Robust Pipeline at Inspire Pharma

We maintain our Buy rating on Inspire Pharmaceuticals, Inc. (ISPH - Analyst Report). Currently, the company has three products on the market and a robust pipeline. We see strong top-line growth from 2008 and beyond. Inspire just reported positive phase III data of Denufosol for cystic fibrosis. The company has a strong collaborative alliance with Allergan Pharmaceuticals (AGN) for key products that treat dry eyes and allergic conjunctivitis.

The company’s Japanese partner Santen Pharmaceutical recently completed phase III trial of diquafosol tetrasodium for dry-eye disease. Marketing application will be filed in Japan by the end of 2008. Inspire received milestone payment and will receive royalty payment when the product is commercialized in Japan and other Asian countries. Also, we believe the positive data for Denufosol bodes well for the company, since the drug candidate can act as a long term value driver for Inspire.

We believe Inspire is heading in the right direction. Elestat (for allergic conjunctivitis) and Restasis (for dry-eye disease) continue growth momentum. Although initial uptake of AzaSite (for bacterial conjunctivitis) has been slow, we believe sales may pick up momentum after a few quarters and that AzaSite sales will drive top-line and bottom-line growth going forward. Upcoming catalysts include the announcement of partners for the cystic fibrosis program.

Based on the progress the company has made so far, we maintain our price target of $8.50 on the shares. We arrive at this price target by using specialty eye-care pharmaceutical industry average P/E ratio of 18 x, multiplied by our estimated 2011 EPS of $1.06, discounted by 30 percent for three year. We believe the company can trade in-line with biotechnology stocks, as Denufosol progresses in the clinic.

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