InSite's AzaSite royalties from Merck help avoid debt default
This article was originally published in Scrip
InSite Vision has renegotiated its licence agreement with Merck & Co so that the Alameda, California-based company receives minimum royalty payments for AzaSite (azithromycin ophthalmic solution) 1% from its big pharma partner on a quarterly rather than yearly basis to avoid defaulting on its $60 million debt secured by AzaSite royalties.
InSite CEO Timothy Ruane told Scrip that funding for the company's ongoing clinical trials for three different products would not have been affected if InSite could not repay the debt tied to promissory notes due in 2019, which were sold in a 2008 private placement.
If Merck had not agreed to change the AzaSite royalty structure and InSite did not meet its quarterly debt obligation, the note holders only would have been able to claim InSite's annual royalty payments from Merck, not its $17.6 million cash balance as of 30 June.
"It's a nice move by Merck to accommodate us and our note holders and it doesn't really cost Merck anything given their size and cost of capital," Mr Ruane said. "The only thing we gave them was our gratitude."
With the royalty structure renegotiation out of the way, the companies can focus on increasing AzaSite sales, which have been in decline since last year.
The US FDA approved AzaSite for the treatment of bacterial conjunctivitis in 2007 after InSite licensed the North American commercial rights for the antibiotic eye drops to Inspire Pharmaceuticals. The deal included $32 million in upfront and milestone payments plus 25% royalties on US and Canadian sales with minimum royalty payments that increased annually (scripintelligence.com, 23 February and 4 May 2007).
Merck acquired Inspire in for $420 million in April 2011 (scripintelligence.com, 6 April 2011).
Under the renegotiated license agreement, the minimum royalties due to InSite in 2012 total $17 million and in 2013 will total $19 million. The company will receive the greater of 25% of AzaSite sales or $4.25 million per quarter in 2012 and $4.75 million per quarter in 2013. The 2012 contract year began on 1 October 2011 and ends 30 September 2012.
Merck will make a $7.2 million catch-up payment for 2012 by 15 August so that InSite can pay all current and deferred interest on its AzaSite-secured debt plus a $4.9 million principal payment on the promissory notes.
Mr Ruane said Merck's agreement to change the royalty payment structure in exchange for nothing but InSite's gratitude shows that Merck believes in the future of AzaSite and the partners' ability to improve sales for the ophthalmic drug.
"Obviously Merck has been having some challenges with the commercialisation of AzaSite. It was having quite a negative effect on our market cap and it was giving our note holders concern that we would default on our payments this quarter," he said.
Merck disclosed in November 2011 that it is cooperating with a US Department of Justice investigation into allegations that Inspire may have marketed AzaSite for off-label uses (scripintelligence.com, 10 November 2011).
And in its second quarter 2012 earnings report on 31 July, InSite said AzaSite sales are down in 2012 compared to 2011, due to a drop in prescriptions since Merck's acquisition of Inspire.
Based on a 25% royalty rate, InSite earned $1.8 million in revenue from AzaSite sales between April and June of 2012 compared to $3.1 million during the same period in 2011.
Before InSite renegotiated the royalty payment structure, Merck would have paid the company the difference between actual royalties and this year's $17 million minimum royalty rate at the end of the 2012 contract year, rather than one-fourth of the minimum payment at the end of each quarter.
"The good news is that by doing this restructuring it shows that they are a good partner and they are committed to AzaSite and making it a good success," Mr Ruane said. "Quite frankly, given the size of AzaSite to a company like Merck, if they were not in agreement with us they could've easily turned around and given it back to us."
He said InSite is in discussions with potential partners who are interested in seeking approval for AzaSite and marketing the drug outside of North America, which would generate new funding that is non-dilutive to the company's shareholders.
However, Mr Ruane said InSite has the funding it needs to complete Phase III development for AzaSite Plus (ISV-502), DexaSite (ISV-305) and BromSite (ISV-303), which all use the company's DuraSite technology that extends the duration of drug retention on the surface of the eye for medicated eye drops. The Merck partnership applies only to AzaSite, not AzaSite Plus.
InSite will report data late in 2012 or early in 2013 for the three clinical trials: AzaSite Plus (1.0% azithromycin plus the anti-inflammatory steroid 0.1% dexamethasone) as a treatment for the eyelid infection blepharitis; DexaSite (0.1% dexamethasone) for non-bacterial blepharitis and ocular inflammation; and BromSite (0.075% bromfenac ophthalmic solution) for pain and inflammation following cataract surgery.
If Phase III data from all three trials are unblinded by the first quarter of 2013, InSite's goal is to submit new drug applications (NDAs) to the FDA by the end of 2013.
InSite's patent protection for the three assets ends between 2029 and 2031, which Mr Ruane said could transform even a well-known ophthalmic company, such as Novartis' Alcon or Bausch + Lomb "into a dominant front of the eye company for a long time" if they partner with InSite to market the company's new drugs.