Expert Financial Analysis and Reporting

BromSite Results are Strikingly Positive in First Phase III Trial

InSite Vision (INSV.OB) just announced top-line results from its first phase III trial of BromSite which is indicated for the reduction of inflammation and pain after cataract surgery. BromSite is the anti-inflammatory drug bromfenac delivered with the Company's proprietary DuraSite drug delivery system; it was compared to the DuraSite drug delivery system used alone.

The trial enrolled 268 patients who were randomized and then dosed twice-a-day beginning the day before surgery and continuing the day of surgery and for 14 days afterward. The primary study endpoint was the reduction of inflammation; BromSite was strikingly superior to the control (DuraSite) with p<0.001. The secondary endpoint was reduction in pain and BromSite achieved statistically significant superiority compared to vehicle with p<0.001. This drug is clearly effective

What Comes Next

InSite will quickly begin a confirmatory phase III trial with BromSite of roughly the same patient size. If this trial can be enrolled in the same time frame as the first phase III trial, topline results could be available in 4Q, 2013. An NDA filing could be made in 1H, 2014 and assuming a twelve month review, US and potentially European approval could be gained in 1H, 2015. Given the strikingly positive p values obtained in this first phase III trial of BromSite, there is a high probability of clinical success and regulatory approval.

Investment Significance

I think that the highly probably approval of BromSite de-risks the investment situation for InSite as a whole. It has sales potential of $20 to $100 million depending on results of clinical trials that I will discuss shortly. The Company will almost certainly partner BromSite, possibly before the results of the second phase III trial are reported in 4Q, 2013. An upfront payment of as much as $15 to $20 million is possible. This along with a royalty deal for Besivance that is expected shortly could bring in another $10 to $15 million which would put the company on a reasonably sound financial footing.

The next and huge upcoming event for the company is the phase III results of the DOUBle trial evaluating AzaSite Plus, DexaSite and the currently marketed AzaSite for the treatment of blepharitis; it likely will be reported in 2Q, 2013. AzaSite Plus and DexaSite could be the first products ever approved for blepharitis as no other drugs are approved for this indication. Steroids are currently used off label for short term treatment, but side effect concerns limit their use to two weeks or less.

DexaSite is based on the steroid dexamethasone and is the first steroid based product studied in a phase III trial. Given the history of successful off-label steroid usage in blepharitis, DexaSite is likely to be successful in the DOUBle trial. The theory behind the combination product AzaSite Plus is that its dexamethasone steroid component (which is DexaSite) will produce a short term effect and that the azithromycin antibiotic component will produce a long term effect. This would provide a long term option for treatment of blepharitis that is not currently available for this chronic condition.

I view AzaSite Plus as a homerun product for InSite Vision and view DexaSite as a more modest opportunity. If the DOUBle trial is successful, I believe that the FDA will require a second confirmatory trial before granting approval. Assuming success in this second trial, I project that both products could be approved in the US in 2016. I see AzaSite Plus as having sales of over $200 million five years after launch and DexaSite as $25 million.

In the upcoming DOUBle trial, I have a high level of confidence that DexaSite will be shown to be effective given the successful history of steroid use in short term treatment of blepharitis. I am less confident on AzaSite Plus as InSite did not conduct a phase II trial to validate the concept of combining an antibiotic with a steroid to increase the time between disease recurrences. There are sound hypotheses as to why AzaSite Plus may be successful, but no strong clinical data.

My view is that the successful phase III trial of BromSite and the high probability of ultimate approval of DexaSitesignificantly de-risks the stock. If AzaSite Plus is unsuccessful in the DOUBle trial, I think that there would be a short term negative impact on the stock price, but investors would see BromSite (even as a me-too product) and DexaSite as having enough potential to justify something close to the current stock price of $0.34. Hence investors have good downside protection in the event of AzaSite Plus failure and have a valuable and essentially free call on the stock if the AzaSite Plus results are successful. Assuming successful development of AzaSite Plus, DexaSite and BromSite, I put together a model in the previously cited initiation report that projects a price target of $1.75 to $2.50 in 2018. This is another asymmetric investment opportunity.

Let me close with just a final word on the DOUBle trial. Patient outcomes are being based on recurrences or exacerbations of blepharitis as measured at 30 days periods over a six month time frame. There have been fewer reoccurrence or exacerbations than expected when the trial was designed and as a result the company is now looking for topline data in 2Q, 2013 as opposed to an original expectation for 1Q, 2013. A logical explanation is that this is because AzaSite Plus is effective at preventing reoccurrence or exacerbations. While this is one explanation, it is not the only possibility so that we will have to await the unblinding of the trial to know for sure.

Rationale for Developing BromSite

Cataract surgery is the most frequently performed ocular surgery in the United States with more than three million procedures annually. Both before and after surgery, anti-inflammatory eye drops are prescribed to reduce pain and inflammation. The current market leader is Bausch & Lomb's BromDay (obtained through the acquisition of ISTA Pharmaceuticals), whose active ingredient is also bromfenac, an NSAID that was originally introduced by Wyeth in 1997 for the short term relief of pain. Following reports of liver failure in some patients, it was withdrawn from the market in 1998. However, the rapid absorption and high degree of tissue penetration in ocular tissue and lower amount of drug needed for efficacy made bromfenac an excellent candidate for treating ocular inflammation and pain.

ISTA first marketed a twice a day formulation of bromfenac called Xibrom that was in-licensed from a Japanese company. The patent on Xibrom expired in January 2009. As a life extension strategy, ISTA launched a once a day formulation of bromfenac called BromDay in October 2010 before a generic was introduced in May of 2011. Under Waxman-Hatch, BromDay as a new dosage form has marketing exclusivity through October of 2013.

The US market for topical anti-inflammatory drugs used in ophthalmology has annual sales of about $370 million based on three million prescriptions according to Bausch & Lomb. BromDay is the leading product in this category with annual sales of $85 million. Since 2000, it is estimated that BromDay and Xibrom have been prescribed over 20 million times globally. Bausch & Lomb will soon introduce still another lower bromfenac dose product called Prolenza; it is a once a day formulation which has an added feature of a permeation enhancer that is expected to increase bromfenac's tissue penetration in the eye.

Bausch & Lomb's development focus has been on life extension strategies. InSite believes that the DuraSite delivery system has superior product qualities and a major marketing differentiation that allows more tissue concentration of bromfenac in the eye despite a lower formulation. Key opinion leaders generally feel that this gives BromSite a meaningful clinical differentiation. InSite believes that BromSite is a superior drug. It has potential exclusivity until 2029.

In October of 2011, InSite announced positive top-line results from a Phase 2 head-to-head pharmacokinetic study of BromSite versus Bromday. Although BromSite has a 25% lower concentration of bromfenac than Bromday, it still achieved more than twice the tissue penetration in the eye as Bromday. This enhanced tissue penetration could lead to additional back-of-the-eye uses and new indications for BromSite beyond the initial post-cataract surgery indication.

Commercial Potential

If BromSite is seen as a me-too drug, its potential would be modest, perhaps on the order of $20 million. However, InSite believes that the DuraSite drug delivery system delivers bromfenac more efficiently so that even though there is less bromfenac in BromSite than in BromDay, it allows higher concentrations in the eye. This was shown in a pharmacokinetic study.

A major driving force behind the usage of anti-inflammatory drugs such as steroids and NDAIDs like BromDay is that many physicians believe that it provides affective prophylaxis against cystoid macular edema, or CME, a relatively rare but extremely serious adverse event in ocular surgery that can lead to blindness. The prevention of CME has not been established in clinical trials for any of the currently used drugs. Key opinion leader consultants to InSite believe that its higher concentration of bromfenac into the ocular tissues may further reduce the risk of CME. InSite intends to do additional clinical studies post-approval in pursuit of adding prevention of CME to the BromSite label.

Shortly after Prolenza's approval, InSite will compare BromSite to Prolenza. As previously stated, BromSite has already shown better tissue concentration than Bromday and it hopes to show the same result when comparing to Prolenza. This pharmacokinetic study should take about three months. I am assuming approval of Prolenza in mid-2013; remember that Bausch & Lomb is trying to introduce it before the October 2013 loss of market exclusivity for BromDay. InSite has to await approval of Prolenza before it can conduct this comparative test. Conceivably, results could be available in 2H, 2014.

If ocular tissue concentrations are superior to Prolenza, I think that BromSite could quickly capture a large percentage of the market.

The next step in BromSite development would be a trial to show that it is effective in preventing CME. This trial would take about one year. Because Prolenza would be unlikely to have such data, this would be a convincing reason to switch more Prolenza users to BromSite. It would also expand the market. A significant number of surgeons are skeptical about the CME prophylaxis and feel that the prevention of pain and inflammation is not a sufficient reason to use an inflammatory drug. Hence, this indication could potentially expand the market. This trial would start sometime after approval.