for INSY’s Naloxone nasal spray. Then in the fourth quarter of 2019, the company expects to report data in their phase 2 clinical study in Prader-Willi syndrome.
Also in Q4 of 2019 INSY is filing another NDA for its Epinephrine nasal spray. Furthermore, INSY is working with UC San Diego to initiate a clinical trial testing the treatment of Autism.
In May of 2018, INSY landed a licensing partner Lunatus in the middle east who will be initiating the regulatory process for Subsys in the United Arab Emirates in May. This could also lead to a catalytic announcement in 2019 regarding positive developments.
Another catalyst could come on the legal front. Right now there is a lot of uncertainty about how the legal expenses facing INSY will be resolved and if INSY can simultaneously sustain operations. As we learned from management INSY is pursuing “discounts” by challenging the reasonableness of the enormous expenses incurred from their indemnification obligation to former executives. If they are successful in litigating a discount or setting a cap on what is reasonable this could abate
Several developments caught my attention. As noted in the latest conference call INSY increased yield at their CBD manufacturing facility by 50% while reducing cycle time 25%.
INSY is involved in ongoing discussions to divest from their opiate assets; most notably its lead product Subsys. What I like is that INSY began moving away from opiates toward Cannabinoids years ago as reflected by them investing $250 MM in research and development of new, non-opioid product candidates.
To counter balance revenue declines INSY has made meaningful reductions in operating expenses. For instance, general administrative expenses were down 32% in Q4 2018 compared to the same period in 2017. While at the same time INSY has managed to increase gross margins.
Risks To Consider
Overall I am bullish on the future of INSY. However, some serious risks are present investors need to consider. The following risks are the biggest and most obvious ones I see.
- Legal expenses- INSY may not be able to successfully navigate its indemnification obligations for executives facing charges while sustaining operations.
- Clinical Trials- Data readouts this year are of the utmost importance for INSY because it represents their future means of revenue and ultimately becoming profitable.
- NDA filings- A refusal to file for either NDA this would hurt INSY’s share price even more.
- Divestiture failure from INSY’s Opioid assets, or roadblocks to strategic alternatives.
The Swing Thesis
I entered INSY on Friday at $4.15. If the share price drops more Monday I will buy more. My rationale is that INSY will recover from the knee-jerk reaction to the auditor’s comments. Additionally, I expect the share price to increase in anticipation for the phase 2 data coming next month as well as the NDA filing for INSY’s Naloxone Nasal applicator.
INSY is pretty beat up right now. I am hesitant to hold my position through the data readout, which I predict will come in early April before the NDA filing. In biotech, there is essentially 1 way to win and 2 ways to lose. If the data exceeds expectations then the stock skyrockets. If the data is neutral or disappointing it becomes a “sell the news” event.
My plan is to hold and sell once I realize a ~20%+ gain. A reasonable price target over the next several weeks is five dollars. More is certainly possible
From a long-term perspective, I am bullish on INSY’s performance. I believe they have their priorities in order and a pipeline capable of generating more revenue than Subsys in its heyday. Collectively the market value of indications INSY is pursuing with their CBD product portfolio is projected to be worth $4.134 billion by 2020.
My strategy here though is to get in, out, and on to the next money move.
One thing I’ve learned trading is that when everyone else is selling, that is when I want to buy. INSY presents a familiar setup AB=BC Harmonic trading pattern where at the end of leg(5), starts a “corrective wave.” This corrective wave enables investors who missed the initial sell-off to enter.
AB=BC means that from the start of leg (A) $6.71 to start of leg(B) $4.71 is essentially equal to the end of leg(B) $5.80 down to Leg(C). Now not only do these measurements make the technical’s compelling, but this level also bounced off .786 Fibonacci ratio, a key Fibonacci ratio holding support. Furthermore, the chart is presenting a potential Cup + Handle formation making this .786 Fib. ratio even more important to the short- and long-term price movement of INSY and catalysts coming over the next month.
I am long INSY.