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Expert Financial Analysis and Reporting

Besivance Royalty Deal Extends InSite’s Cash Runway (INSV.OB, $0.31)

InSite Vision(INSV.OB) announced that it agreed to sell its royalty stream on future sales of Besivance, a product that is marketed by Bausch & Lomb. The Company will receive $15 million upon closing and an additional $1 million if certain undisclosed sales levels are met by February 2014. The deal was done with SWK Holdings which will be entitled to all of the royalty stream of Besivance in the next few years. Royalties from Besivance were $1.2 million in 2011 and $2.1 million in 2012.

After SWK receives a 1x return on their investment, InSite will receive 25% of the royalty over and above $4.2 million annually; this which would represent a sales level of about $70 million or double estimated sales of $35 million for 2012. If SWK receives 2.75x their investment or $44 million, the full royalty will be returned to InSite. Patent protection for Besivance in the United States expires in mid-2021 so this remains a distinct possibility.

This transaction puts the Company in a more comfortable and flexible cash position as it awaits the phase III results of the DOUBle trial evaluating AzaSite Plus, DexaSite and the currently marketed AzaSite for the treatment of blepharitis; topline data likely will be reported in 2Q, 2013. AzaSite Plus and DexaSite could be the first products ever approved for blepharitis. Steroids are currently used off label for short term treatment, but side effect concerns limit their use to two weeks or less. The cash position will also allow the Company to complete the second phase III trial of BromSite.

Without this deal, I estimate that the Company would have ended 2013 with about $4.5 million of cash. Taking into account the payment of $15 million and the loss of Besivance revenues, I now project the year end cash position as $16.6 million. This is after a projected cash burn for 2013 of about $11 million. While this cash position is not robust, it does give the Company a cash runway well into 2014 even it has to begin a supportive phase III trial for DOUBle in order to support registration.

The most important clinical issue facing the Company is the outcome of the DOUBle trial, which I have talked about extensively in prior reports. Outright success for AzaSite Plus would have a dramatic impact on the stock, but there is significant risk that the trial might not show meaningful results. I do expect positive results for DexaSite. The outcome of this trial will be the major determinant in the strategic direction the Company decides to take.

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