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Insys Therapeutics, Inc 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 THE LONG VIEW 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.
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