INSMED Inc - Quarter Report: 2016 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to      

 

Commission File Number 0-30739

 

INSMED INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

(908) 977-9900

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting Company (See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting Company” in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Small Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 31, 2016, there were 61,877,905 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

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INSMED INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

 

INDEX

 

PART I.  FINANCIAL INFORMATION
ITEM 1	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3
	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2016 and 2015	4
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015	5
	Notes to Consolidated Financial Statements (unaudited)	6
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	26
ITEM 4	Controls and Procedures	26
PART II.  OTHER INFORMATION
ITEM 1	Legal Proceedings	27
ITEM 1A	Risk Factors	27
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3	Defaults Upon Senior Securities	30
ITEM 4	Mine Safety Disclosures (Not Applicable)	30
ITEM 5	Other Information	30
ITEM 6	Exhibits	30
SIGNATURE		31
EXHIBIT INDEX		32

 

In this Form 10-Q, we use the words “Insmed Incorporated” to refer to Insmed Incorporated, a Virginia corporation, and we use the words “Company,” “Insmed,” “Insmed Incorporated,” “we,” “us” and “our” to refer to Insmed Incorporated and its consolidated subsidiaries. IPLEX is a registered trademark and ARIKAYCE, INSMED and CONVERT are trademarks of Insmed Incorporated. This Form 10-Q also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-Q is the property of its owner.

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

INSMED INCORPORATED

Consolidated Balance Sheets

(in thousands, except par value and share data)

 

		As of			As of
		September 30, 2016			December 31, 2015
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	200,518		$	282,876
Prepaid expenses and other current assets		5,778			5,242
Total current assets		206,296			288,118
In-process research and development		58,200			58,200
Fixed assets, net		10,274			8,092
Other assets		1,874			2,146
Total assets		$	276,644		$	356,556
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	8,283		$	7,468
Accrued expenses		14,528			10,995
Other current liabilities		647			683
Current portion of long-term debt		—			3,113
Total current liabilities		23,458			22,259
Debt, long-term		34,681			22,027
Other long-term liabilities		676			572
Total liabilities		58,815			44,858
Shareholders’ equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 61,877,905 and 61,813,995 issued and outstanding shares at September 30, 2016 and December 31, 2015, respectively		619			618
Additional paid-in capital		914,049			900,043
Accumulated deficit		(696,834		)	(588,963		)
Accumulated other comprehensive (loss)		(5		)	—
Total shareholders’ equity		217,829			311,698
Total liabilities and shareholders’ equity		$	276,644		$	356,556

 

See accompanying notes to consolidated financial statements

 

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INSMED INCORPORATED

Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
Revenues		$	—		$	—		$	—		$	—
Operating expenses:
Research and development		23,433			19,221			67,851			54,631
General and administrative		13,716			11,024			38,498			30,272
Total operating expenses		37,149			30,245			106,349			84,903
Operating loss		(37,149		)	(30,245		)	(106,349		)	(84,903		)
Investment income		138			75			472			166
Interest expense		(769		)	(725		)	(2,015		)	(2,165		)
Other income (expense), net		45			(67		)	92			(36		)
Loss before income taxes		(37,735		)	(30,962		)	(107,800		)	(86,938		)
Provision for income taxes		25			—			71			—
Net loss		$	(37,760	)	$	(30,962	)	$	(107,871	)	$	(86,938	)
Basic and diluted net loss per share		$	(0.61	)	$	(0.50	)	$	(1.74	)	$	(1.51	)
Weighted average basic and diluted common shares outstanding		61,878			61,774			61,871			57,565
Net loss		$	(37,760	)	$	(30,962	)	$	(107,871	)	$	(86,938	)
Other comprehensive loss:
Foreign currency translation loss		(17		)	—			(5		)	—
Total comprehensive loss		$	(37,777	)	$	(30,962	)	$	(107,876	)	$	(86,938	)

 

See accompanying notes to consolidated financial statements

 

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INSMED INCORPORATED

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

		Nine months ended September 30,
		2016			2015
Operating activities
Net loss		$	(107,871	)	$	(86,938	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,756			1,342
Stock based compensation expense		13,879			11,757
Amortization of debt discount and debt issuance costs		250			343
Accrual of the end of term charge on the debt		—			57
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(230		)	(2,616		)
Accounts payable		361			1,340
Accrued expenses and other		3,109			1,562
Net cash used in operating activities		(88,746		)	(73,153		)
Investing activities
Purchase of fixed assets		(3,428		)	(3,047		)
Net cash used in investing activities		(3,428		)	(3,047		)
Financing activities
Proceeds from exercise of stock options		128			5,001
Proceeds from issuance of debt		10,000			—
Payment of debt issuance costs		(308		)	—
Proceeds from issuance of common stock, net		—			222,942
Net cash provided by financing activities		9,820			227,943
Effect of exchange rates on cash and cash equivalents		(4		)	—
Net (decrease) / increase in cash and cash equivalents		(82,358		)	151,743
Cash and cash equivalents at beginning of period		282,876			159,226
Cash and cash equivalents at end of period		$	200,518		$	310,969
Supplemental disclosures of cash flow information:
Cash paid for interest		$	2,471		$	2,230
Cash paid / (received) for income taxes		$	49		$	(994	)

 

See accompanying notes to consolidated financial statements

 

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INSMED INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.            The Company and Basis of Presentation

 

Insmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. The Company’s lead product candidate is ARIKAYCE, or liposomal amikacin for inhalation (LAI), which is in late-stage development for patients with nontuberculous mycobacteria (NTM) lung disease, a rare and often chronic infection that is capable of causing irreversible lung damage and which can be fatal. The Company’s earlier clinical-stage pipeline includes INS1007, a novel oral reversible inhibitor of dipeptidyl peptidase 1, and INS1009, an inhaled prodrug formulation of treprostinil.

 

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located in Bridgewater, New Jersey. The Company has operations in the United States (US), Ireland, Germany, France, the United Kingdom (UK) and the Netherlands. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The interim statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

 

2.             Summary of Significant Accounting Policies

 

The following are interim updates to certain of the policies described in “Note 2” to the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015:

 

Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgments associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:

 

·                  Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

·                  Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

·                  Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

Each major category of financial assets and liabilities measured at fair value on a recurring basis are categorized based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1 generally include US treasuries and mutual funds listed in active markets.

 

The Company’s only assets and liabilities which were measured at fair value as of September 30, 2016 and December 31, 2015 were Level 1 and such assets were comprised of cash and cash equivalents of $200.5 million and $282.9 million, respectively.

 

The Company’s cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. Cash equivalents consist of liquid investments with a maturity of three months or less from the date of purchase.

 

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The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers in or out of Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2016 and 2015, respectively.

 

As of September 30, 2016 and December 31, 2015, the Company held no securities that were in an unrealized gain or loss position. The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making its determination, the Company considers a number of factors, including: (1) the significance of the decline; (2) whether the securities were rated below investment grade; (3) how long the securities have been in an unrealized loss position; and (4) the Company’s ability and intent to retain the investment for a sufficient period of time for it to recover.

 

Net Loss Per Common Share - Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, restricted stock units and warrants to purchase common stock would be antidilutive as the Company incurred a net loss. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock options and warrants are determined based on the treasury stock method.

 

The following table sets forth the reconciliation of the weighted average number of shares used to compute basic and diluted net loss per share for the three and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
		(in thousands, except per share amounts)
Numerator:
Net loss		$	(37,760	)	$	(30,962	)	$	(107,871	)	$	(86,938	)
Denominator:
Weighted average common shares used in calculation of basic net loss per share:		61,878			61,774			61,871			57,565
Effect of dilutive securities:
Common stock options		—			—			—			—
Restricted stock and restricted stock units		—			—			—			—
Weighted average common shares outstanding used in calculation of diluted net loss per share		61,878			61,774			61,871			57,565
Net loss per share:
Basic and diluted		$	(0.61	)	$	(0.50	)	$	(1.74	)	$	(1.51	)

 

The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of September 30, 2016 and 2015 as their effect would have been anti-dilutive (in thousands):

 

		2016		2015
Stock options to purchase common stock		7,306		5,241
Unvested restricted stock units		89		44

 

New Accounting Pronouncements—In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update requires an entity to recognize assets and liabilities for leases with lease terms of more than 12 months on the balance sheet. The Company plans to adopt this standard on January 1, 2019, and is still evaluating the impact that this standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company plans to adopt this standard on January 1, 2017, and is evaluating the impact that this standard will have on its consolidated financial statements.

 

3.             Identifiable Intangible Asset

 

The Company believes there are no indicators of impairment relating to its in-process research and development intangible asset as of September 30, 2016.

 

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4.             Accrued Expenses

 

Accrued expenses consist of the following:

 

		As of September 30,			As of December 31,
		2016			2015
		(in thousands)
Accrued clinical trial expenses		$	5,623		$	4,331
Accrued compensation		6,063			4,302
Accrued professional fees		1,898			1,202
Accrued technical operation expenses		446			702
Accrued interest payable		195			199
Other accrued expenses		303			259
		$	14,528		$	10,995

 

5.            Debt

 

On September 30, 2016, the Company and its domestic subsidiaries, as co-borrowers, entered into an Amended and Restated Loan and Security Agreement (the A&R Loan Agreement) with Hercules Capital, Inc. (Hercules). The A&R Loan Agreement includes a total commitment from Hercules of up to $55.0 million, of which $25.0 million was previously outstanding. The amount of borrowings was initially increased by $10.0 million to an aggregate total of $35.0 million on September 30, 2016. An additional $20.0 million was available at the Company’s option through June 30, 2017 subject to certain conditions, including the payment of a facility fee of 0.375%. The Company exercised this option in early October 2016 and borrowed an additional $20.0 million in connection with its upfront payment obligation under the License Agreement with AstraZeneca (see Note 10 — Subsequent Event). The interest rate for the term is floating and is defined as the greater of (i) 9.25% or (ii) 9.25% plus the sum of the US prime rate minus 4.50%, along with a backend fee of 4.15% of the aggregate principal amount outstanding and an aggregate facility fee of $337,500. The interest-only period extends through May 1, 2018, but can be extended up to 12 months under certain conditions. The maturity date of the loan facility was also extended to October 1, 2020. Pursuant to the A&R Loan Agreement, the Company is required to have consolidated minimum cash liquidity in an amount no less than $25.0 million. Such requirement terminates upon the earlier of the date by which the Company completes an equity financing with at least $75.0 million in proceeds or the date the Company generates and announces data from the CONVERT Phase III study in a manner that could support an NDA filing. In addition, pursuant to the A&R Loan Agreement, Hercules has the right to participate, in an aggregate amount of up to $2.0 million, in a subsequent private financing of equity securities.

 

In connection with the A&R Loan Agreement, the Company granted Hercules a first position lien on all of the Company’s assets, excluding intellectual property. Prepayment of the loans made pursuant to the A&R Loan Agreement is subject to penalty. The backend fee of 4.15% on the aggregate outstanding principal balance will be charged to interest expense (and accreted to the debt) using the effective interest method over the original life of the A&R Loan Agreement. Debt issuance fees paid to Hercules were recorded as a discount on the debt and are being amortized to interest expense using the effective interest method over the life of the A&R Loan Agreement.

 

The following table presents the components of the Company’s debt balance as of September 30, 2016 (in thousands):

 

Debt:
Notes payable		$	35,000
Debt issuance costs		(319		)
Current portion of long-term debt		—
Debt, long-term		$	34,681

 

As of September 30, 2016, future principal repayments of the debt for each of the years ending December 31, were as follows (in thousands):

 

Year Ending in December 31:
2016		$	—
2017		—
2018		8,527
2019		13,837
2020		12,636
		$	35,000

 

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The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are currently in place.  The Company believes the estimated fair value at September 30, 2016 approximates the carrying amount.

 

6.             Shareholders’ Equity

 

Common Stock — As of September 30, 2016, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 and 61,877,905 shares of common stock issued and outstanding. In addition, as of September 30, 2016, the Company had reserved 7,306,178 shares of common stock for issuance upon the exercise of outstanding common stock options.

 

On April 6, 2015, the Company completed an underwritten public offering of 11,500,000 shares of the Company’s common stock, which included the underwriter’s exercise in full of its over-allotment option of 1,500,000 shares, at a price to the public of $20.65 per share. The Company’s net proceeds from the sale of the shares, after deducting the underwriter’s discount and offering expenses of $14.5 million, were $222.9 million.

 

Preferred Stock — As of September 30, 2016 and December 31, 2015, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01 and no shares of preferred stock were issued and outstanding.

 

7.             Stock-Based Compensation

 

The Company’s current equity compensation plan, the 2015 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 21, 2015. The 2015 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Under the terms of the 2015 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), performance options/shares and other stock awards, as well as the payment of incentive bonuses to all employees and non-employee directors. On May 21, 2015, 5,000,000 shares of the Company’s common stock were authorized and as of September 30, 2016, there were 2,130,917 shares available for future grants (or issuances) of stock options, stock appreciation rights, restricted stock, restricted stock units and incentive bonuses under the 2015 Incentive Plan. The 2015 Incentive Plan will terminate on April 9, 2025 unless it is extended or terminated earlier pursuant to its terms. In addition, from time to time, the Company makes inducement grants of stock options. These awards are made pursuant to the Nasdaq inducement grant exception as a component of new hires’ employment compensation in connection with the Company’s equity grant program.

 

Stock Options - The Company calculates the fair value of stock options granted using the Black-Scholes valuation model. The following table summarizes the Company’s grant date fair value and assumptions used in determining the fair value of all stock options granted:

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2016		2015		2016		2015
Volatility		75%-76%		78%-79%		75%-77%		78%-82%
Risk-free interest rate		1.00%-1.18%		1.49%-1.72%		1.00%-1.73%		1.31%-1.72%
Dividend yield		0.0%		0.0%		0.0%		0.0%
Expected option term (in years)		6.25		6.25		6.25		6.25
Weighted-average fair value of stock options granted		$7.79		$17.32		$8.74		$14.38

 

For all periods presented, the volatility factor was based on the Company’s historical volatility since the closing of the Company’s merger with Transave in December 2010. The expected life was determined using the simplified method as described in ASC Topic 718, Accounting for Stock Compensation, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the US Treasury yield in effect at the date of grant. Forfeitures are based on the actual percentage of option forfeitures since the closing of the Company’s merger with Transave in December 2010, and this is the basis for future forfeiture expectations.

 

From time to time, the Company grants performance-condition options to certain of the Company’s employees. Vesting of these options is subject to the Company achieving certain performance criteria established at the date of grant and the individuals fulfilling a service condition (continued employment). As of September 30, 2016, the Company had performance options totaling 158,334 shares outstanding which have not met the recognition criteria to date. For the nine months ended September 30, 2015, $1.5 million of non-cash compensation expense was recorded related to certain performance based options as the recognition criteria was

 

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met upon the marketing authorization application for ARIKAYCE being accepted for filing by the European Medicines Agency in February 2015.

 

The following table summarizes the Company’s aggregate stock option activity for the nine months ended September 30, 2016:

 

		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2015		5,273,722		$	13.64
Granted		2,406,165		$	12.89
Exercised		(20,356	)	$	6.32
Forfeited or expired		(353,353	)	$	16.29
Options outstanding at September 30, 2016		7,306,178		$	13.29		7.85		$	22,537
Vested and expected to vest at September 30, 2016		6,998,262		$	13.23		7.80		$	21,995
Exercisable at September 30, 2016		3,062,677		$	10.81		6.58		$	15,758

 

The total intrinsic value of stock options exercised during the three months ended September 30, 2015 was $0.7 million and during the nine months ended September 30, 2016 and 2015 was $0.1 million and $4.6 million, respectively. There were no stock options exercised during the three months ended September 30, 2016.

 

As of September 30, 2016, there was $29.2 million of unrecognized compensation expense related to unvested stock options which is expected to be recognized over a weighted average period of 2.8 years. Included in unrecognized compensation expense was $1.2 million related to outstanding performance-based options. The following table summarizes the range of exercise prices and the number of stock options outstanding and exercisable:

 

Outstanding as of September 30, 2016										Exercisable as of September 30, 2016
						Weighted
						Average
						Remaining		Weighted
Range of Exercise				Number of		Contractual		Average		Number of		Weighted Average
Prices ($)				Options		Term (in years)		Exercise Price ($)		Options		Exercise Price ($)
3.03		3.40		850,137		5.83		3.34		850,137		3.34
3.60		6.96		673,847		6.20		6.14		563,814		6.00
8.77		10.85		1,186,595		9.56		10.84		3,000		8.77
11.14		12.44		791,505		7.37		12.00		388,892		12.05
12.45		14.24		822,857		7.59		13.28		402,074		13.35
14.32		16.09		509,512		7.86		15.90		207,570		15.85
16.16		16.16		766,650		9.07		16.16		10,250		16.16
16.19		20.92		754,750		7.51		19.38		366,013		19.58
21.20		22.14		51,800		4.94		21.62		30,075		21.77
22.76		27.38		898,525		8.38		22.92		240,852		22.93

 

Restricted Stock and Restricted Stock Units — The Company may grant Restricted Stock (RS) and Restricted Stock Units (RSUs) to eligible employees, including its executives, and non-employee directors. Each RS and RSU represents a right to receive one share of the Company’s common stock upon the completion of a specific period of continued service or achievement of a certain milestone. RS and RSU awards granted are valued at the market price of the Company’s common stock on the date of grant. The Company recognizes noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the requisite service period of these awards. The following table summarizes the Company’s RSU award activity during the nine months ended September 30, 2016:

 

				Weighted
		Number of		Average
		RSUs		Grant Price ($)
Outstanding at December 31, 2015		43,554		16.07
Granted		89,194		10.85
Released		(43,554	)	16.07
Outstanding at September 30, 2016		89,194		10.85

 

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The following table summarizes the aggregate stock-based compensation recorded in the Consolidated Statements of Comprehensive Loss related to stock options and RSUs during the three and nine months ended September 30, 2016 and 2015:

 

		Three months ended September 30,						Nine months ended September 30,
		2016			2015			2016			2015
		(in millions)						(in millions)
Research and development expenses		$	1.7		$	0.8		$	4.6		$	3.1
General and administrative expenses		3.4			3.0			9.3			8.7
Total		$	5.1		$	3.8		$	13.9		$	11.8

 

8.             Income Taxes

 

The Company’s provision for income taxes was $25,000 and $71,000 for the three and nine months ended September 30, 2016, respectively. The current year provision was a result of certain of the Company’s subsidiaries in Europe, which had taxable income during the three and nine months ended September 30, 2016. In jurisdictions where the Company has net losses, there was a full valuation allowance recorded against the Company’s deferred tax assets and therefore no tax benefit was recorded. The Company is subject to US federal, US state and foreign income taxes. The statute of limitations for tax audit is open for the US federal tax returns for the years ended 2013 and later and is generally open for certain states for the years 2012 and later. The Company’s US federal tax return for the year ended December 31, 2013 is currently under audit by the Internal Revenue Service. The Company has incurred net operating losses since inception, with the exception of 2009. Such loss carryforwards are subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin. As of September 30, 2016 and December 31, 2015, the Company has recorded no reserves for unrecognized income tax benefits, nor has it recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next twelve months.

 

9.             Commitments and Contingencies

 

Commitments

 

The Company has an operating lease for office and laboratory space located in Bridgewater, NJ, its corporate headquarters, for which the initial lease term expires in November 2019. Future minimum rental payments under this lease are $3.2 million. In July 2016, the Company signed an operating lease for additional laboratory space located in Bridgewater, NJ for which the initial lease term expires in September 2021. Future minimum rental payments under this lease are $2.1 million.

 

Rent expense charged to operations was $0.4 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively, and $0.9 million and $0.6 million for the nine months ended September 30, 2016 and 2015, respectively. Future minimum rental payments required under the Company’s operating leases for the period from October 1, 2016 to December 31, 2016 and for each of the next five years are as follows (in thousands):

 

Year Ending December 31:
2016 (remaining)		$	340
2017		1,395
2018		1,433
2019		1,390
2020		444
2021		423
		$	5,425

 

Legal Proceedings

 

On July 15, 2016, a purported class action lawsuit was filed in the U.S. District Court for the District of New Jersey against the Company and certain of its executive officers: Hoey v. Insmed Incorporated, et al, No. 3:16-cv-04323-FLW-TJB (D.N.J. July 15, 2016). The complaint alleges that from March 18, 2013 through June 8, 2016, the Company and certain of our executive officers made material misstatements or omissions concerning the likelihood of the EMA approving the Company’s European MAA for use of ARIKAYCE in the treatment of NTM lung disease and the likelihood of commercialization of ARIKAYCE in Europe. The complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages. On October 25, 2016, the Court issued an order appointing Bucks County Employees Retirement Funds as lead plaintiff for the putative class. A consolidated amended complaint has not yet been filed. The Company believes that the allegations in the complaint are without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of the lawsuit.

 

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10.          Subsequent Event

 

License Agreement

 

AstraZeneca — On October 4, 2016, the Company entered into a license agreement (the License Agreement) with AstraZeneca AB, a Swedish corporation (AstraZeneca). Pursuant to the terms of the License Agreement, AstraZeneca granted the Company global exclusive rights for the purpose of developing and commercializing AZD7986 (renamed INS1007 by the Company). INS1007 is a novel oral inhibitor of dipeptidyl peptidase 1 (DPP1). DPP1 is an enzyme that catalyzes the activation of neutrophil serine proteases, which play a key role in pulmonary diseases such as non-cystic fibrosis bronchiectasis.

 

In consideration of the licenses and other rights granted by AstraZeneca, the Company paid an upfront payment of $30.0 million in early November 2016, which will be included as research and development expense in the fourth quarter of 2016. In connection with the upfront payment obligation in the License Agreement, the Company borrowed an additional $20.0 million under the A&R Loan Agreement in early October 2016, as further described in Note 5 - Debt. The Company will make a series of contingent milestone payments totaling up to an additional $85.0 million upon the achievement of clinical development and regulatory filing milestones. If the Company elects to develop INS1007 for a second indication, the Company will make an additional series of contingent milestone payments equal to half of the contingent milestone payments in the preceding sentence. No additional milestone payments are due for any indications beyond the first and second indications. In addition, the Company will pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teen on net sales of any approved product based on INS1007 and one additional payment of $35.0 million upon the first achievement of $1 billion in annual net sales. The License Agreement provides AstraZeneca with the option to negotiate a future agreement with the Company for commercialization of INS1007 in chronic obstructive pulmonary disease or asthma.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward looking statements.  “Forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995, are statements that are not historical facts and involve a number of risks and uncertainties.  Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” “continues,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements.

 

Forward-looking statements are based upon our current expectations and beliefs, and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated in any forward-looking statements. Such factors include, among others, the factors discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (SEC) on February 25, 2016, our subsequent quarterly reports on Form 10-Q filed in 2016, and the following: the ability to complete development of, receive regulatory approval for, and successfully commercialize ARIKAYCE, or liposomal amikacin for inhalation, INS1007, an oral reversible inhibitor of dipeptidyl peptidase, and INS1009, an inhaled treprostinil prodrug; the number of patients enrolled and the timing of patient enrollment in the Company’s global phase 3 clinical study of ARIKAYCE; estimates of expenses and future revenues and profitability; plans to develop and market new products and the timing of these development programs; status, timing, and the results of preclinical studies and clinical trials and preclinical and clinical data described herein; the sufficiency of preclinical and clinical data in obtaining regulatory approval for the Company’s product candidates; the timing of responses to information and data requests from the US Food and Drug Administration, the European Medicines Agency, and other regulatory authorities; clinical development of product candidates; the ability to obtain and maintain regulatory approval for product candidates; expectation as to the timing of regulatory review and approval; estimates regarding capital requirements, including milestone payments due to AstraZeneca, and the needs for additional financing; the ability to repay our existing indebtedness; estimates of the size of the potential markets for product candidates; selection and licensing of product candidates; ability to attract third parties with acceptable development, regulatory and commercialization expertise; the benefits to be derived from corporate license agreements and other third party efforts, including those relating to the development and commercialization of product candidates; the degree of protection afforded to the Company by its intellectual property portfolio; the safety and efficacy of product candidates; sources of revenues and anticipated revenues, including contributions from license agreements and other third party efforts for the development and commercialization of products; the ability to create an effective direct sales and marketing infrastructure for products the Company elects to market and sell directly; the rate and degree of market acceptance of product candidates; the impact of any litigation the Company is a party to, including, without limitation, the class action lawsuit filed against the Company; the timing, scope and rate of reimbursement for product candidates; the success of other competing therapies that may become available; and the availability of adequate supply and manufacturing capacity and quality for product candidates.

 

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

OVERVIEW

 

We are a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. Our lead product candidate is ARIKAYCE, or liposomal amikacin for inhalation (LAI), which is in late-stage development for patients with nontuberculous mycobacteria (NTM) lung disease, a rare and often chronic infection that is capable of causing irreversible lung damage and can be fatal. Our earlier clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral reversible inhibitor of dipeptidyl peptidase 1 (DPP1), an enzyme responsible for activating neutrophil serine proteases, which are implicated in the pathology of chronic inflammatory lung diseases, such as non-cystic fibrosis (non-CF) bronchiectasis. INS1009 is our inhaled treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

 

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We are conducting a global phase 3 clinical study of ARIKAYCE (the 212 or CONVERT study) in adult patients with treatment refractory NTM lung disease caused by Mycobacterium avium complex (MAC), which is the predominant infective species in NTM lung disease in the United States (US), Europe, and Japan.

 

In October 2016, we acquired the global exclusive rights to INS1007 (formerly known as AZD7986) from AstraZeneca and we are finalizing our plans for a phase 2 study in our lead indication, non-CF bronchiectasis. In a phase 1 study of healthy volunteers, AZD7986 was well tolerated and demonstrated inhibition of the activity of the neutrophil serine protease neutrophil elastase in a dose and concentration dependent manner. In preclinical studies, AZD7986 was shown to effectively and reversibly inhibit DPP1 and the activation of neutrophil serine proteases within maturing neutrophils.

 

We have completed a phase 1 study of INS1009 in healthy subjects and the results were presented at the European Respiratory Society international congress in September 2016. This first-in-human study of INS1009 determined the maximum-tolerated dose of a single dose of INS1009 and characterized a pharmacokinetic profile that supports once- or twice-daily dosing. The longer half-life of treprostinil associated with INS1009 was likely due to a sustained pulmonary release.

 

Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, including methicillin-resistant staph aureus (MRSA), NTM, and sarcoidosis. To complement our internal research and development, we actively evaluate in-licensing and acquisition opportunities for a broad range of rare diseases.

 

The following table summarizes the current status of and anticipated milestones for ARIKAYCE, INS1007, and INS1009:

 

 

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Product Pipeline

 

ARIKAYCE for patients with NTM lung disease

 

Our lead product candidate is ARIKAYCE, or LAI, a novel, once-daily formulation of amikacin that is in late-stage clinical development for patients with NTM lung disease, a rare and often chronic infection that is capable of causing irreversible lung damage and death. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Our advanced liposome technology uses charge-neutral liposomes to deliver amikacin directly to the lung where it is taken up by the lung macrophages where the NTM infection resides. This prolongs the release of amikacin in the lungs while minimizing systemic exposure thereby offering the potential for decreased systemic toxicities. ARIKAYCE’s ability to deliver high levels of amikacin directly to the lung distinguishes it from intravenous amikacin. ARIKAYCE is administered once-daily using an optimized, investigational eFlow® Nebulizer System manufactured by PARI Pharma GmbH, a novel, highly efficient and portable aerosol delivery system.

 

The CONVERT study

 

ARIKAYCE is currently being evaluated in a global phase 3 randomized, open-label clinical study designed to confirm the culture conversion results seen in our phase 2 clinical trial. This phase 3 study, which is known as the CONVERT (or 212) study, is comprised of non-CF patients 18 years and older with an NTM lung infection caused by MAC that is refractory to a stable multi-drug regimen for at least six months with the regimen either ongoing or completed within 12 months of screening. In our completed phase 2 study, the highest response to ARIKAYCE treatment was observed in the subgroup of non-CF patients with NTM lung infection caused by MAC. The CONVERT study also excludes subjects whose susceptibility scores indicate that their MAC NTM infection is resistant to amikacin. We believe the CONVERT study will confirm the culture conversion results seen in the phase 2 study and provide the basis for submitting a New Drug Application (NDA) to the FDA, as well as regulatory submissions in Europe, Japan and other countries.

 

After a screening period of approximately 10 weeks, eligible subjects are randomized 2:1 to once-daily ARIKAYCE plus a multi-drug regimen or the same multi-drug regimen without ARIKAYCE.  The primary efficacy endpoint is the proportion of subjects who achieve culture conversion by Month 6 in the ARIKAYCE plus multi-drug regimen arm compared to the arm in which subjects receive the same multi-drug regimen without ARIKAYCE. A converter is defined as a subject with three consecutive monthly negative sputum cultures by Month 6. The study’s key secondary endpoints include the change from baseline in the six-minute walk test and off-treatment assessments to evaluate durability of effect. The study also includes a comprehensive pharmacokinetic sub-study in Japanese subjects in lieu of a separate local pharmacokinetic study in Japan.

 

At Month 8, after all sputum culture results are known up to and including Month 6, subjects will be assessed as converters or non-converters for the primary efficacy endpoint. All converters will continue on their randomized treatment regimen for 12 months beginning from the first negative culture that defined culture conversion. All converters will return for off-treatment follow-up visits. A 12-month off-treatment study visit will be the last visit for the CONVERT study. All non-converters, as determined at the Month 8 visit, may be eligible to enter a separate 12-month open-label study (the 312 study). The primary objective of the 312 study is to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard multi-drug regimen. The secondary endpoints of the 312 study include evaluating the proportion of subjects achieving culture conversion (three consecutive monthly negative sputum cultures) by Month 6 and the proportion of subjects achieving culture conversion by Month 12 (end of treatment).

 

The protocol for the CONVERT study incorporates feedback from the FDA and the European Medicines Agency (EMA) via its scientific advice working party process, as well as local health authorities in other countries, including Japan’s Pharmaceuticals and Medical Devices Agency. If the CONVERT study meets the primary endpoint of culture conversion by Month 6, we believe we would be eligible to submit an NDA pursuant to 21 CFR 314 Subpart H (Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses), which permits FDA to approve a drug based on a surrogate endpoint provided the sponsor commits to study the drug further to verify and describe the drug’s clinical benefit. We believe that efficacy data from the CONVERT study after Month 6, if successful, will suffice to meet this commitment. The CONVERT study is taking place in North America, Europe, Australia, New Zealand and Asia. The CONVERT study is designed to enroll enough subjects to ensure at least 261 patients are evaluable for the primary endpoint.

 

Phase 2 Study (112 Study)

 

Our completed phase 2 study, which is also known as the 112 study, was a randomized, double-blind, placebo-controlled study that evaluated the efficacy and safety of ARIKAYCE in adults with NTM lung disease due to MAC or Mycobacterium

 

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abscessus (M. abscessus) that was refractory to guideline-based therapy. The study included an 84-day double-blind phase in which subjects were randomized 1:1 either to ARIKAYCE once-daily plus a multi-drug regimen or to placebo once-daily plus the same multi-drug regimen. After completing the 84-day double-blind phase, subjects had the option of continuing in an 84-day open-label phase during which all subjects received ARIKAYCE plus the same multi-drug regimen. The study also included 28-day and 12-month off-ARIKAYCE follow-up assessments.

 

Eighty-nine (89) subjects were randomized and dosed in the study. Of the 80 subjects who completed the 84-day double-blind phase, 78 subjects entered the open-label phase and received ARIKAYCE plus the same multi-drug regimen for an additional 84 days. Seventy-six (76) percent (59/78) of subjects who entered the open-label phase of the study completed the open-label study.

 

The primary efficacy endpoint of the study was the change from baseline (day 1) to the end of the double-blind phase of the trial (day 84) in a semi-quantitative measurement of mycobacterial density on a seven-point scale. ARIKAYCE did not meet the pre-specified level for statistical significance although there was a positive trend (p=0.072) in favor of ARIKAYCE. The p-value for the key secondary endpoint of culture conversion to negative at Day 84 was 0.003, in favor of ARIKAYCE. A shorter time to first negative sputum culture was also observed with ARIKAYCE relative to placebo during the double-blind phase (p=0.013).

 

The microbiologic outcomes from the 112 study were also explored post hoc using a more stringent definition of culture conversion, which is defined as at least three consecutive monthly sputum samples that test negative for NTM. This definition of culture conversion is in the guidelines and used in clinical practice.

 

Twenty-three (23) subjects achieved at least three consecutive negative monthly sputum samples by the 28-day follow-up assessment, of which four started to convert at baseline prior to administration of study drug. For the 19 patients who achieved culture conversion, 17 achieved culture conversion after receiving ARIKAYCE, 10 who were randomized to ARIKAYCE in the double-blind phase and seven after entering the open-label phase. Two patients achieved culture conversion while receiving placebo in the double-blind phase.

 

The majority of subjects who achieved culture conversion (three consecutive negative monthly sputum samples) during the double-blind phase continued to have negative cultures through the open-label and follow-up phases.

 

At the end of the double-blind phase, the ARIKAYCE group improved from baseline in mean distance walked in the six-minute walk test. At the end of the open-label phase, patients in the ARIKAYCE group continued to improve in the mean distance walked in the six-minute walk test while the patients who previously received placebo in the double-blind phase and subsequently received ARIKAYCE in the open-label phase demonstrated a reduced rate of decline from baseline.

 

The majority (90 percent) of patients in both treatment groups experienced at least one treatment-emergent adverse event with most events either mild or moderate in severity. During the double-blind phase a greater percentage of patients treated with ARIKAYCE experienced dysphonia, bronchiectasis exacerbation, cough, oropharyngeal pain, fatigue, chest discomfort, wheezing, and infective pulmonary exacerbation of cystic fibrosis. No clinically relevant changes were detected in laboratory values and vital signs.

 

In October 2016, the phase 2 study was published online in the American Journal of Respiratory and Critical Care Medicine (Olivier et al. 2016).

 

ARIKAYCE for NTM in the EU

 

We previously filed a marketing authorization application (MAA) with the EMA for ARIKAYCE as a treatment for NTM lung disease. The filing was based on data from our phase 2 study. In May 2016, we participated in an oral explanation meeting with the EMA’s Committee for Medicinal Products for Human Use (CHMP). After the oral explanation meeting, the CHMP concluded that the data submitted did not provide enough evidence to support an approval. In June 2016, we withdrew our MAA. We intend to resubmit our MAA when sufficient clinical data from our ongoing global CONVERT study are available.

 

NTM Market Opportunity

 

NTM is a rare and serious disorder associated with increased morbidity and mortality. There is an increasing rate of lung disease caused by NTM and this is an emerging public health concern worldwide. Patients with NTM lung disease may experience a multitude of symptoms such as fever, weight loss, cough, lack of appetite, night sweats, blood in the sputum, and fatigue. Patients with NTM lung disease frequently require lengthy, and repeat, hospital stays to manage their condition. There are no inhaled antibiotic treatments specifically indicated for the treatment of NTM lung disease in North America, Europe or Japan. Current guideline-based approaches involve multi-drug regimens that may cause severe side effects and treatment can be as long as two years or more.

 

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The prevalence of human disease attributable to NTM has increased over the past two decades. In a decade-long study (1997-2007), researchers found that the prevalence of NTM in the US is increasing at approximately 8% per year and that NTM patients on Medicare over the age of 65 are 40% more likely to die over the period of the study than those who did not have the disease (Adjemian et al., 2012). A 2015 publication from co-authors from several US government departments stated that prior year statistics led to a projected 181,037 national annual cases in 2014 costing the US healthcare system approximately $1.7 billion (Strollo et al., 2015).

 

Our market research indicates that there are approximately 100,000 patients in the US, the EU5 (France, Germany, Italy, Spain and the United Kingdom), and Japan who have a confirmed diagnosis of NTM lung disease, of which an estimated 10 to 30 percent are refractory to current treatments. In 2012, in collaboration with the NIH, we funded a study performed by Clarity Pharma Research that showed there were an estimated 50,000 cases of pulmonary disease attributable to NTM in the US in 2011 and that such cases were estimated to be growing at a rate of 10% per year. In 2013, we engaged Clarity Pharma Research to perform a similar chart audit study of NTM in Europe and Japan. Based on results of this study, researchers estimated that there are approximately 20,000 cases of pulmonary disease attributable to NTM within the EU5 and approximately 30,000 in the 28 countries comprising the EU. In addition, there are nearly 32,000 cases in Japan. Although population-based data on the epidemiology of NTM lung disease are limited, and determining the true prevalence and incidence of rare diseases can be challenging, studies worldwide have described an increasing prevalence.

 

NTM currently includes over 165 species. MAC is the predominant pathogenic species in NTM pulmonary disease in the US, Japan and Europe, followed by M. abscessus. Thus far, we have studied ARIKAYCE in both MAC and M. abscessus.

 

We are studying the economic and societal implications of NTM lung infections. We have conducted a burden of illness study in the US with a major medical benefits provider. This study showed that patients with NTM lung infections are costly to healthcare plans and ATS/IDSA guideline-based treatment results in healthcare savings as opposed to suboptimal treatment.

 

In partnership with one of the nation’s largest Medicare insurance providers, we presented the results of three claims-based studies.

 

·                  At the Interscience Conference of Antimicrobial Agents and Chemotherapy in September 2015, researchers reported a 36.1% increase in the incidence of NTM lung infections between 2008 and 2013 in US Medicare population of a national managed care health plan, with the greatest incidence increase (56.3%) observed in members 65 to 74 years of age. Following diagnosis with NTM lung infections, over 50% of members were still in the plan after six years (Abraham et al., 2015).

 

·                  At the Infectious Disease Week in October 2015, researchers reported that patients with NTM lung infections were using greater healthcare resources than their age and gender-matched controls in the period preceding their initial diagnosis. Ordering mycobacterial testing of sputum earlier may help in preventing a misdiagnosis or delaying a diagnosis (Holt et al., 2015).

 

·                  At the Academy of Managed Care Pharmacy conference in October 2015, researchers reported higher resource utilization and costs for patients with NTM lung infections than their age and gender-matched controls both pre- and post-diagnosis. Patients who received treatment regimens conforming to the 2007 ATS/IDSA guidelines showed lower healthcare resource utilization and total medical costs than patients who received suboptimal treatment. These data suggest that healthcare plans should consider mechanisms to identify and appropriately treat patients with NTM lung disease (Abraham et al., 2015).

 

We plan to repeat this type of research globally in support of our overall disease awareness and education efforts. Results from an EU burden of illness study were recently presented at the International Society of Pharmacoeconomic and Outcomes Research annual European congress.

 

The FDA has designated ARIKAYCE as an orphan drug, a breakthrough therapy, and a QIDP for NTM lung disease. Orphan designation features seven years of post-approval market exclusivity, and QIDP features an additional five years of post-approval exclusivity. A QIDP-designated product is eligible for fast track and priority review designations. A priority review designation for a drug means the FDA’s goal is to take action on the NDA within six months of the 60-day filing date, as compared to 10 months of the 60-day filing date under a standard review.

 

INS1007

 

INS1007 is a small molecule, oral reversible inhibitor of DPP1, an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain three neutrophil serine proteases, neutrophil elastase, proteinase 3, and cathepsin G, that have been implicated in a variety of inflammatory diseases. In chronic

 

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inflammatory lung diseases, neutrophils accumulate in the airways and result in excessive active neutrophil serine proteases that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases.

 

Non-CF bronchiectasis

 

Non-CF bronchiectasis is a rare, progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Neutrophils play a key role in the pathologic inflammatory process. Symptoms include chronic cough, excessive sputum production, shortness of breath, and repeated respiratory infections, which can worsen the underlying condition. There is currently no cure for non-CF bronchiectasis.

 

Bronchiectasis increases susceptibility to NTM lung disease, and up to 50 percent of patients with bronchiectasis may also have an active NTM infection. We have completed a phase 2 study of ARIKAYCE for the treatment of chronic Pseudomonas aeruginosa infection in patients with non-CF bronchiectasis.

 

INS1009

 

INS1009 is an investigational sustained-release inhaled treprostinil prodrug that has the potential to address certain of the current limitations of existing inhaled prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH.

 

In late 2014, we had a pre-investigational new drug (pre-IND) meeting with the FDA for INS1009 and clarified that, subject to final review of the preclinical data, INS1009 could be eligible for an approval pathway under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (FDCA) (505(b)(2) approval). Like a traditional NDA that is submitted under Section 505(b)(1) of the FDCA, a 505(b)(2) NDA must establish that the drug is safe and effective, but unlike a traditional NDA the applicant may rely at least in part on studies not conducted by or for the applicant and for which the applicant does not have a right of reference. The ability to rely on existing third-party data to support safety and/or effectiveness can reduce the time and cost associated with traditional NDAs. We have completed a phase 1 study of INS1009. The phase 1 study was a randomized, double-blind, placebo-controlled single ascending dose study of INS1009 for inhalation to determine its safety, tolerability, and pharmacokinetics in healthy volunteers. The pharmacokinetic characteristics supported once- or twice-daily whereas existing inhaled therapies are dosed four to nine times per day. The adverse event profile was consistent with other inhaled prostanoids.

 

Twenty-four (24) subjects were enrolled and received INS1009 with cohorts of eight subjects receiving doses of 85 mcg, 170 mcg, 340 mcg or placebo. Participants in the first cohort (8 patients) received a single dose of open label treprostinil (Tyvaso) at 54 mcg 24 hours prior to receiving INS1009 at 85 mcg. The 85 mcg dose of INS1009 provides an equivalent amount of treprostinil on a molar basis as the 54 mcg dose of Tyvaso. The peak serum concentration was approximately 90% lower for treprostinil after INS1009 administration compared with Tyvaso, which could indicate a reduced future adverse event (AE) profile. The pharmacokinetic characteristics also supported once- or twice-daily dosing. The longer half-life of treprostinil for INS1009 was likely due to a sustained pulmonary release. The AE profile was consistent with other inhaled prostanoids. These data were presented at the European Respiratory Society international congress in September 2016.

 

Our Strategy

 

Our strategy focuses on the needs of patients with rare diseases. We are currently focused on the development and commercialization of ARIKAYCE. There are currently no inhaled products specifically indicated to treat NTM lung disease in North America, Europe or Japan. While we believe that ARIKAYCE has the potential to treat many different diseases, we are prioritizing securing US regulatory approval of ARIKAYCE in NTM lung disease caused by MAC. We are also advancing earlier-stage programs in other rare pulmonary disorders.

 

Our current priorities are as follows:

 

·                  Advancing the global CONVERT study;

·                  Preparing our US NDA submission, which will be based on the primary endpoint of the CONVERT study;

 

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·                  Ensuring our product supply chain will support the clinical development and, if approved, commercialization of ARIKAYCE;

·                  Preparing for potential commercialization of ARIKAYCE in the US, Europe, Japan, and certain other countries;

·                  Supporting further research and lifecycle management strategies for ARIKAYCE, including investigator-initiated studies;

·                  Developing the core value dossier to support the global reimbursement of ARIKAYCE;

·                  Filing an IND with FDA and starting a phase 2 study of INS1007 in non-CF bronchiectasis;

·                  Generating preclinical findings from our earlier-stage program(s); and

·                  Expanding our rare disease pipeline through corporate development.

 

Corporate Development

 

We plan to develop, acquire, in license or co-promote complementary products that address rare diseases. We are focused broadly on rare disease therapeutics and prioritizing those areas that best align with our core competencies and current therapeutic focus in the area of rare pulmonary diseases.

 

Manufacturing

 

ARIKAYCE is manufactured by Therapure Biopharma Inc. (Therapure) in Canada at a 200 liter scale and by Ajinimoto Althea, Inc. (Althea) in the US at a 50 liter scale. In September 2015, we entered into a commercial fill/finish services agreement with Althea to produce ARIKAYCE. Althea has the right to terminate this agreement upon written notice for our uncured material breach, if we are the subject of specified bankruptcy or liquidation events, or without cause with 24 months’ prior written notice. In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of ARIKAYCE. We have also identified certain second source suppliers for our supply chain, and plan to implement supply and quality agreements in preparation for commercialization of ARIKAYCE. In July 2014, we entered into a commercialization agreement with PARI, the manufacturer of our drug delivery nebulizer, to address our commercial supply needs. We expect to enter into a commercial supply agreement with AstraZeneca related to certain short-term production needs for INS1007. In addition, we expect our future requirements for INS1007 will be manufactured by a contract manufacturing organization. We currently produce INS1009, our investigational inhaled treprostinil prodrug, and plan to utilize third parties to manufacture INS1009 at a larger scale and the drug delivery device.

 

KEY COMPONENTS OF OUR STATEMENT OF OPERATIONS

 

Revenues

 

In 2015, the French National Agency for Medicines and Health Products Safety granted LAI several nominative Temporary Authorization for Use (Autorisation Temporaire d’Utilisation or ATU). Pursuant to this program, we shipped ARIKAYCE to pharmacies after receiving requests from physicians for patients in France. In 2016, the revenue recorded from the ATU program was immaterial to disclose and is included as a component of “other income (expense), net” Other than the ATU revenue in France, we currently do not recognize any revenue from product sales or other sources.

 

Research and Development Expenses

 

Research and development expenses consist primarily of salaries, benefits and other related costs, including stock based compensation, for personnel serving in our research and development functions. Expenses also include other internal operating expenses, the cost of manufacturing our drug candidate for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. Our expenses related to manufacturing our drug candidate for clinical study are primarily related to activities at contract manufacturing organizations that manufacture ARIKAYCE for our use. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

 

Since 2011, we have focused our development activities principally on our proprietary, advanced liposomal technology designed specifically for inhalation lung delivery. In 2015, we commenced the CONVERT study for ARIKAYCE for patients with NTM lung disease. In 2015, we also completed an open-label extension study in which CF patients that completed our phase 3 trial

 

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received ARIKAYCE for a period of two years. The majority of our research and development expenses have been for our ARIKAYCE development programs. Our development efforts in 2015 and 2016 principally relate to the development of ARIKAYCE in the NTM indication.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance and accounting, legal, pre-commercial, corporate development, information technology, program management and human resource functions. General and administrative expenses also include professional fees for legal, including patent-related expenses, consulting, insurance, board of director fees, tax and accounting services. We expect that our general and administrative expenses will increase in order to support increased levels of development activities and preparation for commercialization activities for our product candidates.

 

Debt Issuance Costs

 

Debt issuance costs are amortized to interest expense using the effective interest rate method over the term of the debt. Our balance sheet reflects debt net of debt issuance costs paid to the lender. Unamortized debt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.

 

Investment Income and Interest Expense

 

Investment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense consists primarily of interest costs related to our debt.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended September 30, 2016 and 2015

 

Net Loss

 

Net loss for the quarter ended September 30, 2016 was $37.8 million, or ($0.61) per common share—basic and diluted, compared with a net loss of $31.0 million, or ($0.50) per common share—basic and diluted, for the quarter ended September 30, 2015. The $6.8 million increase in our net loss for the quarter ended September 30, 2016 as compared to the same period in 2015 was primarily due to:

 

·                  Increased research and development expenses of $4.2 million resulting from higher compensation and related expenses due to an increase in headcount compared to the prior year period and in increase in clinical trial expenses primarily related to the CONVERT study. These increases were partially offset by a decrease in manufacturing expenses primarily due to the completion of the build-out of our production area at Therapure’s facility in 2015; and

 

·                  Increased general and administrative expenses of $2.7 million primarily resulting from an increase in pre-commercial activities and higher compensation and related expenses due to an increase in headcount as compared to the prior year period.

 

Research and Development Expenses

 

Research and development expenses for the quarters ended September 30, 2016 and 2015 were comprised of the following (in thousands):

 

		Quarters Ended September 30,						Increase (decrease)
		2016			2015			$			%
External Expenses
Clinical development & research		$	9,628		$	6,515		$	3,113		47.8	%
Manufacturing		2,967			5,713			(2,746		)	-48.1	%
Regulatory and quality assurance		401			956			(555		)	-58.1	%
Subtotal—external expenses		$	12,996		$	13,184		$	(188	)	-1.4	%
Internal Expenses
Compensation and related expenses		$	8,086		$	4,464		$	3,622		81.1	%
Other internal operating expenses		2,351			1,573			778			49.5	%
Subtotal—internal expenses		$	10,437		$	6,037		$	4,400		72.9	%
Total		$	23,433		$	19,221		$	4,212		21.9	%

 

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Research and development expenses increased to $23.4 million during the quarter ended September 30, 2016 from $19.2 million in the same period in 2015. The $4.2 million increase was due to a $3.1 million increase in external clinical development expenses primarily related to the CONVERT study and a $3.6 million increase in compensation and related expenses, including stock-based compensation, due to an increase in headcount. These increases were partially offset by a $2.7 million decrease in manufacturing expenses primarily due to the completion of the build-out of our production area at Therapure’s facility in 2015. We expect research and development expenses to increase in 2016 as compared to 2015 due primarily to the clinical trial activity related to the CONVERT study.

 

General and Administrative Expenses

 

General and administrative expenses for the quarters ended September 30, 2016 and 2015 were comprised of the following (in thousands):

 

		Quarters Ended September 30,						Increase (decrease)
		2016			2015			$			%
General & administrative		$	9,097		$	7,508		$	1,589		21.2	%
Pre-commercial expenses		4,619			3,516			1,103			31.4	%
Total general & administrative expenses		$	13,716		$	11,024		$	2,692		24.4	%

 

Total general and administrative expenses increased to $13.7 million during the quarter ended September 30, 2016 from $11.0 million in the same period in 2015. The $2.7 million increase was primarily due to an increase of $1.4 million in consulting expenses related to pre-commercial marketing activities and legal expenses and an increase of $1.4 million due to higher compensation, including stock-based compensation, related to an increase in headcount.

 

Interest Expense

 

Interest expense was $0.8 million during the quarter ended September 30, 2016 as compared to $0.7 million in the same period in 2015. The $0.1 million increase in interest expense in 2016 was due to expenses for debt issuance costs related to our previous loan agreement with Hercules.

 

Comparison of the Nine Months Ended September 30, 2016 and 2015

 

Net Loss

 

Net loss for the nine months ended September 30, 2016 was $107.9 million, or ($1.74) per common share—basic and diluted, compared with a net loss of $86.9 million, or ($1.51) per common share—basic and diluted, for the nine months ended September 30, 2015. The $20.9 million increase in our net loss for the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily due to:

 

·                  Increased research and development expenses of $13.2 million resulting from an increase in clinical trial expenses primarily related to the CONVERT study and higher compensation and related expenses due to an increase in headcount compared to the prior year period. These increases were partially offset by a decrease in manufacturing expenses primarily due to the completion of the build-out of our production area at Therapure’s facility in 2015; and

 

·                  Increased general and administrative expenses of $8.2 million primarily resulting from an increase in pre-commercial activities and higher compensation and related expenses due to an increase in headcount as compared to the prior year period.

 

Research and Development Expenses

 

Research and development expenses for the nine months ended September 30, 2016 and 2015 were comprised of the following (in thousands):

 

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		Nine Months Ended September 30,						Increase (decrease)
		2016			2015			$			%
External Expenses
Clinical development & research		$	26,266		$	18,393		$	7,873		42.8	%
Manufacturing		12,243			16,141			(3,898		)	-24.1	%
Regulatory and quality assurance		1,366			1,897			(531		)	-28.0	%
Subtotal—external expenses		$	39,875		$	36,431		$	3,444		9.5	%
Internal Expenses
Compensation and related expenses		$	21,463		$	13,795		$	7,668		55.6	%
Other internal operating expenses		6,513			4,405			2,108			47.9	%
Subtotal—internal expenses		$	27,976		$	18,200		$	9,776		53.7	%
Total		$	67,851		$	54,631		$	13,220		24.2	%

 

Research and development expenses increased to $67.9 million during the nine months ended September 30, 2016 from $54.6 million in the same period in 2015. The $13.2 million increase was due to a $7.9 million increase in external clinical development expenses primarily related to the CONVERT study and a $7.7 million increase in compensation and related expenses, including stock-based compensation, due to an increase in headcount. These increases were partially offset by a $3.9 million decrease in manufacturing expenses primarily due to the completion of the build-out of our production area at Therapure’s facility in 2015. We expect research and development expenses to increase in 2016 as compared to 2015 due primarily to the clinical trial activity related to the CONVERT study.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2016 and 2015 were comprised of the following (in thousands):

 

		Nine Months Ended September 30,						Increase (decrease)
		2016			2015			$			%
General & administrative		$	26,789		$	22,840		$	3,949		17.3	%
Pre-commercial expenses		11,709			7,432			4,277			57.5	%
Total general & administrative expenses		$	38,498		$	30,272		$	8,226		27.2	%

 

General and administrative expenses increased to $38.5 million during the nine months ended September 30, 2016 from $30.3 million in the same period in 2015. The $8.2 million increase was primarily due to an increase of $4.6 million in consulting fees relating to pre-commercial marketing activities and legal and consulting expenses and an increase of $3.6 million due to higher compensation costs, including stock-based compensation, related to an increase in headcount.

 

Interest Expense

 

Interest expense was $2.0 million during the nine months ended September 30, 2016 as compared to $2.2 million in the same period in 2015. The $0.2 million decrease in interest expense relates to a decrease in the amortization of our debt issuance costs in 2016.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

There is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point of regulatory approval and commercialization. In recent years, we have funded our operations through public and private placements of equity securities and through debt financing. We expect to continue to incur losses both in our US and certain international entities, as we plan to fund research and development activities and commercial launch activities.

 

We believe we currently have sufficient funds to meet our financial needs for at least the next twelve months. We will opportunistically raise additional capital and may do so through equity or debt financing(s), strategic transactions or otherwise. Such additional funding may be necessary to continue to develop our potential product candidates, to pursue the license or purchase of other technologies, to commercialize our product candidates or to purchase other products. We cannot assure you that adequate capital will be available on favorable terms, or at all, when needed. If we are unable to obtain sufficient additional funds when required, we may

 

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