Insmed Inc (INSM)

[ED20332]

Article out - "Insmed should merge"
http://biz.yahoo.com/seekingalpha/061214/22399_id.html?.v=1

SeekingAlpha
Insmed Loses Patent Case to Tercica; Companies Should Merge
Thursday December 14, 2:23 am ET

Andrew Vaino submits: As I mentioned last week in the Daily Blog, the patent case between Insmed (NASDAQ: INSM - News) and Tercica (NASDAQ: TRCA - News) decided in Tercica's favor. A jury found that Insmed infringed on Tercica's patents and ordered them to pay $7.5M in damages.
As well, Insmed was ordered to pay Tercica a 15% royalty on sales of less than $100M and 20% on sales above $100M. Insmed hasn't filed any appeal. I'm very happy I had a stop order for $1.50, and got out with a slight profit. INSM is now trading at less than a dollar.

To recap, both Insmed and Tercica sell insulin-like growth factor-1 [IGF-1] for the treatment of growth deficiencies in children who don't respond to normal human growth hormone therapy. Tercica's drug, Increlex, is given twice a day by injection and Iplex, Insmed's drug, is given once a day. Iplex is cleverly delivered with a complementary binding protein to improve distribution in the body.

Of the two, I think Insmed has the better pipeline. In addition to Iplex to treat growth deficiency, Insmed completed Phase 2 studies looking at application of Iplex to diabetes (in particular extreme insulin resistance), as well as to patients receiving skin grafts. Insmed also has a Phase 1/2 clinical study underway to treat prostate cancer and has a potential treatment for complications arising from HIV. According to the FDA's website, Insmed is not currently pursuing any Phase 3 studies.

Tercica recently licensed Somatuline Autogel to treat patients with acromegaly (a disorder in which the pituitary gland produces too much growth hormone). A NDA had been filed, and Tercica should hear back late next year. This, like Increlex, won't have a huge market but, as I mentioned, that's ok for such a small company.

While Tercica is the stronger company right now, I think the small market size for its products won't provide for much increase in stock price and therefore I wouldn't buy. Indeed, TRCA is up less than 15% since the verdict: this is still preferable to the 50% haircut INSM has taken.

I think Insmed is now is a world of hurt. In a best case scenario sales for Iplex will not be great (likely less than $200M/yr), so losing 15-20% hurts. Also, manufacturing IGF-1 isn't easy or cheap. Last spring INSM took a plunge when their auditors said they weren't certain the company had the ability to continue as a going concern. This report was a bit premature in that it didn't take into account a secondary offering of stock (predicted the week before in the Weekly Newsletter!) into account.

Regardless, at the end of Q3 Insmed has ~$30M net current assets, very weak sales, and no new products on the horizon for years. With a stock price below ninety cents, financing options are limited.

I think Iplex is a better drug than Increlex. My take, as I mentioned previously, is the best thing is for these companies to merge. Given the bad blood between them this won't be easy (the two companies have been almost absurdly litigious) but right now I think Insmed has no choice. So, while I wouldn't buy INSM right now it's worth keeping an eye on. A merger or outright acquisition, which I predict, will send the stock up. It's just a question of finding the bottom.

As a follow-up to my post on Friday about Encysive (NASDAQ: ENCY - News), the spike it received on announcement they were resuming a Phase 2 study on TCB3711 has dissipated (even after a single 'thumbs up' from Cramer on Monday night). My highly speculative short position is still under water, but less worryingly so.



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