Insys Plunges on Auditor's Concern About Insufficient Funds

Insys Therapeutics, Inc. INSY announced in its 10-K filing with Securities Exchange Commission that the company’s auditor has raised concerns about its ability to continue operations. Shares of the company plunged more than 25% on Mar 13 following the filing.

However, shares of Insys have increased 21.4% so far this year compared with the industry’s rally of 11.9%.

In fact, the auditor stated that the company may not be able to meet its ongoing legal expenses and obligations and continue its operations due to uncertainty around the generation of sufficient funds. The company has been incurring losses over the years and also has a negative operating cash flow. The company ended 2018 with $104.1 million in cash, cash equivalents, and short-term investments. However, it spent $228 million in 2018. A higher cash burn rate made the scenario worse.

Insys spent more than $50 million in legal expenses in 2018, almost equivalent to its research and development (R&D) expenses. The company spent a huge amount on legal defense of criminal charges on former executives. The executives allegedly bribed doctors to increase sales of the company’s opioid painkiller, Subsys.

Moreover, with the progress of pipeline candidates in the later stage of development, R&D expenses are set to increase further. Two candidates — Cannabidiol oral solution and Buprenorphine sublingual spray — are being evaluated in phase III studies. The company is also planning to file a new drug application for Naloxone nasal spray in the second quarter of 2019. An early stage candidate – epinephrine nasal spray – showed similar PK profile with Mylan’s MYL EpiPen as well as Par Pharmaceuticals’, a subsidiary of Endo ENDP, Adrenalin (epinephrine injection) in treating anaphylaxis. Insufficiency of funds can disrupt development of one or all its pipeline candidates.

Insys is reviewing strategic alternatives and has hired advisors to address issues such as high legal costs, legal settlement obligations and negative cash flow.

In November 2018, the company provided a few strategic alternatives, which it may choose to avoid closure or bankruptcy. The company may raise capital through borrowing or sale of its common stock. It may also enter strategic licensing deals and partnerships or joint ventures. Insys is also looking to sell Subsys and focus on developing dronabinol and cannabidiol candidates. The company stated on its fourth-quarter earnings call that it has been actively negotiating deals to sell the drug.

The company currently has two marketed drugs – Subsys and Syndros. While Subsys was launched in 2012, Syndros is available since mid-2017. The company earns the majority of its product revenues from the sales of Subsys. However, demand for Subsys fell in 2018, pulling the company’s top line down by almost 42% year over year. Moreover, Teva Pharma’s TEVA abbreviated NDA seeking approval generic version of Subsys is under review.

Although Syndros, a dronabinol, is unlikely to face any setback due to the current legal scenario, the drug generates minimal sales. If there is no significant increase in demand of the drug, Insys will lose a major chunk of its revenues if it divests Subsys.

Investors can expect a detailed update on the situation when the company reports first-quarter earnings.