COMPANY NOTE

Initiating Coverage

USA | Healthcare | Pharmaceuticals/Specialty December 8, 2014

BUY EQUITY RESEARCH Insys Therapeutics, Inc. (INSY) Price target $51.00 An Emerging Leader in Supportive Care and Price $38.63 Pain Management; Initiating at Buy Key Takeaway Via an effective, cost-efficient sales model & what’s quickly become the leading treatment for breakthrough cancer pain (BTCP), Insys has become one of the fastest growing companies in Specialty Pharma. We expect Subsys, & Financial Summary the anticipated launch of dronabinol OS (chemo induced nausea) in 2016 to Net Debt (MM): $0.0 generate LT revenue & EPS growth of 21% & 28%, respectively. Insys also has 5 products in late stage development & a strong balance sheet. Market Data 52 Week Range: $57.91 - $20.52

Subsys Became the BTCP Market Leader in Just 18 Months. Introduced in 2012, AMERICAS transmucosal fentanyl product Subsys now commands a ~40% share of the BTCP market. Total Entprs. Value (MM): $1,413.9 Key opinion leaders (KOLs) generally view Subsys as “best in class” due to its rapid onset Market Cap. (MM): $1,413.9 of action & patient friendly administration. Sales are expected to more than double in 2014 Shares Out. (MM): 36.6 to reach $215M. Looking ahead, modelling 16.5% Rx growth and 10% price growth, we Float (MM): 13.5 expect 2015 Subsys sales to reach $277M, with peak potential sales of ~$400M. Avg. Daily Vol.: 470,325 Deep, Underappreciated Pipeline Based On Reproducible Technology Platform. Leveraging the company’s sublingual spray technology platform and mfg expertise in highly regulated cannabinoid products, Insys has 5 late-stage product candidates. Promising projects include sublingual spray candidates to treat pain, opiate addiction, and emesis – as well as cannabidiol for orphan forms of epilepsy, etc. We believe there is little value ascribed to much of this relatively low risk pipeline – which are largely reformulations of existing drugs. Insys Has Had its Share of Controversy. Insys has faced significant media attention during the past 6 months – including questions related to sales/marketing practices, use of paid clinicians in peer to peer marketing, and allegations against a former high Subsys prescriber. Less than two weeks ago the NYT published a second article on Insys. Very Recent Clinician Survey Underpins Our Positive Outlook. Last week, we conducted a survey of high prescribers of transmucosal fentanyl products, supplemented by due diligence calls with KOLs in the field. Of note, 45% of respondents stated they are likely David Steinberg * to increase their use of Subsys over the next six months. Importantly, not a single doctor Equity Analyst (415) 229-1553 [email protected] indicated they would discontinue use of Subsys due to recent media reports. Edward Chung * Valuation/Risks Equity Associate Our 12 months PT is $51, based on 22.5x (20% disc to growth) our 2017 EPS est of $2.49, (415) 229-1513 [email protected] Amran Gowani * disc 1 year at 10% (see details). Key risks are related to the uptake of Subsys and regulatory/ Equity Associate clinical development issues associated with key pipeline candidates. (415) 229-1512 [email protected] * Jefferies LLC

USD Prev. 2013A Prev. 2014E Prev. 2015E Prev. 2016E Price Performance Rev. (MM) -- 99.3 -- 217.5 -- 276.5 -- 340.4 60 EV/Rev 14.2x 6.5x 5.1x 4.2x EPS

Mar -- 0.12 -- 0.41A ------50 Jun -- 0.24 -- 0.58A ------Sep -- 0.39 -- 0.63A ------40 Dec -- 0.47 -- 0.38 ------FY Dec -- 1.33 -- 2.00 -- 1.45 -- 1.94 FY P/E 29.0x 19.3x 26.6x 19.9x 30

20 DEC-13 APR-14 AUG-14 DEC-14

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 30 to 34 of this report. INSY

Initiating Coverage Insys Therapeutics, Inc.

December 8, 2014 Buy: $51 Price Target

VIEW LONG THE Scenarios Target Investment Thesis Upside Scenario Downside Scenario . Subsys Rx growth moderates to 16.5% in . Subsys Rxs better than expected (i.e., . Subsys Rxs slow significantly (<5%) in FY15 after very strong launch +20% Y/Y) in FY15 FY15 . Subsys peak market share of 45-50% . Subsys peak share of 60% . Subys peak share of 40-42% . Dronabinol OS launch in 1H16; Rx . Dronabinol OS launch in 1H16; Better than . Dronabinol OS launch in 1H16; Rx trajectory similar to Subsys expected Rx trajectory vs Subsys trajectory slower than Subsys . 330 bp annual operating margin . Greater than projected operating margin . Delays/setbacks with pipeline assets expansion with the launch of dronabinol expansion buprenorphine and ondansetron sprays

OS . 2017 EPS: $2.90; Target Multiple: 28x; . 2017 EPS: $1.60; Target Multiple: 18x; . 2017 EPS: $2.49; Target Multiple: 22.5x; Discounted 10% for 1 year; PT: $73 Discounted 10% for 1 year; PT: $26 Discounted 10% for 1 year; PT: $51

Long Term Analysis Revenue ($’000s) and Op. Margin (%) Long Term Financial Model Drivers Other Considerations

800 50% 2015-2020 EPS CAGR 21% Rapid acting opioid products like Subsys 2015-2020 Revenue CAGR 28% are tightly regulated. As such, there is 600 45% Operating Margin Expansion 330 bp/year significant scrutiny and Insys has been the 400 40% (2015-2020) subject of media reports about its marketing practices. With controversies, a 200 35% sizeable short position has emerged. Also, 0 30% the company’s highly concentrated 2015E 2017E 2019E ownership (e.g., small float) could result Source: Jefferies estimates in greater than typical volatility in Insys’s shares.

Peer Group 2015 P/E Ratios 2015 PEG Ratios Recommendation / Price Target 40.0x 37.44 7.0x Ticker Rec. PT 5.79 35.0x 6.0x 5.10 INSY Buy $51 30.0x 5.0x 25.28 23.37 24.02 25.0x 22.06 BDSI NC NA 4.0x 20.0x 17.76 3.0x 2.57 2.62 2.53 DEPO NC NA 15.0x 2.20 10.0x 2.0x GWPH NC NA 5.0x 1.0x HZNP NC NA 0.0x 0.0x INSY BDSI DEPO GWPH HZNP SUPN INSY BDSI DEPO GWPH HZNP SUPN SUPN Hold $9

Source: FactSet Source: FactSet

Catalysts Company Description . Dronabinol OS NDA resubmission in 4Q14 Insys is a fast growing specialty pharma company focused on the supportive care and pain 1Q15; Potential approval/launch in 1H16 management markets. The company utilizes its proprietary delivery technologies to address the clinical shortcomings of existing commercial pharmaceutical products. Insys’ . Buprenorphine Spray Ph 3 initiation in flagship product is Subsys, a sublingual fentanyl spray that has quickly become the market 1H15 leader in the breakthrough cancer pain segment following its launch in 2012. The . Buprenorphine/Naloxone Spray and company also has a pipeline of relatively low risk development programs, led by Ondansetron Spray proof of concept data Dronabinol OS (2nd line treatment for chemo induced nausea and vomiting), cannabidiol in 1H15 for various orphan indications, and a number of candidates utilizing the company’s . Potential accretive acquisitions sublingual spray technology. Insys is headquartered in Chandler, Arizona.

page 2 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014 Executive Summary We are initiating coverage of Insys with a Buy investment rating and 12-month price target of $51.

Insys is an emerging Specialty Pharmaceuticals company focused on supportive care and pain management. Via an effective, cost-efficient sales model and what is arguably a "best in class" treatment for breakthrough cancer pain (BTCP), Insys has quickly established itself as one of the fastest-growing companies in the sector. With a rapid onset of action and patient friendly administration – Subsys overtook the leading brand in the segment in just 18 months post launch and now commands a ~40% market share. We believe Subsys could achieve peak sales of ~$400M – up from a current estimated $240M+ runrate.

Behind Subsys, Insys has what we believe to be an underappreciated pipeline of relatively low risk development programs – leveraging the company’s sublingual spray technology platform and manufacturing capabilities of highly regulated cannabinoid products – that can likely help sustain and possibly accelerate Insys’ growth rate in the coming years. The company’s lead pipeline candidate dronabinol OS (NDA filed) could be commercialized in 2016 and potentially gain significant share as an improved product offering in the $450M+ branded Marinol market. Insys has four other development programs entering pivotal Phase 3 testing in 2015. Two of these – buprenorphine and ondansetron sublingual sprays – we project reaching the market in the 2018/2019 timeframe. Taken together with the company’s leverageable sales and marketing organization, we see Insys capable of generating 5 year average revenue and EPS growth of 21% and 28%, respectively.

Recently, this promising outlook has periodically been overshadowed by noteworthy media reports over the past six months. Key concerns cited include the receipt of two federal subpoenas related to Subsys sales and marketing practices (no charges have been filed against Insys), alleged Medicare fraud by a former high prescriber of Subsys, reports highlighting the growth of Subsys use in non-cancer pain patients, and the use of physicians in paid peer to peer marketing (two separate New York Times articles). While the Federal investigation must be taken seriously, we believe most of these items offer “headline risk” and likely will not impact the business – and we discuss each point in detail in the report. Nonetheless, there are currently ~6.8M shorted shares, representing 54% of Insys’ free float – by far the highest in our coverage universe. If our analysis is correct, we tend to think this offers another source of demand for Insys shares.

Given the significant controversies, a critical piece of our investment thesis is to ascertain whether they actually will have any impact on the business. To that end, during the week of December 1, we conducted a clinician survey of high transmucosal immediate release fentanyl (TIRF) prescribers, supplemented by due diligence calls with key opinion leaders (KOLs) in the field. Of 22 clinicians that met our stringent survey entry criteria, 45% stated they are likely to increase their use of Subsys over the next six months. Importantly, not a single doctor indicated they would discontinue use of Subsys despite being fully aware of the most recent (including the NYT article published November 27) media reports. And in lengthy calls with three prominent anesthesiologists/pain experts that same week, we found that while there was a belief that there could be some slight carryover effect from the heightened media attention, “doctors are creatures of habit” and will continue to prescribe Subsys given its acknowledged “best in class” profile and the fact that it has generated positive responses from patients. The KOLs further believe that while Subsys and other BTCP products are expensive, the use of patient co-pay assistance cards will continue to help the products grow. We conclude that – based on both the survey and doctor interviews conducted last week – the outlook is positive for continued Subsys

page 3 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

market share gains and revenue growth. This very up to date information is a critical factor underpinning our Buy rating. Valuation Our 12-month price target is $51, based on 22.5x our 2017 EPS estimate of $2.49, discounted 1 year at 10%. We think that it makes sense to value Insys shares on 2017 earnings given that 1) the company will have exhausted net operating losses and will pay a full US cash tax rate and 2) it should be the first full year of contribution from the company’s second growth driver – dronabinol OS. The 22.5x forward P/E multiple represents a ~20% discount to our 28% projected long term growth rate – which we believe is reasonable given the aforementioned issues. While we’ve modeled very modest contributions from two of the sublingual spray programs starting in 2018, there are several other late-stage opportunities we have not included in our forecast (i.e., orphan indications for cannabinoids and buprenorphine/naloxone). Hence, our analysis suggests there is little to no value ascribed to several late-stage projects currently in development.

Looked at another way, the $51 price objective is consistent with our discounted cash flow (DCF, see Chart 18) analysis. We evaluate Insys as a fully-taxed (~35% due to orphan drug credits) operating company over a forecast window from 2014-2024. We utilize a 15% discount rate for both the forecast period and the terminal value calculation, which we believe reflects the blended risk profile for Insys’ development pipeline as well as potential risks associated with the company’s commercial operations. We apply a 0.5% terminal growth rate in order to capture the latent growth profile of Insys’ pipeline programs. Taken together, this analysis yields an enterprise value of $1.6B, which after adjusting for cash and debt produces an equity value of $51 per share 12 months from now. Risks Commercial and promotional risks related to Subsys: Sustaining the growth of Subsys is critical to Insys’ near term outlook. While the company has executed on an impressive launch and Subsys has already become the leading product in the BTCP category, there is possible risk to the company’s operating model, which depends on active promotion by its sales representatives – in light of the scrutiny in the use of powerful opioids for pain management by regulators. Historically, there occasionally have been fines levied against companies selling products in this market due to off-label promotion. Hence, Insys has to “walk a fine line” in its detailing of Subsys in order to ensure continued uptake of the product while staying clear of potential regulatory violations.

Second, as Subsys continues to grow, it will continue to be scrutinized by payers and Insys may have to increase rebates and discounts to selected managed care organizations in order to maintain formulary coverage. For instance, in the case of Express Scripts, which accounts for an estimated ~4% of Subsys Rxs, Subsys now faces formulary exclusion all together starting in 2015. That said, a significant portion of existing Express Scripts patients already have letters from the pharmacy benefits manager (PBM) indicating that they will continue to be covered, according to Insys. Moreover, Insys is in the process of contracting with other large PBMs to carry Subsys on their formularies, which could well be a net positive.

Clinical development risk: As with all pharmaceutical companies, there is inherent risk associated with product development and clinical trials. That said, Insys has a relatively low risk approach towards product development given that all of the programs are based on well-known compounds and the company is able to utilize the faster 505(b)(2) submission pathway to seek product approval (see below). page 4 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Manufacturing risk: A valuable asset is the company’s manufacturing capabilities in producing highly regulated cannabinoids that serve as key active ingredients in the company’s current (dronabinol soft gel capsule) and potential future product candidates (i.e., cannabidiol for treating childhood epilepsy, glioma, etc.). While this is a significant barrier to entry for potential future competitors, Insys currently has just one product facility to manufacture cannabinoids and could become capacity constrained if there is greater than expected initial demand for its pipeline product dronabinol OS. To that end, Insys has constructed a second cannabinoid manufacturing facility that is current awaiting regulatory (DEA and FDA) inspections, prior to being fully online for active production.

page 5 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014 Company Background Insys Therapeutics is a commercial stage Specialty Pharmaceutical company headquartered in Chandler, AZ and is the surviving entity following the completion of a reverse merger with NeoPharm – a drug delivery company focused on liposomal oncolytics – in November 2010. Insys subsequently completed an initial public offering (IPO) in May 2013, with proceeds earmarked for capital expenditures (establishment of a second dronabinol manufacturing facility) and retirement of debt from a revolving credit facility.

Insys is principally focused on the areas of supportive care/pain management led by Subsys – a proprietary sublingual fentanyl spray for breakthrough cancer pain (BTCP) – that was launched in March 2012. Driven by a class leading onset of action and rapid administration, Subsys rapidly became the leading branded product in this segment, having passed Teva’s Fentora by fall 2013 and currently commands a ~40% market share. The company also markets (via Mylan) Dronabinol SG Capsules, a generic equivalent to Marinol – an approved cannabinoid indicated as a second-line treatment for chemotherapy-induced nausea and vomiting and anorexia associated with weight loss in AIDS patients. In its development pipeline, Insys hopes to introduce a new, liquid formulation of dronabinol (NDA submitted in August 2014) that addresses certain shortcomings of the marketed capsule form. In addition, Insys has a portfolio of sublingual product candidates based on well-known compounds such as buprenorphine, buprenorphine/naloxone, and ondansetron, among others. An Efficient, Leverageable Business Model Insys promotes Subsys through a relatively small 249 person sales and marketing organization (~200 sales representatives) that is capable of targeting the ~1,850 key prescribers of transmucosal immediate release fentanyl (TIRF) products. These physicians write 90% of all TIRF Rxs. The company employs an incentive based, cost-efficient sales model whereby a significant component of the sales representatives’ compensation is derived from bonuses based on sales performance (e.g., low base plus variable incentive based bonus structure).

With a commercial infrastructure focused on oncology supportive care and pain management, Insys has been able to assemble a development pipeline comprised of candidates that target opportunities primarily prescribed by these physician groups. Hence, Insys could potentially derive significant operating leverage as additional products are approved and promoted by this sales force.

Finally, in addition to a focused marketing effort, Insys has two proprietary platforms – a sublingual spray technology and pharmaceutical cannabinoids – that will allow it to build out future product opportunities (see pipeline section below). Besides offering strong intellectual property protection (i.e., sublingual formulation technology/unit-dose device) and barriers to entry (i.e., highly regulated manufacturing for cannabinoids), the company’s proprietary platforms also allow for the utilization of the FDA’s 505(b)(2) regulatory submission pathway, which typically reduces development times as compared to developing new chemical entity (NCE) therapeutics.

Taken together, Insys utilizes a drug delivery technology platform – with the ability to line up successive proprietary product opportunities to drive future growth. As such, this business model does not require serial acquisitions to generate high growth. Secondly, given its low cost, efficient sales and marketing organization, the model can yield high levels of profitability.

page 6 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014 Subsys Has Quickly Emerged as the Top Branded Drug in the Breakthrough Cancer Pain Segment Insys’ flagship product is Subsys (sublingual fentanyl spray), which is indicated for the treatment of breakthrough cancer pain (BTCP) in opioid-tolerant patients. BTCP is characterized by sudden, often unpredictable episodes of intense pain despite background pain medication. This condition occurs in 40-80% of patients with cancer pain – and can be debilitating and interfere with patients ability to participate in routine daily activity, as peak pain intensity can occur in as little as three minutes in some patients.

Historically, this market has been dominated by transmucosal immediate release fentanyl (TIRF) products – with the most successful one being Cephalon’s (Teva) Actiq, which reached sales of $580M prior to generic competition in 2006. And to date, aggregate branded and generic Actiq Rxs still represent nearly a 40% share of Rxs in this segment. According to Symphony Health Solutions, aggregate TIRF market sales totaled $420M in 2013, up from $388M in 2012.

Chart 1: Analgesia Relative to Morphine Drug Relative potency to morphine Asprin 1/360 Acetaminophen (IV) 1/25 Codeine 1/10 Tramadol 1/10 Hydrocodone 1 Morphine 1 Oxycodone 1.5 Morphine (IV) 3 Hydromorphone 5 Oxymorphone 7 Buprenorphine 40 Fentanyl 50-100 Sufentanil 500-1k Carfentanil 10k-100k

Source: Wikipedia

As a brief background, fentanyl is an opioid analgesic used to treat acute and chronic pain and is available in three main forms of administration – injectables, transdermals, and transmucosal delivery. Relative to other analgesics, fentanyl is one of the most potent pain agents available (see Chart 1), which makes it particularly useful in treating breakthrough episodes. Key commercialized products include JNJ’s Duragesic fentanyl patch (peak sales of $2B) and Teva/Cephalon’s Actiq (peak sales of $580M) and follow-on product Fentora (IMS sales of $175M in 2013).

Subsys Appears to Possess Best in Class Characteristics Subsys utilizes a proprietary, single-use sublingual spray that delivers fentanyl via a fine mist disbursed across a broad surface area of highly permeable membrane underneath the tongue. Based on the strength of its pivotal clinical trial – demonstrating pain relief

page 7 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

within 5 minutes, which is the fastest onset of action in the TIRF class of products – Subsys received FDA approval in January 2012 and was formally launched in March 2012.

Chart 2: Subsys - Single-use Sublingual Fentanyl Spray

Source: Company Data

Importantly, in a head-to-head study, Subsys also established superior bioavailability versus Actiq (76% vs 51%), with administration that takes less than a minute (vs 14-30 minutes for Actiq and its follow-on product Fentora). Among the TIRF class of products, Subsys has the most complete range of dosage strengths – 100, 200, 400, 600, 800, 1,200, and 1,600 mg – which are critical for maintaining adequate pain relief as patients develop tolerance to opioid medication. Of note, Subsys is approved for the two highest doses in the TIRF class (1,200 and 1,600) – which are only available for Actiq. And Fentora is only approved up to 800 mg. Hence, not only does Subsys act quickly, but it offers the patient a much more flexible dosing regimen.

Chart 3: Breakthrough Cancer Pain Product Competitive Landscape October 2014 Rx Product Launched Marketer market share* Delivery Method Onset of Action Administration Available Doses Sugar Content

Subsys 2012 Insys 40.3% Sublingual spray 5 min < 1 min 100-1600 mg None Actiq/gActiq 1999/2006 Teva/multiple 34.1% Lozenge 15 min up to 15 min 200-1600 mg Yes Fentora 2006 Teva 21.2% Effervescent buccal 15 min 14-25 min 100-800 mg None tablet Abstral 2011 Galena 3.4% Quick-dissolve, 10 min < 1 min 50-800 mg None sublingual tablets Lazanda 2011 DepoMed 1.0% Nasal spray 10 min < 1 min 100-800 mg None Onsolis 2009** MEDA 0% Buccal film 30 min 15-30 min 200-1200 mg None

* IMS indicates significant understatement in retail channel during the month of September 2014 due to an outlet which became non sample. ** Product currently unavailable due to product manufacturing/appearance issues - submitted for FDA review in March 2013

Source: Company Data, IMS Health

In Just 18 Months, Subsys Became the Leading Branded BTCP Product While Subsys was the fourth approved branded BTCP product in a four year period between 2009 and 2012, it quickly leap frogged the other new agents within the first four weeks of launch with an initial ~65-person sales force. As an indication of its success,

page 8 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Subsys held a greater market share than the combination of the three other branded products.

And just one year post launch, Subsys became the second most prescribed branded BTCP product with a mid-teens market share. And within 18 month following introduction, Subsys surpassed Fentora to become the leading branded BTCP product in the US. Based on the most recent monthly data, Subsys now holds a 40% share in the BTCP market – just ahead of the combined branded and generic Actiq share of 34%.

Chart 4: Rx Share of Key Products in the Breakthrough Cancer Pain Category

Source: IMS Health

Given its arguably best in class characteristics, we see the potential for Subsys to garner additional share – although prior rapid growth is likely to abate as the product matures. As such, we forecast Rxs slowing for Subsys entering 2015, as it runs into stiffer managed care headwinds (i.e., Express Scripts formulary exclusion). To that end, after rapid projected Rx growth of 70%+ during 2014, we are forecasting Rxs to moderate to 16.5% in 2015. Importantly, however, the average revenue per for Subsys however should continue to grow – based on patients titrating up to higher doses that have greater value – as well as annual price increases. We forecast Subsys average Rx $ per Rx to increase 10% in 2015. Taken together, we project 2014-2016 Subsys sales of $215M, $277M, and $318M, respectively, and potential peak sales of $400M – based on a ~45-50% peak share in the BTCP market.

Further Upside to Our Forecast If Insys Can Successfully Expand Subsys’ Label In addition to the breakthrough cancer pain indication, Insys is looking to further expand Subsys’ label in Phase 4 studies. Potential expanded indications include dyspnea (incidental shortness of breath), pain in outpatient (office) procedures, emergency room use, burn patients, among others. Note that Cephalon had previously failed to obtain a label expansion for Fentora as a treatment for opioid-tolerant patients with non-cancer breakthrough pain. Hence, while an expanded label could further drive sales, our Subsys forecast is derived solely from the current BTCP indication given likely significant challenges ahead for Insys based on Cephalon’s prior experience.

page 9 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014 We Take a Look at Some Controversies Tied to the Company Since Its Rapid Emergence Given the company’s rapid emergence with Subsys and with it the heightened regulatory environment TIRF products operate in, several points of controversy have emerged (see below) and with it an attendant short position in Insys’ shares. As such, we thought it made sense to examine each of the issues. Currently, there appears to be 6.8M total shares short, which represents ~19% of Insys’ diluted share count. That said, given Chairman John Kapoor’s significant ~66% ownership in the company, the aforementioned short position represents ~54% of Insys’ float. And based on the average daily trading volume, it would take 12+ days for this short position to be covered.

Chart 5: Insys Short Interest and Days to Cover 10,000,000 18

9,000,000 16

8,000,000 14 7,000,000 12 6,000,000 10 5,000,000 8 4,000,000 6 3,000,000 2,000,000 4 1,000,000 2 0 0 5/31/2013 8/31/2013 11/30/2013 2/28/2014 5/31/2014 8/31/2014

Short Interest Days to Cover

Source: Factset

Two Federal Subpoenas Relating to Subsys Sales and Marketing Practices In December 2013, Insys received a subpoena from the Office of Inspector General (OIG) of the Department of Health and Human Services requesting all documents regarding sales and marketing practices related to Subsys since inception. This is not particularly unusual in the pharmaceuticals industry, where in recent years there have been numerous such investigations. In a few cases, there have been significant fines levered against companies that have been found to have engaged in off-label marketing. In the TIRF market, Cephalon’s $425M fine related to the promotions of Actiq, Gabatril, and Provigil in 2008 clearly stands out. Subsequently, Insys received a second subpoena last September from the US Attorney’s Office (Department of Justice, District of Massachusetts) requesting similar information. This most recent subpoena expands the timeframe of the requested documents (now through September 2014) and potentially the scope of the investigation into the criminal arena, as the first OIG subpoena pertained to civil law.

page 10 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Insys indicates that it is fully cooperating with the government and is in the process of producing all documents and corporate communications related to Subsys sales and marketing practices. Insys management states that they have and will continue to promote Subsys with an on-label message. Experts indicate to us that it could take as long as 2-4 years for this investigation to be resolved. It is entirely possible that these investigations and related legal matters surrounding Insys could potentially result in more negative headlines for the company. As we are not privy to the facts, we are not in a position to render a conclusion. That said, we’re pretty sure that the worst case outcome for Insys is some sort of fine.

Medicare Fraud Allegation and Illegal Distribution of Controlled Substances In May 2014, Michigan neurologist Dr. Gavin Awerbuch was arrested for Medicare fraud, having collected more than $5M by billing payers for procedures he did not conduct (including nerve conduction studies, etc.). And over a five year period (from 2009 to 2014), according to Federal investigators, Dr. Awerbuch received six times more money for prescribing controlled drugs to treat cancer pain than the next closest US prescriber and was allegedly responsible for 20% of Subsys prescribed to Medicare beneficiaries nationwide during this period. While Dr. Awerbuch potentially prescribed certain opioid pain medications (including Subsys) for non-cancer indications, the key point is that his writing of Subsys Rxs is unrelated to the allegations of Medicare fraud.

Insys has been emphatic that its representatives are instructed not to stray from on-label promotions. Moreover, upon disclosure of Dr. Awerbuch’s indictment, Insys severed all ties with the doctor, who was formerly a paid speaker for the company. According to Insys, while they have a number of very high prescribing physicians (~30% of Rxs written by 118 doctors), Dr. Awerbuch’s Rxs represented no more than 3% of total Subsys Rxs prior to his arrest. And management indicates at this point in time that no one prescriber accounts for more than 1.5% of current Subsys’ prescription volume. Moreover, this initial concentration should continue to subside as Subsys gains additional share in the BTCP market over time.

The publicity surrounding Dr. Awerbuch and his robust writing of Subsys Rxs in tandem with a New York Times (NYT) article on May 13, 2014 (see following section) had a clear impact on other physician’s behavior for a very short period of time. However, after an initial ~50% dip in Rxs (see Chart 6) following Dr. Awerbuch’s arrest in May through July, Subsys Rx growth trends have steadily returned in recent months. Insys indicates that they have no involvement in this case and importantly, has not been named in the court documents.

page 11 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Chart 6: Subsys Weekly Total Prescriptions 3,000

2,500

2,000

1,500 Awerbuck arrested for Medicare fraud (May 7)

First NYTimes article (May 14) 1,000

500

IMS disclosed missing data (Sept) 0

SUBSYS (IMS Unadjusted) TIRF Category SUBSYS (IMS Adjusted)

Source: IMS Health

A May New York Times Article Added Fuel to the Fire Contributing to the negative headlines on Insys, the New York Times published an article last May shortly after Dr. Awerbuch’s arrest. This report discussed the rapid uptake of Subsys and the fact that just 1% of prescribers were oncologists, with significant use of the product by pain specialists and a wide range of other doctors, including neurologists and general practitioners. The report further attempts to implicate the company’s incentive-based sales model for aggressive promotion by its representatives, suggesting the possible use of off-label promotions to garner higher sales. This article follows other NY Times reports discussing financial ties between doctors and the health care industry, highlighting the industry’s use of speaker fees and consulting payments to influence physician behavior.

And a Second Very Recent NY Times Article Seemingly Attempts to do the Same On November 27, 2014, the same author published a second article in the New York Times discussing physicians involved in paid peer to peer marketing. Specifically, the article highlighted data from the new Federal Open Payments database and suggests that Insys specifically targeted pain doctors who have inappropriately prescribed pain medication and were facing legal or disciplinary action – based on documented payments to physicians. In addition to the payments to doctors, the article highlighted additional financial incentives to several physicians’ family members, who were employed as Insys sales representatives.

Insys management indicates that it employs 150-175 peer speakers to help promote Subsys use amongst 12k targeted physicians. We note this is a fairly standard industry practice whereby key opinion leaders (KOLs) help educate their peers via speaking engagements paid for by companies that market the specific product discussed. And to that end, the company indicates that it has a far lower annual cap of $125k on speaker payments relative to the industry average of $250k. page 12 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Also of note, the two children of high prescribing physicians discussed in the November article are no longer Insys employees. And to that end, while the company previously did not have a policy on sales representatives detailing to physicians who were family members, management has recently implemented new rules to prevent such activity from taking place to prevent the appearance of impropriety with its promotional efforts.

A Very Recent Survey of High TIRF Prescribers Provides a Positive Outlook for Subsys Based on the fact that the tandem of Dr. Awerbuch’s arrest and the May NY Times article led to a sharp decline in Rxs, we thought it made sense to conduct a survey of physicians who are high prescribers of TIRF and Subsys Rxs to gauge the potential impact, if any, of the most recent NY Times article. In an attempt to capture the sentiment of the key prescribers, we excluded clinicians who wrote less than seven TIRF Rxs/month and fewer than 4 Subsys Rxs/month. On average, the 22 clinicians who met the survey criteria – out of 260 total respondents – prescribe 26 TIRF Rxs/month (range of 10-120) and 9 Subsys Rxs/month (range of 5-40). We note that there was one outlier prescriber in our survey who writes on average 120 TIRF Rxs/month and 40 Subsys Rxs/month.

Chart 7: TIRF Market High Prescriber Survey – Clinician Profile Actiq TIRF Category (Brand+Generics) Fentora Subsys Others Total Monthly Rxs 565 177 187 197 4 Average Monthly Rxs 25.7 8.0 8.5 9.0 0.2

Market Share % -- 31% 33% 35% 1% Source: Jefferies; Gerson Lehrman Group

The clinicians indicated the following market shares for TIRF products they prescribed – Subsys (35%), Fentora (33%), Actiq/generics (31%), and others (1%) – which actually closely parallels IMS reported monthly data.

Our findings were as follows:

According to the clinicians, 41% have increased their prescriptions of Subsys versus 1H14 while 59% are prescribing the same amount. In the next six months, 45% of the clinicians expect to increase their writing of Subsys Rxs and 55% indicated that they plan to prescribe at the current level. Importantly, none of the respondents indicated that they expect to reduce their prescriptions of Subsys in the next six months.

When asked about recent media reports on the use of TIRF products (including Subsys), just 9% of respondents found the articles to be highly negative. The vast majority (87%) of clinicians viewed the reports as neutral, modestly negative, or modestly positive and 5% of respondents actually perceived the reports as highly positive. Importantly, based on the heightened recent media exposure, the majority of clinicians (77%) indicated that they would not be changing their prescribing habits and none of the high prescribers believed that they would stop prescribing Subsys due to the media coverage.

While this is certainly a limited sample size, the TIRF category is highly concentrated with 90% of Rxs written by ~1900 physicians. Hence, we believe the survey results may well be a good predictor of future Subsys sales.

page 13 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Chart 8: Clinician Usage Survey Summary Are you currently writing (or expect to write) an increased, same, or decreased number of prescriptions for Subsys in the following time periods: Decrease Same Increase Current Use vs 1H14 0 13 9 Use in next 6 months 0 12 10

Based on media reports surrounding the use of transmucosal fentanyl products (including Subsys) in the past six months, please rate how you perceive them on a scale of 1-5. Response # Respondents % 1 - Highly negative 2 9% 2 7 32% 3 - Neutral 7 32% 4 5 23% 5 - Highly positive 1 5%

Given the heightened media exposure regarding TIRF products, how will that affect your Subsys prescribing habits? Please rate on a scale of 1-5. Response # Respondents % 1 - Increase use 0 0% 2 1 5% 3 - No change 17 77% 4 4 18% 5 - Stop prescribing 0 0%

Outside of the heightened media exposure, are there other factors that would make you reduce your use of Subsys? Response # Respondents % Yes 3 14% No 19 86%

If you answered yes to the prior question, what is your main concern? 1 - Third party payers will scrutinize use of these agents more closely 2 - Aggressive sales tactics 3 - Abuse potential

Source: Jefferies; Gerson Lehrman Group

Very Recent Conversations with KOLs Also Offered a Positive Outlook for Future Subsys Rxs As a supplement to the survey, we also spoke with three highly regarded key opinion leaders (KOLs) to gauge their views of Subsys and the TIRF market. We made sure to speak to them the week of December 1 – post the most recent NY Times article.

All three KOLs agreed that Subsys has clearly emerged as the leader in the category due to “best in class” attributes – rapid onset of action and fast administration. Although they acknowledged that a significant portion of Rxs are likely from off-label use – i.e., treating painful neuropathies, etc. – the experts believe that Subsys and TIRF products work very well for patients experiencing breakthrough pain episodes.

We also heard that while Lazanda (marketed by Depomed) has preferred formulary status with several managed care organizations, patients in general were less comfortable with nasal as compared to sublingual delivery of fentanyl (i.e., Subsys). Outside of best in class characteristics, the clinicians also attributed Subsys’ success in part to rebate cards that have helped with improving patient access despite managed care hurdles (i.e., prior authorizations, etc.). page 14 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

As for the recent negative media exposure, in general the experts thought there could be some modest carry over. Importantly, however, there was general agreement that “doctors are creatures of habit” and will continue to use products that are deemed “best in class” and have generated positive responses from patients versus other available therapies. While the three physicians we spoke with were not paid speakers for Subsys, they noted that peer-to-peer marketing is fairly common practice in the pharmaceutical industry and it is often supportive of important research. One KOL noted that if indeed Insys was found to have marketed Subsys too aggressively, he believed that the company would ultimately pay a fine to resolve the Federal investigations, attributing it as “cost of doing business.” But most importantly, none of the KOLs saw any evidence of inappropriate marketing by Insys representatives in any of their frequent interactions given that all three were high prescribers of Subsys.

page 15 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014 A Rapidly Expanding, Lower Risk Pipeline Sublingual Technology Enables Improved Onset of Action Insys has been able to leverage two key platforms to develop multiple product opportunities. The company’s first platform is a proprietary sublingual spray system that addresses clinical shortcomings of existing commercial pharmaceutical products, including the potential for improved onset of action and increased bioavailability. Already established via flagship drug Subsys, the sublingual technology enables on demand use, with the active ingredient of the drug able to reach optimal plasma concentration quickly via transmucosal delivery.

A key component of Insys’ sublingual technology is a unit dose spray (licensed from Aptar) that offers ready to use convenience without priming. This no priming feature is particularly important for controlled substance products given the potential risks of overdose and diversion.

Expertise in Producing Synthetic Cannabinoids Insys’ second platform leverages the company’s extensive manufacturing capabilities in Round Rock, Texas for producing dronabinol (synthetic tetrahydrocannabinol – THC) – the main active ingredient (API) in the dronabinol SG capsule (a generic equivalent to Marinol) – and cannabidiol (CBD) – a synthetically produced, 99%+ pure form of this active ingredient. The company has a seven plus year track record of manufacturing pharmaceutical cannabinoids in a DEA approved and FDA inspected US-based facility, which should serve as a significant development and production advantage. In fact, Insys is the only company with the capacity to produce pharmaceutical dronabinol and CBD in commercial quantities in the US, according to management. The company also believes that they are one of just three facilities worldwide capable of producing cannabidiols in large scale.

Worth noting, while Marinol and its generics are categorized as schedule 3 controlled substances, the dronabinol API actually has a schedule 1 designation (i.e., high potential for abuse; no currently accepted medical use) and hence, is subject to very stringent annual DEA production quotas. This active ingredient cannot be readily procured and imported.

In addition to manufacturing CBD for its clinical programs, Insys’ Texas facility currently has adequate capacity to produce commercial dronabinol capsule supplies as well as initial launch quantities of its pipeline candidate dronabinol oral solution (OS). To that end, the company is in the process of securing expanded manufacturing to support future demand. The build out of a second facility has been completed and is currently awaiting prerequisite regulatory (DEA) inspections. Lead Pipeline Candidate: Dronabinol Oral Solution – Potentially an Improved Marinol The company’s lead pipeline candidate is dronabinol oral solution (OS) – a proprietary oral, liquid formulation of dronabinol. Recall that Insys currently supplies a capsule version of dronabinol (distributed by Mylan) that is a generic equivalent to Marinol, a second-line oncology supportive care product indicated for chemotherapy induced nausea and vomiting (CINV) and anorexia associated weight loss in patients with AIDS. Insys’ generic dronabinol product garnered modest revenue of ~$3.5M in 2013.

page 16 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Despite limitations with Marinol (and generics to it initially approved in 2008) – delayed absorption (capsule must be dissolved and digested before being metabolized in the liver), highly variable bioavailability, and lack of dosing flexibility (available only in 2.5mg, 5.0mg, and 10mg strengths) – Rxs have continued to grow (mid-single digits) in recent years. With TRxs approaching 270k in 2013, Insys estimates that the branded market for dronabinol is estimated at ~$450M.

Dronabinol OS Appears to Have A Number of Improved Attributes In clinical testing, Insys’ dronabinol OS reached detectable plasma levels in 100% of patients after just 15 minutes versus <25% in Marinol patients – suggesting a much faster onset of action than the current capsule formulation. Marinol typically takes 30-60 minutes to reach therapeutic levels and upwards of 2-4 hours post administration to attain peak effect. Liquid dronabinol’s rapid onset is particularly important for patients who experience “breakthrough” episodes of nausea and vomiting. Further, dronabinol OS demonstrated less intra-patient variability than Marinol – by more than 60% as measured by area under the curve – thus potentially yielding a more consistent effect in patients. And due to its liquid formulation, drornabinol OS (5mg/ml in 30 ml bottle sizes) can be more easily titrated to suit individual patient needs. These improvements may ultimately increase patient compliance and allow for increased penetration in this market.

While clinical testing was completed in 3Q13, Insys did not file the NDA for dronabinol OS until August 2014 following completion of human abuse studies that were required by the DEA for scheduling purposes. On October 15, 2014, Insys announced the receipt of a refusal to file letter from the agency because the company provided an inadequate/incomplete pediatric study plan in its NDA. Insys is working closely with the FDA to address this issue and believes that it can expeditiously resolve the request without additional clinical studies. According to management, a pediatric waiver was submitted in its NDA package as THC could have psychotropic/hallucinating effects in children, as well as adults. However, according to new guidelines (starting 2014), pediatric plans must be filed in addition to the waiver, even if the plan is as simple as indicating a lack of one. The company has already submitted its plans to the FDA and should receive comments back shortly. Hence, it appears that Insys should be able to address this deficiency in the coming weeks and we are forecasting initial dronabinol OS sales in 2016.

Dronabinol OS Could Reach Peak Sales Approaching $200M Given the aforementioned recent growth trends despite the clear limitations of Marinol, we think that this market should continue to witness low single digit growth in the coming years – at a minimum. According to Insys, there is a concentrated universe of approximately 8,000 prescribers who write 70% of Rxs in this segment. Approximately 55% of Rxs are written by oncology/supportive care physicians and are well aligned with the company’s promotion of Subsys. The other 45% of prescribers are physicians who treat AIDS patients. Based on these market dynamics, Insys plans to add another 50-100 representatives to promote dronabinol OS to physicians in the AIDS community – which is fairly concentrated in a few large metropolitan areas in the US.

For now, we assume that dronabinol will be initially priced at parity to branded Marinol despite potential advantages, with an average Rx value of $1100 – representing gross to net sales deductions of ~30% on Marinol’s average wholesale price of $1580/Rx (calculated on the mix of the different strengths of prescribed Marinol Rxs). Given the success of Subsys, we think that Insys may be able to garner similar initial market penetration. Taken together, we project a peak market share approaching ~40% over time and peak sales potential of $200M.

Beyond dronabinol OS, Insys has a number of other line extensions planned for this franchise, including: a proprietary sublingual spray, inhalation, and intravenous dronabinol formulations – all of which are currently in pre-clinical development. page 17 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

A Number of Potential Orphan Indications for Cannabidiol Much earlier in development, Insys is exploring the potential use of cannabidiol (CBD) in a number of indications. These include: 1) orphan forms of epilepsy (e.g., Dravet Syndrome and Lennox-Gastaut Syndrome), 2) glioblastoma, 3) gliomas, 4) pediatric schizophrenia, among others. To date, the FDA has granted orphan drug status (rare diseases/conditions affecting less than 200k patients in the US) to all of the aforementioned programs, which would confer seven year exclusivities for each product, if approved. Importantly, Insys has been granted DEA quota to produce 15 kg of CBD in 2014 and potentially a larger quota could be issued for 2015 – and with it sufficient quantities for the company’s CBD development programs. Assuming successful development, initial approval for cannabidiol could emerge in the 2018 timeframe.

On the competitive front, Insys’ primary competitor in the CBD area is UK-based GW Pharmaceuticals, which is focused on plant-derived cannabinoid therapeutics (i.e., non- synthetic). Currently, GW Pharma has one product Sativex – an oromucosal spray containing delta-9 THC – that has been approved in 27 ex-US countries for the treatment of MS spasticity. Sativex is currently in Phase 3 testing in the US for cancer pain (partnered with Otsuka).

In addition, GW Pharma has a purified CBD candidate Epidiolex orphan program that is entering Phase 2/3 testing for Dravet Syndrome and LGS – possibly 1-2 years ahead of Insys’ development programs (Phase 1 studies expected to commence by 2014 year end). Given Epidiolex’ orphan drug designation – which offers seven years of exclusivity for the indicated condition – an approval for GW Pharma’s product could potentially delay Insys’ entry into some of these markets. That said, it is possible that Insys and GW Pharma secure approvals in different childhood epilepsy conditions that would allow both companies to compete in this arena. Moreover, GW Pharma could potentially face a more challenging commercialization pathway given DEA restrictions and quotas on its plant- derived schedule 1 active ingredient that will need to be imported to the US.

At this point, while Insys’ CBD orphan programs appear very intriguing and could yield peak sales potential of several hundred million dollars if successfully developed, we have excluded them from our model due to the aforementioned competitive uncertainties.

page 18 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Chart 9: Cannabidiol Pipeline Dravet Syndrome (DS)¹ Lennox-Gastaut Syndrome (LGS)¹

Ÿ Ÿ  Rare form of refactory, infant-onset epilepsy  Severe form of childhood-onset epilepsy Ÿ  Seizures appear between years one and five in 85%  Characterized by multiple seizure types, moderate of children with DS to severe cognitive impairment, abnormal EEG  Progressive decline typically begins at age two  More common in males than in females  Higher incidence of SUDEP (sudden unexplained  Prevalence: 0.26 in 1,000 death in epilepsy)  Represents 2-5% of all childhood epilepsy cases  Prevalence: one in 20,000 - 40,000

Addiction Glioblastoma Multiforme (GBM)

 U.S. Department of Health estimates substance  Cannabidiol enhances the uptake of cancer 3 abuse treatment costs will increase to $35B in killing drugs  Can stop the rapid proliferation of glioblastoma cells 2014² when combined with a cytotoxic drug  Cocaine abuse / dependence is estimated to affect  GBM accounts for 60-70% of 14,000 malignant >1.1M people in the U.S.2 glioma cancer cases in the U.S. annually4  >2M people suffer from opiod dependence (U.S.)2

1 Epilepsy Foundation - Dravet's and LGS Syndrome 2 US Dept Health and Human Services 3 National Cancer Institute - NIH 4 New England Journal of Medicine 2008: 359:492-507

Source: Company Data

Beyond Subsys – Numerous Sublingual Spray Pipeline Opportunities Available Insys also looks to have a robust pipeline leveraging the company’s sublingual spray technology. The three lead development programs include sublingual formulations of buprenorphine (semi-synthetic opioid to treat moderate and acute chronic pain), buprenorphine/naloxone (opioid antagonist to treat addiction), and ondansetron (5-HT3 receptor antagonist used as an antiemetic to treat nausea and vomiting following chemotherapy). All of these candidates address significant market opportunities and would leverage Insys’ sales and marketing effort in oncology/supportive care. And given abbreviated development pathways, these programs could potentially enter late-stage testing over the next 12-18 months.

Beyond these supportive care product candidates, Insys has three pre-clinical sublingual spray development programs – sildenafil (the active ingredient in Viagra) and two well- known (and widely used) NSAIDs for pain – diclofenac and ketorolac.

page 19 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Chart 10: Insys' Sublingual Spray Pipeline 2H14 1H15 2H15 1H16 Pre-IND Meeting Proof of Sublingual Pivotal Safety Study Completed Concept Study Buprenorphine / Naloxone IND Filing (Q4) Pivotal Clinical Study

Pivotal Safety / Efficacy Study Sublingual End of Phase 2 Buprenorphine Meeting (October) Pivotal pK Study

Pre-IND Proof of Sublingual Meeting (Q4) Concept Study Ondansetron IND Filing (Q4) Pivotal Clinical Study

Pre-IND Meeting Comparative pK Pre-Phase 3 Pivotal Clinical Sublingual Completed Study Meeting Study Sildenafil IND Filing (Q4)

Source: Company Data

Insys anticipates having four of these programs in Phase 3 testing during 2015 – sublingual formulations of buprenorphine, buprenorphine/naloxone, and ondansetron, as well as CBD for treating childhood epilepsy. All of these lower risk development programs target significant market opportunities where there are unmet needs and could potentially benefit from Insys’ sublingual delivery platform, which offers enhanced administration/faster onset.

For buprenorphine sublingual spray, Insys has completed an end of Phase 2 meeting with the FDA and will advance the sublingual spray candidate into Phase 3 testing for treating acute pain, which is expected to commence in 1H15. The company plans to enroll 320 patients in a post bunionectomy pain trial and anticipates completion of the study within 12 months following initial enrollment. If successfully developed, sublingual buprenorphine spray could potentially reach the market in the late 2017/early 2018 timeframe.

As a schedule 3 compound with lower propensity for addiction, potentially fewer opioid side effects (i.e., respiratory depression, etc.), and a pain relief profile comparable to morphine – buprenorphine represents a solid alternative to widely used Schedule 2 opioids (e.g., morphine, oxycodone) for treating pain. Further, the recent final DEA ruling on moving hydrocodone combination products (HCP – i.e., Vicodin, Lortab, etc.) from Schedule 3 to the more restrictive Schedule 2 creates additional opportunity given the nearly 130M annual prescriptions for the HCP class of drugs. That said, there will be a number of competitors – including Endo/BDSI’s BEMA buprenorphine (NDA submission expected in late 2014 or early 2015) – by the time Insys’ buprenorphine spray is commercialized. Hence, while this could potentially be a very large market capable of supporting multiple competitors, we are conservatively projecting peak potential sales of $200-300M for this program.

With respect to buprenorphine/naloxone sublingual spray, the company has IND clearance to begin clinical testing in treating opioid dependence. Insys plans to complete a Phase 1 proof of concept study, followed by pivotal trials in 2H15. This sublingual spray formulation could offer a much faster method of administration relative to Reckitt’s $1.4B Suboxone franchise. The company is not sure if the FDA will require a long term safety

page 20 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

study for this candidate and hence, there is some uncertainty as to the development timeline. We are currently not including buprenorphine/naloxone spray in our model.

Finally, Insys is launching a Phase 1 pK study for ondansetron sublingual spray in 4Q14. If positive, the company anticipates initiating a Phase 3 program for this product candidate in 2H15. Ondansetron sublingual, if it is successfully developed, would compete in a primarily generic antiemetic market dominated by tablets and injectables, which has a branded market value of $4B+ according to Insys. In our view, ondansetron spray appears to be a nice complement to Insys’ dronabinol OS program (second-line treatment for chemotherapy induced nausea and vomiting) and would enable the company to offer a full range of products for nausea and vomiting. Based on the current development timelines, Ondansetron spray could potentially reach the market as early as 2019.

Given just limited data on these seemingly attractive opportunities, we have included just modest sales for buprenorphine starting in 2018 and ondansetron starting in 2019.

Chart 11: Insys Product Revenue Summary ($ in 000)

Insys Product Revenue Summary 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Subsys 8,576 95,800 214,906 276,507 317,605 348,724 371,993 390,911 407,387 Total CBD franchise (dronabinol) 6,900 3,489 2,634 0 22,818 59,667 113,782 150,462 177,333 Total Sublingual Spray Pipeline 0 0 0 0 0 0 20,000 73,000 142,300 Buprenorphine 20,000 58,000 107,300 Buprenorphine/naloxone 0 0 Ondansetron 15,000 35,000 Sildenafil 0 0 TOTAL REVENUES $ 15,476 $ 99,289 $ 217,540 $ 276,507 $ 340,424 $ 408,391 $ 505,775 $ 614,373 $ 727,020

Source: Jefferies estimates, company data

Intellectual Property and Other Barriers to Entry Fentanyl and dronabinol have been on the market for decades. As such, the Insys formulations will not benefit from composition claims – the strongest form of patent protection. The Subsys IP is based on a unique patented formulation of fentanyl capable of achieving appreciable plasma concentration within five minutes following dosing and delivering effective pain relief without the need for injections. Moreover, Insys also benefits from Aptar’s patents covering its unit-dose spray devices – effectively creating a drug-device combination that makes it much more difficult for competitors to develop generic “knock offs.” In addition, Insys has significant expertise in the manufacturing of controlled substances – with both Subsys and dronabinol – and navigating the challenging DEA regulatory environment – which provides another layer of potential protection from possible future generic competitors.

Insys currently holds 11 issued US patents and has 8 patents pending with the US Patent and Trademark Office (PTO). Collectively, these U.S. patents and patent applications will expire between 2015 and 2034.

Subsys The Subsys patent portfolio currently consists of four Orange Book listed patents that expire between January 2027 and April 2030. They are comprised of two formulation patents – that have specific claims to the product’s unique pharmacokinetic profile – as page 21 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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December 8, 2014

well as two method of use patents – sublingual fentanyl spray for treating pain. Insys also has seven issued foreign patents and 11 pending foreign patent applications covering the formulation and method of use related to Subsys. These ex-US patents/applications are not expected to expire earlier than 2027.

Dronabinol Insys also has one issued US patent, two patents pending, and one P.C.T. (Patent Cooperation Treaty) patent application for dronabinol. The claims of the patents and applications are related to formulations of dronabinol and methods of manufacturing and packaging dronabinol. The issued dronabinol patents will expire in 2028 and any patents that may issue from the pending applications are expected to expire between 2028 and 2033, according to the company.

Chart 12: Insys Key Issued Patents Product US Patent No. Type of Patent Expiration Subsys 8,486,972 * Formulation 27-Apr-30 Subsys 8,486,973 * Use 27-Apr-30 Subsys 8,835,459 * Formulation 25-Jan-27 Subsys 8,835,460 * Use 25-Jan-27

Dronabinol OS 8,222,292 Formulation 6-Aug-28

* = FDA Orange Book listed

Source: US PTO; Company Data

In summary, we are comfortable that that Subsys and dronabinol OS will not be genericized for at least the next decade. As discussed previously, the company has a strong IP position. Moreover, drug/device combinations are notoriously difficult to duplicate. And DEA regulatory oversight of controlled substances provides another layer of protection. For all these reasons and more, we therefore view the portfolio as a series of durable assets.

page 22 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014 Financial Projections The successful launch of Subsys has quickly established Insys as a profitable, high growth Specialty Pharmaceuticals company. Over the next 12 months, Subsys should continue to be the key growth driver of Insys’ revenue and profits – although exclusion on Express Scripts (see Risk section above) may have a modest adverse impact on Subsys’ uptake. With potential approval of dronabinol OS in late 2015/early 2016, we are projecting launch in 2016 and an initial modest revenue contribution of $23M for that year. Hence, for 2014-2016, we project Insys total revenue of $218M, $277M, and $340M. We also forecast initial contributions from the buprenorphine and ondansetron programs starting in 2018 and 2019, respectively. Taken together, we project total revenue to reach $727M by 2020, up from $218M in 2014.

While revenue growth is expected to remain strong from 2014-2016, we note three significant items that could potentially impact Insys’ historically rapid earnings growth on a near term basis. First, 2015 will be the first year that Insys will start paying taxes as remaining NOLs will have been exhausted during 2014. That said, given the recent orphan designation for the CBD programs, Insys will be able to offset some of the near term impact with R&D tax credits. Hence, we are projecting a tax rate in the low 30% range for the next few years, gradually settling in the mid-30% range longer term. Second, Insys will likely be launching dronabinol OS in early 2016 and will likely increase sales and marketing expenses markedly to support these activities – including a possible 50-100 person sales force expansion. Third, Insys anticipates advancing four programs into pivotal Phase 3 testing next year. Hence, after reporting R&D margins of 8.6% in 2013 and an estimated 13.9% in 2014, R&D levels are expected to increase to 15-20% of revenue in 2015. Based on these dynamics, we forecast 2014-2016 EPS of $2.00, $1.45, and $1.94. And by 2020, we project EPS of $4.97, representing CAGR of 28% from 2015- 2020. Note that Insys completed a 3-for-2 stock split on March 31, 2014.

With A Clean Balance Sheet –There is Sufficient “Dry Powder” for Potential Value Creating Acquisitions With the rapid initial uptake of Subsys and transformation of Insys into a fast-growing earnings company, cash and equivalents totaled $89.5M and no debt at the end of 3Q14. And by year end, Insys’ cash position could approach $100M. Further, Insys has access to $15M in revolving credit (none outstanding as of September 30, 2014), which could be utilized to further optimize the company’s growth outlook via complementary late-stage or on market assets.

page 23 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014 Concentrated Ownership Executive chairman John Kapoor provided significant financing for Insys during its early days of operations. Post the IPO, all accrued principal and interest accrued on the Kapoor promissory notes (payable to the John N Kapoor Trust and the Kapoor Children 1992 Trust) were converted into 11.1M shares of common stock (7.4M on a pre-split basis). In aggregate, Dr. Kapoor continues to own ~24M Insys shares or approximately two-thirds of all diluted shares outstanding. The remaining top ten shareholders own ~21% of the company’s outstanding shares.

Chart 13: Insys Top Holders % Outstanding Holder Name Position Shares Report Date 1) John N Kapoor 21,218,940 58.0% 8/7/2014 2) The Kapoor Children's 1992 Trust 2,797,758 7.7% 3/28/2014 3) Janus 1,545,633 4.2% 9/30/2014 4) Consonance Capital Management 1,119,917 3.1% 9/30/2014 5) Fidelity 1,036,170 2.8% 9/30/2014 6) BlackRock 1,021,162 2.8% 9/30/2014 7) Empyrean Capital Partners 868,000 2.4% 9/30/2014 8) Millennium 772,896 2.1% 9/30/2014 9) OrbiMed 735,600 2.0% 9/30/2014 10) Point72 675,765 1.8% 9/30/2014 Total 31,791,841 86.9%

Source: FactSet

Source: Factset

An Entrepreneurial Management Team

Michael Babich, President and Chief Executive Officer Michael L. Babich has served as Insys’ President since November 2010 and was appointed Chief Executive Officer in March 2011. Previously, Mr. Babich served as the Chief Operating Officer and a director of INSYS Pharma, a wholly-owned subsidiary of the company from March 2007 until November 2010. From 2001 to 2007, Mr. Babich worked at EJ Financial, a venture capital firm specializing in early stage and startup investments primarily in the healthcare sector. During his time at EJ Financial Enterprises, Mr. Babich held various roles and worked on various projects, including private equity transactions, asset management and strategic consulting for both public and private companies. Prior to his work at EJ Financial, Mr. Babich worked at Northern Trust managing mid- to large-cap portfolios for high net worth individuals. Mr. Babich also has served as a director and in management roles at Alliant Pharmaceuticals. Mr. Babich received a B.A. from the University of Illinois at Urbana-Champaign and an MBA from the Kellogg School of Management at Northwestern University.

Darryl Baker, Chief Financial Officer Darryl Baker has served as Insys’ Chief Financial Officer since October 2012. From 1997 to 2012, Mr. Baker served as Chief Financial Officer and Corporate Controller for various publicly-traded and entrepreneurial companies, including iGo, a developer of accessories for mobile electronic devices, Integrated Information Systems, a provider of secure

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Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

integrated IT solutions, and SkyMall, a specialty retailer. Prior to 1997, Mr. Baker was an audit manager for Ernst & Young LLP. Mr. Baker has extensive experience in accounting, SEC issues for smaller public companies, merger and acquisition transactions, and small business financing and frequently serves as a panelist and lecturer for the Center for Professional Education. Mr. Baker earned his BS in Accountancy from the Marriott School of Management at Brigham Young University and is a Certified Public Accountant.

Franc Del Fosse, General Counsel Franc Del Fosse has been Insys’ General Counsel since February 2014. Mr. Del Fosse joined Insys from private practice, where he advised public company boards, management and in-house counsel on the critical issues affecting their businesses. In addition, as a transactional attorney, he specialized in corporate and project financing, compliance with federal securities laws and mergers and acquisitions advisement. Prior to joining Insys, Mr. Del Fosse was a partner at the law firm of Snell & Wilmer LLP and from 2001-2005, Mr. Del Fosse was an associate at the law firm of Shearman & Sterling. Mr. Del Fosse holds a J.D. degree from Columbia University School of Law and an undergraduate degree from Arizona State University.

John Kapoor, Ph.D., Executive Chairman and Founder Dr. John Kapoor is Insys’ founder and has served Executive Chairman since June 2006. He has also served as Chairman of EJ Financial Enterprises since 1990 and is the Chairman of the Board of Akorn, Inc. Dr. Kapoor has also held executive management and board positions at Sciele Pharma, OptionCare, Lyomed, among others – a number of which have been acquired. During his long career, Dr. Kapoor has had significant experience with supportive care products, including Marinol while he was Chairman of Unimed Pharmaceuticals. He received his Ph.D. in Medicinal Chemistry from the State University of New York at Buffalo and a B.S. in Pharmacy from Bombay University in India.

Chart 14: Insys Management Team Position Year Joined Michael Babich President, Chief Executive Officer 2007 Darryl Baker Chief Financial Officer 2012 Franc Del Fosse General Counsel 2014 John Kapoor, Ph.D. Executive Chairman of the Board 2006

Source: Company Data

page 25 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Chart 15: Insys Income Statement ($ in 000, except per share data) FY: DEC 2012A 2013A 1Q14A 2Q14A 3Q14A 4Q14E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Revenues: Product sales, net $15,476 $99,289 $41,637 $55,696 $58,281 $61,926 $217,540 $276,507 $340,424 $408,391 $505,775 $614,373 $727,020 TOTAL REVENUES $15,476 $99,289 $41,637 $55,696 $58,281 $61,926 $217,540 $276,507 $340,424 $408,391 $505,775 $614,373 $727,020 Cost of Goods Sold: COGS 7,627 12,665 4,773 6,555 5,390 6,193 22,911 27,136 32,340 38,797 45,520 55,294 65,432 GROSS PROFIT 7,849 86,624 36,864 49,141 52,891 55,734 194,630 249,371 308,083 369,594 460,255 559,079 661,588 Operating Expenses: R&D 6,305 8,499 4,008 9,189 7,018 10,035 30,250 50,002 53,002 56,182 59,272 62,473 65,722 SG&A 19,581 45,567 20,186 24,766 25,851 26,790 97,593 110,458 131,570 151,107 177,777 209,870 240,897 Total Operating Expenses 38,916 66,731 28,967 40,510 38,259 43,018 150,754 187,595 216,913 246,086 282,569 327,637 372,051 OPERATING INCOME (EBIT) (23,440) 32,559 12,670 15,186 20,022 18,909 66,787 88,911 123,511 162,305 223,206 286,736 354,969 Net interest/Other income (expense) (938) (982) 19 26 43 45 133 209 502 875 1,364 2,016 2,844 PRETAX INCOME (24,378) 31,577 12,689 15,212 20,065 18,954 66,920 89,120 124,013 163,180 224,570 288,751 357,814 Reported taxes - 484 - - - 8,675 8,675 34,074 46,510 60,655 83,787 109,173 133,751 NET INCOME (24,378) 31,093 12,689 15,212 20,065 10,279 58,245 55,046 77,502 102,525 140,783 179,578 224,063 Non-GAAP, cash adjustments* 5,553 7,239 2,455 5,731 3,037 3,875 15,098 17,360 19,096 20,624 21,861 23,173 24,331 Adj. NET INCOME (including taxes) (18,825) 38,332 15,144 20,943 23,102 14,154 73,343 72,406 96,598 123,148 162,644 202,751 248,394 Adj. EBITDA (17,271) 40,632 20,691 27,248 32,222 22,784 102,945 106,271 142,607 182,929 245,067 309,909 379,301 Shares outstanding (basic) 13,974 25,920 33,566 34,298 34,617 34,867 34,337 35,654 36,854 38,154 39,354 40,554 42,054 Shares outstanding (diluted) 13,974 28,735 36,903 36,337 36,564 36,867 36,668 37,854 39,852 41,152 42,352 43,552 45,052 Adjusted cash EPS (diluted) ($1.35) $1.33 $0.41 $0.58 $0.63 $0.38 $2.00 $1.45 $1.94 $2.49 $3.32 $4.12 $4.97 * includes stock option expense, non-cash interest expense, etc. MARGINS: 2012A 2013A 1Q14A 2Q14A 3Q14A 4Q14E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Gross 50.7% 87.2% 88.5% 88.2% 90.8% 90.0% 89.5% 90.2% 90.5% 90.5% 91.0% 91.0% 91.0% R&D 40.7% 8.6% 9.6% 16.5% 12.0% 16.2% 13.9% 18.1% 15.6% 13.8% 11.7% 10.2% 9.0% SG&A 126.5% 45.9% 48.5% 44.5% 44.4% 43.3% 44.9% 39.9% 38.6% 37.0% 35.1% 34.2% 33.1% Sales and Marketing 73.7% 29.4% 27.9% 25.3% 25.8% 25.8% 26.1% 24.2% 25.1% 24.9% 24.9% 25.3% 25.3% G&A 52.8% 16.5% 20.6% 19.2% 18.5% 17.5% 18.8% 15.7% 13.6% 12.1% 10.3% 8.9% 7.9% Operating NM 32.8% 30.4% 27.3% 34.4% 30.5% 30.7% 32.2% 36.3% 39.7% 44.1% 46.7% 48.8% Pre-tax NM 31.8% 30.5% 27.3% 34.4% 30.6% 30.8% 32.2% 36.4% 40.0% 44.4% 47.0% 49.2% Tax Rate (as reported) 0.0% 1.2% 0.0% 0.0% 0.0% 38.0% 10.6% 32.0% 32.5% 33.0% 34.0% 35.0% 35.0% Adjusted Net Income NM 38.6% 36.4% 37.6% 39.6% 22.9% 33.7% 26.2% 28.4% 30.2% 32.2% 33.0% 34.2% Adjusted EBITDA NM 40.9% 49.7% 48.9% 55.3% 36.8% 47.3% 38.4% 41.9% 44.8% 48.5% 50.4% 52.2%

Source: Jefferies estimates, company data

page 26 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

INSY

Initiating Coverage

December 8, 2014

Chart 16: Insys Balance Sheet ($ in 000) FY: DEC 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E ASSETS Cash and equivalents 361 45,382 68,280 132,463 217,383 328,314 477,895 659,781 892,949 Accounts receivable, net 3,089 16,313 30,456 37,328 45,276 53,091 63,222 76,797 87,242 Inventories, net 7,095 14,528 30,929 28,493 30,723 34,917 36,416 44,235 49,074 Other Current assets 1,344 5,927 8,267 9,678 11,234 12,252 15,173 18,431 21,811 CURRENT ASSETS 11,889 82,150 137,931 207,962 304,616 428,574 592,706 799,244 1,051,076 Net Property and equipment 6,791 10,127 28,170 34,544 40,312 46,075 51,771 57,328 62,672 Long-term investments 26,683 26,683 26,683 26,683 26,683 26,683 26,683 Intangible assets, net 0 0 0 0 0 0 0 0 0 Goodwill 0 0 0 0 0 0 0 0 0 Other assets 61 8,281 9,000 9,180 9,364 9,551 9,742 9,937 10,135 TOTAL ASSETS 18,741 100,558 201,784 278,369 380,975 510,884 680,902 893,192 1,150,566 LIABILITIES AND EQUITY Short-term borrowings 70,241 0 0 0 0 0 0 0 0 Trade accounts payable 6,479 16,557 25,202 27,136 30,723 34,917 38,692 44,235 49,074 Salaries, wages and commissions 1,392 3,568 7,614 9,678 11,915 14,294 17,702 21,503 25,446 Other liabilities 5,307 956 12,617 15,208 18,723 22,462 27,818 33,790 39,986 CURRENT LIABILITIES 83,419 21,081 45,433 52,021 61,361 71,673 84,211 99,528 114,506 Long-term debt 0 0 0 0 0 0 0 0 0 Post-retirement obligations and LT liabilities 0 0 0 0 0 0 0 0 0 Other long-term liabilities 0 0 0 0 0 0 0 0 0 TOTAL LIABILITIES 83,419 21,081 45,433 52,021 61,361 71,673 84,211 99,528 114,506 TOTAL STOCKHOLDERS' EQUITY (64,678) 79,477 156,351 226,347 319,614 439,211 596,691 793,663 1,036,061 TOTAL LIABILITIES AND EQUITY 18,741 100,558 201,784 278,369 380,975 510,884 680,902 893,192 1,150,566

Source: Jefferies estimates, company data

page 27 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Chart 17: Insys Cash Flow Statement ($ in 000) FY: DEC 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss) (24,378) 40,377 58,245 55,046 77,502 102,525 140,783 179,578 224,063 Depreciation and amortization 1,662 1,788 2,360 3,626 4,232 4,837 5,435 6,018 6,579 Stock-based Compensation 2,761 6,339 15,500 17,360 19,096 20,624 21,861 23,173 24,331 Reversal of Non-cash Profit (Loss) 5,917 (13,883) (11,661) (2,591) (3,515) (3,738) (5,356) (5,973) (6,196) Change in Working Capital, excluding Cash 411 (10,372) (8,532) 741 (2,395) (2,715) (2,012) (9,335) (3,687) Cash provided by operating activities (13,627) 24,249 55,912 74,183 94,920 121,532 160,711 193,461 245,091

CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (Purchase of PP&E) (1,020) (5,125) (21,000) (10,000) (10,000) (10,600) (11,130) (11,575) (11,922) Acquisitions of subsidiaries, associates & investments 0 0 (29,164) 0 0 0 0 0 0 Disposals of subsidiaries, associates & investments 0 0 0 0 0 0 0 0 0 Other investing cash flows 0 (400) 400 0 0 0 0 0 0 Cash used in investing activities (1,020) (5,525) (49,764) (10,000) (10,000) (10,600) (11,130) (11,575) (11,922)

CASH FLOWS FROM FINANCING ACTIVITIES Notes Payable Issuance (Repayment) 14,845 (11,858) 0 0 0 0 0 0 0 Share Capital Issuance (Buy-back) 152 35,410 4,351 0 0 0 0 0 0 Other financing Cashflows 0 2,745 12,399 0 0 0 0 0 0 Cash provided by financing activities 14,997 26,297 16,750 0 0 0 0 0 0 Effects of Exchange Rate Changes 0 0 0 0 0 0 0 0 0 Net increase (decrease) in cash and cash equivalents 350 45,021 22,898 64,183 84,920 110,932 149,581 181,886 233,168 Cash and cash equivalents, beginning of period 11 361 45,382 68,280 132,463 217,383 328,314 477,895 659,781 Cash and cash equivalents, end of period 361 45,382 68,280 132,463 217,383 328,314 477,895 659,781 892,949

Source: Jefferies estimates, company data

page 28 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Chart 18: DCF Valuation (Assume Fully-taxed Operating Model) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Operating Income 66,786.6 88,911.1 123,510.8 162,305.2 223,205.6 286,736.0 354,969.5 -Taxes 35.0% (23,375.3) (31,118.9) (43,228.8) (56,806.8) (78,122.0) (100,357.6) (124,239.3) +Non-Cash Items 17,860.0 20,986.1 23,327.7 25,460.3 27,295.6 29,190.7 30,910.2 -Change in WC (8,531.6) 741.3 (2,394.9) (2,715.2) (2,012.0) (9,334.9) (3,687.0) -CAPEX (21,000.0) (10,000.0) (10,000.0) (10,600.0) (11,130.0) (11,575.2) (11,922.5) FCFF 31,739.7 69,519.6 91,214.8 117,643.5 159,237.3 194,659.0 246,031.0 286,380.0 322,463.9 353,742.9 371,430.1 Growth Rate 119.0% 31.2% 29.0% 35.4% 22.2% 26.4% 16.4% 12.6% 9.7% 5.0%

Terminal Growth Rate 0.5% Terminal Value Discount Rate 15.0% $2,574,395 NPV of Cash Flows $815,781 NPV of Terminal Value $735,463 Enterprise Value $1,551,244 +Cash $89,508 -Debt $0 Equity Value $1,640,752 Shares Outstanding 36,668 Equity Value / Share $44.75

12-Month PT $51.46

Source: Jefferies estimates

page 29 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.

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Initiating Coverage

December 8, 2014

Company Description Insys is a commercial stage specialty pharmaceutical company focused on the development and commercialization of supportive care drugs. The company leverages its formulation expertise to provide differentiated products to its customers.

Analyst Certification: I, David Steinberg, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Edward Chung, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Amran Gowani, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Company Specific Disclosures Jefferies Group LLC makes a market in the securities or ADRs of Insys Therapeutics, Inc.. Jefferies Group LLC makes a market in the securities or ADRs of Supernus Pharmaceuticals Inc..

Meanings of Jefferies Ratings Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12- month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion. page 30 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

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Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.

Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • Supernus Pharmaceuticals Inc. (SUPN: $8.95, HOLD)

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Please see important disclosure information on pages 30 - 34 of this report. INSY

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Distribution of Ratings IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY 1040 52.21% 275 26.44% HOLD 806 40.46% 142 17.62% UNDERPERFORM 146 7.33% 5 3.42%

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Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange page 33 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

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page 34 of 34 David Steinberg, Equity Analyst, (415) 229-1553, [email protected]

Please see important disclosure information on pages 30 - 34 of this report.