INSM Lazard Report...............
|--------+--------+--------|
| Ticker | RATING | Price |
|--------+--------+--------|
| INSM | BUY | $1.31 |
|--------+--------+--------|
| TRCA | HOLD | $5.90 |
|--------+--------+--------|
Verdict in favor of Tercica; Insmed found to infringe all three patents.
Jurors found that Insmed infringed all three of Genentech's U.S. Patents and
provided monetary damages to Tercica consisting of an up-front payment of
$7.5 M and a 15% royalty for past Iplex sales ranging from $0 M to $100 M and
a 20% royalty for past Iplex sales over $100 M.
Based on feedback from our attorneys, we outline the next possible steps;
most relevant, in our view, is the possibility of a permanent injunction.
Per our attorneys, it is standard for the court to grant such an injunction
(essentially, blocking Insmed from selling Iplex) unless the injunction would
harm the public interest. If the injunction is granted, Insmed could ask for
a stay while under appeal to the Federal Circuit Court, which would then
decide to either uphold the injunction or deny it. If the Judge does not
grant Tercica’s request for a permanent injunction in the next month or two,
monetary damages will be awarded. Where willful infringement was found on
one of the patents, the Judge could even enhance the damages (royalty) up to
treble (three times) the amount initially granted. Once damages are decided
upon by the court, the usual process is that a bond is posted to secure the
award pending appeal.
Injunction overhang now exists. While we previously envisioned a worst-case
scenario for Insmed where they were found to infringe and would pay a 5-10%
royalty, the possibility of an injunction being granted, while remote, now
looms. We have not adjusted our models for Insmed or Tercica pending the
court’s decision on granting an injunction or final decision on a royalty.
Obviously, issuing an injunction would now be the worst-case scenario for
Insmed (and conversely, best case for Tercica), but granting an enhanced
damage royalty above 20% could be just as problematic. We await notice from
the court as to the request for permanent injunction and/or royalty rate as
the next catalyst for both stocks. Our current opinion is that the permanent
injunction will not be granted and that the juror’s sliding royalty of
15%-20% will be upheld.
As of 3Q06, Insmed had approximately $35 M in cash and we expect the company
to end the year with approximately $20-$22 M, which is not sufficient to fund
operations for 2007. We anticipate a cash infusion (via a financing, or
ex-U.S. partnership, or both during 1H07). Approximately $6 M of convertible
debt remains (convertible at $1.295 per share), as well as approximately $12
M worth of warrants outstanding.
Risks to INSM include a slower-than-expected launch of Iplex and/or a
permanent injunction.
Maintain BUY on INSM and price target of $3, derived by applying an
enterprise value to revenue multiple of five times to our 2011 revenue
estimates of $172 M, discounted four years at 20%.
We maintain our HOLD rating for TRCA. Tercica appears fairly valued at
current levels. By applying an enterprise value-to-revenue multiple of 4-6
times to our 2011 revenue estimates of $146M, discounted four years at 20%,
we believe shares are fairly valued in the $4-$6 range.
Upcoming Milestones
INSM
|-------+-------+----------------------------------------|
| Date |Product|Event |
|-------+-------+----------------------------------------|
| 1Q07 | INSM-1| Phase I/II data in prostate cancer |
| | 8 | (MTD) |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | Announce ex-U.S. partnership or |
| | | decision to go it alone |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | 6-month dose-ranging Phase II data in |
| | | myotonic muscular dystrophy |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | Submit refrigeration stable data for |
| | | Iplex |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | Data from Phase II study in |
| | | HIV-associated lipodystrophy |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | Data from Phase II study in myotonic |
| | | dystrophy |
|-------+-------+----------------------------------------|
| 1Q07 | Iplex | Court decision on permanent injunction |
|-------+-------+----------------------------------------|
| 2Q07 | Iplex | EMEA approval decision expected |
|-------+-------+----------------------------------------|
| 2Q07 | Iplex | Noonan's Syndrome data at ENDO/LWSPE |
|-------+-------+----------------------------------------|
TRCA
|--------+--------------+-------------------------|
| Date |Product |Event |
|--------+--------------+-------------------------|
| YE06 | Increlex | EMEA approval decision |
| | | expected |
|--------+--------------+-------------------------|
| 1Q07 | Increlex | Complete enrollment for |
| | | MS308 |
|--------+--------------+-------------------------|
| 1Q07 | Somatuline | Launch in Canada |
| | Autogel | |
|--------+--------------+-------------------------|
| 1Q07 | Increlex | Court decision on |
| | | permanent injunction |
|--------+--------------+-------------------------|
| mid-200| Increlex | Complete enrollment for |
| 7 | | MS301 |
|--------+--------------+-------------------------|
| 8/30/07| Somatuline | PDUFA date |
| | Autogel | |
|--------+--------------+-------------------------|
