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INSV > SEC Filings for INSV > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for INSITE VISION INC


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below under "Risk Factors," as well as elsewhere herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence or identification of unanticipated events.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

We are an ophthalmic product development company advancing ophthalmic pharmaceutical products to address unmet eye care needs. Our current portfolio of products is based on our proprietary DuraSite ® sustained drug delivery technology.

Our DuraSite sustained drug delivery technology is a proven synthetic polymer-based formulation designed to extend the residence time of a drug relative to conventional topical therapies. It enables topical delivery of a drug as a solution, gel or suspension and can be customized for delivering a wide variety of drug candidates. We have focused our research and development and commercial support efforts on the following topical products formulated with our DuraSite drug delivery technology.

• AzaSite®(azithromycin ophthalmic solution) 1% is a DuraSite formulation of azithromycin, a broad spectrum ocular antibiotic approved by the U.S. Food and Drug Administration (FDA) in April 2007 to treat bacterial conjunctivitis (pink eye). It was commercialized in the United States by Inspire Pharmaceuticals, Inc. (Inspire) beginning in August 2007. The key advantages of AzaSite are a significantly reduced dosing regimen leading to better compliance and outcome, a trusted broad spectrum antibiotic, and a lowered probability of bacterial resistance based on high tissue concentration. In May 2011, Merck & Co. (Merck) acquired Inspire and Inspire became a wholly-owned subsidiary of Merck. Merck is now responsible for commercializing AzaSite in North America. We receive a 25% royalty on net sales of AzaSite in North America, plus minimum royalties if applicable.

• Besivance®(besifloxacin ophthalmic suspension) 0.6% is a DuraSite formulation of besifloxacin, a broad spectrum ocular antibiotic approved by the FDA in May 2009 to treat bacterial conjunctivitis (pink eye). An advantage of Besivance is a faster rate of resolution of the infection that may reduce the duration of the illness and reduce the chances of infecting others. Besivance was developed by Bausch + Lomb Incorporated (Bausch & Lomb) and launched in the United States in the second half of 2009. In 2011, Besivance was launched internationally in select countries. Until its sale in April 2013, we received a middle single-digit royalty on net sales of Besivance globally. In April 2013, we sold the royalty payments on sales of Besivance, beginning on January 1, 2013, for $15 million at closing, with an additional $1 million payable in February 2014 if certain Besivance sales targets are met. Under the terms of the agreement, if the purchaser receives specified levels of total cash from the Besivance royalty, the royalty would be returned to us in whole or in part. Patent protection for Besivance in the United States expires in 2021.

• AzaSite PlusTM (ISV-502) is a fixed combination of azithromycin and dexamethasone in DuraSite for the treatment of ocular inflammation and infection (blepharitis and/or blepharoconjunctivitis) for which there is no FDA approved indicated treatment. We completed a Phase 3 trial in November 2008 for the treatment of blepharoconjunctivitis and AzaSite Plus was very well tolerated. Although efficacious, the trial did not achieve its primary clinical endpoint as defined by the previous protocol. We discussed the results


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of this trial with the FDA and determined a new development plan for this product candidate. In May 2011, we reached an agreement with the FDA on a Special Protocol Assessment (SPA) for the design of a Phase 3 clinical trial of AzaSite Plus in patients with blepharitis. An SPA is a written agreement with the FDA that the study design and planned analysis of the sponsor's Phase 3 clinical trial adequately addresses the objectives necessary to support a regulatory submission. In November 2011, we initiated a new Phase 3 clinical trial for this product candidate in blepharitis and completed patient enrollment in the clinical trial in September 2012. This study enrolled more than 900 patients and we expect to receive top-line data in the second or third quarter of 2013.

• DexaSiteTM (ISV-305) is a DuraSite formulation of dexamethasone in development for the treatment of ocular inflammation. DexaSite is included in the Phase 3 clinical trial SPA for AzaSite Plus. In November 2011, we initiated a Phase 3 clinical trial for this product candidate in blepharitis and completed patient enrollment in the clinical trial in September 2012. This study enrolled more than 900 patients and we expect to receive top-line data in the second or third quarter of 2013.

• BromSiteTM (ISV-303) is a DuraSite formulation of bromfenac in development for the treatment of post-operative inflammation and eye pain. We initiated a Phase 1/2 clinical trial for this product candidate in August 2010 and we received positive top-line results from this study in the first quarter of 2011, which demonstrated the efficacy and safety of BromSite. In the third quarter of 2011, we completed an additional Phase 2 clinical trial to investigate the pharmacokinetics (PK) of BromSite in humans. We received positive top-line results that showed that the mean concentration of bromfenac in the aqueous humor of patients using BromSite was more than double compared to the currently available bromfenac eye product. In July 2012, we initiated a Phase 3 clinical trial for this product candidate and completed patient enrollment in November 2012. In March 2013, we received positive top-line results from the first Phase 3 clinical trial of BromSite demonstrating statistically significant superiority (p < 0.001) compared to vehicle in alleviating ocular pain and inflammation among patients following cataract surgery. The BromSite Phase 3 clinical trial enrolled 268 patients undergoing cataract surgery in a two-arm trial designed to evaluate the efficacy and safety of BromSite against the DuraSite vehicle alone. We plan to initiate the second Phase 3 clinical trial for this product candidate in the second quarter of 2013.

• DuraSite 2® is our next-generation enhanced drug delivery system, which is designed to provide a broad platform for developing superior ophthalmic therapeutics. DuraSite 2 is based on the original DuraSite technology, and incorporates a cationic polymer to achieve sustained and enhanced ocular delivery of drugs. DuraSite 2 is designed to increase the tissue penetration for topically delivered ocular drugs with the aim of improved efficacy and dosing convenience. We obtained preclinical data from a comparative study that demonstrated superior drug retention and tissue penetration compared to DuraSite. We plan to utilize the DuraSite 2 platform in future pipeline product candidates and expect that it will be available for license for our other drugs. A patent application for DuraSite 2 was submitted to the U.S. Patent and Trademark Office (USPTO) in 2009.

• ISV-101 is a DuraSite formulation with a low concentration of bromfenac for the treatment of dry eye disease. We filed an Investigational New Drug Application (IND) with the FDA for this product candidate in the first quarter of 2011. We plan to initiate a Phase 1/2 clinical trial for this product candidate, but no time period has been set.

Business Strategy.

Our business strategy consists of the following:

1. Develop our pipeline of ocular product candidates. We seek to identify new product candidates from proven drugs that can be improved by formulation in DuraSite, which can substantially reduce the clinical risk involved in these product candidates. As appropriate, we plan to conduct preclinical and clinical testing of our product candidates.

2. Partner our product candidates. When we deem it appropriate, we seek to partner with larger pharmaceutical companies to manufacture and market our products. Partnering agreements generally include upfront and milestone payments, as well as on-going royalty payments upon commercialization, payable to us.


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Major Developments

Our major developments and events in 2013 included:

• In March 2013, we completed the BromSite Phase 3 clinical trial with 268 patients enrolled and received positive top-line results; and

• In April 2013, we sold our rights to royalty payments relating to sales of Besivance, beginning on January 1, 2013, for $15 million at closing, with an additional $1 million payable in February 2014 if certain Besivance sales targets are met.

Results of Operations

Revenues.

Our revenues for the three months ended March 31, 2013 and 2012 were:

Revenues

(in millions)

                                            Three months ended
                                                 March 31,
                                            2013           2012
                   AzaSite royalties     $      4.8     $      1.9
                   Besivance royalties          0.5            0.4

                   Total                 $      5.3     $      2.3

For the three months ended March 31, 2013 and 2012, AzaSite royalties included $1.4 million and $1.9 million, respectively, of royalties based on net sales. For the three months ended March 31, 2013, AzaSite royalties also included an additional $3.4 million minimum royalty true-up payment from Merck. The increase in royalties was driven by the quarterly pro-rata share of the required $19 million minimum royalty for the fiscal year ended September 30, 2013, the measurement period pursuant to the terms of the Merck License. Merck's obligation to make minimum royalty payments terminates in September 2013 and also may be suspended upon the occurrence of certain events, such as a requirement by the FDA or other governmental agency to suspend the marketing of AzaSite or withdraw it from the market in the United States. In addition, a decline in net sales of AzaSite by Merck further increased the minimum royalty true-up payment. Earned AzaSite royalties declined by 29% compared to the same period in 2012. The increase in Besivance royalties in 2013 was driven by an increase in net sales of Besivance by Bausch + Lomb. In April 2013, we sold the royalty payments on sales of Besivance, beginning on January 1, 2013, for $15 million at closing, with an additional $1 million payable in February 2014 if certain Besivance sales targets are met. Under the terms of the agreement, if the purchaser receives specified levels of total cash from the Besivance royalty, the royalty would be returned to us in whole or in part. Patent protection for Besivance in the United States expires in 2021.


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Research and development expenses.

Our research and development (R&D) expenses for the three months ended March 31, 2013 and 2012 were:

                              R&D Cost by Program

                                 (in millions)



                                              Three months ended
                                                   March 31,
                  Program                    2013            2012
                  AzaSite Plus/DexaSite    $     0.8       $     2.1
                  BromSite                       0.9             0.4
                  New products and other          -              0.1
                  Programs-non-specific          1.7             1.4

                  Total                    $     3.4       $     4.0

For the three months ended March 31, 2013, our AzaSite Plus/DexaSite program expenses were primarily related to costs for our Phase 3 clinical trial. We completed patient enrollment for the AzaSite Plus/DexaSite clinical trial in September 2012 and enrolled more than 900 patients. Our BromSite program expenses were primarily related to the costs for our Phase 3 clinical trial. We completed patient enrollment in November 2012 with 268 patients and received positive top-line results in March 2013. Non-specific program costs, which comprised facility, internal personnel and stock-based compensation costs that are not allocated to a specific development program, increased primarily due to an increase in headcount as a result of the Phase 3 clinical trials for AzaSite Plus/DexaSite and the Phase 3 clinical trial for BromSite. In addition, we expect to incur additional R&D expense to develop new product candidates.

For the three months ended March 31, 2012, our AzaSite Plus/DexaSite program expenses were primarily related to costs for our Phase 3 clinical trial. Our BromSite program expenses were primarily related to costs to prepare for our Phase 3 clinical trial. Non-specific program costs, which comprised facility, internal personnel and stock-based compensation costs that are not allocated to a specific development program.

General and administrative expenses.

General and administrative expenses for the three months ended March 31, 2013 and 2012 were $1.5 million and $1.4 million, respectively.

Cost of revenues.

Cost of revenues for the three months ended March 31, 2013 and 2012 were $0.1 million and $0.3 million, respectively. Cost of revenues in 2012 consisted of royalties to Pfizer and another third party. In 2013, we were not required to pay royalties to the other third party, which resulted in lower cost of revenues. The decline in cost of revenues was caused by a decline in net sales of AzaSite.


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Interest expense and other, net.

Interest expense and other, net, for the three months ended March 31, 2013 and 2012 was an expense of $2.1 million and $2.5 million, respectively. Interest expense included interest expense on the non-recourse notes issued in February 2008 and related amortization of the debt issuance costs incurred from our issuance of the notes. Interest expense decreased in 2013 as a result of payments of principal on the notes.

Change in fair value of warrant liability.

Change in fair value of warrant liability was expense of $0.1 million and income of $1.0 million, respectively, for the three months ended March 31, 2013 and 2012. The expense and income was primarily driven by an increase and a decrease, respectively, in our stock price, which directly impact the fair value of our warrant liability.

Liquidity and Capital Resources

In recent years, we have financed our operations primarily through private placements, debt financings and payments from corporate collaborations. At March 31, 2013, our cash and cash equivalents and short-term investments were $1.5 million and $3.0 million, respectively. It is our policy to invest our cash and cash equivalents and short-term investments in highly liquid securities, such as interest-bearing money market funds, treasury and federal agency notes. The current uncertain credit markets may affect the liquidity of such money market funds or other cash investments.

Net cash used in operating activities was $2.5 million and $4.1 million for the three months ended March 31, 2013 and 2012, respectively. In 2013 and 2012, we incurred $1.7 million and $2.5 million, respectively, in direct costs related to our Phase 3 clinical trials for AzaSite/DexaSite and BromSite.

Net cash provided by investing activities was $5.0 million for the three months ended March 31, 2013 and 2012. In 2013 and 2012, we converted short-term investments to cash and cash equivalents.

Net cash used in financing activities for the three months ended March 31, 2013 reflected the principal payments of $2.4 million on our notes. For the three months ended March 31, 2012, we undertook no financing activities.

In April 2013, we sold the royalty payments on sales of Besivance, beginning on January 1, 2013, for $15 million at closing, with an additional $1 million payable in February 2014 if certain Besivance sales targets are met. Under the terms of the agreement, if the purchaser receives specified levels of total cash from the Besivance royalty, the royalty would be returned to us in whole or in part. Patent protection for Besivance in the United States expires in 2021.


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