Has the Next Insys Therapeutics Been Identified?

Insys Therapeutics has seen a sudden and unexpected rise to biotech royalty, with gains of more than 400% in the last year. These gains have followed the commercial success of its fentanyl spray Subsys for the treatment of breakthrough cancer pain. However, another company, Galena Biopharma , is on the company's heels, which is particularly evident following Galena's third-quarter earnings.

Blowing away expectations
Insys' drug Subsys is innovating because it's a spray delivering the pain killing agent fentanyl. Given the $400 million U.S. market for this drug, investors weren't particularly optimistic in late 2012, prior to Subsys' launch.

However, in its first full quarter of launch, sales reached $9.7 million, and then in its second quarter, sales rose 90% to $18.5 million. Hence, expectations for Subsys have risen, and the valuation of Insys has increased from $150 million last year to $850 million today.

Two companies with many similarities
To me, what's impressive about Subsys is both the size of the fentanyl market and the drug's immediate success. This brings up an interesting debate as to what drives the size of an industry. In the past, fentanyl drugs have been somewhat standard, not innovating and having the same drugs on the market for many years. Subsys is innovating, and if it proves better than other treatments of breakthrough pain then its success could increase the overall size of the fentanyl market.

The same argument applies to Abstral, which is the fentanyl product marketed by Galena. While it is not sprayed, it is dissolved under the tongue and has an even faster drug uptake. This has led many (including myself) to believe that Galena could be the next Insys. When you consider Galena's current market capitalization of $240 million one must admit that there are many similarities to Galena now and Insys last year.

An impressive initial quarter
On Thursday, we got our first glance at Abstral when the company reported third-quarter earnings. For the quarter, Galena reported $1.2 million from Abstral sales. Immediately, many might say that $1.2 million hardly compares to Subsys' first quarter of $9.7 million. However, investors must note that Abstral didn't even officially launch until Oct. 3, which was after the company's third quarter ended. Hence, Galena reported $1.2 million without its sales force and commercial organization deployed. That's impressive!

Also, let's take into account expectations: Galena was very conservative in guiding for future sales of Abstral. The company gave a midpoint estimate of $2.5 million for 2013, $10 million next year, and about $60 million in peak sales. Now, this is interesting because clearly we see the performance of Subsys and that of Abstral prior to its actual launch. Moreover, investors should note that Abstral sales are halfway to reaching its full-year target with roughly one month of it being stocked in pharmacies and prior to being launched. This suggests that sales could far exceed estimates with a full three months of being marketed.

Lastly, keep in mind that Abstral is already marketed in Europe. It has proven success with $54 million in sales during 2012, 42% year-over-year growth, and a 29% market share. When you add all these factors together, we might have found the next Insys. Now, I am not suggesting that Abstral sales will be as good, but I do think the third quarter proves that very low estimates will be easy to surpass. And if so, Insys investors might want to take note, as future success of Abstral could hurt momentum in sales of Subsys.

A strong business approach
While the topic discussed stems from the launch and performance of two competing products, an even bigger backstory might be that Abstral is a small piece of the Galena pie.

Galena is marketing Abstral as a way to produce revenue and operational profits while developing its phase 3 vaccine NeuVax, which prevents breast cancer recurrence in patients with low to intermediate levels of the protein HER2. In a phase 2 trial of patients optimally dosed and node positive, NeuVax prevented breast cancer recurrence by nearly 80% compared to its control.

If successful, NeuVax would treat the remaining 50%-75% of patients who don't qualify for Herceptin. Roche markets and manufactures Herceptin, a $7 billion a year blockbuster that treats patients with high levels of HER2. Herceptin is crucial to Roche, about 13% of its $51.85 billion in trailing 12 month revenue. Therefore, Herceptin is important in supporting the valuation of Roche, at $230 billion, and if successful, NeuVax could target an even larger patient population.

Final thoughts
Personally, I like Galena and its approach of marketing Abstral while developing NeuVax. At first, I didn't think Abstral would have much effect on the valuation of the company, but after seeing its first quarter, and considering the performance of Subsys, I think investors have to like the stock's outlook and its comparison to Insys.

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The article Has the Next Insys Therapeutics Been Identified? originally appeared on Fool.com.

Brian Nichols owns shares of Galena Biopharma. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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