Description

Insmed (INSM) - compelling risk/reward 

We are long Insmed. Insmed is viewed by the market as a pure biotech when really it is both a pharma and a biotech. The stock trades at near to the value of ARIKAYCE, a treatment that received accelerated approval as an orphan drug in 2018 for the treatment of refractory MAC lung disease for patients who did not respond to other treatments. Additionally, investors get a healthy pipeline of important biotech investments.

• ARIKAYCE should benefit from greater attention from pulmonologists as Covid related attention recedes as well as from international growth and the potential for expansion into front line treatment in MAC lung disease. 

• Various “shots on goal” highlight the significant optionality: Brensocatib (in phase III) and TPIP (in Phase II) show promise in early trial data and offer significant upside optionality.  This is particularly true of Brensocatib which could prove to be a “pipeline in a product” as a treatment for multiple diseases. 

The stock is down in recent months due to a Covid-driven slowdown in the ARIKAYCE ramp, shareholder frustration surrounding an equity/convertible debt issuance, and the broader biotech selloff.

At $28 per share, the skew is very compelling: The Company has multiple compelling opportunities and more than sufficient capital to execute.  In a bear case scenario where ARIKAYCE shows disappointing revenue growth and all of the trials fail, we estimate that Insmed is worth roughly $15 per share. If ARIKAYCE has modest success and some to most of the opportunities accrue to the benefit of shareholders through positive clinical trials, the opportunity is $72 (almost 3x today’s price) in our base Case and >4x in our bull case.

Insmed snapshot

Insmed is a biopharmaceutical company that develops and commercializes therapies for patients with serious and rare diseases.  The company is advancing four strategic pillars.  The pillar currently in commercialization is ARIKAYCE, a treatment for refractory Mycobacterium avium complex (MAC) lung disease.  In addition, the company is developing Brensocatib for the treatment of bronchiectasis as well as other neutrophil-mediated diseases.  Thirdly, the Company is focused on Treprostinil palmitil inhalation powder (TPIP) which could provide disease-modifying impact for those suffering from pulmonary arterial hypertension (PAH).  The fourth pillar is a focus on translational medicine. 

ARIKAYCE: Commercialized Pharmaceutical Supports Insmed Valuation Today

Insmed’s first commercial product, ARIKAYCE, received accelerated approval as an orphan drug in the United States in September 2018 for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients with no alternative treatments.  ARIKAYCE’s innovation was primarily based on its proprietary Pulmovance technology.  Pulmovance enables the delivery of high levels of amikacin (antibiotic traditionally used in treatment of MAC lung) directly to the lung instead of the historic approach which was orally or intravenously administered (and subject to toxicity to hearing, balance, and kidney function).  In summary, the innovation was in the delivery technology which resulted in more targeted treatment and less toxicities.  ARIKAYCE is administered through a customized portable nebulizer called Lamira (manufactured by PARI).  Due to its orphan drug status, ARIKAYCE is eligible for 12 years of exclusivity in the indication for refractory MAC lung disease. The patents should extend protection into 2035.  Our understanding is that ARIKAYCE market position might extend after its exclusivity period concludes.  ARIKAYCE’s device complexity and liposomal formulation (a fat bubble where the drug is encased in liposome which is source of targeted delivery to the lung) relative to the anticipated market size might create reservations amongst potential competition to enter the market.  While small molecule tablets are straightforward to make in a generic, ARIKAYCE is not.  As an analogue, you can think of inhaled bronchodilators for asthma which have been on the market way past patent life but potential competitors have been challenged to make a device that could deliver in the same way. 

Revenue growth (see chart above on right) was on a compelling trajectory over the first five quarters of U.S. commercialization.  In fact, it had one of the top 10 most successful non-oncology rare disease launches following initial commercial efforts in the U.S. Starting in Q1 of 2020, sales growth reversed.  Since prescribing physicians of ARIKAYCE were focused on the treatment of Covid-19, it was difficult for sales representatives to get in front of medical professionals and difficult for medical professionals to get in front of their patients.  

Despite these challenges, revenues should stabilize just below $200M for 2021 with reasonable opportunities to grow in the U.S. refractory MAC lung disease market (~ $300M+ of potential revenue) starting in late 2021 and into 2022. 

ARIKAYCE Growth Opportunities 

ARIKAYCE has two significant new sources of potential future revenue growth. The first is in international markets, specifically Japan where management announced that commercial sales started in July 2021.  The revenue opportunity in Japan could prove similar to the United States for refractory MAC because Japan actually performs routine nationwide screening for Non-Tuberculous Mycobacteria/NTM lung disease.  Interestingly, although Japan’s screening is better, the treatment protocol for refractory MAC lung disease lags materially behind that of the United States since nearly half of Japanese patients with this condition are treated by general care practitioners and not specialists (pulmonologists).  This represents a challenge for Insmed, but also a clear opportunity.  In this regard, the company has dedicated material efforts to building a strong commercialization program in Japan where list pricing is, according to management, similar to that of the U.S. and Europe (also launched within the past year – see chart on left below).  In summary, between the United States and international markets, our research indicates that ARIKAYCE should be a $500M+ revenue opportunity for Insmed based on treatment for only non-refractory MAC lung patients. 

Secondarily, Insmed is advancing the post-approval confirmatory, frontline clinical trial program for ARIKAYCE through the ARISE trial and the ENCORE trial, which are intended to fulfill the FDA’s post-marketing requirements and allow for the full approval for ARIKAYCE in the use as a frontline treatment for patients with MAC lung disease in the US, Europe and Japan.  The basis for using ARIKAYCE as a frontline treatment for patients is largely predicated on management’s belief that ARIKAYCE will be more effective at reducing the number of patients who, ultimately, become refractory patients and that refractory patients have worse health outcomes (e.g. higher levels of mortality) than generally appreciated in the medical community. 

Although front line approval could bring up pricing questions and adoption would be smaller as a percentage of the population relative to refractory MAC patients, there is significant potential for increased revenue from a greatly expanded potential patient population.  As the chart above (on right) indicates, the U.S. has 80,000-90,000 total diagnosed NTM patients compared to 12,000-17,000 total refractory MAC patients.  Perhaps more interesting due to their screening process, Japan has 125,000-145,000 total diagnosed NTM patients compared to 15,000-18,000 total refractory MAC patients.

Valuation of ARIKAYCE

We estimate that ARIKAYCE revenues will reach peak revenues somewhere between $400M to $1.2B and we estimate a value of 2x-5x of revenue.  This equates to a wide range of valuation, but our base estimate is that valuation falls somewhere between $1.8B to $4.0B for ARIKAYCE based on $600M-$1B of peak revenue and 3x-4x revenue as a valuation multiple.  This comes to roughly $15-$34 per share.  Therefore, at $28 per share, we are buying Insmed for not much more than the value of their ARIKAYCE asset.  We look at this as the “pharma backstop” of our investment.  The upside to our investment is described in Pillars 2, 3 and 4 which are described below. 

Brensocatib: Potential Pipeline in a Product

While Insmed’s present valuation is mostly supported by ARIKAYCE alone, a source of upside potential is in Brensocatib.   Described by Senior VP of Clinical Development Kevin Mange at their research day in September of 2020 as “At a high level, we view Brensocatib as a pipeline in a product and a cornerstone of our efforts to build a portfolio around neutrophil-mediated diseases and the DPP1 pathway.  This novel, oral, once-a-day reversible DPP1 inhibitor represents an entirely new way to address a broad array of diseases”.

What is Brensocatib?

Brensocatib is a small molecule, oral, reversible inhibitor of DPP1, which Insmed licensed from AstraZeneca in October of 2016 (https://investor.insmed.com/2016-10-06-Insmed-Announces-Worldwide-License-Agreement-with-AstraZeneca-for-Oral-DPP1-Inhibitor).  DPP1 is an enzyme that is responsible for activating neutrophil serine proteases (NSPs) in neutrophils when they are formed in the bone marrow.  Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and mediating inflammation.  Neutrophils contain NSPs (including neutrophil elastase, proteinase 3, and cathepsin G) that have been implicated in a variety of inflammatory diseases.  In chronic inflammatory lung diseases, neutrophils accumulate in the airways and result in excessively active NSPs that cause lung destruction and inflammation. Brensocatib may decrease the damaging effects of inflammatory diseases such as bronchiectasis by inhibiting DPP1 and its activation of NSPs.  Expressed differently, there is abnormal mucociliary clearance which leads to bacterial infection.  This then drives chronic inflammation that leads to airway destruction.  Unlike prior bronchiectasis programs which have typically focused on providing intermittent inhaled antibiotics focused on the bacterial colonization process of the cycle, Brensocatib focuses on the neutrophil-mediated inflammation. 

In February of 2020, top-line data for the WILLOW study focused on Brensocatib efficacy on bronchiectasis met its primary endpoint for both 10mg and 25mg dosages.  Upon release of this information, shares of Insmed appreciated over 60% from roughly $20 per share to over $33 per share.  Further data from the WILLOW study was shared in June of 2020 and results were published in the New England Journal of Medicine in September of 2020.  Brensocatib was generally well-tolerated.  In June of 2020, the FDA granted breakthrough therapy designation for Brensocatib for the treatment of adult patients with NCFBE (non cystic fibrosis bronchiectasis).  In December of 2020, Insmed commenced a Phase 3 trial (ASPEN) which they hope will confirm the results seen in the WILLOW study for patients with NCFBE. 

Further support for the potential of Brensocatib was revealed in the “STOP-COVID19” trial.  In response to the outbreak of Covid-19, Professor James Chalmers of the University of Dundee (who led the WILLOW trial) approached Insmed to see whether Brensocatib might be effective for patients with severe Covid-19.  Insmed provided money and Brensocatib, but had no role in the design or conduct of the trial.  The multi-center study enrolled approximately 400 patients, predominantly very sick ICU patients suffering from Covid-19 and were at risk of needing increased supplemental oxygen and/or ventilation.  Although Brensocatib did not demonstrate evidence of a clinical benefit in treating Covid-19 patients, it did have an effect on the main target of neutrophil serine  proteases and, perhaps most importantly, there was no significant difference in adverse events amongst a group of extremely sick ICU patients.  In summary, STOP-COVID19 provided additional evidence that Brenscotatib appears to have a clean side effect profile and well tolerated by patients. 

The Likelihood of Efficacy of the Aspen Trial

Drug development is inherently unpredictable.  Taking a historical perspective, numerous companies have looked at neutrophil elastase with limited success.  Combined with challenging pricing for respiratory therapeutics, many of these companies have reduced investment or even sold off their assets.  For example, Insmed purchased the license for Brensocatib for a very small sum.  Therefore, the historic lack of success should offer a degree of caution since the WILLOW study, insights from STOP-COVID19, and references to animal models is not the same as showing dozens of successful trials.  Nevertheless, the pathway pursued in the WILLOW study showed effectiveness where others studies did not.

As we will discuss below, since the mechanism of action is as a neutrophil mediator, Brensocatib presents the possibility of an entirely new way to approach diseases where high neutrophil activity is a factor in the disease process.  To this end, AstraZeneca actually exercised an exclusive option to develop Brensocatib in asthma and chronic obstructive pulmonary disease (COPD).  AstraZeneca would bear sole responsibility for development through Phase 2b clinical trials and would permit AstraZeneca to pursue further trials and (ultimately) commercialization in these indications upon reaching commercially satisfactory terms with Insmed.  Most importantly, the WILLOW developments were meaningful enough to entice AstraZeneca to opt into something that they had previously discarded for a very small amount of funds and the FDA to grant Breakthrough Therapy designation.

What is the Market Opportunity for Brensocatib

If the ASPEN Phase 3 trial confirms the results seen in the WILLOW study, Brensocatib may represent a novel nonantibiotic treatment option for the prevention of exacerbations associated with NCBFE.  Currently, pulmonologists use antibiotics depending on the organism (e.g. pneumonia) to treat the infections from the bronchiectasis.   With Brensocatib, the medication treats the persistent inflammation (see cycle above) that could be leading to bronchiectasis instead of treating the infection from the bronchiectasis.  Even when Brensocatib is around, will still need antibiotics to treat infections from bronchiectasis because you will have infections.  Hopefully just less infections.  The trial is designed to evaluate efficacy on patients who have had two or more exacerbations in the prior year with the idea that Brensocatib can prevent exacerbations (symptoms so bad you end up in the hospital).  Therefore, the medication would (ideally) be given prophylactically to reduce exacerbation.  We believe that the commercial opportunity should easily exceed $1 billion in annual revenue for this indication since Brensocatib will be the “only game in town”.  In addition, Insmed recently reported that the CF Therapeutics Development network endorsed their study protocol for Brensocatib in the treatment of bronchiectasis in patients with cystic fibrosis.  The process for initiating the Phase II pharmacokinetics and pharmacodynamics studies are now underway and a list of potential indications for treatment are visible below.  

From an opportunity perspective, effective neutrophil elastase is of potential importance throughout the body and not just in pulmonary conditions.  As the Insmed’s CEO commented on the Q2 2021 earnings call, “I think if ever there was the potential for a pipeline in a product, it’s Brensocatib”. While a tempering of this enthusiasm might be justified, the bevy of indications to pursue (see above) coupled with ‘pipeline in a product’ benefits is quite promising.

The ‘pipeline in a product’ presents wonderful opportunities, but also challenges.  Over time,  the drug discovery team becomes more experienced in the given pathway and extensive research in a given area (neutrophil elastace) should help Insmed identify which indications to pursue.  Furthermore, as more patients take Brensocatib, Insmed’s understanding of safety and tolerability for new indications improves.  Regulator comfort and understanding likely improves as well. Perhaps less meaningful, but the units costs associated with a small molecule would continue to decline with scale of production.  These are all material benefits.  In contrast, there can be challenges to development for some indications because the population size is too small relative to the prevailing price of the drug to justify the investment associated with medical trials.  Alternatively, perhaps the  introduction of a drug like Brensocatib to an indication with a large population base might impact the payers willingness to pay a certain price point on the existing bronchiectasis population.  There is also the consideration of patent expiration in roughly 15 years which might also impact the net present value of development as that date draws closer.  Finally, there might arise a need to coordinate commercialization with Astrazeneca.  In summary, the pipeline in a product is a great problem to have, but it is clearly not without its complications.  

Applying a 70% likelihood of success in Brensocatib for bronchiectasis, we estimate a fair value approaching $23-$45 per share based on a range of $1.3B-$1.9B in peak revenue at a 3x-4x multiple (see below).  It is important to note that we did not apply any value for any indications besides bronchiectasis (including the Astrazeneca efforts in Asthma and COPD).  The drug that we considers the best example of a “pipeline in a product”, Dupixent from Regeneron is annualizing at nearly $6B in annual revenue with potentially a doubling from there as commercialization proceeds and additional indications are tested. 

https://www.fiercepharma.com/pharma/sanofi-s-dupixent-amid-eu10b-sales-push-posts-positive-data-chronic-spontaneous-urticaria

If Insmed’s CEO’s enthusiasm becomes reality, Brensocatib could be worth multiples of what is indicated below. 

Trepostinil Palmitil Inhalation Powder (TPIP)

Trepostinil Palmitil Inhalation Powder (TPIP) is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for pulmonary arterial hypertension (PAH) and other rare pulmonary disorders including interstitial lung diseases (PH-ILD) and idiopathic pumponary fibrosis (IPF) .  In summary, PAH is a backup in the heart pump.  As pressure increases because the right ventricle has to pump that blue blood through the lungs and force the blood into the left side where the backup is.  So PAH is a ‘left sided’ heart disease.  During Insmed’s R&D Day in September of 2020, Dr. Oudiz, an internationally recognized expert in PAH and lead investigator for Insmed’s plan Phase IIa trial for TPIP said that “the overall 2-year mortality untreated…if you were a functional Class IV patient (at the time in that registry), you had a 6-month 50% survival.  So it’s a very progressive and very devastating disease”. 

In December 2020, Insmed completed dosing of subjects in a Phase 1 healthy volunteer trial to assess the safety, tolerability and pharmacokinetics of TPIP.  In February of 2021, they announced the topline results which demonstrated that TPIP was generally well tolerated, with a pharmacokinetic profile that supports continued development.  Insmed’s TPIP medication is a “PRO” drug which means that it activated by enzymes, but not prior to exposure to them.  In this regard, TPIP is differentiated because the enzymes that TPIP is activated by are predominantly in the lung.  So the drug can navigate the body without much activation until it reaches its target (lung).  Since the activation is concentrated where it is intended (and not where it isn’t), the drug is designed to be less toxic.  Furthermore, it is longer lasting (nearly 24 hours) instead of a short spike and then a fall off which requires multiple dosing in a day and lapses at night.  Finally, since the active ingredient is the same as used in current treatment called Tyvaso, it is well understood and its side effect and tolerability profile are well known and established.  Combined with the apparent effectiveness in the Phase 1 trial makes this an intriguing opportunity for Insmed since Tyvaso revenues are ~ $540M over the past year despite the small target patient population.  Pricing is clearly attractive and so is the potential of TPIP.  As CEO Will Lewis said TPIP “has the potential to be the cornerstone of therapy for the treatment of PAH and PH-ILD.  By unlocking the full potential of prostanoid therapy, we believe TPIP could provide a disease-modifying impact for patients in need”.  We are not sure what is implied by “disease-modifying impact” in the upside/reasonableness of what is implied above, but we estimate an 85% chance of commercialization and roughly $400-$600 of peak revenue.  This implies a fair value of roughly $9-$17 for TPIP based on $400-$600 in peak annual revenue and a 3x-4x peak revenue multiple.

Investment in Translational Medicine

With ARIKAYCE, Brensocatib, and TPIP, Insmed has multiple promising opportunities to create value.  Since launching the commercialization efforts in ARIKAYCE with (arguably) a limited infrastructure, Insmed has been investing in additional human capital as well as raising financial capital in the public markets.  Despite a compelling portfolio for a smaller organization, the company seems to have aspirations to continue to expand its portfolio.  The 4th Pillar of growth at Insmed was recently described by the CEO as “translational medicine”.  According to the European Society for Translational Medicine, this terminology can be described as “an interdisciplinary branch of the biomedical field supported by three main pillars: benchside, bedside, and community”.  Insmed itself doesn’t provide any further indication of focus except that information should be announced with clinical candidates within the next 12 months. 

Recent Acquisition

As we describe below, Insmed has raised a significant amount of capital in past years and most recently.  While we are not sure of the needs for such a large capital investment, we believe that it exceeds what is required for ARIKAYCE, Brensocatib, and TPIP.  Therefore, our guess is that it will be used for new initiatives and perhaps to support the Translational Medicine Pillar.  In this regard, in August 2021, the Company acquired Motus Biosciences and AlgaeneX.  Although there were distinct terms of shares, cash payments, and milestones, the two entities appear to be founded by a similar individual, incorporated around the same time (mid-2020), and based out of the same San Diego office. 

In summary, we anticipate learning more about these acquisitions and investments in Translational Medicine in time but, for now, ascribe no value to this Pillar.

Management and Capital Allocation

In Q221, Insmed raised $350M in incremental (face value) of convertible debt that matures in 2028 and converts at roughly $32.50 per share.  After using some proceeds to pay off part of the outstanding 2025 Convertible Notes, the company has $225M and $575M of convertible notes that mature in 2025 and 2028, respectively. Alongside the increased issuance of convertible debt, the company issued 11.5M shares of new Insmed stock for $270M in proceeds.  In total, $625M in addition capital was raised.  Interestingly, the company ended Q121 with over $400M in cash and, through the first half of 2021, experienced a $140M cash drain.  Despite having roughly 18 months of cash on hand, the Company decided to raise an additional $625M. Despite Wall Street’s concern with the capital raise described above, we trust that over time, capital will be deployed to high anticipated return projects as has generally been achieved in recent history (e.g. Brensocatib, TPIP, etc.). 

From a broad valuation perspective, the company has roughly $930M in cash and equivalents at the end of Q221.  We assume that this cash offsets both the long-term debt obligation as well as the remaining development costs (and some cash burn) for Pillar I through Pillar III. 

Below we provide valuation estimates for a range of outcomes at Insmed.  In a bearish scenario, we assume that only ARIKAYCE is commercialized.  Everything else fails in clinical trials.  The Base valuation is predicated on the midpoint of the ranges highlighted in yellow and provided for each indication described above.  The Bull valuation is the high end of the ranges highlighted in yellow for ARIKAYCE and TPIP but allowing for some positive additional developments in Brensocatib.  But in a true “bullish scenario”, Brenscotib’s bullish scenario is probably conservative. 

Catalyst

- Brensocatib positive data update
- ARIKAYCE ramp-up, including in Japan and Europe
- Takeout