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Expert Financial Analysis and Reporting

InSite Vision: Upcoming Results on the DOUBle Trial May Not Be as Binary as I Have Been Thinking

I met with the CEO, Tim Ruane, and CFO, Lou Drapeau, of InSite Vision (INSV.OB) in early January during my trip to the JP Morgan conference in San
Francisco. I have written an extensive introductory report and follow-up reports on my website. I would refer investors to those reports for a more in-depth analysis of the company.

I took this opportunity to focus on the possible outcome of the phase III trial called

DOUBle. It is evaluating AzaSite Plus and DexaSite against AzaSite and the delivery vehicle, DuraSite, for the treatment of blepharitis. AzaSite Plus is the most critical of the three products. There are no approved products for blepharitis and success in this trial for AzaSite Plus would be a home run. Topline results will be available in mid-2013.

Investors have to consider the consequences of the DOUBle trial not working and how this might impact the stock. All trials run the risk of not meeting their endpoints, even if the drugs are effective, because of trial design or execution of the trial. Moreover, the hypothesis underlying the phase III trial that AzaSite Plus will provide short term relief of blepharitis though its steroid component and long term relief through its antibiotic component has not been tested in a phase II trial, but is based on observations from other trials and clinical experience.

Management has consistently guided that if DOUBle is successful, it believes that it will have to run a second supportive trial to gain approval. During the meeting, I asked what would happen if the DOUBle was unsuccessful. They replied that they felt that it was extremely unlikely that it would be a complete failure given the favorable clinical experience seen with the individual drug components comprising these products and that even if the primary endpoints were not convincingly reached that there would likely be favorable trends and that information gained could be used to better design a second trial. It was their opinion that there was an excellent chance of gaining approval by conducting a successful second trial and using the DOUBle as a supportive trial even in the event that DOUBle does not reach its primary endpoints in this first phase III trial.

The important takeaway message is that DOUBle may not be a binary, make or break event and that there remains hope in the event that it does not meet its endpoints. Very importantly, the timeline for ultimate regulatory approval might be the same in the case that DOUBle is not a total success as in the case that it is successful. Of course, the degree of confidence of investors for success in the second phase III trial would be less. This line of thought leads me to believe that there may not be as much downside risk if DOUBle narrowly misses its endpoints as I have been thinking. I think there would be a sharp initial drop in the stock, but it might then recover to the level at which it was trading prior to announcement of the results. On the other hand, there is very significant upside if the trial is successful. I like the risk reward on this upcoming data point.

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