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DIRTY DOZEN RESEARCH: NO AGENDA

InSite Vision Incorporated

ISV (Amex)$2.20

March 27, 2002

RECOMMENDATION:BUY

(This report may not be reproduced)

D. Paul CohenDirty Dozen Research: No Agenda

Tel: 415 454 6985Fax: 415 455 0295

e-mail [email protected]

Share Data Share Data Ratios Values Price $2.20 EPS TTM -0.38 P/E TTM Nm 52 W High $2.99 Est. EPS FY02 -0.07 Est. P/E FY02 Nm 52W Low $0.99 Est. EPS FY03 0.19 Est. P/E FY03 11.63 Mkt Cap (MM) $55.04 Sales TTM 0.00 P/Sales TTM Nm Shares Out 24.91 Current Ratio 6.75 P/Cash Flow TTM Nm Float 22.00 Book Value 12/31 0.38 P/Book 5.81 Mo Volume 0.65 Inst Own 12% ROE TTM -66.56% Daily Volume 0.02 Insiders Own 12% LT Debt/Equity 0.01


INSITE VISION INCORPORATED 2

The Company Investment Background Investment Considerations The Investment Thesis - The Inflection Point Pay Off Business Strategy Marketing Strategy An Overview of the Product Pipeline ISV-900 – OcuGeneISV-205ISV-401ISV-403AquaSiteISV-014Our 2002 Model and Financial Highlights, 2001 Table 2: Product Market PotentialMinus Dartnership Deals = Estimated Revenues, 2002 – 2006ERecent Events Industry and Market Overview Glaucoma Diabetic Retinopathy Table 3. InSite’s Therapeutic Products and Product CandidatesAge-Related Macular Degeneration An Overview of Insight’s Technology and ProductsThe DuraSite® Eye Drop System(ISV-014) A Second Delivery System Genetic Tools for Diagnosing and Determining the Prognosis of GlaucomaThe Ocular Conditions Targeted by InSiteDry Eye Figure 1: Normal eyeGlaucoma Figure 2: Aqueous fluid drainage in normal eye Table 4. Characteristics of the Different Types of GlaucomaHow Common is Glaucoma and Who Gets It? Limitations of Current Detection Methods Figure 3. Two boys as seen by normal vision and with glaucoma Figure 4. Schematic diagram TIGR gene and the protein it encodesInsite’s Diagnostic/Prognostic Tools for Glaucoma OcuGeneTM and the TIGR Gene Figure 5. Effect of Mt-1 on Glaucoma severity Figure 6. Effects of mt-1 on intraocular pressure in ocular hypertensive patients The OPTN Gene and Normal-Tension GlaucomaTreating GlaucomaISV-205: A Therapeutic Tool in InSite’s Product PipelineEye Infections and Antibiotic DuraSite Formulations Figure 7. Photograph of an eye with bacterial conjunctivitisISV-401 ISV-403 A Novel Treatment for Diabetic Retinopathy and Macular Degeneration Figure 8. Two boys as seen with normal vision and with diabetic retinopathy .Diabetic Retinopathy Macular Degeneration InSite’s Angiogenesis Inhibitor InSite’s Drug-Delivery SystemsThe DuraSite® Eye-Drop Delivery System

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Contents



Figure 9. The DuraSite eye-drop formulation Figure 10. The ISV-014 Intra-Scleral Drug Delivery SystemThe ISV-014 Retinal Delivery Device CompetitionGlaucoma AgentsRetina ProductsAntibiotics Table 4: Officers and Director Table 5: Beneficial Share OwnershipManagement and Board of Directors Management Officers Board of Directors Table 6: Institutional OwnershipInstitutional Ownership Valuation Table 7: A 34 Company Comparative ValuationBull CaseBear CaseConclusion GLOSSARY APPENDIX FINANCIAL DATA Table 8: Annual Balance Sheet Table 9: Consolidated Statements of Cash Flow Table 10: Annual Income Statement

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THE COMPANY

InSite Vision Incorporated (AMEX: ISV) is anophthalmic product development companydeveloping genetically based tools for thediagnosis, prognosis and management ofglaucoma, as well as ophthalmic pharmaceuticalproducts based on its proprietary DuraSite eyedrop-based drug delivery technology. TheCompany’s focus is on the discovery of genesaffecting genetic testing and screening anddeveloping therapeutics based on thesediscoveries. The Company’s retinal programsinclude both therapeutic agents and drug deliverytechnologies. ISV’s research and developmentfocuses on expanding its ISV-900 technology forthe genetic diagnosis, prognosis and managementof glaucoma. R&D is also focused on ISV-205, aDuraSite formulation for the treatment ofglaucoma; ISV-401, a DuraSite formulation of anovel antibiotic not used in ophthalmology; ISV-403, a DuraSite formulation of a second-generation fluoroquinolone; ISV-014, a retinal drugdelivery device, and treatments for diabeticretinopathy and macular degeneration. TheCompany, located in Alameda, California wasformed in 1986 and employs 41 people.

INVESTMENT BACKGROUND

InSite delivers advanced solutions into a readymarket. If diagnosed early, diseases of the eye,such as glaucoma can be managed and treatedwith limited long-term effects. Currently, thereare no medical tools that can predict the severityof this disease. InSite’s genetic screening basedapproach to diagnosis answers this shortcoming.

There is no cure for degenerative retinal diseasessuch as diabetic retinopathy and age-relatedmacular degeneration. Promising drugs often failin early clinical trials because they cannot bedelivered effectively or safely to the retina. Insevere disease, the medical therapies ofteninvolve surgery or lasers which are not applicableto everyone and in some cases damaging to thesensitive retinal tissue. Partial to severe vision loss(blindness) results in many cases. InSite’sDuraSite formulations of anti-angiogeniccompounds and delivery device for the non-

surgical delivery of drugs to the retina are beingdeveloped for safe and targeted delivery to theretina, non-invasiveness and broad applicability.

The biotech industry has emerged as one of themost promising post 911 sector groups. Whilemany of the larger biotech stocks have reboundedsignificantly, shares of ISV common lagged untilearly December 2001, rising thereafter 65%following the initiation of coverage by a majorWall Street investment banking firm. This priceincrease outpaced the American ExchangeBiotechnology Index (Amex: ^BTK), which hasdeclined 20% over the same period. This shareappreciation supports one of the major tenets ofour investment thesis: ISV shares will gainsignificant upward price momentum as Wall Streetbegins to understand the story.

INVESTMENTCONSIDERATIONS

ISV common currently trades at $2.20, well abovethe $1.00 to $1.50 trading range of May to midDecember 2001, below its 52 week high of $2.99reached in March, 2001, but well above its 52week low of $0.90. We believe some of the shareprice decline reflects the stock market’s valuationof the Company’s reduced cash position year overyear. FYE 2000 working capital of $18.30 milliondecreased to $8.75 million at FYE 2001.

The Company’s near-term prospects depend onthe success of OcuGene, which we believe hassignificant market potential. At December 31,2001, ISV reported $10.27 million of cash andcash equivalents, little in the way of long-termliabilities ($45,000) and total liabilities of $1,566million. At its current quarterly burn rate of $3million dollars, the Company has liquidity to lastanother four quarters. The current burn rate doesnot factor in the successful launch of OcuGeneand the licensing of other product candidates inthe pipeline. We believe the Company will continueits past success in raising capital to fund itsoperations. To date, InSite has not generated anyrevenues from the sale of its products, although ithas received nominal licensing royalties and hasreceived research and development



reimbursements, which were significant in 2000.We anticipate a substantial $5 million dollarlicensing deal in CY 2002.

The Company’s major competitors are AllerganPharmaceuticals, a division of Allergan, Inc.;Alcon Laboratories, Inc., a division of NestleCompany; Bausch and Lomb; CIBA Vision, adivision of Novartis Ltd.; Merck, Sharp & Dohme,a division of Merck & Co., Inc., and PharmaciaCorporation.

THE INVESTMENT THESIS -THE INFLECTION POINT PAYOFF

Shares of ISV common are an exciting investmentopportunity. InSite is only beginning to ramp up apowerful sales cycle, the result of $67.9 milliondollars of R&D spending over the past 10 years.We believe that this is the inflection point pay off.Risk is associated with the capital raising functionand execution of marketing plans, similar to manyother smaller biotech companies. The Companyis well positioned with products in growingophthalmic markets, specifically with respect toglaucoma. We believe the current share pricedoes not fully reflect the Company’s potentialrevenue and earnings growth based on thestrength of the product pipeline and significantmarket potential.

It is our view that ISV’s ability to deliver geneticbased solutions into a two billion dollar marketwill generate exciting growth. If the Company issuccessful in its launch of two products,OcuGeneTM and its corporate relationship, theseevents will result in significant upside in shareprices, resulting from impressive revenue andearnings growth beginning in 2002. Institutionalownership comprises approximately 12% ofshares outstanding. We believe there isconsiderable upside share appreciation availableas the Company’s common stock gains exposureand interest of Wall Street institutional investors.Those investors willing to accept inherent capitalraising risks associated with a small biotechnologyCompany may be handsomely rewarded in thelong run.

Revenue and earnings growth should allow ISVshares to command a price to earnings (P/E)multiple more in line with its micro-capbiotechnology company peers. Applying a multipleof 15x to our 2003 EPS of $0.19, results anintermediate target share price of $2.80. Our long-term target price of $11.00 per share is based ona multiple of 15x, less a 20% discount factor, ofour 2004 EPS estimate of $.98. The bonus maybe that the market could command a premiumfor top and bottom line growth performance,including an anticipated growth rate in excess of50% during the next four years.

BUSINESS STRATEGY

InSite Vision’s focus is on the development of1) diagnostics, 2) therapeutics, and 3) drug-delivery solutions applicable to glaucoma and otherophthalmic diseases. The Company’s applicationsare based on three technology platforms:1) genetics based tools for the diagnosis andprognosis of Glaucoma; 2) DuraSite, an eye-dropsystem for the sustained-release and delivery ofdrugs for up to six hours; and 3) a nonsurgicaldelivery system for administering drugs to theretina and posterior segment of the eye.

The Company’s research and development focusis on expanding its genetically based tools for thediagnosis, prognosis and management ofglaucoma, based on its ISV-900 technology. Inaddition to the aforementioned products, ISV hasa rich pipeline of diagnostic, therapeutic and drug-delivery systems targeted at glaucoma and otherophthalmic conditions. Each of the therapeuticproduct candidates is based on the Company’sproprietary DuraSite drug delivery system. Theseinclude:

♦ ISV-205, a DuraSite formulation for thetreatment of glaucoma

♦ ISV-401, a DuraSite formulation of a novelantibiotic not currently used in ophthalmology

♦ ISV-403, a DuraSite formulation of a fourthgeneration fluoroquinolone

♦ ISV-014, a retinal drug delivery device



♦ ISV-616, a DuraSite formulation for thetreatment of diabetic retinopathy and maculardegeneration.

MARKETING STRATEGY

InSite’s marketing strategy is to license promisingproduct candidates and technologies fromacademic institutions and other companies, toconduct necessary preclinical and clinical testing,and to partner with pharmaceutical companies forthe purposes of completing needed clinicaldevelopment and regulatory filings, and to marketthe Company’s products. In addition, the Companyhas internally developed DuraSite productcandidates based on either non-proprietary drugsor compounds developed by others for non-ophthalmic indications. InSite has partnerships inplace and/or plans to partner with pharmaceuticalcompanies to complete clinical development andcommercialization of its own product candidates.

InSite’s reliance of future marketing partners isan intelligent approach to bringing its products andcompounds to the market. Small biotechdevelopment companies traditionally have haddifficulty developing compounds while building anin house marketing and sales force for productdelivery to the market place. ISV currently haslicensing agreements with Bausch & Lomb forISV 208 (currently not pursuing finaldevelopment), Novartis: marketing AquaSite andthe use of ISV-205 in inflammation, ColumbiaLaboratories: for DuraSite in ophthalmicindications, Global Damon Pharmaceuticals inSouth Korea: for AquaSite, INSERM, for therights to apoE for the use in diagnosis of glaucoma,SSP Co., Ltd, for SS734, a novel fluoroquinoloneantibiotic, the active drug in ISV 403, Universityof California: for the TIGR gene, University ofConnecticut: for the Optineurin and CYPIBI foradult onset glaucoma and primary congenitalglaucoma (PCG) genes, and University ofUppsala in Sweden: glaucoma genetics.

While ISV has both an inter-Company andcontract sales force for the marketing of OcuGene,it is actively looking for a major marketing partner.In house marketing strategy includes direct mail,the OcuGene website targeted at both physicians

and patients, advertising in professional magazinesand media, teleconferences and programs withinstitutions such as the American Academy ofOphthalmology. ISV-205, and ISV-401 areanticipated for product launch during 2004. ISV-403 and ISV-616 are scheduled for FY 2005.

AN OVERVIEW OF THEPRODUCT PIPELINE

ISV-900 – OcuGene

In September 2001, the Company announced thelaunch in the United States of its first commercialproduct based on its ISV-900 technology for thediagnosis, prognosis and management of primaryopen angle glaucoma (POAG). The OcuGeneglaucoma genetic test is the first commercializedgenetic test that screens for the presence of apromoter region mutation and several codingregion mutations of the TIGR gene. This test isbased on published studies showing that subjectswith coding region mutations have a highprobability of developing glaucoma as well as theassociation between the pressure of the promoterregion variant and a more aggressive form ofglaucoma. ISV-900 is being launched under thebrand name OcuGene glaucoma genetic test. TheCompany’s near-term prospects are heavilydependent on the success of OcuGene in themarketplace. We believe that OcuGene is basedon strong science and is well positioned in a largemarket with significant demand for the Company’sproduct.

ISV-205

The ISV-205 product candidate contains the drug,diclofenac, formulated in the DuraSite sustained-release delivery vehicle. This DuraSiteformulation contains a drug that has been shownin cell and organ culture systems to inhibit theproduction of a protein known as the TIGR proteinthat appears to cause glaucoma. Diclofenac is anon-steroidal anti-inflammatory drug (NSAID)that is traditionally used to treat ocularinflammation. The ISV-205 product candidate hasbeen shown to deliver sufficient concentrations



of diclofenac to the eye that have been shown incell culture systems to inhibit the production ofthe TIGR protein.

A clinical study published in the September 2001issue of Clinical Genetics, showed a correlationbetween the presence of the promoter regionmutation in individuals with POAG and a moreaggressive form of glaucoma including morevisual field damage. Published studies have alsoshown the correlation of the coding regionmutations included in our test and a highprobability of developing glaucoma.

A Phase IIa clinical study was successfullycompleted in 1999 to evaluate the efficacy oftwo concentrations of diclofenac. Data from thisstudy showed that ISV-205 was safe andeffective in reducing, by 75%, the number ofsubjects with clinically significant IOP elevationfollowing steroid use. Other potential indicationsmay include glaucoma prevention, analgesia andanti-inflammatory indications. Co-exclusive rightsin the United States to develop, manufacture, useand sell ISV-205 to treat inflammation or analgesiawere licensed to CIBA Vision in May 1996.

ISV-401

ISV-401 is a formulation of a broad-spectrumantibiotic for use in ophthalmology. A broadspectrum antibiotic could be used by physiciansto treat a variety of ophthalmic diseases, ratherthan targeting each disease specifically. TheCompany filed an investigational New Drug(IND) application with the FDA in FY2001. TheCompany is involved in Phase II clinical trials totest efficacy of the formulation in bacterialconjunctivitis (pink eye).

ISV-403

Fluoroquinolones are effective against gram-positive and gram-negative bacteria, includingpseudomonas, and are often used as prophylaxisduring ophthalmic surgery. Fourth-generationfluoroquinolones have expanded bacterialsensitivities and may be effective against theantibiotic-resistant bacteria that have developed.Based on preclinical studies, ISV-403 mayprovide for a reduced dosing frequency andenhanced efficacy.

AquaSite

In October 1992 the first product utilizing theCompany’s DuraSite technology was introducedby CIBA Vision to the over-the-counter marketin the United States. The Company receives aroyalty on sales of AquaSite by CIBA Vision. Theproduct contains the DuraSite formulation anddemulcents for the symptomatic treatment of dryeye. In March 1999, the Company licensed theproduct to Global Damon Pharma, a KoreanCompany. The license is royalty-bearing, has aterm of 10 years and is exclusive in the Republicof Korea. In August 1999, the Company enteredinto a 10-year license with SSP Co., Ltd. for salesand distribution in Japan.

ISV-014

ISV-014 is a device that is used to place a smallamount of drug under the surface of the sclera(white of the eye) under local anesthesia for thetreatment of degenerative retinal diseases suchas diabetic retinopathy and maclular degeneration.A metering mechanism controls the amount andrate that the drug is introduced into the tissue.This produces a highly localized depot of druginside the eye adjacent to the diseased sites inthe retina. Drug diffuses to the sites of diseasewithout entering the systemic circulation andcausing systemic side effects. The Companyholds one patent related to the device and scleraluse and has filed one other. The company isinvestigating licensing this technology to a thirdparty. If diagnosed and treated early, diseases ofthe eye, Diabetic Retinopathy, and Age-RelatedMacular Degeneration can be efficaciouslytreated with limited long-term effects.Unfortunately, these diseases tend to beasymptomatic and are therefore often notdiagnosed early enough. Partial to severe visionloss (blindness) is too often the result.

OUR 2002 MODEL ANDFINANCIAL HIGHLIGHTS, 2001

ISV recorded a net loss of -$9.6 million in 2001,or -$.38 cents per share compared with a net lossof -$3.4 million in 2000, or -$.15 cents per share.The Company reported a net loss of -$2.8 million



Company Product Target Radio-

in 4Q01, or -$.11 per share compared with netincome of $2.5 million in 4Q00, or $.10 per share,which included the recognition of deferredlicensing revenue of $3.3 million under a researchand licensing agreement with PharmaciaCorporation. The increase in losses over the priorperiods resulted from higher R&D costs, of whicha smaller portion was reimbursed, and higherG&A expenses. The decreases in reimbursedR&D expenditures reflect payments in 2000 forseveral joint development programs by PharmaciaCorporation. The increases in G&A to $3.5 millionin 2001 from $2.6 million in 2000 were related topersonnel and materials to support the sales andmarketing activities for the introduction of theOcuGene glaucoma genetic test.

Our Model estimates that 2002 revenues will risedramatically resulting from the ramp in productrevenue, primarily from OcuGene (ISV – 900),and one-time license fees of $2.5 million each inQ2 and Q3 during 2002. Research andDevelopment expenses will decrease from $7.3million in 2001 to $4.3 million in the current fiscal

year. General and Administrative expenses areestimated to increase from $3.5 million in 2001 to$6.5 million in 2002. The increase in revenue fromvirtually nil in 2001 to $12.2 million in 2001 willmore than offset increases in G&A expenses toresult in a reduction of operating losses to ($2.0)million in 2002 from ($9.4) million in 2001. Weestimate earnings per share will improve from-$.38 cents in 2001 to –($.07) cents in 2002. Witha cash burn rate of approximately 2.5M - $3Mper quarter, $10.1 million of cash and equivalentsat year-end 2001, and positive cash flows fromoperations in 2003, the Company’s business planshould be fully funded upon an additional capitalraise of between $5 - $10 million. We havemodeled a raise in 2003, although it is possiblethat additional capital will be funded in 2002.

Table 2: Product Market Potential

Minus Dartnership Deals = Estimated Revenues, 2002 – 2006E

Est. Dirty Dozen Research: No Agenda

Note that in Table 2, we have estimated total product market potential, less payments to third parties. Thenet result is our estimated annual revenues and our corresponding estimates of earnings per betweenfiscal years 2002 and 2006.

2002E 2003E 2004E 2005E 2006E

OcuGene (ISV-900) $5,900 $26,500 $43,250 $51,000 $59,000

ISV-205 ~ ~ 20,000 35,000 58,000

ISV-401 ~ ~ 38,000 67,000 109,000

ISV-403 ~ ~ ~ 11,000 23,000

ISV-616 (Angiogenesis Inhibitor) ~ ~ ~ ~ 19,000

ISV-014 (Intrascleral Drug Delivery Device) 700 2000 4,300 6,800 17,750

AquaSite 600 3000 6,100 10,150 14,500

Total Product Market Potential $7,000*** $31,500 $111,650 $180,950 $300,250

Estimated Annual Revenues** $12,200 $24,825 $65,000 $80,000 $111,076

Estimated Shares Outstanding 26,000 30,000* 30,500 31,500 32,500

Estimated Earnings Per Share (0.07) 0.19 0.98 1.29 1.55

* assumes a $10M financing

** = Market Potential less partnership deals

*** Does not include $5M licensing fee



RECENT EVENTS

March 2002 – ISOPP meeting ISV 205 PhaseII b study.

Feb 2002 – Hall St. Forum

Feb 2002 – InSite released 2001 fourth quarterand full year financial results.

Feb 2002 – The discovery of the Optineurin geneand its mutations, which have been reported tocause normal-tension glaucoma (NTG). InSiteVision announced that it has licensed exclusive,worldwide rights to the gene and its mutationsfrom the University of Connecticut, the gene’sdiscoverer and pending patent holder. Will createa genetic test to screen for this gene.

Dec 2001 - InSite Vision Incorporated announcedthat it has initiated a Phase II clinical study withISV-401 for the treatment of bacterialconjunctivitis. ISV-401 is a DuraSite formulationof a broad-spectrum antibiotic not currently usedin ophthalmology.

Sept 2001 - InSite Vision Incorporated LaunchesGenetic Test for the Management and Detectionof Glaucoma. InSite Vision Incorporatedannounced that it has launched its first commercialproduct, the ISV-900 test for the early prognosisand diagnosis of glaucoma. ISV-900 is beinglaunched under the brand name OcuGeneglaucoma genetic test.

Sept 2001 - InSite Vision announced the initiationof a Phase I clinical study with ISV-401, aformulation of a broad-spectrum antibiotic, notcurrently used in ophthalmology, in the DuraSitesystem. DuraSite is the Company’s proprietarypatented drug-delivery vehicle offering thebenefits of prolonged time-release of an activeingredient.

May 2001 - InSite Vision stock fell sharply asthe Company reported that Pharmacia hasreturned development and commercializationrights to its treatment for glaucoma (ISV-205)following the recent completion of a Phase IIbstudy. The Company said the results of the studywill be made available at a future date.

April 2001 - InSite Vision announced that it hassigned a licensing agreement for ophthalmicindications for two fluoroquinolone compounds,SS732 and SS734, from SSP Co. Ltd. of Tokyo.InSite Vision will develop the SS734/DuraSite drugproduct (ISV-403) in the United States andEurope, while SSP will develop the product forJapan. InSite Vision will have exclusive rights touse of these compounds in ophthalmology in theUnited States and Europe, SSP in Japan, and rightswill be shared by the parties in Asia.

INDUSTRY AND MARKETOVERVIEW

Glaucoma

There are approximately 50 million glaucomasufferers worldwide, according to the WorldHealth Organization, resulting in over 5 millionreported cases of blindness. An estimated 3 millionpeople in the U.S. have the disease. At least halfof those with glaucoma are undiagnosed and asmany as 120,000 are blind as a result. Glaucomaprimarily affects the elderly and can occur as aprimary disorder or it can be secondary to otherocular or systemic conditions. Glaucoma relatedblindness costs the U.S. Government $1.5 billionannually in the form of Social Security benefits,lost tax revenues and healthcare expenditures.The disease is easily treatable without significantvision loss if detected earlier. Unfortunately, thedisease is often asymptomatic until wellprogressed.

Diabetic Retinopathy

Worldwide incidence of diabetes has increasedfive-fold from 30 million to 143 million in the pastten years and is projected to reach 300 million by2005. Approximately 6% of the U.S. population,or 16 million Americans have diabetes. Diabeticshave 25 times more risk of blindness than non-diabetics. According to the American DiabetesAssociation, diabetes causes 12,000 to 24,000 newcases of blindness annually in the U.S. in adultsaged 25 to 74 years. Diabetes is the leading causeof blindness among working age Americans.According to research conducted by the NationalEye Institute, between 40 to 45% of Americans



diagnosed with diabetes have some degree ofdiabetic retinopathy and between 600,000 and700,000 Americans have diabetic retinopathysevere enough to cause vision loss. Studies haveshown that early detection and treatment cansignificantly reduce complications associated withdiabetic retinopathy.

Age-Related MacularDegeneration

Age-Related Macular Degeneration (AMD) is aleading cause of vision loss in the elderly.According to the American Macular Foundationthere are some 40 million “at risk” people in theU.S., with only one million diagnosed. The risk ofAMD increases with age. An estimated 5.8% ofthe over 45 population are affected by AMD. Thisrate increases to 8.8% in people over the age of52. The risk rises to almost 30% in the over 75-age group. Given the rapid aging of America,AMD could become a more prevalent cause ofblindness than both diabetic retinopathy andglaucoma combined.

The target market for InSite Vision’s products isvast, estimated at $2 billion annually. This marketis being driven by factors including an agingpopulation, healthcare systems shifting their focusfrom treatment to prevention of eye diseases,rising expectations for the quality of vision care,greater awareness, and eye care practitionerschallenged to meet the expectations of patients,and payers. It is estimated that approximately 250million primary care eye examinations areconducted annually in the developed world, ofwhich about 85 million are conducted in the U.S.alone.

AN OVERVIEW OF INSIGHT’STECHNOLOGY ANDPRODUCTS

InSite Vision’s mission is to develop products thataid in the fight against glaucoma and otherdebilitating diseases of the eye. InSite currentlyhas three distinct technology platforms:

Table 3. InSite’s Therapeutic Products and Product Candidates

IOP: intraocular pressure

PRODUCT

ACTIVE

COMPONENT

INDICATIONS

ANTICIPATED

BENEFITS

STATUS

(TARGETMARKET DATE)

AquaSite

Dry eye

Reduced dosing frequency/ prolonged duration of action

Marketed

ISV-205

Diclofenac

Steroid-induced IOP elevation Glaucoma

Prevent disease progression

Phase IIb (2004)

ISV-401

Broad-spectrum antibiotic

Bacterial infection, including ophthalmia neonatorum

Reduced dosing frequency

Preclinical (2004)

ISV-403

Fourth-generation fluoroquinolone

Bacterial infection

Reduced dosing frequency effective against resistant bacteria

Preclinical (2005)

ISV-616

Angiogenesis inhibitor

Diabetic retinopathy Age-related macular degeneration

TBD Localized and effective delivery

Preclinical (2006)



The DuraSite® Eye DropSystem

The DuraSite system is a polymer-based, patentedeye-drop formulation that prolongs the durationof a drug’s delivery to the eye, allowing lessfrequent administration. The Company’s intentionis to improve compliance with the treatmentregimen while reducing the potential for adverseevents. This delivery system can be used with awide variety of drug candidates.

(ISV-014) A Second DeliverySystem

ISV-014 is still in development. The ISV-014intra-scleral drug-delivery device allows thecontrolled and minimally invasive delivery of drugsto the retina and other tissues in the posterior (rear)chamber of the eye. The ISV-014 device may beuseful with a variety of drug candidates.Combining this device with gene delivery orpolymer-based drug platforms may allow long-term delivery of therapeutic agents to treat retinaldiseases, most of which cannot be effectivelytreated at the present time.

Genetic Tools for Diagnosingand Determining thePrognosis of Glaucoma

InSite’s glaucoma genetics program is focusedon discovering gene mutations that are associatedwith glaucoma. The Company intends to use thesediscoveries to develop new diagnostic, prognostic,and management tools for glaucoma. To date, theCompany’s academic collaborators at variousresearch centers in the Unites States and Europehave identified genes (TIGR, OPTN) associatedwith open-angle glaucoma, juvenile glaucoma, andprimary congenital glaucoma. InSite’s OcuGeneTM

test kit normal tension glaucoma identifiesmutations in the TIGR gene, providing diagnosticand prognostic information to helpophthalmologists make treatment decisions forpatients suspected of having glaucoma. InFebruary 2002, InSite licensed the worldwiderights to the optineurin (OPTN) gene and its

mutations. ISV plans to develop a genetic testbased on this technology that will complement theTIGR-based OcuGene test.

InSite’s therapeutic product pipeline is growingquickly. The drug discovery program has alreadyyielded one marketed and at least four potentialDuraSite-based therapeutic products (Table 1).All except AquaSite® are expected to be onlyavailable by prescription.

THE OCULAR CONDITIONSTARGETED BY INSITE

Dry Eye

AquaSite for treating dry eye was InSite’s firstmarketed product to use the DuraSite technology.Dry eyes are caused by failure to produce enoughtears or alteration in the natural composition oftears. Fewer tears are produced. Symptoms ofdry eye increase as people age. Temporarysymptoms of dry eye can be caused by exposureto environmental factors and pollutants, includingcomputer screen viewing, due to reduced blinking;indoor heating systems, skiing, and airplane travel;medications (eg, antihistamines, oralcontraceptives, anti-depressants); and burns to theeye. Dry eye may also be associated with poorgeneral health or medical conditions (eg, arthritis).

Untreated, excessive dry eye can damage tissue.Dry eye can make contact lens wear moredifficult, and in some cases impossible. In extremecases of dry eye, the cornea may becomescratched and scared, which impairs vision, orcauses infection.

Dry eye cannot be cured, but the symptoms canbe reduced with eye drops (artificial tears or tearsubstitutes). For more severe dry eye, ointmentcan be used, usually applied at bedtime. In verysevere cases, small plugs may be inserted in thecorner of the eyelids to slow drainage and loss oftears. AquaSite is an over-the-counter (OTC)treatment for dry eyes caused by environmentalpollutants. AquaSite was launched in 1992 byCIBA Vision (Novartis Ophthalmics), to whichthe Company has licensed certain co-exclusiverights.



Glaucoma

InSite’s second product to market is trademarkedas OcuGeneTM, a diagnostic/prognostic test forglaucoma. Glaucoma is a general term thatdescribes several different eye manifestiationswith varying degrees of intensity and speed ofprogression. All are characterized by damage tothe optic nerve (optic neuropathy). The opticnerve is a bundle of more than 1 million nervefibers that connects the retina, the light-sensitivelayer of tissue at the back of the eye, with thebrain (Figure 1). The optic nerve transfers the“pixels” of each image to the brain for processinginto a complete image. A healthy optic nerve isnecessary for good vision.

The firm, round shape of the eye is maintainedby a pressure within the eye (the intraocularpressure), which is normally between 8 mm and21 mm Hg. When the pressure is too low, the eyebecomes softer. If the pressure is too high theeye may become harder. The optic nerve is themost susceptible part of the eye to high pressurebecause the delicate fibers in this nerve are easilydamaged. The most common types of glaucoma(Table 2) are caused by an increase in the pressureof the aqueous fluid in the eye (intraocularpressure [IOP]) that progressively damages theoptic nerve.

The front of the eye is filled with a clear fluid(the aqueous humor or aqueous fluid) thatnourishes the structures in the front of the eye.This fluid is produced constantly by the ciliarybody, which surrounds the lens of the eye. In thehealthy eye, the aqueous humor flows in and outof the anterior chamber at the front of the eye(Figure 2) to bathe and nourish nearby tissues.The fluid leaves the anterior chamber through tinychannels (the trabecular meshwork) located atthe angle where the cornea and iris meet.

In most types of glaucoma, the fluid is blocked ordrains too slowly out of the eye due to a buildupof “sticky” protein in the drainage system of theeye and as a consequence the pressure rises. Ifnot controlled, the increased pressure can damagethe optic nerve, other parts of the eye and causevision loss. Glaucoma usually occurs in both eyes(bilateral). Currently, damage from glaucomacannot be reversed. Treatment to relieve thepressure can prevent or slow vision loss.

Glaucoma is usually asymptomatic in its earlystages. Vision changes may be absent or so subtlethat they go unnoticed. As glaucoma progresses,the “pixels” associated with the affected nervefibers become dimmed or completely lost to theimage, resulting in a gradual loss of peripheral(side) vision, leaving the individual able to see onlythings at the center of the field of vision (Figure3). If undiagnosed and untreated, glaucoma canprogress to loss of central vision and blindness.

Figure 1: Normal eye

Source: National Eye Institute, NIH

Figure 2: Aqueous fluid drainage in normal eye

Source: National Eye Institute, NIH



How Common is Glaucomaand Who Gets It?

Glaucoma is the largest cause of bilateralblindness in individuals of African descent andafter cataracts, the second most important causeof blindness in Caucasians. More than 67 millionpeople worldwide are afflicted with glaucoma, andmore than 6 million individuals are blind in botheyes from this disease. Of the 3+ millionAmericans estimated to have open-angleglaucoma—the most common type ofglaucoma—approximately half are unaware ofthe disease.

Risk factors for developing glaucoma include:

♦ Abnormally high intraocular pressure

♦ Glaucoma in a close family member

♦ African descent

♦ Age over 60 (40 for individuals of Africandescent)

♦ Diabetes

♦ Myopia (nearsightedness)

♦ Regular, long-term steroid/cortisone us

♦ Previous eye injury

High intraocular pressure is a risk factor forglaucoma. However, this pressure does notnecessarily mean that an individual will developthe disease. Whether or not people developglaucoma depends on the level of pressure thattheir optic nerves can tolerate without beingdamaged. The threshold is different for eachperson. Some people may develop glaucoma evenwith intraocular pressures in the normal range (i.e.,between 12-21 mm Hg).

Table 4. Characteristics of the Different Types of Glaucoma

TYPE OF GLAUCOMA

CHARACTERISTICS

Open-angle glaucoma

The most common type of glaucoma, in which the angle remains open, but the fluid passes too slowly resulting in damage to the optic nerve and visual field.

Low/normal-tension glaucoma

Another type of open angle glaucoma with normal eye pressure.

Closed-angle glaucoma

The iris blocks the angle, preventing drainage. Intraocular pressure increases suddenly, resulting in severe pain, nausea, redness of the eye, and blurred vision. This is a medical emergency requiring immediate treatment, without which blindness can occur in as little as 1-2 days.

Congenital glaucoma

Babies are born with angle defects that slow normal drainage. Symptoms include (cloudiness, photosensitivity to light, tearing). Prompt surgery usually preserves vision.

Secondary glaucomas

Glaucomas develop as a complication of trauma or other medical conditions: eye surgery or advanced cataracts, eye injuries, certain eye tumors, uveitis (eye inflammation), diabetes, long-term corticosteroid use.

Source: National Eye Institute, National Institutes of Health (NIH)



Limitations of CurrentDetection Methods

Glaucoma may be detected by visual field teststo assess peripheral vision; dilation of the pupil toexamine the optic nerve for signs of damage; andtonometry to determine fluid pressure inside theeye. It is believed that none of these tests havesignificant prognostic value. They cannot tell thephysician whether the individual will suffer visionloss or how rapidly that might occur. Without thisinformation, the physician cannot know howaggressively a patient should be treated. Giventhe costs, inconvenience, and side effects oftreatment, many physicians prefer to wait untilthe patient shows signs of progression beforebeginning treatment. Obviously, this situation is

far from ideal. Useful genetic or cellular markersto use in addition to the known risk factors, wouldbe an invaluable tool to help in makingmanagement decisions.

Insite’s Diagnostic/PrognosticTools for GlaucomaOcuGeneTM and the TIGRGene

InSite’s OcuGeneTM diagnostic/prognostic kit canidentify multiple mutations in the trabecular-meshwork inducible glucocorticoid response(TIGR) gene. The TIGR gene codes for a“sticky” protein that blocks or slows drainage ofthe aqueous fluid. The TIGR/myocilin gene mapsto the previously identified GLC1A locus at bands23 and 25 of the long arm of chromosome 1.GLC1A is the gene previously identified as beingresponsible for juvenile primary open-angleglaucoma to which it is mapped. Mutations in thisgene are the cause of hereditary glaucoma withautosomal dominant inheritance and, often, highintraocular pressure and early (juvenile) onset.

A gene is a segment of DNA on a chromosomethat encodes a protein. Briefly, a gene locusconsists of a promoter region that regulatesexpression of the gene (turning it on and off),several segments of DNA (exons) that code forthe protein plus non-coding, intervening sequencesof DNA (introns). These intervening sequencesare edited out after the DNA “code” is transcribedinto messenger RNA (mRNA) and beforetranslation of the message into the protein. Mostof the pathogenic (disease-causing) mutations inTIGR are in exon III of the coding region of thegene (Figure 4). This means that genetic testsneed only screen a single DNA segment to identifythe vast majority of individuals with disease-causing mutations.

Figure 3. Two boys as seen by a personwith normal vision (above) and someonewith glaucoma (below)

Source: National Eye Institute

Figure 4. Schematic diagram TIGR geneand the protein it encodes



OcuGene screens for 3 mutations (K423E,T377M, and N480K) in the exon-III coding regionthat result in expression of an abnormal protein,which causes primary open-angle glaucoma.Approximately 2-4% of adults with primary open-angle glaucoma and most of hereditary juvenilecases of primary open-angle glaucoma havecoding-region mutations. Individuals with thesecoding-region mutations have a 90-100% likelihoodof developing glaucoma during their lifetimes.

Additionally, a variant, mt-1, has been identifiedin the promoter region of TIGR. The mt-1 variantis associated with an increased intraocularpressure and more damaged visual field (Figure5). (Adam MF et al. Human MolecularGenetics. 1997;2091; Colomb E et al. ClinicalGenetics. 2001;60:220.) Patients with thismutation also do not respond well to medications(primarily beta blockers and pilocarpine) for lowering intraocular pressure (Figure 6). Thus,

testing for this mutation can identify patients whomay be at risk of developing more aggressiveglaucoma. These patients may be resistant tocertain treatments and may, therefore, requirecloser monitoring and potentially earlier and moreaggressive therapy. Approximately 15-20% ofadults with high-intraocular pressure primaryopen-angle glaucoma have the mt-1mutation.

Ocugene is being marketed as an easy-to-use,all-inclusive kit for use by office-basedophthalmologists. The kit contains everythingneeded, including shipping materials, to take asample from inside the cheek of the patient andsend it to a DNA testing laboratory. In November2001, InSite signed an exclusive 1-yearagreement with Quest Diagnostics Incorporatedto provide the laboratory services in the UnitedStates for OcuGene. Results are returned directlyto the ophthalmologist within approximately 2weeks. InSite claims that the sensitivity andspecificity of the test are greater than 99%. Theseresults are excellent for this type of test. At thistime, the test is not covered by most medicalinsurance, which may limit its use.

Figure 5. Effect of Mt-1 on Glaucomaseverity

(Top) Visual field score at inclusion to study, and(Below) intraocular pressure after treatment

Figure 6. Effects of mt-1 on intraocularpressure in ocular hypertensive patientswho received placebo (i.e., no IOP-loweringtreatment) during a 6-month Phase II study



The OPTN Gene and Normal-Tension Glaucoma

In February 2002, InSite licensed the worldwiderights to the optineurin (OPTN) gene and itsmutations. The OPTN gene is linked to hereditaryopen-angle glaucoma, including the subgroup ofpatients with normal-tension glaucoma. Optineurinis located at band 14 on the short arm ofchromosome 10 (10p14). The OPTN geneappears to encode a secreted 66-kD protein thatis expressed in a number of organs and tissues,including the brain, trabecular meshwork, retina,and aqueous humor. The OPTN protein may bea component in the tumor necrosis factor alpha(TNF-a) signaling pathway that maintains theequilibrium between cell growth and cell death(apoptosis). If abnormally regulated, theequilibrium can be skewed toward apoptosis. TheOPTN protein may have a protective role in theeye and optic nerve when normal; but whendefective, results in vision loss.

Glaucoma-causing mutations in OPTN werefound in 16.7% (9/54) families with hereditaryforms of glaucoma. (Rezaie T et al. Science.2002;295:1077). At least one member of eachfamily had normal-tension glaucoma. A differentmutation that increases the risk of developingglaucoma was found in 17.8% (8/45) and 12.1%(15/124) of individuals with familial (inherited) orsporadic (not familial) cases of glaucoma,respectively. Most of these individuals had normalintraocular pressure.

Normal-tension glaucoma constitutes up to 30%and 70% of all cases of primary open-angleglaucoma patients in the U.S. and Japan,respectively. Lacking elevations of intraocularpressure, normal-tension glaucoma has beendifficult to detect. This population represents themajority of undiagnosed glaucoma patients. Thediscovery of OPTN and its mutations should helpto identify potential normal-tension glaucomapatients and allow early treatment to improveoutcomes. InSite plans to develop a genetic testbased on this technology that will complement theTIGR-based OcuGene test.

Treating Glaucoma

Currently, all the treatments for glaucoma act byrelieving the intraocular pressure. All havelimitations. Topical and oral medications eitherreduce pressure by slowing the flow of fluid intothe eye or improve fluid drainage. They areeffective for many patients but can cause bothtopical and systemic side effects in about one thirdof cases and may cease to be effective over time.Argon-laser trabeculoplasty (“laser surgery”) iseffective for certain types of glaucoma. .Additionally, the benefits of laser surgery maywear off over time. Some patients may need tocontinue taking medications. Surgery(trabeculectomy), which is delicate microsurgery,is effective but associated with significant sideeffects in many patients. Since few physicianswant to operate on a “hunch”, this method isreserved for patients who have clear evidence ofprogression and intraocular pressure that cannotbe controlled by other means.

ISV-205: A Therapeutic Tool inInSite’s Product Pipeline

InSite has another glaucoma product, ISV-205,in late development for treating glaucoma. ISV-205 is a DuraSite-based formulation of diclofenac,a commonly used NSAID. In cell- and organ-culture systems, diclofenac has been shown toinhibit the production of the TIGR protein thatappears to be the cause of glaucoma. Unlike allcurrent therapies, this approach treats the rootcause of glaucoma (i.e., the “sticky-protein”buildup) rather than the symptoms (the intraocularpressure). Two Phase II trials have beencompleted. In a Phase IIa trial with 136 closerelatives of primary open-angle glaucoma,subjects concomitantly received corticosteroid andISV-205 or vehicle as control. The ISV-205significantly reduced the number of subjects withclinically relevant elevations of intraocularpressure compared with placebo (P <.05). In aPhase IIb trial, ISV-205 was given twice dailyfor 6 months to 233 patients with elevatedintraocular pressure, of whom 70% had mt-1 ormt-11 variant in the TIGR gene. ISV-205 loweredintraocular pressure significantly more often thanplacebo in patients with the mt-1 variant(P=.008)but to a much lesser extent in patients without



the mt-1 variant. Ocular safety and comfort withISV-205 were similar to that of placebo. TheCompany is actively seeking a partner tocomplete the clinical development and bring thisproduct to market.

Eye Infections and AntibioticDuraSite Formulations

Although normally well protected by numerousdefenses, the eye can become infected if thesedefenses break down. The most commoninfections are caused by Staphylococcus aureus,Haemophilus influenzae, and Pseudomonasaeruginosa. One of the most common eyeinfections is bacterial conjunctivitis (“pink eye”)a condition characterized by redness of the eye,mucous discharge, tearing, irritation, andphotosensitivity (sensitivity to light), but usuallyno pain or loss of visual function. (Figure 7).

Bacterial conjunctivitis usually starts in one eyeand rapidly spreads to the other eye. Hyperacutebacterial conjunctivitis is characterized by similar,but more severe signs and symptoms. The mostcommon infectious organisms in hyperacuteconjunctivitis are Neisseria gonorrhoeae andCorynebacterium diptheroides. As theseorganisms can penetrate the cornea, hyperacutebacterial conjunctivitis is more dangerous.

Bacterial conjunctivitis is treated with an eye-dropformulation of a antibiotic such as gentamicin ortobramycin. These will give good coverage ofmost gram-positive and gram-negative organismsbut have weak activity against gram positive suchas staphylococcal species and some resistantstrains of Pseudomonas. Fluoroquinolones arealso excellent options. Several ophthalmicfluoroquinolone formulations are available.Antibiotics will eradicate the bacteria but do notreduce the concurrent inflammation. When nosignificant corneal disruption is present, concurrentsteroids or a steroid-antibiotic combination areusually prescribed. Antibiotics are also used inophthalmology as prophylaxis (to preventinfections) during ocular surgery or lasertreatment, including cataract and photorefractiveprocedures. The growth of the photorefractivesurgery market has led to an increase in the useof ophthalmic antibiotics.

ISV-401

ISV-401 is a DuraSite formulation of a broad-spectrum antibiotic that has not previously beenused in ophthalmology. The antibiotic is effectivefor both gram-positive and gram-negative bacteriaand has demonstrated an excellent safety andefficacy record when given orally to both childrenand adults. The Company does not identify theantibiotic used in the formulation.

Current ophthalmic antibiotics must be dosedevery two hours during the first day and four timesa day for the remainder of the treatment period,which may be up to fourteen days. Based onpharmacokinetic and other preclinical studies, theCompany believes that the DuraSite/antibioticformulation may enable patients to greatly reducedosing frequency, which would be a greatconvenience. An improved product could greatlyimprove patient compliance with the dosingregimen, which could, in turn, improve the clinicaloutcome.

Because ISV-401 contains a broad-spectrumantibiotic, it could theoretically be used to treat avariety of ophthalmic infections rather thantargeting each one individually, which could giveit a good market base. We understand that InSiteis currently targeting for a broad indication:“bacterial infection, including neonatorum

Figure 7. Photograph of an eyewith bacterial conjunctivitis

www.revoptom.com/handbook/sect2c.htmCopyright© 2000 - 2001 Jobson Publishing L.L.C



ophthalmia”. Phase I trials indicated that the drugwas safe and well tolerated. Phase II trials areunder way.

ISV-403

ISV-403 is a DuraSite formulation of a fourth-generation fluoroquinolone antibiotic, SS734,which was one of two newly developedfluoroquinolone compounds licensed from SSP Co,Ltd. of Japan. Fluoroquinolones are effectiveagainst both gram-positive and gram-negativebacteria, including Pseudomonas species, and areoften used as prophylaxis during ophthalmicsurgery.

Fourth-generation fluoroquinolones haveexpanded bacterial sensitivities and may beeffective against some of the fluoroquinelone-resistant bacteria that have developed in recentyears due to widespread over-use of antibiotics.Based on preclinical studies, InSite believes thatISV-403 will allow reduced dosing frequencycompared with other formulations currently onthe market. InSite is targeting for a broad indication(treatment for and prophylaxis against bacterialinfection).

A Novel Treatment for DiabeticRetinopathy and MacularDegeneration

InSite’s ISV-616 is a DuraSite-based ophthalmicformulation of anti-angiogenic drug that is beingevaluated by the Company for its potential inpreventing the excessive growth of new bloodvessels (neovascularization) in the retina that isassociated with diabetic retinopathy and age-related macular degeneration. The compound istargeted at diabetic retinopathy and age relatedmacular degeneration. ISV is working withanother large pharmaceutical company developingthis product. This therapeutic is a topical eye dropformulation containing, a potent metalloproteinaseinhibitor combined for drug delivery with theDuraSite system. The active ingredient, has beenshown in various animal models and in humans tohave an a powerful effect on blood vessel growth.Drug therapies currently in clinical trials areadministered either orally or by intravenousinjection. These systemic delivery methods could

cause severe side effects. Because ISV-616 isdelivered as an eye drop, it may be free of thesesystemic side effects.

Diabetic Retinopathy

Diabetic retinopathy is a leading cause of blindnessthat affects half of all Americans with diabetes.It is caused by changes in the blood vessels ofthe retina: blood vessels may swell and leak fluidor abnormal new blood vessels may grow on thesurface of the retina, causing blurring of vision(Figure 8). Initially, diabetic retinopathy may beasymptomatic and no vision changes are apparent.

Figure 8. Two boys as seen by a person withnormal vision (above) and someone withdiabetic retinopathy (below).

Source: National Eye Institute



With timely treatment, 90 percent of those withadvanced diabetic retinopathy can be saved fromgoing blind.

Diabetic retinopathy occurs when diabetesdamages the tiny blood vessels in the retina, sothat the retina does not get proper nourishment.The retina is a light-sensitive tissue at the back ofthe eye (see Figure 2 and Appendix: The Eyeand How We See). When light enters the eye,the retina changes the light into nerve signals andsends the signals along the optic nerve to the brain.Without a retina, the eye cannot communicatewith the brain, making vision impossible.

Some people with diabetic retinopathy developmacular edema, a condition characterized byaccumulation of fluid and lipids under the macula.The macula is the part of the retina that allows usto see detail. The fluid makes the macula swell,which blurs vision. In some cases, vision maychange—get better or worse—over the courseof a day.

Diabetic retinopathy may progress to an advanced(proliferative) stage, in which fragile new bloodvessels grow along the retina and in the clear,gel-like vitreous humor that fills the inside of theeye (see Figure 2). As new blood vessels form atthe back of the eye, they can hemorrhage (bleed),cloud vision, and destroy the retina. The firstoccurrence may be mild, leaving just a few specksof blood, or spots, floating in the vision that oftengo away after a few hours. Frequently, a muchgreater leakage of blood that will blur vision occurswithin a few days or weeks. In extreme cases, aperson will only be able to tell light from darkwith that eye. Clearing may take from a few daysto months or even years; in some cases, the bloodnever clears. Such large hemorrhages tend torecur, often during sleep. Timely treatment iscritical.

Everyone with diabetes—either Type I (juvenileonset) or Type II (adult onset)—is at risk fordeveloping diabetic retinopathy. The likelihood ofdeveloping diabetic retinopathy increases with theduration of diabetes. Nearly 50% of diabetics willdevelop some degree of retinopathy during theirlifetimes. Diabetic retinopathy may be a problemfor diabetic women during pregnancy.

Diagnosis of diabetic retinopathy is made duringan eye examination that includes a visual acuitytest, pupil dilation to examine the retina, andophthalmoscopy (use of a device with a specialmagnifying lens to view the retina). If signs ofmacular edema are observed, fluoresceinangiography (injection of fluorescein dye into theveins) may be ordered to locate the leaking bloodvessels.

Two treatment modalities are used for diabeticretinopathy: laser surgery, for severe macularedema and proliferative retinopathy; andvitrectomy, a surgical procedure that is performedwhen the vitreous contains a lot of blood. Althoughno cure exists, these methods are very effectivein reducing vision loss. Even people with advancedretinopathy have a 90% chance of maintainingtheir vision if treatment is given before the severeretinal damage occurs. In severe cases ofmacular edema, laser surgery may be requiredmore than once to control leaking fluid.

Macular Degeneration

The macula is a special area of the retina thatcontains the highest concentration of protectivepigment and photoreceptors. When light isfocused on the macula, the eye is able to detect aclear image in the center of the field of vision.Age-related macular degeneration is aprogressive disease that is most prevalent inpatients over 65 years of age. It is detected bychanges in the protective pigments, accumulationof drusen, degeneration of the photoreceptors, andsometimes bleeding in the retina.

Macular degeneration is divided into twocategories—dry and wet. The dry form ofmacular degeneration accounts for 90% of casesand is correlated with heredity and aging. It canprogress slowly, usually resulting in a mild loss ofperipheral vision. The wet form of maculardegeneration, although it accounts for only 10%of cases, poses the greater threat to vision. Newand abnormal (thin and leaky) blood vessels growout from the choroid at the back of the eye andinvade the retina. Scar tissue can form at the sitesof blood and blood-vessel accumulation. If thescar is in or near the macula, vision will bemarkedly impaired.



InSite’s Angiogenesis Inhibitor

InSite is performing limited formulation andpreclinical testing of ISV-616 in collaboration withthe pharmaceutical company that developed theactive anti-antiogenesis agent. (See Page 22)

INSITE’S DRUG-DELIVERYSYSTEMS

The DuraSite® Eye-DropDelivery System

Conventional eye drops typically remain in theeye only a few minutes, requiring a highlyconcentrated burst of the drug and frequentadministration to sustain therapeutic levels. Initialefforts to increase the residence time of the drugincluded using suspensions, gels, or ointments.While these systems did prolong the residencetime of the drug, they were cosmeticallyunattractive, blurred vision for extended periodsof time, and often felt like having a foreign bodyin the eye. The utility of newer systems—inserts,collagen shields, and medicated contact lenses—has been limited due to poor patient compliancebecause they are difficult to use, easily displaced,and cause a foreign-body sensation.

The DuraSite system is a patented eye-dropformulation consisting of a cross-linked carboxyl-containing, biocompatible polymer thatincorporates the drug to be delivered to the eye(Figure 9). The duration of time a drop stays inthe eye is controlled by the viscosity, elasticity ofthe matrix, surface tension, and mucoadhesion.The viscosity and elasticity of polycarbophilincrease with pH within the range of ~5.5 to 7.5.Although not water-soluble, polycarbophil iswater-swellable and can take up many times itsown weight in water. DuraSite is formulated atpH 5.0-6.0, so that it has low viscosity andelasticity and can easily be given as an eye drop.When instilled in the cul-de-sac of the eye as asmall-volume eye drop, the formulation takes upwater and changes to physiological pH. Thiscauses the polymer to form a pseudo-gel withincreased viscosity and elasticity, forming a softin-situ insert that prevents drug loss due to spillageor removal through the nasolachrymal (tear) ductas occurs with normal eye drops. Additionally, thesurface tension of most polymers decreases whenadded to water, allowing them to spread evenlyover the surface; in contrast, polycarbophilincreases in surface tension when added to water,which helps it to resist being spread out byblinking. Finally, polycarbophil is known to be astrong mucoadhesive, which means that DuraSiteinteracts strongly with the mucus on eye tissues,contributing to the prolonged residence time inthe eye.

Figure 9. The DuraSite eye-drop formulation

Photographs courtesy of InSite Vision, Inc.



The polycarbophil matrix is eventually removedby blinking and eliminated via the gastrointestinaltract. Thus, due to the polycarbophil properties,DuraSite remains in the lower eyelid, releasingdrug slowly for as long as six hours, increasingthe amount of drug absorbed into the eye tissuesover time, which improves bioavailability andduration of action of the drug. This permits theuse of lower concentrations of a drug to be givenat longer intervals of time, minimizing theinconvenience of frequent dosing—hopefully,improving compliance with the treatmentregimen—reducing the potential for adverseevents. This delivery system can be used withboth soluble and insoluble drugs and should,therefore, be useful to deliver a wide variety ofdrug candidates. It has the added advantage ofbeing an easy-to-use eye-drop formulation withwhich patients are familiar.

The ISV-014 Retinal DeliveryDevice

The ISV-014 intra-scleral drug-delivery deviceallows the controlled and minimally invasive (i.e.,non-surgical) delivery of drugs to the retina andother tissues in the posterior (rear) chamber ofthe eye. The ISV-014 device consists of a handlewith a distal platform that is placed against thesurface of the eye (Figure 10). A small needleconnected to a drug reservoir is extended from

the platform into the tissues of the eye. A meteringdevice controls the amount of drug injected andthe rate of delivery. This device allows highlylocalized delivery of drug inside the tissues of theeye. By controlling the distance and direction thatthe needle protrudes, the device greatly reducesthe likelihood of accidental penetration throughthe sclera into easily damaged underlying tissues.

Current therapeutic options for drug delivery tothe retina involve substantial risks for surgery,damage to ocular tissue, or systemic side effects.A targeted delivery system such as ISV-014permits localized treatment of retinal diseases andmay be useful with a variety of drug candidates,including gene-therapy vectors and therapeuticsmall molecules. InSite is collaborating with theFoundation Fighting Blindness and variousacademic researchers to perform in-vivoexperiments delivering products with a variety ofmolecular sizes and biological properties to retinaltissues in animals. The combination of this devicewith polymer-based drug platforms may allowlong-term delivery of therapeutic agents to treatretinal diseases, most of which cannot beeffectively treated at the present time.

ISV-014 is still in development. InSite has filedtwo patents related to the device and its use, andone device. InSite is seeking to license thistechnology to a third party and hopes to marketthe device during 2002.

COMPETITION

Overall, InSite’s primary competitors are NovartisOphthalmics, Alcon Laboratories, Allergan, andSanten.

Glaucoma Agents

Novartis Ophthalmics has two glaucomaagents, Rescula® and Ocupress®, both of whichwork by lowering intraocular pressure.

♦ Rescula® (unoprostone isopropyl ophthalmicsolution) 0.15% is indicated for treating patientswith open-angle glaucoma or ocularhypertension who are intolerant of, orinsufficiently responsive to, another or otherintraocular pressure lowering medications.

Figure 10. The ISV-014 Intra-Scleral DrugDelivery System

Photograph courtesy of InSite Vision, Inc.



This is not considered a first-line treatment.In clinical trials, Rescula reduced meanintraocular pressure by 13-18.5% (3-4 mmHg) and an additional 12.5% when combinedwith timolol. The recommended dosing is onedrop in the affected eye(s) twice daily.Novartis’ claims for Rescula include increasedfluid outflow without alpha-agonist–like allergicreactions and no loss of efficacy for at least12 months. The most common ocular adverseevents occurring in approximately 10-25% ofpatients were burning/stinging upon instillation,dry eyes itching, and increased length ofeyelashes patients. The full prescribinginformation includes a warning that Resculahas been reported to cause changes topigmented tissue (i.e., change eye color) thatmay be permanent. These potential adverseeffects may make the drug unacceptable topatients for unilateral use.

♦ Ocupress® (carteolol HCl OphthalmicSolution) 1% is an adrenergic beta-blockerindicated for use alone or in combination withother intraocular pressure loweringmedications in patients with chronic open-angleglaucoma and intraocular hypertension. Inclinical trials, adverse events including transienteye irritation, burning, tearing, conjunctivalhyperemia (increased blood), and edema(swelling due to increased fluid) were reportedin approximately 25% of patients. The usualdose is one drop in the affected eye(s) twicea day.

Alcon Laboratories has 4 glaucoma agents—Travatan, Betoptic S, Azopt, and Iodipine—all ofwhich work by lowering of intraocular pressure,albeit by different mechanisms:

♦ TravatanTM (travoprost ophthalmic solution)has been approved as a second-line treatmentfor use in patients with open-angle glaucomaor ocular hypertension who are intolerant of,or inadequately controlled by other intraocularpressure lowering medications. Travoprost isa selective FP prostanoid—a syntheticprostaglandin F

2a analog that is thought to work

by increasing fluid outflow. Travatan alsocontains the warning that it may alterpigmentation and increase eyelash length orthickness. Travatan was teratogenic (causing

birth defects) in rats. Ocular hyperemiaoccurred in 35-50% of patients. The dosageis one drop daily. Onset of action is rapid,within 2 hours and maximum effect is reachedafter 12 hours. When used with other drugs,administration must be at least 5 minutes apart,which could be a patient compliance issue.

♦ Betoptic S® is betaxolol hydrochloride, acardioselective beta-adrenergic receptorblocking agent, in a resin suspensionformulation. Betoptic S is the only b

1 selective

beta-blocker available as an eye drop in theUnited States. Betoptic S is indicated for usealone or in combination with other intraocularpressure lowering medications in patients withchronic open-angle glaucoma and ocularhypertension. It may be better tolerated thannon-selective ophthalmic beta-blockers,particularly in patients with reduced pulmonary(breathing) function. Clinical studies showedbetaxolol to be safer than timolol, a non-selective beta-blocker, in glaucoma patientswith or without a history of asthma or chronicobstructive pulmonary disease (COPD). Therecommended dose is one to two drops twicedaily. Onset of action usually occurs within 30minutes, with a maximal effect at 2 hours afteradministration.

♦ Azopt® is also a suspension that containsbrinzolamide, a carbonic anhydrase inhibitor(CAI). Azopt is indicated for use in patientswith glaucoma and ocular hypertension. Itworks by decreasing the formation of fluidproduced in the eye. In clinical trials, Azoptsignificantly reduced intraocular pressure. Theonly other CAI on the market is Trusopt®

(dorzolamide), which has similar efficacy butis less comfortable in the eye. Azopt wasgenerally safe and well tolerated. The mostfrequently reported adverse were transientblurred vision (5.8% of patients) and bitter, souror unusual taste (5.7% of patients). Azopt isadministered three times daily.

♦ IopidineTM 0.5% (apraclonidine HCI) is arelatively selective alpha

2-agonist that reduces

the production of aqueous fluid. Iopidine 0.5%is currently approved for short-term use aloneor in conjunction with other medications inpatients on maximally tolerated therapy



needing additional intraocular pressurereduction.

Allergan markets two glaucoma medications:

♦ Alphagan® (brimonidine tartrate ophthalmicsolution) 0.2% is an alpha

2-adrenergic agonist

indicated for use in patients with primary openangle glaucoma or ocular hypertension.Brimonidone’s most common local side effectis irritation of the eye and most commonsystemic effects are dry mouth, drowsiness,and dizziness; however it is usually welltolerated.

♦ Lumigan® (bimatoprost) is indicated to treateye conditions such as glaucoma and ocularhypertension in patients who are intolerant toor insufficiently responsive to othermedications. Like Travatan, Lumigan is asynthetic structural analog of prostaglandinthat selectively mimics the effects of naturallyoccurring substances called prostamides, andhas ocular hypotensive activity. Bimatoprostis believed to lower intraocular pressure inhumans by increasing outflow of aqueoushumor. In clinical trials, adverse eventsoccurring in approximately 15-45% of subjectsincluded conjunctival hyperemia, growth ofeyelashes, and itching. Events occurring inapproximately 3-10% of subjects includedocular dryness, visual disturbance, ocularburning, foreign-body sensation, eye pain,pigmentation of the periocular skin, andeyelash darkening. The usual dose is 1 drop inthe affected eye(s) once daily, in the evening.

Retina Products

Novartis Ophthalmics also has a product fortreating diseases of the retina. VisudyneTM isindicated for age-related macular degenerationin patients with predominantly classic subfovealchoroidal neovascularization. Unlike most of theeye products, Visudyne is administered byinjection. Visudyne involves the use of a light-activated compound called verteporfin (the activeingredient in Visudyne) combined with a non-thermal laser (a laser that does not burn theretina). Activation causes the release of oxygenfree radicals that cause endothelial damage and

thrombus formation, resulting in blocking of theblood vessels. Visudyne slows retinal damage butdoes not stop the vision loss or restore vision thathas already been damaged. The adverse eventsmost commonly associated with Visudyne therapyinclude injection site reactions, transient visiondisturbances, and photosensitivity (increasedsensitivity to light). Because verteporfin isactivated by light, the patient must avoid exposureof the skin or eyes to direct sunlight or bright indoorlight for 5 days after treatment. A severe visiondecrease equivalent to the loss of 4 or more linesof vision on a standard eye chart within 7 days oftreatment has been reported in 1-4% of patients.Back pain due to infusion occurred in 2.2% ofpatients. The safety and efficacy of Visudynetherapy beyond 2 years has not yet beendemonstrated. Visudyne therapy is being co-developed by Novartis and QLTPhotoTherapeutics Inc. QLT will manufactureVisudyne and Novartis will market the productworldwide.

ANTIBIOTICS

Novartis, Alcon, Allergan, and Santen all haveophthalmic antibiotics that could be consideredcompetition for InSite, some of which are widelyused.

Novartis Ophthalmics has 3 ophthalmic antibiotics:

♦♦♦♦♦ Dexacidin® Solution and Dexacine™Ointment are combinations of an antibiotic(neomycin) and a steroid (dexamethasone)indicated for treating steroid responsiveinflammatory ocular conditions for which acorticosteroid is indicated and where bacterialinfection or a risk of bacterial ocular infectionexists. Because steroids suppress theinflammatory response to a variety of agentsand probably delay or slow healing, corticoidsmay inhibit the body’s ability to ward offinfection, and dexamethasone is a potentcorticoid. For this reason, an antimicrobial drugis often used concomitantly when immunesuppression is believed to be clinicallyimportant. Combination products simplifyadministration. Adverse reactions occurring



most often from the presence of the anti-infective ingredient are allergic sensitizations.The reactions due to the steroid componentinclude elevation of intraocular pressure withpossible development of glaucoma andinfrequent optic nerve damage; posteriorsubcapsular cataract formation; and delayedwound healing. The recommended dosage ofthe solution is 1-2 drops of solution in theconjunctival sac 4 to 6 times daily for milddisease. In severe disease, drops may be usedhourly and tapered to discontinuation as theinflammation subsides. With the ointment, asmall amount of ointment is applied into theconjunctival sac up to 3 to 4 times daily or atbedtime adjunctively with drops.

♦♦♦♦♦ Gentacidin® (gentamicin sulfate ophthalmicsolution, USP 0.3%) is indicated for the topicaltreatment of ocular bacterial infectionsincluding conjunctivitis, keratitis,keratoconjunctivitis, corneal ulcers, blepharitis,blepharoconjunctivitis, acute meibomianitis anddacryocystitis, that are caused by gentamicin-susceptible strains of S. aureus, S. epidermidis,Streptococcus pyogenes, Streptococcuspneumoniae, Enterobacter aerogenes, E. coli,Haemophilus Influenzae, Klebsiellapneumoniae, Neisseria gonorrhoeae,Pseudomonas aeruginosa, and Serratiamarcescens. The most frequently reportedadverse reactions are ocular burning andirritation upon drug instillation, non-specificconjunctivitis, conjunctival epithelial defectsand conjunctival hyperemia. Bacterial andfungal corneal ulcers have developed duringtreatment with gentamicin ophthalmicpreparations. The recommended dosage is 1-2 drops instilled in the affected eye every 4hours. In severe infections, as much as 2 dropsevery hour may be used.

♦ Vasocidin® solution is another antibiotic-steroid combination (sulfacetamide andprednisolone) indicated for steroid-responsiveinflammatory ocular conditions for which acorticosteroid is indicated and in whichbacterial infection or a risk of bacterial ocularinfection exists. It may be used forinflammatory conditions of the bulbarconjunctiva, cornea and anterior segment of

the globe and in chronic anterior uveitis andcorneal injury from chemical, radiation, orthermal burns, or penetration of foreign bodies.The most common adverse reactionsattributable to the presence of the antibacterialingredient are allergic sensitizations; reactionsdue to the corticosteroid component includeelevation of intraocular pressure with possibledevelopment of glaucoma and infrequent opticnerve damage, posterior subcapsular cataractformation, and delayed wound healing. Therecommended dose is 2 drops instilled in theeye(s) 4 to 6 times daily for mild disease. Insevere disease drops may be used hourly andtapered to discontinuation as the inflammationsubsides.

Alcon Laboratories has 2 antibiotics:

♦ Tobradex® is another antibiotic and steroidcombination containing tobramycin anddexamethasone that is indicated for steroid-responsive inflammatory ocular conditions forwhich a corticosteroid is indicated and wheresuperficial bacterial ocular infection or a riskof bacterial ocular infection exists. Alcon billsTobradex as “the #1 prescribed ophthalmicanti-infective / anti-inflammatory combinationdrug”. Tobradex offers a broader spectrumof anti-bacterial coverage than combinationscontaining neomycin or sulfacetamide and hasgood tolerability. Hypersensitivity and localizedocular toxicity occur in less than 4% ofpatients. Tobramycin is active againstsusceptible strains of staphylococci, includingS. aureus and S. epidermidis (coagulase-positive and coagulase-negative) and penicillin-resistant strains; streptococci, including someof the Group A-beta-hemolytic species, somenonhemolytic species, and someStreptococcus pneumoniae; Pseudomonasaeruginosa, Escherichia coli, Klebsiellapneumoniae, Enterobacter aerogenes,Proteus mirabilis, Morganella morganii,most Proteus vulgaris strains, Haemophilusinfluenzae and H. aegyptius, Moraxellalacunata, Acinetobacter calcoaceticus andsome Neisseria species. Somemicroorganisms resistant to gentamicin remainsusceptible to tobramycin. The most frequentadverse reactions occurring in less than 4%



of patients are hypersensitivity and localizedreactions, including lid itching and swelling andconjunctival erythema (redness). Therecommended dose for the solution is 1-2 dropsin the conjunctival sac(s) every 4-6 hours. Thedosage may be increased to one or two dropsevery 2 hours during the initial 24-48 hours.For the ointment, approximately 1/2 inch isinstilled into the conjunctival sac(s) up to threeor four times daily.

Allergan markets one antibiotic, Ocuflox®

(ofloxacin ). Ocuflox is a fluorinatedcarboxyquinolone anti-infective. Ocuflox is theonly fluoroquinolone that contains apyridobenzoxazine ring linking C

1 and C

8, which

provides activity against gram-positive andanaerobic organisms and helps protect themolecule from metabolizing. Ocuflox® also has amethyl group at C

4 of the 1-piperazinyl group,

resulting in effective penetration and long-lastingtear levels. Ocuflox® is indicated for the treatmentof corneal ulcers caused by susceptible strains ofStaphylococcus aureus, Staphylococcusepidermidis, Streptococcus pneumoniae,Pseudomonas aeruginosa, Serratiamarcescens (efficacy studied in fewer than 10infections), and Propionibacterium acnes. It isalso indicated for bacterial conjunctivitis due tosusceptible strains of S aureus, S epidermidis,S pneumoniae, Enterobacter cloacae,Haemophilus influenzae, Proteus mirabilis, andP aeruginosa. Ocuflox® is indicated for adult and

pediatric use (age 1 and older). OCUFLOX® hasa high rate of penetration into ocular tissue andmaintains therapeutic dose levels for up to 12hours or more after a single dose. The mostfrequently reported drug-related adverse reactionis transient ocular burning or discomfort. Otherreported reactions include stinging, redness,itching, chemical conjunctivitis/keratitis, pericular/facial edema, foreign body sensation, photophobia,blurred vision, tearing, dryness, eye pain, and,rarely, dizziness. The dosage regimenrecommended dose for bacterial conjunctivitis is1-2 drops every 2-4 hours on days 1-2 and 1-2drops four times daily on days 3-7. For bacterialcorneal ulcer, the recommended dose is 1-2 dropsevery 30 minutes while awake and once duringthe night approximately 4-6 hours after retiringon days 1-2; 1-2 drops hourly while awake ondays 3-7; and 1-2 drops four times daily on days7-9. These regimens are somewhat complex andrequire frequent administration for the first fewdays, which may adversely affect patientcompliance.

Santen Inc. markets Quixin™(levofloxacin)0.5%. Quixin is another fluoroquinolone fortreating of bacterial conjunctivitis. Levofloxacinhas high solubility at neutral pH that permits aformulation having a high-concentration of activedrug compared to other currently marketedophthalmic fluoroquinolones (0.5% vs. 0.3%).Quixin is a broad-spectrum antibiotic effectiveagainst most common Gram-positive and Gram-

Table 4: Officers and Director

Officers and Directors Position Age S. Kumar Chandrasekaran, Ph.D. Chairman, Pres, CEO and Chief Financial Officer 58 Lyle Bowman, Ph.D. VP of Devel. and Operations 52 Cheryl E. Chen Sr. Director, Clinical Operations 41 T. Raymond Chen, Ph.D. Sr. Director, Regulatory, Quality Assurance and Quality

Control 50

Sandra C. Heine Sr. Director, Fin. and Admin 39 Samir D. Roy, Ph.D. Senior Director, Formulation Development and Operations 41

Erwin C. Si, Ph.D. Senior Director, Preclinical Research

47

Mitchell H. Friedlaender, M.D

Director 55

John L. Mattana Director 71 Jon S. Saxe, Esq. Director 64 Anders P. Wiklund Director 61



negative pathogens. Founded in Osaka in 1890.Santen holds the top share among prescriptionophthalmic pharmaceuticals within the Japanesemarket and is one of the leading ophthalmiccompanies worldwide. Santen has subsidiaries inthe U.S., Europe and Asia, including its California-based unit, Santen Incorporated. Santen isfocusing its product research and developmentefforts on four key disease categories—allergy,infection, dry eye, and glaucoma—which makesit an important competitor for InSite.

MANAGEMENT AND BOARDOF DIRECTORS

The following table lists ISV’s management teamand Board of Directors.

Management Officers

S. Kumar Chandrasekaran, Ph.D. joined theCompany in September 1987 as Vice President,Development. From 1988 to 1989, Dr.Chandrasekaran served as Vice President,Research and Development. From 1989 to 1993,he served as President and Chief OperatingOfficer. Since August 1993, Dr. Chandrasekaranhas served as Chairman of the Board of Directors,President, Chief Executive Officer and, sinceJanuary 1999, as Chief Financial Officer, aposition he also held from December 1995 to

December 1997. Dr. Chandrasekaran holds aPh.D. in Chemical Engineering from theUniversity of California, Berkeley.

Lyle M. Bowman, Ph.D. joined InSite inOctober 1988 as Director of Drug DeliverySystems. From 1989 to 1991, Dr. Bowman servedas Vice President, Science and Technology. From1991 to 1995, he served as Vice President,Development, and since 1995 has served as VicePresident Development and Operations. Dr.Bowman holds a Ph.D. in Physical Chemistryfrom the University of Utah.

Cheryl E. Chen joined the Company in January1990 as the Manager of Clinical Research. From1994 to 1998, Ms. Chen served as Director ofClinical Operations. In 1999, Ms. Chen becamethe Senior Director of Clinical Operations. Ms.Chen holds a B.S. in Biological Science fromUniversity of California at Irvine and an M.B.A.in Business from Pepperdine University.

T. Raymond Chen, Ph.D. joined the Companyin August 1990 as a Senior Staff Researcher.From 1994 to August 1997, he served as theDirector of Analytical Research. Since September1997, Dr. Chen has served as Senior Director ofRegulatory, Quality Assurance and QualityControl. Dr. Chen holds a Ph.D. in AnalyticalResearch from Indiana University.

Sandra C. Heine joined InSite in March 1997as Controller. Since October 1999, Ms. Heine hasserved as Senior Director of Finance and

Table 5: Beneficial Share Ownership

Table 5 outlines beneficial share ownership and market value.

Name Shares % Shares Market Value Out

Pharmacia & Upjohn AB 2,665,614 10.73% $5,864,350.80 S. Kumar Chandrasekaran, Ph.D. 1,038,761 4.04% $2,285,274.20 Lyle M. Bowman, Ph.D. 179,417 * $394,717.40 Mitchell H. Friedlaender, M.D. 55,000 * $121,000.00 John L. Mattana 60,000 * $132,000.00 Jon S. Saxe 31,904 * $70,188.80 Anders P. Wiklund 55,000 * $121,000.00 Total Officers and Directors 1,420,082 5.46% $3,124,180.40



Administration. Before joining us, Ms. Heineserved as General Accounting Manager ofSoftware Logistics Corporation from 1995 to 1997;Systems Engineer for Platinum SoftwareCorporation from 1994 to 1995; General AuditManager for Genentech, Inc. from 1991 to 1994and was an Audit Manager at Deloitte & Touchefrom 1989 to 1991. Ms. Heine holds a B.S. inBusiness Administration from Colorado StateUniversity.

Samir D. Roy, Ph.D. joined InSite in May 1997as Director of Formulation Development. Since1998, Dr. Roy has served as Senior Director ofFormulation Development and Operationsinvolving clinical supply and scale-up activities.Dr. Roy holds a Ph.D. in Pharmaceutical Sciencesfrom the University of Saskatchewan, Canada,and has post-doctorial training in drug transportat the University of Michigan.

Erwin C. Si, Ph.D. joined the Company in April1989 as Manager of Pharmacology andToxicology. From 1992 to 1996, he served asManager of Drug Discovery. From 1996 to 1999,he served as Principal Scientist. Since October1999, he has served as Senior Director of Pre-clinical Research. Dr. Si holds a Ph.D. inPharmacology and Toxicology from PurdueUniversity.

BOARD OF DIRECTORS

Kumar Chandrasekaran, Ph.D. has been aDirector of the Company since 1989.

Mitchell H. Friedlaender, M.D. has been aDirector of the Company since May 1996. Hehas served as an ophthalmologist at Scripps Clinicand Research Foundation (“Scripps”) since 1986and currently serves as director of Cornea andRefractive Surgery in the Division ofOphthalmology. Prior to joining Scripps, Dr.Friedlaender served as a full-time faculty memberat the University of California, San Francisco for10 years. He is the founder of the Aspen CornealSociety and the Pacific Ophthalmic Forum, co-editor in chief of International OphthalmologyClinics, a member of four scientific editorialboards, a member of the Sjogren’s SyndromeFoundation Medical Advisory Board, and former

president of the Ocular Microbiology andImmunology Group. He also serves as aconsultant for several pharmaceutical companiesand performs clinical studies on new ophthalmicdrugs. Dr. Friedlaender holds an M.B.A. fromthe University of Phoenix and an M.D. from theUniversity of Michigan.

John L. Mattana has been a Director of theCompany since September 1997. From 1992 to1997, Mr. Mattana served as an Investment VicePresident at New York Life Insurance Company,where he was a Director of Venture CapitalInvestments. From October 1997 to December2000, he served as a Vice President at CeptorCorporation. Mr. Mattana holds an M.B.A. fromNew York University.

Jon S. Saxe, Esq. has been a Director of theCompany since December 1999. Mr. Saxe wasa Director of the Company from 1992 through1997, when he resigned as a member of the Boardof Directors and became Director Emeritus. Mr.Saxe is a Director of Protein Design Labs, Inc.for which he served as President from January1995 to May 1999. Mr. Saxe served as Presidentof Saxe Associates, a biotechnology consultingfirm, from May 1993 to December 1994,President, Chief Executive Officer and a Directorof Synergen, Inc., from October 1989 to April1993, and Vice President, Licensing & CorporateDevelopment for Hoffmann-LaRoche fromAugust 1984 through September 1989. Mr. Saxeserves on the board of directors of QuestocorPharmaceuticals, Inc., Incyte Genomics Inc., FirstHorizon Pharmaceutical Corporation, VistaGenInc., and ID Biomedical Corporations, and isChairman of Point Biomedical Corporation andIconix Pharmaceuticals. Mr. Saxe holds a B.S.in Chemical Engineering from Carnegie-MellonUniversity, a J.D. from George WashingtonUniversity School of Law, and an L.L.M. fromNew York University School of Law.

Anders P. Wiklund has been a Director of theCompany since November 1996. Since January1997 he has served as Principal at WiklundInternational Inc., an advisory firm to thebiotechnology and pharmaceutical industries, andsince 1997 has served as Senior Vice Presidentat Biacore Holding Inc., a life science technology



Company. He served as Vice President,Corporate Business Development of Pharmacia& Upjohn from January to December 1996, asExecutive Vice President of Pharmacia U.S. Inc.from January to December 1995 and as Presidentand Director of Pharmacia Development Corp.from 1993 to 1994. Mr. Wiklund served as ChiefExecutive Officer, President and Director ofKABI Pharmacia Inc. from 1990 to 1993. Mr.Wiklund serves on the board of directors ofRibozyme Pharmaceuticals Inc., Glyco DesignInc., Esperion Therapeutics, Inc., Medivir AB.and Bioreason Inc. Mr. Wiklund holds a Masterof Pharmacy from the Pharmaceutical Institute,Stockholm, Sweden.

INSTITUTIONAL OWNERSHIP

The following institutions own ISV common.While ISV common has gained institutionalinterest, we believe that it is clear that there issignificant upside to be garnered from expandedinstitutional ownership. Many of theseshareholders represent index funds that do notnormally invest on fundamental company analysis.Institutional ownership represents approximately12% of the float.

VALUATION

We have sampled 34 small cap biotech andmedical device manufacturers, sorted by marketcapitalization of $224 million or less. The averagecurrent price of all of these companies is quitelow: $3.20. The current price of ISV common is$2.20, below the average of the group as apercent. Nine of the companies whose marketcap is in the upper 35%, have relevant salessupporting a higher market cap. Five companieswith negligible sales have higher market capsbased on future expectations. ISV’s current ratioof 6.8 to 1 is higher than the 4 to 1 average of thegroup. The sample indicates that institutions arenot familiar with the ISV story. The group’saverage of institutional shareholders is 24.2%compared to ISV’s 12%. The majority ofinstitutional share ownership reflects index fundparticipation.

Two companies, Avanir Pharmaceuticals andThermoGenesis Corp (KOOL) are relevantcomparisons to ISV, and appear to us to bedistinctly undervalued. Avanir (AVN) has an FDAapproved drug. ThermoGenesis is beginning asignificant sales cycle that should result in theCompany’s becoming profitable in 2004. We notethat ISV’s market cap is $55.0 million, while AVN

Table 6: Institutional Ownership

Value Institution Name Shares % Held Quarter

Held End

$2,296,459.00 Perseus, L.L.C. 1,043,845 4.19% 9/30/01 $2,013,000.00 Capital Research and Management Company 915,000 3.67% 9/30/01 $1,469,380.00 Dimensional Fund Advisors Inc 667,900 2.72% 9/30/01

$616,778.80 Barclays Bank Plc 280,354 1.12% 9/30/01 $592,196.00 Prudent Bear Fund 269,180 1.08% 9/30/01 $131,956.00 HSBC Holdings Plc 59,980 0.24% 9/30/01

$67,100.00 Northern Trust Corporation 30,500 0.12% 9/30/01 $64,937.40 Mellon Bank, N.A. 29,517 0.11% 12/31/01 $46,200.00 Bank of America Corporation 21,000 0.08% 9/30/01 $22,000.00 PNC Financial Services Group, Inc. 10,000 0.04% 9/30/01 $6,624.20 Taunus Corporation 3,011 0.01% 9/30/01 $2,860.00 Price (T.Rowe) Extended Equity Market Index Fund 1,300 0.00% 6/30/01

$7,329,491.40 Total 3,331,587



and KOOL’s market capitalization is $73.0 millionand $178.0 million respectively. As ISV enters itssales cycle in 2002 and 2003, we believe theCompany’s market capitalization should at leastdouble. If so, shares of ISV common should tradeclose to $4.00, more than double its current price.Because ISV’s 2006 gross projected revenuesare $300 million+ in a $2 billion market, we believeshares of ISV common should carry a $2.00premium compared to other biotech companies,many of whom will not develop FDA approved

drugs. Therefore, we value ISV common at $6.00per share during the next 18 – 36 months. As theCompany racks up impressive sales, we believethe biotech market will take notice of FDAapproved drugs on the market and accord ISVcommon shares a premium. It is our view thattoday’s $2.20 current price reflects a high cashburn rate, not the impressive top line growth wehave estimated in the future. We also believe theCompany will raise additional cash that willmoderate current investor concerns.

Table 7: A 34 Company Comparative Valuation

Ticker Name Current Price Price Annual Mk Prc Annual Annual Annual No

Insid

3/27/02 Price 12 Month

12 Month Total Cap to Price

LT Debt To

Current Inst Own

Low High Sales Sales To Book

Tot. Equity Ratio Shr %

AVM Advanced Magnetics, Inc. 3.9 2.8 5.1 6.0 26 4 2.3 0.0 5.2 17 13

ACEL Alfacell Corporation 0.6 0.3 2.1 0.0 13 1,349 NM NM 0.1 1 11

ANX Antex Biologics, Inc. 1.6 0.9 2.9 0.9 20 22 3.1 0.0 4.6 6 29 AGIX AtheroGenics, Inc. 7.7 2.2 8.0 8.2 214 57 3.4 0.0 17.2 50 25

AVN Avanir Pharmaceuticals 3.1 2.5 6.4 12.7 178 13 7.4 0.0 8.3 70 4

BSTI BioShield Technologies 0.2 0.1 0.8 1.5 6 2 NM NM 0.3 3 8 BBI Blockbuster Inc. 24.5 12.9 28.7 4,960.1 4,319 1 0.7 0.2 0.7 273 86 CTE CardioTech International 1.4 0.9 3.5 1.5 13 4 2.0 0.1 6.6 9 8

CVM CEL-SCI Corporation 0.6 0.5 2.0 0.7 15 22 3.2 0.0 6.9 11 2 CLGY Cellegy Pharmaceuticals 6.7 4.2 9.2 0.9 116 117 5.9 0.0 5.2 43 22 COB Columbia Laboratories 4.4 2.5 8.4 1.8 148 74 NM NM 3.3 102 10 CVGR Covalent Group, Inc. 4.8 1.6 4.9 12.0 59 3 9.3 0.0 2.7 12 5 DOR DOR BioPharma, Inc. 1.3 0.8 2.1 NA 28 NM NM 0.0 4.5 6 23 EPMN Epimmune Inc. 2.7 1.7 4.8 1.6 27 3 1.7 0.0 5.4 23 69

FLML Flamel Technologies S.A. 1.8 0.7 4.1 10.9 29 2 2.7 0.1 2.3 16 54

HITK Hi-Tech Pharmacal Co. 11.1 5.1 15.2 29.6 50 2 2.3 0.0 3.6 25 29 INCR Incara Pharmaceuticals 0.8 0.7 2.3 0.0 10 96 1.8 0.0 2.3 13 46

ISV Insite Vision Inc. 2.2 0.9 2.7 0.0 55 11,004 5.8 0.0 6.8 15 12 IFSC Interferon Sciences, Inc. 0.2 0.0 0.5 1.1 4 2 0.6 0.0 2.0 6 53 INIS International Isotopes 0.1 0.0 0.2 6.3 2 0 NM NM 1.2 2 13 MATX Matrix Pharmaceutical 2.2 0.4 11.8 1.5 58 29 1.2 0.2 7.6 109 20 NTOL Natrol, Inc. 1.8 1.0 4.4 87.1 23 0 0.4 0.1 1.9 31 71

NEOP Neoprobe Corporation 0.4 0.3 1.1 7.6 15 1 2.2 0.0 2.6 10 10 NURC NeuroCorp., Ltd. 0.2 0.0 2.1 0.4 2 2 2.4 0.0 1.3 NA 85

QSC Questcor Pharmaceuticals 1.8 0.4 2.3 3.6 67 10 48.7 0.6 1.2 14 37

SHM Sheffield Pharmaceuticals 2.3 1.5 4.9 0.9 66 75 NM NM 0.3 20 53

SIGA SIGA Technologies, Inc. 2.6 1.6 5.2 0.5 26 16 20.6 0.9 1.3 8 51 SYBD Synthetic Blood Int'l Inc 0.3 0.1 0.5 NA 28 NM 6.0 0.0 12.7 NA 12 KOOL ThermoGenesis Corp. 2.3 1.5 3.0 5.8 73 10 9.3 0.0 5.5 17 4 UG United-Guardian, Inc. 6.1 4.6 8.0 10.4 30 3 3.5 0.0 7.8 14 45 VERP Viragen (Europe) Ltd. 0.6 0.4 1.5 0.2 23 29 4.1 0.0 1.8 NA 91 WFHC Women First HealthCare 9.4 2.6 11.8 28.4 211 7 4.6 0.0 3.7 61 51 ZKEM Xechem International 0.0 0.0 0.0 0.0 5 NM NM NM 0.2 NA 35 ZMTX ZymeTx, Inc. 0.1 0.1 1.2 0.9 1 0 NM NM 0.6 10 23

Average 3.2 1.6 5.0 162.6 175.3 418.1 6.0 0.1 4.0 33.2 32.6



BULL CASE

♦ Significantly undervalued relative to peers

♦ Fully funded business plan

♦ Cash burn should wind down

♦ The Company has enough cash on hand forfour quarters

♦ Dramatic ramp in product sales should driveoperating and earnings growth

♦ OcuGene, ISV’s first commercial diagnosticproduct, OcuGene, should be successful, withgross margins in the 70-75% range

♦ Multiple additional products are in late-stagedevelopment: ISV-205, a glaucomatherapeutic, has completed Phase IIb clinicalstudies; ISV-401, a broad-spectrum antibioticentering Phase II trials; and several otherearlier stage candidates

♦ Negligible debt

♦ The Company will be sold or merged atpremium share prices

♦ Huge $2 billion potential market forCompany’s products, driven by an agingpopulation, newer and innovative treatments

BEAR CASE

♦ New competitive products, technologies,diagnostics and treatments could enter themarket, reducing demand for the Company’sproducts

♦ Larger, better resourced and capitalizedpharmaceutical companies could devotegreater focus to the ophthalmic market

♦ The pharmaceuticals industry is subject tosignificant government regulation, which couldhinder or delay the launch and marketing ofnew products

♦ Many of ISV’s technologies are in early stagedevelopment and/or untested

♦ Testing will disappoint

♦ Significant additional research anddevelopment and preclinical and clinical testingwill be needed to commercialize ISV’s productpipeline

♦ ISV’s limited commercial manufacturingexperience will necessitate manufacturingrelationships with third-parties

♦ Product sales could ramp more slowly thananticipated

♦ Slow sales will necessitate additional funding

♦ To date, InSite has not generated any revenuesfrom the sale of its products

♦ Share prices will languish

CONCLUSION

InSite Vision is at the beginning stages of a longterm growth cycle. Institutional ownershipcomprises approximately 12% of sharesoutstanding. We believe there is considerableupside share appreciation available as theCompany’s common stock gains exposure andinterest of Wall Street institutional investors. Thoseinvestors willing to accept inherent capital raisingrisks associated with a small biotechnologyCompany may be handsomely rewarded in thelong run.

Revenue and earnings growth should allow ISVshares to command a price to earnings (P/E)multiple more in line with its micro-capbiotechnology company peers. Applying a multipleof 15x to our 2003 EPS of $0.19, results anintermediate target share price of $2.80. Our long-term target price of $11.00 per share is based ona multiple of 15x, less a 20% discount factor, ofour 2004 EPS estimate of $.98. The bonus maybe that the market could command a premiumfor top and bottom line growth performance,including an anticipated growth rate in excess of50% during the next four years. At a price of$2.20, we recommend shares of ISV commonfor long-term growth investors.

The Dirty Dozen Research Team

tel 415 454 6985 fax: 415 455 0295

[email protected]



GLOSSARY

Angiogenesis: the formation of new bloodvessels

Antiangiogenesis: Treatment of disease byinhibiting the formation of new blood vessels(angiogenesis)

Anterior chamber: the space in front of the irisand behind the cornea

Aqueous humor (fluid): clear, watery fluidsecreted by the ciliary processes that flowsbetween and nourishes the lens and the cornea

Buccal: pertaining to, adjacent to, or in thedirection of the cheek

Choroid: a membrane containing blood vessels(vascular) that covers the eye between the retinaand the sclera and provides nourishment to theretina

Ciliary body: the thickened part of the vascularportion of the eye that lies between the iris andthe choroids and produces the aqueous humor

Coding region: A region of DNA (exon) thatcarries the instructions necessary to determinethe sequence of amino acids in protein synthesis.

Cornea: the outer, transparent, dome-likestructure that covers the iris, pupil, and anteriorchamber; part of eye’s focusing system

Cytokine: any of a number of small moleculesproduced by cells in response to a stimulus.Cytokines regulate the intensity and duration ofimmune responses and are involved incommunication between cells; binding of thecytokine to a receptor on the surface of a cellsets up a cascade of intracellular events (thesignaling pathway) that ultimately carries the“message” to the DNA, turning a gene on or off

Edema: excessive accumulation of watery fluid

Exon: a coding segment of a gene; exons areusually separated by intervening sequences(introns)

Fluorescein angiography: use of a special dyeinjected into the arm that permits pictures to betaken as the dye passes through the blood vesselsof the retina

Ganglion: a grouping of nerve cell bodies in theperipheral nervous system

Gene expression: The process by which agene’s coded information is converted into aprotein

Genetic code: The information system containedin DNA that determines the sequence of aminoacids in protein synthesis. The DNA backbonecontains just 4 nucleotides: adenine (A), guanine(G), cytosine (C), and thymine (T). In RNA, uracil(U) is substituted for thymine. Each 3-nucleotidesequence, called a codon, specifies either anamino acid (eg, GCA à alanine; GGC à glycine)or chain termination. Alteration of singlenucleotide (a point mutation) could change theamino acid and result in an abnormal protein

Intraocular pressure: pressure caused byaqueous fluid in the eye; normal intraocularpressure varies among individuals

Intron: a non-coding segment of DNA foundbetween the exons of a gene

Iris: the colored ring of tissue suspended behindthe cornea and immediately in front of the lensthat regulates the amount of light entering the eyeby adjusting the size of the pupil

Lens: the transparent, double convex (outwardcurve on both sides) structure suspended betweenthe aqueous and vitreous that helps to focus lighton the retina

Macula: the small, sensitive area of the centralretina that provides vision for fine work andreading

Mutation: A permanent, heritable change in theDNA; if it occurs in the coding region of a gene,it can alter the structure or function of the resultingprotein

Myopia: nearsightedness; the ability to see closeobjects more clearly than distant objects



Neuropathy: in classical usage, any disorderaffecting any part of the nervous system; in morecurrent usage, a disease involving the cranial(relating to the cranium, or head) nerves or theperipheral nervous system (opposite of centralnervous system; that part of the nervous systemthat is outside of the brain and spinal cord) orautonomic nervous systems (that part of thenervous system not under voluntary control, aswith nerve stimulation of heart muscle)

NSAID: non-steroidal anti-inflammatory drug (eg,ibuprofen, diclofenac)

Optic: of or relating to the eye

Optic nerve: a bundle of more than 1 millionnerve fibers that carry visual messages from theretina to the brain

Peripheral: of the outer part; opposite of central

Peripheral vision: side vision; the ability to seeobjects and movement outside of the direct lineof vision

Phenotype: The physical appearance or makeupof an individual that reflects the genetic make-up(the genotype)

Posterior chamber: the space between the backof the iris and the front face of the vitreous that isfilled with aqueous fluid

Promoter region: the part of a gene essentialfor regulating expression of the gene (i.e., turningit on and turning it off)

Pupil: the small, round, black-appearing,adjustable opening in the center of the iris thatallows varying amounts of light to enter the eye;light passes through the pupil, on through the lens,and to the retina at the back of the eye

Retina: the light-sensitive layer of tissue that linesthe back of the eyeball and sends visual messagesthrough the optic nerve to the brain

Sclera: the white membrane that forms the outerlayer of the eyeball.

Schlemm’s canal: the passageway for theaqueous fluid to leave the eye

Sensitivity: Sensitivity is the positive-predictivevalue (the proportion of true-positive patients thatare identified by the test); specificity is thenegative-predictive value (the proportion of true-negative patients that are identified by the test).

Signaling pathway: a cascade of reactions withinthe cell in response to a signal (eg, binding of thecytokine to a receptor on the cell surface) thatultimately carries the “message” to the DNA,turning a gene on or off

Tonometry: the standard test to determine fluidpressure inside the eye (intraocular pressure).

TIGR (trabecular meshwork inducedglucocorticoid response) gene: believed to beassociated with 2% to 4% of all glaucoma; alsoknown as the MYOC (myocilin) gene, found atthe GCL1A locus (1q23-q25)

Trabecular meshwork: the spongy, mesh-liketissue near the front of the eye that allows theaqueous fluid (humor) to flow to Schlemm’s canalthen out of the eye through ocular veins

Visual acuity: the ability to distinguish details andshapes of objects; also called central vision

Visual field: the entire area that can be seen whenthe eye looks straight ahead, including peripheralvision



APPENDIX

The Eye and How We See

Despite its small size, the eye is one of the mostcomplex organs of the body, allowing us toperceive the world around us. However, “sight”actually occurs in the brain. Objects either giveoff or reflect light. Light waves enter the eye.The lens and the cornea help to bend and focusthe light rays, and an image of the object is focusedon the retina.

The receptor cells in the retina (rods and cones),are activated by absorbing light. The rods andcones are connected to ganglion cells, whoseextensions form the optic nerve. The “message”travels to the part of the brain responsible forvision, which processes the signals into an image.

This report/release is for informational purposes only. Under no circumstancesis it to be used or considered as an offer to sell or a solicitation of any offerto buy any security or other debt instruments, or any options, futures orother derivatives related to such securities herein. Dirty Dozen Research:No Agenda (DDRNA) and its affiliates may trade for their own accounts atany time in any securities of the issuer or in related securities. DDRNA or itsaffiliates, directors, officers and employees, may have a long or short positionin securities of the issuer or related investments. Investors interested inpurchasing securities are urged to read the Prospectus, 10K, 10Q otherrelevant documents in full, and to conduct their own research and duediligence. DDRNA reserves the right to change its opinion at any point intime, as it deems necessary. DDRNA or its affiliates may from time to timeperform investment banking, consulting or other services for, or solicitinvestment banking, consulting or other business from, any entity mentionedin this report/release. This research report/release has been prepared forgeneral circulation and is circulated for general information only. It does nothave regard to the specific investment objective, financial situation,suitability, and the particular need of any specific person who may receivethis report/release. Investors should seek financial advice regarding theappropriateness of investing in any securities or investment strategiesdiscussed or recommended in this report/release and should understand thatstatements regarding future prospects may not be realized. Investors shouldnote that income from such securities, if any, may fluctuate and that eachsecurity’s price or value may rise or fall substantially. Dirty Dozen Research:No Agenda has not entered into a soft dollar agreement with the referred toCompany. Accordingly investors may receive back less than originallyinvested. Past performance is not indicative of future performance. In purviewof Section 17 (b) of the Securities Act of 1933 and in the interest of fulldisclosure, DDRNA has entered into a general consulting contract with theCompany. This contract does not reference this report/release nor investmentresearch. DDRNA has received cash and warrants in consideration for itsconsulting services. This report/release has been prepared in accordancewith the Securities and Exchange Commission’s new rules and amendments,Oct 23, 2000, regarding 17 CFR Parts, 240, 243 and 249, (Selective Disclosureand Insider Trading), and Regulation FD (Fair Disclosure), 10b5-1, 10b5-2. This document shall not be copied or reproduced in any form without theexpressed written and authorized consent of DDRNA. Copyright: DDRNAand D. Paul Cohen

Source: http://www.merck.com/disease/glaucoma/the_eye/how_see/home.html

© 1995-2001 Merck & Co., Inc., Whitehouse Station, NJ,USA. All rights reserved.



Table 8: Annual Balance Sheet

Insite Vision Inc. Ticker: ISV ANNUAL BALANCE SHEET (Thousands of U.S. Dollars) 12/31/01 12/31/00 12/31/99 12/31/98 12/31/97 12/31/96 ASSETS Cash & Equiv. 10,095 18,904 6,746 1,037 8,660 10,518 Prepaid Expenses 173 605 598 190 303 195 Other Current 0 0 0 0 0 0 Total Current Assets 10,268 19,509 7,344 1,227 8,963 10,713 Fixed Assets 783 0 0 0 0 0 Computers/Equip. 0 647 204 1,062 2,731 4,416 Leases 0 9 10 49 163 1,671 Furn/Fixtures 0 3 0 28 390 355 Equip.Cap.Leases 0 0 0 0 0 0 Depreciation 0 -168 -95 -280 -1,701 -4,335 Total Assets 11,051 20,000 7,463 2,086 10,546 12,820 LIABILITIES Accounts Payable 0 181 119 86 109 562 Accrd. Liabil. 1,521 376 534 341 428 247 Accrd. Comp. 0 647 524 256 445 300 Cur.Port.Leases 0 0 0 0 0 0 Cur.Port.Notes 0 0 0 0 0 92 Total Current Liabs 1,521 1,204 1,177 683 982 1,201 LT Debt 45 26 0 0 0 0 Total Long Term Debt 45 26 0 0 0 0 Total Liabilities 1,566 1,230 1,177 683 982 1,201 SHAREHOLDER EQUITY Rdmbl. Pfrd. Stk 0 0 30 1,511 7,533 0 Preferred Stock 0 0 0 0 0 0 Common Stock 0 248 203 169 133 129 Paid-in-Capital 0 106,976 90,807 85,605 78,698 77,146 Other Equity 9,485 -257 0 0 0 0 Retained Earngs. 0 -88,197 -84,754 -85,882 -76,800 -65,656 Total Equity 9,485 18,770 6,286 1,403 9,564 11,619 Shares Outstanding 24,915 24,854 20,299 16,852 13,279 12,936



Table 9: Consolidated Statements of Cash Flow

InSite Vision Incorporated Consolidated Statements of Cash Flows

(thousands) Year Ended December 31,

2001 2000 1999

Operating activities: Net income (loss) $ (9,556) $ (3,440) $ 1,150

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

Depreciation and amortization 433 314 505

Loss on sale of property and equipment - - 107

Changes in:

Prepaid expenses and other current assets 432 (7) (408)

Accounts payable and accrued liabilities 292 20 494

Net cash provided by (used in) operating activities (8,399) (3,113) 1,848

Investing activities: Sale of property and equipment - - 410

Purchases of property and equipment (474) (450) (88) Net cash provided by (used in) investing activities (474) (450) 322

Financing activities: Payment of capital lease obligation (7) (6) - Issuance of common stock, net 71 15,727 3,539 Net cash provided by financing activities 64 15,721 3,539

Net increase (decrease) in cash and cash equivalents (8,809) 12,158 5,709

Cash and cash equivalents, beginning of period 18,904 6,746 1,037

Cash and cash equivalents, end of period $ 10,095 $ 18,904 $ 6,746

Supplemental disclosures: Non-cash preferred dividends $ - $ 3 $ 22 Non-cash conversion of redeemable preferred stock to common stock

$

-

$

33

$

1,503

Capital lease obligation incurred $ 51 $ 39 $ -



Table 10: Annual Income Statement

n

Prod

uct

Sale

s L

icen

se F

ee

Roy

alty

T

otal

Rev

enue

C

ost

Rei

mbu

rsem

ent

Gro

ss P

rofi

t G

ross

Mar

gin

Res

earc

h/D

evel

opm

ent

Gen

eral

/Adm

in.

Tot

al E

xpen

ses

Inte

rest

Exp

ense

In

tere

st/O

ther

In

com

e B

efor

e T

axes

In

com

e T

axes

In

com

e A

fter

Tax

es

Pre

ferr

ed D

ivid

ends

P

ri/B

as E

PS

Ex.

XO

rd

Acc

ount

ing

Cha

nge

Pri

/Bas

EP

S In

. XO

rd

Pri

mar

y/B

asic

Avg

Sh

Exp

ense

s %

of

Sal

es

Res

earc

h/D

evel

opm

ent

Cos

t R

eim

burs

emen

t G

ener

al/A

dmin

. T

otal

Exp

ense

s

Insi

te V

isio

n In

c. T

icke

r: I

SV

A

NN

UA

L IN

CO

ME

ST

AT

EM

EN

T

(Th

ou

san

ds

of

U.S

. Do

llars

)

12/3

1/02

12/

31/0

1 12

/31/

00

12/3

1/99

03

/31/

01

06/3

0/01

09

/30/

01

12/3

1/01

3/

31/0

2 6/

30/0

2 9/

30/0

2 12

/31/

02

6,60

0

900

1,25

0 2,

000

2,45

0

5,00

0 5

4,48

6 4,

750

0 0

0 0

2,

500

2,50

0 0

600

0 27

10

2

1 1

1 0

0 10

0 50

0

12,2

00

5 4,

513

4,76

0 2

1 1

1 90

0 3,

750

4,60

0 2,

950

3,

555

-713

-4

,779

0

-263

-2

66

-164

-2

0 50

0 66

6 1,

106

1,28

3

8,64

5 71

8 9,

292

4,76

0 26

5 26

7 16

5 21

40

0 3,

084

3,49

4 1,

667

0.71

14

3.60

2.

06

1.00

13

2.50

26

7.00

16

5.00

21

.00

0.44

0.

82

0.76

0.

57

nt

4,30

3 7,

323

6,45

3 1,

397

1,72

7 1,

867

1,88

0 1,

849

835

1,01

8 1,

163

1,28

7

6,58

5 3,

523

2,58

4 2,

293

830

833

847

1,01

3 1,

225

1,43

5 1,

825

2,10

0

10,8

88

10,1

33

4,25

8 3,

690

2,29

4 2,

434

2,56

3 2,

842

2,06

0 2,

453

2,98

8 3,

387

0 0

0 0

0 0

0 0

0 0

0 0

237

572

791

85

233

167

105

67

68

59

58

52

-2

,006

-9

,556

1,

046

1,15

5 -2

,059

-2

,266

-2

,457

-2

,774

-1

,592

69

0 56

4 -1

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0 0

0 5

0 0

0 0

0 0

0 0

-2,0

06

-9,5

56

1,04

6 1,

150

-2,0

59

-2,2

66

-2,4

57

-2,7

74

-1,5

92

690

564

-1,6

68

0 0

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0 0

0 0

0 0

0 0

d -0

.07

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02

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0 0

-4,4

86

0 0

0 0

0 0

0 0

0

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8 -0

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0.06

-0

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-0.0

9 -0

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1 -0

.04

0.03

-0

.07

-0.0

6

h 26

,000

24

,897

23

,574

19

,285

24

,873

24

,891

24

,907

24

,915

25

,450

25

,800

26

,150

26

,500

nt

0.35

1,

464.

60

1.43

0.

29

863.

50

1,86

7.00

1,

880.

00

1,84

9.00

0.

93

0.27

0.

25

0.44

0.

29

-142

.60

-1.0

6 0.

00

-131

.50

-266

.00

-164

.00

-20.

00

0.56

0.

18

0.24

0.

43

0.54

70

4.60

0.

57

0.48

41

5.00

83

3.00

84

7.00

1,

013.

00

1.36

0.

38

0.40

0.

71

0.89

2,

026.

60

0.94

0.

78

1,14

7.00

2,

434.

00

2,56

3.00

2,

842.

00

2.29

0.

65

0.65

1.

15

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