111 N. Canal Street, Suite 1101 ● Chicago, IL60606
ISTA Pharmaceuticals Inc. / (ISTA - NASDAQ) / $7.85Note to Readers: All new material since the last update is highlighted.
Reasonfor Report: Positive Phase IIb results of Ecabet Sodium. Prev. Ed.:May 8, 2007
Recent Events
On May 31, 2007, ISTA Pharmaceuticals, Inc. announced positive results from the preliminary analysis of the Company's Phase IIb clinical study of Ecabet sodium
Overview
Based in Irvine, California, ISTA Pharmaceuticals (ISTA) is a specialty pharmaceutical company focused on the development and commercialization of ophthalmic products for serious conditions of the eye in the United States. ISTA has three approved products, Xibrom (for the treatment of ocular inflammation following cataract surgery), Istalol (for the treatment of glaucoma) and Vitrase (for use as a ‘spreading agent’). The company currently has other prescription products under development, including a tobramycin/prednisolone (tobra/pred) acetate for the treatment of inflammation where a bacterial infection might be present, ecabet sodium for the treatment of dry eye, and Caprogel for the treatment of hyphema. ISTA Pharmaceuticals has product licensing collaborations with Allergan, Inc. and Otsuka Pharmaceutical Co., Ltd.
For more information, please visit the company website at
Analysts have identified the following investment merits and demerits in the stock:
Key Positive Arguments / Key Negative ArgumentsReduction in inventories – Inventories at the wholesaler level have been significantlyreduced.
Strong pipeline portfolio – ISTA continues to execute on its strategic goal to introduce a new product to the market every 12-18 months, with the completion of Phase III clinical studies for Xibrom once-daily. With the in-licensing of three new product candidates, it continues to expand its pipeline and expand its reach across the ophthalmology market / Increasing operating expenses – SG&A expense is on the rise, particularly as a function of the expanding sales force.
Dependence on few for revenue visibility – ISTA’s revenue and earnings outlook is highly dependent on the success of a few products, not beingbased on a diversified revenue stream.
Product development failure – Newproduct development is fraught with risk. Of every 200 compounds put into clinical development it is estimated that only one eventually makes it to the market.
Note: The Company’s fiscal references coincide with the calendar year.
Revenue
Both ISTA and Zacks Digest Report reported1Q07 total revenue of $10.3 millionup 86.6% from $5.5 million in 1Q06. One firm (SIG) says that its revenue estimates were slightly decreased to reflect the current growth trends. It further states that the sales estimates will remain volatile as the products are still in the launch phase. Another firm (Punk, Ziegel) says that it is not concerned about the recent quarterly revenue variability as its investment thesis is based on the company’s pipeline.
Management issued 2007 guidance, indicating revenue estimates of $47–56 million, excluding T-Pred, and $52–64 million, including T-Pred.
Total Revenue$ in million / 2006A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009E
Digest High / $34.1 / $10.3 / $13.2 / $15.8 / $17.5 / $56.7 / $94.3 / $106.8
Digest Low / $33.0 / $10.3 / $10.7 / $13.2 / $14.7 / $50.3 / $69.3 / $86.8
Digest Average / $33.5 / $10.3 / $12.1 / $14.2 / $15.8 / $52.4 / $77.6 / $94.8
Please refer to the ISTA Zacks Research Digest spreadsheet for more extensive revenue figures.
Vitrase (spreading agent)
Indication: Vitrase (hyaluronidase injection) is indicated as an adjuvant to increase the absorption and dispersion of other injected drugs; for hypodermoclysis; and as an adjunct in subcutaneous urography for improving resorption of radiopaque agents.
Stage of Development: Mature, sold and distributed.
Importance: Vitrase is a preparation of purified ovine testicular hyaluronidase, a protein enzyme. Theexact chemical structure of this enzyme is unknown. However, the amino acid sequencefor the primary structure of the enzyme has been deduced from the sequence of purifiedpeptides. Vitrase (hyaluronidase injection) is supplied as a sterile, non-preserved, colorless solutionwith a pH of 6.4 to7.2.
Safety Issues: The most frequently reported adverse experiences have been local injection site reactions. Hyaluronidase has been reported to enhance the adverse events associated with co-administered drugs. Edema has been reported most frequently in association with hypodermoclysis. Allergic reactions (urticaria, angioedema) have been reported in less than 0.1% of patients receiving hyaluronidase. Anaphylactic-like reactions following retrobulbar block or intravenous injections have alsooccurred, though rarely. Over-dosage may cause symptoms of toxicity consisting of local edema or urticaria, erythema, chills, nausea, vomiting, dizziness, tachycardia, and hypotension.
Sales: Revenue generated from the sale of Vitrase during 1Q07 was $1.0 million, up 25% from $0.8 million in 1Q06.
Partners: It is marketed by ISTA, but manufactured by Alliance Medical Products, Inc.
2006A / 2007E / 2008E / 2009E / Est. GrowthRevenue from Vitrase / $4.2 / $5.0 / $5.6 / $6.5 / 32.1%
Istalol
Indication: Elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma.
Stages of Development: Mature, sold and distributed.
Importance: Istalol is a non-selective beta-blocker that is applied to the surface of the eye once a day. It significantly reduces the amount of fluid (aqueous) that is produced by the ciliary body. The exact mechanism for the decreased aqueous production within the ciliary body is not completely elucidated. It is a solution (not a suspension or gel) with excellent drug penetration based upon a modification in its formulation. The advantage of Istalol over other topical ophthalmic beta-blockers is the once-daily application.
Safety Issues: Istalol is contraindicated in patients with bronchial asthma, severe chronic obstructive pulmonary disease, sinus bradycardia, atrioventricular block, overt cardiac failure, cardiogenic shock, and hypersensitivity to any of the components of this product.
Sales: Revenue generated from Istalol during 1Q07 was $2.2million up 22%from $1.8 million in 1Q06.
Partners: The product is manufactured by Senju Pharmaceutical for Bausch and Lomb Pharmaceuticals, but distributed by ISTA. ISTA has exclusively licensed from Senju Pharmaceuticals the North American rights of two new product candidates, iganidipine, a calcium channel blocker, and a new formulation of latanoprost, a prostaglandin. Both candidates are under investigation for the treatment of glaucoma and other ophthalmic applications, and, if approved, will be complementary to Istalol. For each product, ISTA will pay Senju an upfront payment and aggregate development and approval milestones of approximately $8M, in addition to royalties on future product sales. It plans to initiate a Phase II clinical study with iganidipine in the United States in 2007 and complete formulation development and optimization studies with latanoprost in 2007.
Others: ISTA currently promotes Istalol through the company’s specialty sales force. The ISTA sales team focuses exclusively on ophthalmologists. Along with sales and marketing efforts focused around ophthalmology, ISTA has a dedicated marketing team that will work with managed care organizations to gain access of Istalol on national and regional formularies.
2006A / 2007E / 2008E / 2009E / Est. growthRevenue from Istalol / $8.3 / $10.6 / $13.5 / $16.3 / 71.3%
Xibrom(steroid)
Indication: Xibrom ophthalmic solution is indicated for the treatment of postoperative inflammation and reduction of ocular pain in patients who have undergone cataract extraction.
Stage of Development: Mature, sold and distributed.
Importance: It is a sterile, topical, non-steroidal anti-inflammatory drug (NSAID) for ophthalmic use.
Safety Issues: It contains sodium sulfite, which may cause allergic-type reactions including anaphylactic symptoms and life-threatening or less severe asthmatic episodes in certain susceptible people. The overall prevalence of sulfite sensitivity in the general population is unknown and probably low. Sulfite sensitivity is seen more frequently in asthmatic than in non-asthmatic people. It should not be used while wearing contact lenses.
Sales: Revenue from Xibrom during 1Q07 was $7.0 million, up 141.4% from $2.9 millionin 1Q06. Ophthalmologists made Xibrom the second most prescribed NSAID in dollar value, claiming 23% of the NSAID market, a 96% increase over the first quarter of 2006.
Partners: The solution is manufactured by Bausch and Lomb Pharmaceuticals for ISTA, under license from Senju Pharmaceutical Co.
Additional Studies: On February 8, 2007, ISTA announced positive topline results from this Phase III study. Preliminary analysis demonstrated that treatment with Xibrom provided substantial benefits relative to placebo. The study enrolled 500 patients who had undergone cataract surgery. ISTA plans to present detailed results at a medical conference in 2007. Based on these preliminary results, ISTA expects to file a supplemental NDA (sNDA) in 3Q07. Given a standard ten-month FDA review, the approval and launch of once-daily Xibrom could occur in 2008.
2006A / 2007E / 2008E / 2009E / Est. GrowthRevenue from Xibrom / $20.2 / $36.6 / $54.1 / $66.1 / 116.9%
Other Pipeline Products
Tobra-Pred(T-Pred): T-Pred consists of a combination of tobramycin and prednisolone. Tobramycin is an antibiotic to treat bacterial infections, while prednisolone is a steroid used to treat inflammation. T-Pred was developed as a treatment of steroid-responsive inflammatory ocular conditions where risk of bacterial infection exists.
On May 4, 2007, ISTA Pharmaceuticals, Inc. announced that it has received a not approvable letter from the FDAregarding its NDA for T-Pred.The FDA assessed the company's clinical data as displaying sufficient equivalence between the prednisolone component in T-Pred and PredForte not at any time point measured. Nordid the equivalence show in the kill time between the tobramycin components in T-Pred and Tobrex, although it showed equivalence versus Zylet and Tobradex. ISTA does not agree with this assessment and plans to request a meeting with the FDA as quickly as possible.
One firm (RBC Cap.) believes that ISTA will make a good case to the FDA. It further states that an additional clinical trail will be required to answer all of the FDA’s questions given the fact that a non-approvable letter was issued as opposed to an approvable letter. A couple of firms (Punk, Ziegel and Thomas Weisel) believe that there will be an approximate six-month delay for T-Pred if ISTA submits more data to the FDA, with the delay extending to about one year if ISTA has to conduct an additional clinical trial.
Ecabet Sodium:Ecabet is a molecule designed to increase the production of mucin, which plays a role in the lubrication and moisture of the eye. It is currently marketed in Japan as an oral agent for treatment of gastric ulcers and gastritis. In November 2004, ISTA acquired U.S. marketing rights to Ecabet sodium for the treatment of dry eye syndrome under a license agreement with Senju.
On May 31, 2007, ISTA Pharmaceuticals, Inc. announced positive results from the preliminary analysis of the Company's Phase IIb clinical study of Ecabet sodium, which is being developed as a treatment for dry eye syndrome. Patients in the Ecabet sodium group achieved a strong trend in the objective sign of blink rate. In addition, patients in the Ecabet sodium group reported a strong trend in the Ocular Symptom Disease Index (OSDI) and a positive trend in the subjective assessment of patients' most bothersome symptom. Strong and positive trends are used to confirm observations from previous clinical Ecabet sodium studies and to serve as indicators of potential efficacy endpoints in Phase III studies.
Vitrase (vitreous hemorrhage):Vitrase, a proprietary formulation of ovine hyaluronidase, is being developed for the treatment of vitreous hemorrhage. The FDA gave an approvable letter for the use of Vitrase in treating vitreous hemorrhage.
Vitrase (diabetic retinopathy):Vitrase, a proprietary formulation of ovine hyaluronidase, is being developed for the treatment of diabetic retinopathy. The product is in Phase IIa trial to evaluate the safety and efficacy of a single-dose injection of Vitrase to cause a detachment of the vitreous humor from the retina and the impact on slowing the progression of diabetic retinopathy over a one-year period.
Caprogel:Caprogel is a new topical gel formulation of aminocaproic acid for treating hyphema. Caprogel has received an orphan drug designation for the treatment of hyphema from the FDA, which may result in receiving a seven year market exclusivity privilege if approved. It is currently ina Phase III trial, and is expected to be launched in 2007.
ISTA added three new products to its R&D pipeline including Bepotastine,Iganipidine, and a new formulation of Latanoprost.
Bepotastine: Bepotastine is a non-sedating, selective antagonist of histamine 1 receptor. The compound has demonstrated a stabilizing effect on mast cells. ISTA submitted an IND for Bepotastine in December 2006. ISTA expects to enter Phase III development in 1H07 and file an NDA in late 2007 or early 2008. The product will compete with Alcon’s Patanol/Pataday franchise.
On May 8, 2007, ISTA announced results from the preliminary analysis of its U.S. Phase II/III clinical study of bepotastine for the treatment of allergic conjunctivitis. The study evaluated two concentrations of bepotastine, each dosed once daily and twice daily. The preliminary results of the study demonstrated both concentrations were highly significant in the reduction of the first primary endpoint, ocular itching, when dosed twice a day, and in one concentration when dosed once a day. The primary endpoints of the study were the assessment of efficacy of bepotastine in treating ocular itching and redness. The company said the study showed statistical significance in the reduction of eye itching, but did not achieve statistical significance in the second main target, eye redness. It further found no serious side effects in patients dosed with bepotastine.
Two firms (RBC Cap. and Thomas Weisel) state that the allergic conjunctivitis market is the largest potential market the company has targeted and bepotastine has the potential differentiating factors that could make it a material player in the market.
Margins
Margins / 2006A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009EGross / 69.8% / 75.3% / 72.7% / 72.6% / 72.8% / 73.2% / 73.2% / 74.2%
Operating / -111.9% / -105.4% / -79.2% / -53.4% / -38.8% / -65.1% / -25.6% / -5.7%
Pre-Tax / -112.8% / -110.6% / -84.7% / -58.8% / -43.8% / -70.4% / -29.0% / -9.2%
Net / -112.8% / -110.6% / -84.8% / -58.8% / -43.8% / -70.4% / -29.0% / -8.9%
According to the Zacks Digest report, gross margin was 75.3% in 1Q07 versus 65.5% in 1Q06. According to the company, gross margin in 1Q07 was 75% versus 65% in 1Q06. The increase in gross margin for the first quarter in 2007 was primarily due to the change in revenue mix. One firm (Lazard) says that the gross margin was 2% above its estimate of 73% due to better product mix.
According to the Zacks Digest report, R&D expense was $6.3 million in 1Q07(same as what the company reported) versus $4.5 million in 1Q06. The increase in R&D expense for the first quarter of 2007 was primarily the result of an increase in clinical development costs, which include FDA filing fees, clinical investigator fees, study monitoring costs and data management costs, due to the completion of the Xibrom once-daily Phase III studies, the completion of the Ecabet Sodium Phase IIb conformity study enrollment, and the commencement of the Bepotastine Phase II/III clinical trials. One firm (SIG) expects the R&D expense to creep upwards in the coming quarters as the company moves forward with the development of its pipeline.
According to the Zacks Digest report, SG&A expense was $12.2 million in 1Q07 versus $10.0million in 1Q06. According to the company, SG&A expense was $12.3 million in 1Q07 versus $10.0 million in 1Q06. The increase in theSG&A expense for the first quarter of 2007 primarily resulted from higher sales and marketing expenses associated with the expansion of of ISTA’s sales force, increased compensation expense, and an overall increase in the administrative expenses, such as facility and personnel costs. SG&A expenses during the first quarter of 2007 included $0.8 million in stock-based compensation expense. Few firms (Jefferies and SIG) note that the SG&A expenses increased in 1Q07 due to the sales force expansion that was undertaken and clinical development activities. They further say that these expenses not only support the continued growth of Xibrom and Istalol, but will also help the company in expanding the clinical pipeline activities.
Management issued 2007 R&D and SG&A expense guidance of $24-28 million and $44-48 million, respectively.
Please refer to the ISTA Zacks Research Digest spreadsheet for more extensive margin figures.
Earnings per Share
According to the Zacks Digest report, theproforma and GAAP net loss per share in1Q07 was$0.44 versus $0.41 in 1Q06. The company reported a net loss of $11.5 million or $0.44 per share in 1Q07,versus a net loss of $10.7 million or $0.41 per share in 1Q06.
One firm (Jefferies) says that the profitability is getting delayed due to investments in the expanding pipeline and a growing commercial infrastructure.
EPS / 2006A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009EDigest High / ($1.39) / ($0.44) / ($0.33) / ($0.20) / ($0.15) / ($1.08) / $0.02 / ($0.13)
Digest Low / ($1.48) / ($0.44) / ($0.45) / ($0.36) / ($0.30) / ($1.47) / ($1.03) / ($0.44)
Digest Average / ($1.46) / ($0.44) / ($0.39) / ($0.31) / ($0.25) / ($1.38) / ($0.65) / ($0.31)
Please refer to the ISTA Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Of the seven analysts covering the stock, five have provided target prices. Target price ranges from $8.00 (RBC Cap.) to $14.00 (Punk, Ziegel), with a Digest average of $10.20 (↑from the previous average target price). Most analysts have based their calculations on a P/E multiple and price/salesmultiple.
All the seven analysts covering the company have assigned ratings to the stock. Of them four have given positive ratings, three gave neutral and notably none havegiven anegative rating to the stock.
Rating DistributionPositive / 57.00%
Neutral / 43.00%↑
Negative / 0.00%↓
Avg. Target Price / $10.20↑
Risks to the target price include execution risk as the company attempts to establish a sales and marketing infrastructure targeting the ophthalmology market, a failure to secure regulatory approvals for key products, and a failure to defend the company’s exclusivity for Vitrase, the company’s proprietary formulation of ovine hyaluronidase, that would negatively impact near-term performance.
Please refer to the ISTA Zacks Research Digest spreadsheet for further details on Valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
ISTA recorded cash and short-term investments of $27.6 million, plus $4.8 million in restricted cashin 1Q07.
Potentially severe problems