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INSV > SEC Filings for INSV > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for INSITE VISION INC

Form 10-Q for INSITE VISION INC


14-Aug-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 the audited consolidated financial statements and notes thereto included 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. On August 1, 2013, Merck notified us that it has ceased sales representative promotion of their ophthalmic products, including AzaSite, in the United States, effective immediately. According to the notice from Merck, the ophthalmic products, including AzaSite, will continue to be commercially available in the United States and physicians will be able to continue to prescribe the products for their patients. On August 8, 2013, we invoked the dispute resolution procedure in the Merck License. We assert in our dispute resolution notice that Merck is not using commercially reasonable efforts to commercialize AzaSite with their recent decision to cease sales representative promotion of AzaSite. In addition, Merck has not compensated us for bulk drug that was transferred to Merck.

• 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


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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 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 907 patients and we announced top-line results in July 2013. AzaSite Plus did not meet the primary endpoint of complete resolution of all clinical signs and symptoms of blepharitis. However, AzaSite Plus did demonstrate statistically significant improvements in the disease's clinical signs and symptoms at the end of treatment on Day 15. We have scheduled a meeting with the FDA in August 2013 to review the overall results of the clinical trial and determine the next steps in the development this product candidate.

• 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 907 patients and we announced top-line results in July 2013. DexaSite did not meet the primary endpoint of complete resolution of all clinical signs and symptoms of blepharitis. However, DexaSite did demonstrate statistically significant improvements in the disease's clinical signs and symptoms at the end of treatment on Day 15. We have scheduled a meeting with the FDA in August 2013 to review the overall results of the clinical trial and determine the next steps in the development this product candidate.

• 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. 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. In March 2013, we received positive top-line results from this Phase 3 clinical trial demonstrating statistically significant superiority compared to vehicle (p < 0.001) in alleviating ocular pain and inflammation among patients following cataract surgery. In May 2013, we initiated the second Phase 3 clinical trial for this product candidate and are seeking to enroll approximately 240 patients.

• 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. In July 2013, the patent application for DuraSite 2 was approved by the U.S. Patent and Trademark Office (USPTO) through a Notice of Allowance. The patent is expected to provide protection to 2029 for both the delivery system and the drugs that are formulated with DuraSite 2. We plan to utilize the DuraSite 2 platform in the development of all future pipeline products. Additionally, once the patent issues, we plan to initiate a broad licensing program that provides access to industry partners through both exclusive and non-exclusive licensing and/or commercialization agreements.


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• 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.

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;

• 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;

• In May 2013, we initiated the second BromSite Phase 3 clinical trial;

• In June 2013, we regained the development rights for AzaSite Xtra from Merck;

• In July 2013, the patent application for DuraSite 2 was approved by the USPTO through a Notice of Allowance; and

• In July 2013, we announced top-line results for the AzaSite Plus and DexaSite Phase 3 clinical trial. AzaSite Plus and DexaSite did not meet the primary endpoint of complete resolution of all clinical signs and symptoms of blepharitis. However, AzaSite Plus and DexaSite did demonstrate statistically significant improvements in the disease's clinical signs and symptoms at the end of treatment on Day 15. We have scheduled a meeting with the FDA in August 2013 to review the overall results of the clinical trial and determine the next steps in the development these product candidates.


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Results of Operations

Revenues.

Our revenues for the three and six months ended June 30, 2013 and 2012 were:

                                    Revenues

                                 (in millions)



                                       Three months ended          Six months ended
                                            June 30,                   June 30,
                                        2013           2012        2013          2012
       AzaSite royalties             $      4.7       $  1.3     $     9.5       $ 3.2
       Besivance royalties                   -           0.5           0.5         0.9
       Sale of royalty rights, net         14.5           -           14.5          -

       Total                         $     19.2       $  1.8     $    24.5       $ 4.1

For the three months ended June 30, 2013 and 2012, AzaSite royalties included $1.4 million and $1.3 million, respectively, of royalties based on net sales, or earned royalties. For the three months ended June 30, 2013, AzaSite royalties also included an additional $3.3 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. Earned AzaSite royalties increased by 4% compared to the same period in 2012. Given Merck's notification that it has ceased sales representative promotion of their ophthalmic products, including AzaSite, in the United States effective August 1, 2013, we believe that our AzaSite earned royalties may decline further in future periods.

In April 2013, we sold the rights to receive 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. $0.5 million of previously recorded Besivance royalties in 2013 were netted against the sales price. Under the terms of the agreement, if the purchasers receive 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.

For the six months ended June 30, 2013 and 2012, AzaSite royalties included $2.7 million and $3.2 million, respectively, of royalties based on net sales. For the six months ended June 30, 2013, AzaSite royalties also included an additional $6.8 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. In addition, a decline in net sales of AzaSite by Merck further increased the minimum royalty true-up payment. Earned AzaSite royalties declined by 15% compared to the same period in 2012. For the six months ended June 30, 2013, we recorded $14.5 million from the sale of the rights to receive royalty payments on sales of Besivance, beginning on January 1, 2013.


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Research and development expenses.

Our research and development (R&D) expenses for the three and six months ended June 30, 2013 and 2012 were:

                              R&D Cost by Program

                                 (in millions)



                                     Three months ended           Six months ended
                                          June 30,                    June 30,
        Program                     2013            2012          2013          2012
        BromSite                  $     1.5       $     0.8     $    2.4       $  1.2
        AzaSite Plus/DexaSite           0.4             2.2          1.2          4.2
        New products and other           -              0.2           -           0.4
        Programs - non-specific         1.6             1.6          3.2          3.0

        Total                     $     3.5       $     4.8     $    6.8       $  8.8

For the three and six months ended June 30, 2013, our BromSite program expenses were primarily related to the costs for our Phase 3 clinical trials. For the first Phase 3 clinical trial, we completed patient enrollment in November 2012 with 268 patients and received positive top-line results in March 2013. In May 2013, we initiated the second Phase 3 clinical trial for BromSite and as of June 30, 2013, we had 74 patients enrolled, out of 240 planned patients. 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 trials in September 2012 and enrolled 907 patients. In July 2013, we announced top-line results for the AzaSite Plus and DexaSite Phase 3 clinical trial. AzaSite Plus and DexaSite did not meet the primary endpoint of complete resolution of all clinical signs and symptoms of blepharitis. However, AzaSite Plus and DexaSite did demonstrate statistically significant improvements in the chronic disease's clinical signs and symptoms at the end of treatment on Day 15. We have scheduled a meeting with the FDA in August 2013 to review the overall results of the clinical trial and determine the next steps in the development these product candidates. Non-specific program costs, which comprised facility, internal personnel and stock-based compensation costs, are not allocated to a specific development program. In addition, we expect to incur additional R&D expense to develop new product candidates.

For the three and six months ended June 30, 2012, our BromSite program expenses were primarily related to costs to prepare for our first Phase 3 clinical trial. Our AzaSite Plus/DexaSite program expenses were primarily related to costs for our Phase 3 clinical trial.

General and administrative expenses.

General and administrative expenses for the three months ended June 30, 2013 and 2012 were $1.6 million and $1.4 million, respectively. General and administrative expenses for the six months ended June 30, 2013 and 2012 were $3.1 million and $2.8 million, respectively. These increases are primarily attributed to legal and professional fees related to the sale of the Besivance royalty payment.

Cost of revenues.

Cost of revenues for the three months ended June 30, 2013 and 2012 were $0.2 million. Cost of revenues for the six months ended June 30, 2013 and 2012 were $0.3 million and $0.5 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 in the 2013 period. The decline in cost of revenues was also 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 June 30, 2013 and 2012 was an expense of $2.0 million and $2.5 million, respectively. Interest expense and other, net, for the six months ended June 30, 2013 and 2012 was an expense of $4.2 million and $4.9 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 the 2013 periods 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 income of $0.2 million for each of the three months ended June 30, 2013 and 2012. Change in fair value of warrant liability was income of less than $0.1 million and $1.2 million, respectively, for the six months ended June 30, 2013 and 2012. The income was primarily driven by a decrease in our stock price, which directly impacts 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 June 30, 2013, our cash and cash equivalents and short-term investments were $6.6 million and $8.0 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.

Our subsidiary is dependent on royalties from Merck on net sales of AzaSite to meet its payment obligations under the AzaSite Notes. Given (i) the current level of AzaSite net sales in the United States, (ii) Merck's notification that it has ceased sales representative promotion of their ophthalmic products, including AzaSite, in the United States effective August 1, 2013, which we believe may result in a further decline in our AzaSite earned royalties in future periods, and (iii) that our minimum royalties from Merck terminate September 2013, we believe it is likely that our subsidiary would not have sufficient funds to pay its obligations under the AzaSite Notes, which could result in an event of default under the AzaSite Notes.

Net cash provided by operating activities was $10.4 million for the six months ended June 30, 2013. Net cash used in operating activities was $8.8 million for the six months ended June 30, 2012. In 2013 and 2012, we incurred approximately $1.9 million and $3.6 million, respectively, in direct costs related to our Phase 3 clinical trials for AzaSite/DexaSite and BromSite. In April 2013, we sold the rights to receive 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.

Net cash used in investing activities was less than $0.1 million for the six months ended June 30, 2013. Net cash provided by investing activities was $9.0 million for the six months ended June 30, 2012. In 2012, we converted short-term investments to cash and cash equivalents.

Net cash used in financing activities for the six months ended June 30, 2013 reflected the principal payments of $5.0 million on our notes. For the six months ended June 30, 2012, we undertook no financing activities.


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Recent Accounting Pronouncements

In July 2013, the FASB issued an amendment to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar loss or a tax credit carryforward exists. The amendment requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. This amendment is effective on a prospective basis for fiscal years beginning after December 15, 2013. We are currently evaluating the impact of this amendment and expect that the adoption of this amendment will not materially impact our consolidated financial position or results of operations, other than additional disclosure and presentation requirements.


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