Insmed Year End 2009 Update

INSM [[INSM]] released their fiscal 2009 results and the results are as I expected – not much different to Q3 results.

I first started following INSM back in November of 2009 because the company was trading below its net net value with the majority of its assets in cash. That was when the stock price was $0.78. The stock price is now $1.20, a 50% gain from November, but nothing has changed with the company since then but there have been some major developments which I’ll get to later.

But onto the financials first. I went through the annual report filed on March 16th and it reads the same as the previous quarterly reports.

The major difference in financial data to the previous year is the  cash from the sale of the FOB (follow-on-biologics) to Merck for $130m. Due to this difference, comparing annual numbers isn’t important. It will only give you a false picture. Instead, you have to look at the company on a quarterly basis.

Balance Sheet Analysis

Abover, I put the Q3 and Q4 balance sheet together to get a better view and the image below is the Q3 and Q2 comparison.

From my notes in the images above you can see how there are no red flags and INSM is doing a fine job of keeping things in check. To be frank, INSM has no operations and so expenses must continually be lowered.

Additional Quick Points from the Financials

The all important cash burn has also stopped. With no manufacturing facility, low headcount and so much cash, INSM is earning a healthy amount of interest to more than offset the expenses.

Throughout 2010 cash burn should be neutral.

But Why is INSM at $1.20 Now?

It started with the Merck CEO mentioning INSM during the JPM healthcare conference. You can view the previous post on this development if you missed it.

Feb 15 was the day INSM started seeing huge volume and there were no press release or any major news to cause such a run up until I received some information that test results performed by ALS worldwide for IPLEX was leaked. Thanks to reader RTN for this info.

We are pleased to present the Interim Report of the Investigational New Drug trial on the use of Iplex (mecasermin rinfabate) by middle-to-late stage Amyotrophic Lateral Sclerosis patients. This trial was conducted under the direction of Principal Investigator Michael E. Schafer, MD and Medical Director of ALS WORLDWIDE, with our assistance. We are hopeful the results will be informative and will serve to facilitate the future use of Iplex for others within the ALS community. While this is a small study, it has provided relevant results for the period from April 2009 through November 2009. For more detailed information, please review the information at the following links.

During the 30-week period of Iplex usage that comprised the first half (26 week study peeriod and follow-up four-week confirmation period) of the one year authorized investigational new drug trial, there was a remarkable parity between the apparent responsiveness of the individual patients compared to the aggregated group of patients at large. Symptoms monitored for their absence, presence, or their degree of severity included the following: Hyperreflexia; Tongue Movement; Swallow; Hand Strength; Shoulder Strength; Fatigue; Clonus; Nausea; Atrophy; Breathing; Lability; Lower Arm Strength; Fasciculations; Dizziness; Cramps/Pain; Weakness; Balance; Speech; Upper Arm Strength; Tremor/Palsy; Rigidity; Libido. In the consolidated 30 week period, individual symptoms showed a maximum decline of 9% (Balance) followed by 6% (Tremor/Palsy). The maximum improvement of an individual symptom was 39% (Fasciculations) followed by 28% (Fatigue). The critical function (Swallowing) improved by 25% and Breathing improved by 1%.

Links to the pdf reports can be found here.

After the Q4 results were announced, the stock price dropped 10% but this was good. Ever since the big increase in volume, many short term momentum players jumped on to make a buck but as the Q4 earnings announcement was flat (as expected) many of the same people sold out.

This was another good opportunity to buy when prices were falling, which is what I did.

Net Net Valuation

INSM is no longer a net net, but with the catalyst building up, it looks like the intrinsic value of $2 to 2.50 can be achieved.

Remember too that the company is still undergoing a strategic review where value could be unlocked even further. There are lots of possible “ifs” but far more on the positive side than the negative.

At the current price, looks like a 100% gain is still possible.



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13 responses to “Insmed Year End 2009 Update”

  1. Paul says:

    Excellent analysis!

    I’m interested in your opinion on net-net opportunities. When they go wrong or the catalyst never happens, what is the reasonable expectation for the company’s use of the cash? It doesn’t seem like a given that they just distribute it, wind down the company, and go home. It seems more likely that they make a desperate stab at using it in other investments (R&D, new business models, etc.). So in a binary bet like this one (it works or it doesn’t), what’s the reasonable expectation for management behavior if the drug gets FDA rejection and never makes it to market?

    There is nothing that forces them to liquidate assets to investors. Can we really anticipate rational management that gives investors their money back?

  2. zehua says:

    Hi Jae,
    Since this company has no operations, the net income is null, so could you please tell me how you figured out the intrinsic value to be $2-2.5?


  3. Jae Jun says:

    To be honest, the use of is entirely up to the management. They are people just like us, so they can either be generous, logical or downright greedy.

    I’ve seen a couple of net nets where management deservedly should be called snakes. Their only interest is to fatten their wallets which is why it’s important to view the cash burn.

    Cash is everything with net nets and if the business just keeps using it all up, your MOS will continue to shrink.

    PDII is an exception. They were, still are, using up plenty of cash, but they are doing it for growth and to get things back on track. Sold that one too early… doh..

    But if a company has plenty of cash, I’m perfectly fine with the company doing nothing. Nothing is better than doing something stupid.

    In the event where plans fail, that is why I like NNWC so much because the market will usually price the stock at it’s liquidation value. No can force the company to liquidate, but sooner or later, the price will reflect at least the assets.

  4. Jae Jun says:

    @ zehua,

    Right now, INSM is still making about $10m each year and the company is being priced at its base case i.e. no operations, no future, just a blank shell. PE is at 1.

    Truth is, INSM is doing something, there is interest in IPLEX, a strategic review could yield excellent alternatives. This will increase that PE. I just upped it to 2.

    You can also do an EPV and you should get something like $1.50 based on zero operations. So $2-2.50 is a very conservative number.

  5. tedk81 says:

    “I just upped the P/E to 2”, really? the p/e right now of the company might be 1 but that doesn’t mean anything, as all the E is a one-time thing from selling a drug to Merck.

    With $122m in cash and no debt the EV of this thing is only $30m, if they invested their cash wisely it’ll be a good deal, but it sounds like that’s not really the case, they are gonna continue betting on this drug. Who knows how that will end up? I can’t even guess probabilities. Guessing on the success of some ALS drug is outside most of our circles of competence.

    EPV is misleading as well with the change in the nature of the company. The company said in their last 10-K that “We will continue to incur losses to the extent we expand our research and development and do not expect material revenues for at least the next several years.”… so we can’t even guess at how much they will earn if things go well, they will have no earnings power for quite awhile (if ever.) So yeah I think $2 is really pushing it here. We’re in a crazy bull market lately and it might go up with the tide but I don’t think it’s worth a whole lot more than the price it is at today.

  6. Jim says:

    I’m not sure how an EPV valuation of anything could be misleading when it is applied at a 0% growth rate. A DCF is usually an analysis that is accused of being misleading – not an EPV
    .-= Jim´s last blog ..Asta Funding – Postion Exited & Analysis =-.

  7. tedk81 says:

    What I mean is that there is no EP, they may have made money in the past but they sold the one thing and now the company itself says it will lose money for at least a few years. There are no earnings anytime soon, and it’s pretty much impossible to predict what the earnings will look like if this company ever makes money again so an EPV is pretty meaningless. I guess to rephrase, extrapolating from past earnings with INSM is misleading.

  8. Jae Jun says:

    The quote from the risk section of the 10-k is also very misleading. Most, if not all companies just write down as much as possible to save themselves from any lawsuits.

    I may not know much about the drug but if you also dig into the remaining management backgrounds as well as the new hire, then you will see that these people have plenty of experience and knowledge on the matter.

    If investors had to know every detail about a product, I guess even KO would be an impossibility since no one knows what goes in it. Of course, that is a gross example but the point is the same.

    Lots of cash, no debt. Not much in terms of operations, but potential is what I’m looking at and not growth.

    Many scenarios can come out of INSM but the important thing is that the all important question of “what can go wrong for me to lose money” has been taken care of.

    My initial concern when investing in INSM was the cash burn but since 2 quarters ago, they have been cash flow positive due to high interest earnings and other non recurring income. I know that these types of income isn’t what you want from a company, but every case is different and INSM is an exception. With all the interest they are earning on lowered expenses, they can just sit and do nothing and still be in business for 20 more years. Plenty of MOS.

  9. tedk81 says:

    The quote from the risk section of the 10-k is also very misleading. Most, if not all companies just write down as much as possible to save themselves from any lawsuits.

    I disagree here, you see a lot of goofy stuff in those sections of 10-K’s but rarely is it so specific: “we expect to lose money for the next few years”… and I think with the stage the company is in right now, its history and the nature of biotech that’s a perfectly reasonable expectation. Even with the sale to Merck the company has lost over $200M in its lifetime.

    IPLEX is extremely speculative…. it’s difficult to make- they can’t manufacture it and the 10-K says to be able to manufacture it will take 12-18 months to find someone to do this since they sold their manufacturing facility to Merck. Only 50 people in the world are getting it now and they aren’t giving it out to anyone new and only have a year of supply left for these guys. More trials will be needed to bring it to market (right?) but they apparently can’t do those for quite awhile longer.

    So when I look at this I look at the 3 quarters since the sale and they have earned $555k, without the $2.3m tax benefit they’d be -$1.7m in those 3 quarters. I can’t tell if they’re going to get that again, I only skimmed their 10-k and I couldn’t figure out where that came from, I know they have a lot of NOL carryforwards, was that it? Will they get another one next year? How much interest do you expect them to earn on the $ from the FOB sale? They didn’t book any interest income since the sale that I’ve seen, which I don’t really get, maybe next quarter I dunno how they account for this stuff.

    Absolutely everything hinges on what they do with this cash. With the history of the company as a money sink and the nature of the biotech game I just don’t see the value here. They have an EV of $33M, one product that isn’t doing a whole heck of a lot and no prospects for earnings that aren’t interest-related beyond a year from today, since they will run out of IPLEX (and they won’t make much $ on IPLEX in the next year either since only 50 people in the whole world are taking it.)

    I disagree on your remark about KO as well, we know 20 years from now KO is going to be selling more flavored water and their earnings should be reasonably predictable. We have here a company that’s lost money over the life of the company, it has a bunch of money in the bank and a very experimental drug that only a few people are taking, and it can’t even manufacture that drug. It’s hard to value the upside here, if IPLEX catches on in a couple years or they make some great acquisition or the market just keeps pushing everything up it can do OK.

    So, yeah, that’s my “bear/neutral” case, no offense or anything, and that’s the last I have to say about it. Good luck!

  10. sergiovlc says:

    May it benow a good time to purchase a few shares with NNWC at 94c and a current price of 56c?

  11. Jae Jun says:

    No this is not a good idea. This post is old and new company developments puts the NNWC at 50c or lower.
    Management is horrible. No shareholder consideration at all.

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