Insmed
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 0-30739INSMED INCORPORATED(Exact name of registrant as specified in its charter)Virginia(State or other jurisdiction of incorporation ororganization) 54-1972729(I.R.S. employer identification no.) 10 Finderne Avenue, Building 10Bridgewater, New Jersey 08807(Address of principal executive offices) (908) 977-9900(Registrant's telephone number including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on whichregisteredCommon Stock, par value $0.01 per share Nasdaq Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ü] No [ ]Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ü]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 preceding12 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 [ü] No [ ]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 postedpursuant 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 suchfiles). Yes [ü] No [ ]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company(See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act). Largeaccelerated filer [ü] Accelerated filer [ ] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ] Emerging growth company [ ]If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü]The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2017, was $1,057 million (based on the closing price forshares of the registrant's common stock as reported on the Nasdaq Global Select Market on that date). In determining this figure, the registrant has assumed solely for this purpose thatall of its directors, executive officers, persons beneficially owning 10% or more of the registrant's outstanding common stock and certain other stockholders of the registrant may beconsidered to be affiliates. This assumption shall not be deemed conclusive as to affiliate status for this or any other purpose.On February 1, 2018, there were 76,617,946 shares of the registrant's common stock, $0.01 par value, outstanding.____________________________________________________________________________Table of ContentsDOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission no laterthan May 1, 2018 and to be delivered to shareholders in connection with the 2018 Annual Meeting of Shareholders, are herein incorporated by reference in Part III of this Form 10-K.Table of ContentsINSMED INCORPORATEDINDEX PAGEREPORT:FORM 10-K CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS4PART I 6 ITEM 1BUSINESS6 ITEM 1ARISK FACTORS31 ITEM 1BUNRESOLVED STAFF COMMENTS55 ITEM 2PROPERTIES56 ITEM 3LEGAL PROCEEDINGS56 ITEM 4MINE SAFETY DISCLOSURES56PART II 57 ITEM 5MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES57 ITEM 6SELECTED FINANCIAL DATA58 ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS60 ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK74 ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA74 ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE74 ITEM 9ACONTROLS AND PROCEDURES74 ITEM 9BOTHER INFORMATION75PART III 76 ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE76 ITEM 11EXECUTIVE COMPENSATION76 ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS76 ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE76 ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES76PART IV 77 ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES77 ITEM 16FORM 10-K SUMMARY80REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM82CONSOLIDATED FINANCIAL STATEMENTS84Unless the context otherwise indicates, references in this Form 10-K to “Insmed Incorporated” refers to Insmed Incorporated, a Virginia corporation, and“Company,” “Insmed,” “we,” “us” and “our” refer to Insmed Incorporated together with its consolidated subsidiaries. INSMED, CONVERT and ARIKAYCEare trademarks of Insmed Incorporated. This Form 10-K also contains trademarks of third parties. Each trademark of another company appearing in thisForm 10-K is the property of its owner.3Table of ContentsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. "Forward-lookingstatements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are statements that are not historical facts and involve a numberof 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 orcircumstances) identify forward-looking statements. Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks, uncertainties and otherfactors, 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 risks, uncertainties and otherfactors include, among others, the following:•risks that the full six-month data from the CONVERT study (the CONVERT study or the 212 study) or subsequent data from the remainder of thestudy’s treatment and off-treatment phases will not be consistent with the top-line six-month results of the study;•uncertainties in the research and development of our existing product candidates, including due to delays in data readouts, such as the full datafrom the CONVERT study, patient enrollment and retention or failure of our preclinical studies or clinical trials to satisfy pre-establishedendpoints, including secondary endpoints in the CONVERT study and endpoints in the CONVERT extension study (the 312 study);•risks that subsequent data from the 312 study will not be consistent with the interim results;•failure to obtain, or delays in obtaining, regulatory approval from the US Food and Drug Administration (FDA), Japan’s Ministry of Health,Labour and Welfare (MHLW) and Pharmaceuticals and Medical Devices Agency (PMDA), the European Medicines Agency (EMA), and otherregulatory authorities for our product candidates or their delivery devices, such as the eFlow Nebulizer System, including due to insufficientclinical data, selection of endpoints that are not satisfactory to regulators, complexity in the review process for combination products orinadequate or delayed data from a human factors study required for US regulatory approval;•failure to maintain regulatory approval for our product candidates, if received, due to a failure to satisfy post-approval regulatory requirements,such as the submission of sufficient data from confirmatory clinical studies;•safety and efficacy concerns related to our product candidates;•lack of experience in conducting and managing preclinical development activities and clinical trials necessary for regulatory approval, includingthe regulatory filing and review process;•failure to comply with extensive post-approval regulatory requirements or imposition of significant post‑approval restrictions on our productcandidates by regulators;•uncertainties in the rate and degree of market acceptance of product candidates, if approved;•inability to create an effective direct sales and marketing infrastructure or to partner with third parties that offer such an infrastructure fordistribution of our product candidates, if approved;•inaccuracies in our estimates of the size of the potential markets for our product candidates or limitations by regulators on the proposed treatmentpopulation for our product candidates;•failure of third parties on which we are dependent to conduct our clinical trials, to manufacture sufficient quantities of our product candidates forclinical or commercial needs, including our raw materials suppliers, or to comply with our agreements or laws and regulations that impact ourbusiness;•inaccurate estimates regarding our future capital requirements, including those necessary to fund our ongoing clinical development, regulatoryand commercialization efforts as well as milestone payments or royalties owed to third parties;4Table of Contents•failure to develop, or to license for development, additional product candidates, including a failure to attract experienced third-partycollaborators;•uncertainties in the timing, scope and rate of reimbursement for our product candidates;•changes in laws and regulations applicable to our business and failure to comply with such laws and regulations;•inability to repay our existing indebtedness or to obtain additional capital when needed on desirable terms or at all;•failure to obtain, protect and enforce our patents and other intellectual property and costs associated with litigation or other proceedings relatedto such matters;•restrictions imposed on us by license agreements that are critical for our product development, including our license agreements with PARIPharma GmbH (PARI) and AstraZeneca AB (AstraZeneca), and failure to comply with our obligations under such agreements;•competitive developments affecting our product candidates and potential exclusivity related thereto;•the cost and potential reputational damage resulting from litigation to which we are or may be a party, including, without limitation, the classaction lawsuit against us that recently was dismissed without prejudice;•loss of key personnel; and•lack of experience operating internationally. We may not actually achieve the results, plans, intentions or expectations indicated by our forward-looking statements because, by their nature,forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in thefuture. You should carefully read the factors discussed in Risk Factors, Item 1A of Part I of this Annual Report on Form 10-K, as well as the discussion andanalysis of our financial condition and financial statements contained in this Annual Report on Form 10-K for additional discussion of the risks anduncertainties that could cause our actual results to differ materially from those in our forward-looking statements. We caution readers not to place unduereliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically requiredby law and the rules of the Securities and Exchange Commission (SEC), to publicly update or revise any such statements to reflect any change in ourexpectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results willdiffer from those set forth in the forward-looking statements..5Table of ContentsPART IITEM 1. BUSINESSBusiness OverviewInsmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. Our lead product candidate is amikacinliposome inhalation suspension (ALIS) (formerly known as liposomal amikacin for inhalation), which is in late-stage development for adult patients withtreatment refractory nontuberculous mycobacteria (NTM) lung disease caused by Mycobacterium avium complex (MAC), a rare and often chronic infectionthat can cause 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 pathologyof chronic inflammatory lung diseases, such as non-cystic fibrosis (non-CF) bronchiectasis. INS1009 is an inhaled nanoparticle formulation of a treprostinilprodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).The table below summarizes the current status and anticipated milestones for our principal product candidates: ALIS, INS1007, and INS1009.6Table of Contents ProductCandidate/TargetIndicationsStatusNext Expected MilestonesALIS for NTM lung infections• We announced top-line data for the CONVERT study onSeptember 5, 2017. Based on top-line results, the CONVERTstudy met its primary endpoint of culture conversion, whichwe defined as three consecutive negative monthly sputumcultures by month six with statistical and clinical significance,with 29% of patients in the ALIS plus current guideline-basedtherapy (GBT) arm achieving culture conversion, compared to9% of patients in the GBT-only arm (p<0.0001).• We announced interim data from the CONVERT study andthe 312 extension study on January 3, 2018. The recent dataincluded interim long-term durability data for the CONVERTstudy and interim efficacy data for the 312 study. • The CONVERT study is a randomized, open-label globalphase 3 clinical study of ALIS in adult patients with treatmentrefractory NTM lung disease caused by MAC. The 312 studyis a 12-month extension study of patients who completed sixmonths of treatment in the CONVERT study, but did notdemonstrate culture conversion by month six.• The FDA has designated ALIS as an orphan drug, abreakthrough therapy, and a qualified infectious diseaseproduct (QIDP).• The European Commission has granted an orphandesignation for ALIS for the treatment of NTM lung disease.• We plan to pursue accelerated approval of ALISpursuant to Section 506(c) of the Federal Food Drugand Cosmetic Act and 21 C.F.R. Part 314 Subpart H(Accelerated Approval of New Drugs for Serious orLife-Threatening Illnesses) (Subpart H) based on thesix-month data from the CONVERT study. We planto file a new drug application (NDA) for approval ofALIS with the US Food and Drug Administration(FDA) before the end of March 2018.• We intend to seek marketing approvals for ALIS incertain countries outside the US, such as Japan, whensufficient data are available. If approved, we expectALIS would be the first inhaled antibiotic specificallyindicated for the treatment of NTM lung diseasecaused by MAC in North America, Japan and Europe. • If approved, we plan to commercialize ALIS in theUS, Japan, certain countries in Europe, and certainother countries. INS1007 (oral reversible inhibitorof DPP1) for non-CF bronchiectasisand other rare diseases • We are enrolling patients in the WILLOW study, a globalphase 2, randomized, double-blind, placebo-controlled,parallel-group, multi-center clinical study to assess theefficacy, safety and tolerability, and pharmacokinetics ofINS1007 administered once daily for 24 weeks in subjectswith non-CF bronchiectasis. • We are currently assessing regulatory strategies which couldexpedite the development and regulatory reviews of INS1007in the US and the EU.• We expect to advance enrollment in the WILLOWclinical study of INS1007 during 2018.• We are exploring the potential of INS1007 in variousneutrophil-driven inflammatory conditions.INS1009 (inhaled nanoparticleformulation of a treprostinil prodrug)for rare pulmonary disorders • The results of our phase 1 study of INS1009 were presentedat the European Respiratory Society international congress inSeptember 2016.• The phase 1 study was a randomized, double-blind, placebo-controlled, single ascending dose study of INS1009 forinhalation to determine its safety, tolerability, andpharmacokinetics in healthy volunteers. • We believe INS1009 may offer a differentiatedproduct profile for rare pulmonary disorders,including PAH, and we are currently evaluating ouroptions to advance its development includingexploring its use as an inhaled dry powderformulation.Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, includingmethicillin-resistant staph aureus (MRSA) and NTM. To complement our internal research and development, we actively evaluate in-licensing andacquisition opportunities for a broad range of rare diseases.7Table of ContentsCorporate HistoryWe were incorporated in the Commonwealth of Virginia on November 29, 1999. On December 1, 2010, we completed a business combination withTransave, Inc. (Transave), a privately held New Jersey-based company focused on the development of differentiated and innovative inhaled pharmaceuticalsfor the site-specific treatment of serious lung diseases.Our Strategy Our strategy focuses on the needs of patients with rare diseases. We are currently primarily focused on the development and commercialization ofALIS. We are not aware of any approved inhaled therapies specifically indicated to treat NTM lung disease in North America, Japan or Europe. While webelieve that ALIS has the potential to treat a number of different bacterial infections, we are prioritizing securing US regulatory approval of ALIS for adultpatients with treatment refractory NTM lung disease caused by MAC. We are also advancing earlier-stage programs in other rare pulmonary disorders. Our current priorities are as follows: •Completing the CONVERT study and the 312 study;•Preparing an NDA for submission under Subpart H to the FDA for ALIS based on the six-month data from the CONVERT study;•Ensuring our product supply chain will support the commercialization, if approved, and future life cycle management programs of ALIS;•Preparing for potential commercialization of ALIS in the US, Japan, certain countries in Europe, and certain other countries;•Developing the core value dossier to support the global reimbursement of ALIS;•Supporting further research and lifecycle management strategies for ALIS, including exploring the potential use of ALIS as part of a front-line,multi-drug regimen and as maintenance monotherapy to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease;•Enrolling patients in the WILLOW phase 2 study of INS1007 in non-CF bronchiectasis;•Exploring INS1009 for use as an inhaled dry powder formulation and generating preclinical findings from our earlier-stage program(s); and•Expanding our rare disease pipeline through corporate development.Product PipelineALIS for Patients with NTM Lung Disease Our lead product candidate is ALIS, a novel, once-daily liposomal formulation of amikacin that is in late-stage clinical development for adultpatients with treatment refractory NTM lung disease caused by MAC, a rare and often chronic infection that can cause irreversible lung damage and can befatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the needto administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenousadministration, our advanced liposome technology uses charge-neutral liposomes to deliver amikacin directly to the lung where it is taken up by the lungmacrophages where the NTM infection resides. This technology prolongs the release of amikacin in the lungs, while minimizing systemic exposure thereby,offering the potential for decreased systemic toxicities. ALIS’s ability to deliver high levels of amikacin directly to the lung distinguishes it from intravenousamikacin. ALIS is administered once-daily, using a portable aerosol delivery system, via an optimized, investigational eFlow® Nebulizer Systemmanufactured by PARI Pharma GmbH (PARI). The FDA has designated ALIS as an orphan drug, a breakthrough therapy, and a QIDP for NTM lung disease. Orphan designated drugs are eligiblefor seven years of exclusivity for the orphan indication. QIDP designation features an additional five years of exclusivity for the designated indication. As aresult, if ALIS is approved in the US, we expect FDA to grant a total of 12 years of exclusivity in the indication for which ALIS is approved. A QIDP-designated product is eligible for fast8Table of Contentstrack status and is often granted priority review status. A priority review designation for a drug which is not a new molecular entity (NME) means the FDA’sgoal is to take action on the NDA within six months following the receipt of the NDA. The CONVERT Study and 312 Study CONVERT Top-Line Efficacy DataWe announced top-line data for the CONVERT study on September 5, 2017. The CONVERT study enrolled 336 adult patients with NTM lungdisease caused by MAC who were refractory to at least six months of treatment on current GBT of a multi-drug regimen. After a screening period of up to10 weeks, eligible patients were randomized 2:1 to once-daily ALIS plus GBT or GBT only. The primary endpoint of the study was the proportion of patientsachieving culture conversion, which we defined as three consecutive monthly negative sputum cultures, by month six. Based on top‑line results, theCONVERT study met its primary endpoint, with 29% of patients in the ALIS plus GBT arm achieving culture conversion, compared to 9% of patients in theGBT‑only arm (p<0.0001).We also reported top-line data for certain secondary and exploratory endpoints for the first six months of the study. Top‑line data for the six‑minutewalk test indicated no statistically significant difference between patients in the two arms of the study. However, an analysis of these data (per a pre-specifiedexploratory endpoint) showed that patients who achieved culture conversion in either arm demonstrated an improvement in six-minute walk distance whencompared to patients who did not culture convert (p=0.0108). Top-line data for the secondary endpoint of time to conversion demonstrated that patients inthe GBT-only arm took approximately 30% longer to convert when compared to patients on ALIS plus GBT (p<0.0001). We are continuing our analysis ofthe impact of conversion on a variety of other clinical measures.The protocol for the CONVERT study incorporates feedback from the FDA and the EMA via its scientific advice working party process, as well aslocal health authorities in other countries, including Japan’s PMDA. Because the CONVERT study met the primary endpoint of culture conversion at monthsix based on the top-line results, we plan to submit an NDA for ALIS to the FDA by the end of March 2018 pursuant to Subpart H, which permits the FDA toapprove a product candidate based on a surrogate or intermediate endpoint subject to the requirement that we conduct post-approval studies to verify anddescribe the clinical benefit of the product. We expect to receive a six-month priority review from the FDA. We believe that efficacy data from the CONVERTstudy at month six will be sufficient to support the accelerated approval of ALIS. We expect that full approval would be contingent on FDA review of, amongother things, the final analyses of durability of culture conversion for converters.CONVERT Top-Line Safety and Tolerability DataApproximately 98% of patients in the ALIS plus GBT arm of the CONVERT study experienced at least one treatment-emergent adverse event(TEAE), compared to 91% of patients in the GBT-only arm, with most events being mild or moderate in severity. A greater percentage of patients in the ALISplus GBT arm than in the GBT-only arm experienced TEAEs involving dysphonia, cough, haemoptysis, dyspnoea, oropharyngeal pain, diarrhea, nausea, andfatigue. Based on our review of the top-line study safety data, the incidence of dysphonia, cough and dyspnoea among patients in the ALIS plus GBT armgenerally decreased after the second study month. Approximately 20% and 18% of patients in the ALIS plus GBT arm and GBT-only arm of the study,respectively, experienced at least one serious treatment emergent adverse event (STEAE). The table below provides additional information regarding certainSTEAEs experienced by patients in the CONVERT study. 2:1 RandomizationPatients Reporting STEAEs >3% in Either Arm ALIS + GBT (n=223)GBT (n=112)Patients Reporting At Least One STEAE 20.2% (45)17.9% (20)System Organ Class Preferred Term Respiratory, Thoracic, Mediastinal Disorders 11.7% (26)9.8% (11) Hemoptysis2.7% (6)4.5% (5) COPD (exacerbation)3.1% (7)0.9% (1)Infections and Infestations 9.0% (20)5.4% (6) Pneumonia3.6% (8)1.8% (2)Cardiac Disorders 0.4% (1)4.5% (5)Patient Deaths 2.7% (6)4.5% (5)9Table of ContentsThere were no distinctions between treatment arms for adverse events of hearing loss or renal impairment, side effects commonly associated with theintravenous use of amikacin. As of September 2017, the overall dropout rate in the CONVERT study was 16.1%, with an 8.9% dropout rate in the GBT-onlyarm and a 19.6% dropout rate in the ALIS plus GBT arm. As of December 2017, the overall dropout rate in the CONVERT study was 18% (n=60/336). CONVERT Long-Term Durability DataWe also recently announced interim data on the durability of culture conversion, as defined by patients that have completed treatment andcontinued in the CONVERT study off all therapy for three months, which we expect will be the endpoint necessary to support full regulatory approval in theUS. The following data are interim results observed through December 2017, and have not been further analyzed. As of December 2017, of the 75 patientsachieving culture conversion in the CONVERT study, 53 of these patients were evaluable for durability of culture conversion three months after thecompletion of treatment. Interim data for durability of culture conversion as of December 2017 on these 53 patients are detailed below: Evaluable Number of Patientsas of December 2017 (At Least Three MonthsPost Treatment)*Percent with Durable CultureConversion Three MonthsAfter Completionof All TreatmentConverters in the ALIS + GBT arm (n=65)4660.9% (28/46)Converters in the GBT‑only arm (n=10)70.0% (0/7)* Evaluable number of patients includes all patients who reached three months post-treatment and all patients who discontinued prior to three months post-treatment.312 Study All non-converters in the CONVERT study, as determined at the month eight visit, may be eligible to enter the 312 study which is a separate 12-month, single-arm, open-label study. The purpose of the 312 study is to evaluate the safety and tolerability of longer-term treatment with ALIS added to GBT.The secondary endpoints of the 312 study include evaluating the proportion of patients achieving culture conversion (three consecutive monthly negativesputum cultures) by month six and the proportion of patients achieving culture conversion by month 12 (end of treatment).312 Study Interim Efficacy DataWe recently announced interim data for the 312 study, which enrolled 163 adult patients with NTM lung disease caused by MAC who completedsix months of treatment in the CONVERT study, but did not demonstrate culture conversion by Month 6. The following data are interim results observedthrough December 2017, and have not been further analyzed. Patients in the ALIS plus GBT arm of the CONVERT study and patients in the GBT-only arm ofthe CONVERT study who did not achieve culture conversion by Month 6 had the option to enroll in the 312 study at Month 8. Under the study protocol,patients from both arms of the CONVERT study will receive 12 months of ALIS plus GBT in the 312 study. We will also use the data from this trial to furtherassess the impact of the addition of ALIS to background GBT on sputum culture conversion, by Month 6.As of December 2017, of the 163 patients enrolled in the 312 study, 124 patients were evaluable for culture conversion. Descriptive interim cultureconversion data as of December 2017 for these 124 patients are detailed below. The interim culture conversion data has not been statistically analyzed.10Table of Contents Number of Patients Completing Six Months ofTreatment in the 312 study as of December2017 **Percent Achieving SputumCulture Conversion byMonth 6 in the 312 studyPatients who received GBT only in the 212 study and crossedover to receive six months of treatment with ALIS + GBT(n=90)6728.4% (19/67)Patients who received ALIS + GBT in the 212 study andcrossed over to continue treatment in the 312 study, to receivea combined total of 14 months of ALIS + GBT treatment inboth studies (n=73)5712.3% (7/57)** Includes all patients completing six months of treatment, all patients who discontinued prior to six months and for all ongoing patients prior to six months who completed twomonths of treatment.312 Study Interim Safety and Tolerability DataWe have not yet performed a final analysis of any safety data for the 312 study. However, based on an interim review of data available from the 312study, we believe that STEAEs were similar to the STEAEs we reported in September 2017 as part of our top-line data results for the 212 study. As ofDecember 2017, the overall dropout rate in the 312 study was 24% (n=39/163).Phase 2 Study (or 112 Study) Our completed phase 2 study (or 112 study) was a randomized, double-blind, placebo-controlled study that evaluated the efficacy and safety ofALIS in adults with NTM lung disease due to MAC or M. abscessus that was refractory to guideline-based therapy. In October 2016, the results from thephase 2 study were published online in the American Journal of Respiratory and Critical Care Medicine (Olivier et al. 2016). The study included an 84-day double-blind phase in which patients were randomized 1:1 either to ALIS once-daily plus a multi-drug regimen or toplacebo (empty liposomes) once-daily plus a multi-drug regimen. After completing the 84-day double-blind phase, patients had the option of continuing inan 84-day open-label phase during which all patients received ALIS plus the same multi-drug regimen. The study also included 28-day and 12-month off-ALIS follow-up assessments. Eighty-nine (89) patients were randomized and dosed in the study. Of the 80 patients who completed the 84-day double-blindphase, 78 patients entered the open-label phase and received ALIS plus the same multi-drug regimen for 84 days. Seventy-six (76) percent (59/78) of patientswho 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. ALIS did not meet the pre-specified level for statistical significance althoughthere was a positive trend (p=0.072) in favor of ALIS. The p-value for the key secondary endpoint of culture conversion to negative at Day 84 was 0.003, infavor of ALIS. A shorter time to first negative sputum culture was also observed with ALIS 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 wasdefined as at least three consecutive monthly sputum samples that test negative for NTM, consistent with the definition of culture conversion in theATS/IDSA Guidelines and in clinical practice. Twenty-three (23) patients 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 other 19 patients who achieved cultureconversion, 17 achieved culture conversion after receiving ALIS (10 during the double-blind phase and seven after entering the open-label phase, of whichsix received ALIS for the first time in the open-label phase). Two patients achieved culture conversion while receiving placebo during the double-blindphase. The majority of patients who achieved culture conversion (three consecutive negative monthly sputum samples) during the double-blind phasecontinued to have negative cultures through the open-label and follow-up phases. At the end of the double-blind phase, the ALIS group improved from baseline in mean distance walked in the six-minute walk test. At the end of theopen-label phase, patients in the ALIS group continued to improve in the mean distance11Table of Contentswalked in the six-minute walk test, while the patients who previously received placebo in the double-blind phase and subsequently received ALIS in theopen-label phase demonstrated a reduced rate of decline from baseline. Approximately 90% of patients in both treatment groups experienced at least one treatment-emergent adverse event, with most events either mild ormoderate in severity. During the double-blind phase a greater percentage of patients treated with ALIS experienced, among others, dysphonia, bronchiectasisexacerbation, cough, oropharyngeal pain, fatigue, chest discomfort, wheezing, and infective pulmonary exacerbation of cystic fibrosis (CF). No clinicallyrelevant changes were detected in laboratory values and vital signs. Further Research and Lifecycle Management for ALIS We are currently exploring and supporting research and lifecycle management programs for ALIS beyond refractory NTM lung infections caused byMAC. Specifically, we are evaluating future study designs focusing on the MAC disease treatment pathway, including front-line treatment and monotherapymaintenance to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease. In addition, we are evaluating non-MAC NTM species, suchas M. abscessus. If the data from the CONVERT study are sufficient to support our marketing authorization applications (MAAs) and regulatory bodiesapprove ALIS, such lifecycle management studies could enable us to reach more potential patients. These initiatives may include new clinical studiessponsored by us or investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding fromus. Market Opportunity for ALIS in NTM Lung Disease in 2018NTM lung disease is associated with increased rates of morbidity and mortality, and MAC is the predominant pathogenic species in NTM lungdisease in the US, Japan and Europe. The prevalence of NTM lung disease has increased over the past two decades, and we believe it is an emerging publichealth concern worldwide. Based on currently available information from external sources, including market research funded by us and third parties, andinternal analyses and calculations, we estimate potential patient populations in the US, Japan and EU5 (comprised of France, Germany, Italy, Spain and theUnited Kingdom) for 2018 as follows:Potential Market Estimated Number of Patientswith Diagnosed NTM LungDiseaseEstimated Number of PatientsTreated for NTM Lung DiseaseCaused by MACEstimated Number of PatientsRefractory to TreatmentUnited States 75,000-105,00040,000-50,00010,000-15,000Japan 125,000-145,00060,000-70,00015,000-18,000EU5 14,0004,4001,400We are not aware of any approved inhaled therapies specifically indicated for NTM lung disease in North America, Japan or Europe. Currentguideline-based approaches for NTM lung disease, including those from the American Thoracic Society and Infectious Diseases Society of America, involvemulti-drug regimens not approved for the treatment of NTM lung disease and treatment that could last two years or more. Based on a burden of illness studythat we conducted in the US with a major medical benefits provider, we previously concluded that patients with NTM lung disease are costly to healthcareplans, while a recent claims-based study in the US has shown that patients with NTM lung disease have higher resource utilization and costs than their ageand gender-matched controls. Accordingly, we believe that a significant market opportunity for ALIS in NTM lung disease exists in the US andinternationally. We are currently exploring the NTM market opportunity for ALIS in Japan. The CONVERT study included a comprehensive pharmacokinetic sub-study in Japanese subjects in lieu of a separate local pharmacokinetic study in Japan, as agreed with the PDMA. If the data from the CONVERT study aresufficient to support our MAAs, and the FDA approves ALIS, we expect our first regulatory filing after the US to be in Japan. We have established a Japaneselegal entity and plan to hire local employees in 2018 to closely manage our regulatory and pre-commercial activities. INS1007 INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October 2016. DPP1 is an enzymeresponsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type ofwhite blood cell and play an essential role in pathogen destruction12Table of Contentsand inflammatory mediation. Neutrophils contain the neutrophil serine proteases, neutrophil elastase, proteinase 3, and cathepsin G, that have beenimplicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophilserine proteases in excess 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 is a progressive pulmonary disorder in whichthe bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approvedtherapies specifically indicated for non-CF bronchiectasis. The WILLOW Study The WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess theefficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. Wecommenced enrollment in the WILLOW study in December 2017. In addition, we are exploring the potential of INS1007 in various neutrophil-driveninflammatory conditions. Phase 1 Study Results In a phase 1 study of healthy volunteers conducted by AstraZeneca, INS1007 (previously AZD7986) was well tolerated and demonstrated inhibitionof the activity of the neutrophil serine protease neutrophil elastase in a dose and concentration dependent manner. In preclinical studies, it was shown toreversibly inhibit DPP1 and the activation of neutrophil serine proteases within maturing neutrophils. INS1009 INS1009 is an investigational sustained-release inhaled treprostinil prodrug nanoparticle formulation that has the potential to address certain of thecurrent limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greaterconsistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for thetreatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may beassociated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial druglevels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile forrare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaleddry powder formulation. Phase 1 Study Results In late 2014, we had a pre-IND meeting with the FDA for INS1009 and clarified that, subject to final review of the preclinical data, INS1009 could beeligible 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 NDAthat 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, theapplicant 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 abilityto 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 studyof INS1009 for inhalation to determine its safety, tolerability, and pharmacokinetics in healthy volunteers. Twenty-four (24) patients were enrolled andreceived INS1009 with cohorts of eight patients receiving doses of 85 micrograms (mcg), 170 mcg, 340 mcg or placebo. Participants in the first cohort (8patients) 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 INS1009provides an equivalent amount of treprostinil on a molar basis as the 54 mcg dose of Tyvaso. The peak treprostinil serum concentration was approximately90% lower after INS1009 administration compared with Tyvaso, which could indicate a reduced future adverse event (AE) profile. The pharmacokineticcharacteristics 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 inSeptember 2016.Research and DevelopmentResearch and development expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel servingin our research and development functions, including medical affairs. Expenses also13Table of Contentsinclude other internal operating expenses, the cost of manufacturing our drug candidate(s) for clinical study, the cost of conducting clinical studies, and thecost of conducting preclinical and research activities. In addition, our R&D expenses include payments to third parties for the license rights to products indevelopment (prior to marketing approval), such as for INS1007. Our expenses related to manufacturing our drug candidate(s) for clinical study are primarilyrelated to activities at contract manufacturing organizations (CMOs) that manufacture our product candidates for our use, including purchases of activepharmaceutical ingredients. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct andmanage clinical trials on our behalf. We incurred approximately $109.7 million, $122.7 million, and $74.3 million for research and development expenses inthe years ended December 31, 2017, 2016, and 2015, respectively.Corporate DevelopmentIn October 2016, we exclusively licensed global rights to INS1007 from AstraZeneca and we plan to continue 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 alignwith our core competencies.ManufacturingWe do not have any in-house manufacturing capability other than for small-scale pre-clinical development programs, and depend completely on asmall number of third-party manufacturers and suppliers for the manufacture of our product candidates for use in clinical trials. We plan to rely on third-partymanufacturers and suppliers for the commercial manufacture and supply of any product candidates that we may commercialize. ALIS is manufacturedcurrently by Therapure Biopharma Inc. (Therapure) in Canada at a 200 kilogram (kg) scale and by Ajinimoto Althea, Inc. (Althea) in the US at a 50 kg scale.For additional information about our agreements with Therapure and Althea, see License and Other Agreements—ALIS-Related Agreements. In order to meetpotential commercial demand, if ALIS is approved, we funded the manufacturing expansion at Therapure in Canada that operates at a larger scale thanAlthea. We have also identified certain second source suppliers for our supply chain and plan to enter into supply and quality agreements with certain ofthese second source suppliers in preparation for commercialization of ALIS. In addition, we have entered into a commercialization agreement with PARI, themanufacturer of our drug delivery nebulizer for ALIS, to address our commercial supply needs (Commercialization Agreement).In October 2017, we entered into certain agreements with Patheon UK Limited (Patheon) related to increasing our long-term production capacity forALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under theseagreements, we are required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed tomanufacture ALIS. The investment in the long-term production capacity build-out, including these agreements, and related agreements or purchase orderswith third parties for raw materials and fixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.In May 2017, we entered into a commercial supply agreement with AstraZeneca related to certain short-term production needs for INS1007. Weexpect our future requirements for INS1007, beyond phase 2, will be manufactured by a CMO.We currently produce INS1009 and plan to utilize third parties to manufacture INS1009 at a larger scale and to manufacture the nebulizer used todeliver the drug.Intellectual PropertyWe own or license rights to more than 350 issued patents and pending patent applications in the US and in foreign countries, including more than175 issued patents and pending patent applications related to ALIS. Our success depends in large part on our ability to maintain proprietary protectionsurrounding our product candidates, technology and know-how; to operate without infringing the proprietary rights of others; and to prevent others frominfringing our proprietary rights. We actively seek patent protection by filing patent applications, including on inventions that are important to thedevelopment of our business in the US, Japan, Europe, Canada, and selected other foreign markets that we consider key for our product candidates. Theseinternational markets generally include Australia, China, India, Israel, and Mexico.Our patent strategy includes obtaining patent protection, where possible, on compositions of matter, methods of manufacture, methods of use,methods of treatment, dosing and administration regimens and formulations. We also rely on trade secrets, know-how, continuing technological innovation,in-licensing and partnership opportunities to develop and maintain our proprietary position.We monitor for activities that may infringe our proprietary rights, as well as the progression of third-party patent applications that may have thepotential to create blocks to our products or otherwise interfere with the development of our business. We are aware, for example, of US patents, andcorresponding international counterparts, owned by third parties that14Table of Contentscontain claims related to treating lung infections using inhaled antibiotics. If any of these patents were to be asserted against us, we do not believe that ourproposed products would be found to infringe any valid claim of these patents.Reflecting our commitment to safeguarding proprietary information, we require our employees, consultants, advisors, collaborators and other third-party partners to sign confidentiality agreements to protect the exchange of proprietary materials and information. We also seek to preserve the integrity andconfidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our informationtechnology systems.ALIS Patents and Trade SecretsOf the patents and applications related to ALIS, there are eight issued US patents and one allowed US patent application that cover the ALIScomposition and its use in treating NTM. Upon approval of ALIS for the treatment of NTM, these patents may be eligible for listing in the FDA Orange Book.These patents and their expiration dates are as follows:•US Patent No. 7,718,189 (expires June 6, 2025)•US Patent No. 8,226,975 (expires August 15, 2028)•US Patent No. 8,632,804 (expires December 5, 2026)•US Patent No. 8,802,137 (expires April 8, 2024)•US Patent No. 8,679,532 (expires December 5, 2026)•US Patent No. 8,642,075 (expires December 5, 2026)•US Patent No. 9,566,234 (expires January 18, 2034)•US Patent No. 9,827,317 (expires April 8, 2024)•US Patent No. 9,895,385 (expires May 15, 2035)In addition, we own six pending US patent applications that cover the ALIS composition and/or its use in treating NTM. We also own a pendingUS application that covers methods for making ALIS. Upon approval of ALIS for the treatment of refractory NTM lung disease caused by MAC, these patentapplications, if issued as patents, may be eligible for listing in the FDA Orange Book.Four patents have been granted by the European Patent Office (EPO) (European Patent Nos. 1581236, 1909759, 1962805 and 2363114) that relateto ALIS and its use in treating NTM. In addition, we have five applications pending before the EPO that relate to ALIS and its use in treating NTM lungdisease. We also have a pending European application that describes certain methods of making ALIS. More than 40 patents have also been issued in othermajor foreign markets, e.g., Japan, China, Korea, Australia, and India, that relate to ALIS and/or methods of using ALIS for treating various pulmonarydisorders, including NTM lung disease. More than 60 foreign patent applications are pending that relate to the ALIS composition and/or its use in treatingvarious pulmonary disorders, including NTM lung disease. We anticipate that in the US, we will have potential patent coverage for ALIS and its use intreating NTM lung disease, through May 15, 2035.European Patent No. 2363114 was opposed by Generics (UK) Ltd, a wholly-owned subsidiary of Mylan NV, and was revoked in November 2017.We intend to appeal that decision, and the patent remains enforceable during the appeal. European Patent No. 1909759, owned by us, was previouslyopposed by Generics (UK) Ltd. An oral hearing was held on October 19, 2015, during which we submitted amended claims. The European Patent OfficeOpposition Division (EPOOD) maintained the patent as amended. This decision is currently under appeal by Generics (UK) Ltd.Through our agreements with PARI, we have license rights to US and foreign patents and applications that cover the eFlow Nebulizer Systemmedical device through January 18, 2034. We have rights to use the nebulizers in clinical trials, and we have entered into a commercial supply agreementwith PARI.The basic terms of utility patents issued in the US are the longer of 17 years from the issue date or 20 years from the earliest effective filing date, ifthe patent was in force on or was issued from a patent application that was filed prior to June 8, 1995; or 20 years from the earliest effective filing date, if thepatent application was filed on or after June 8, 1995. All ALIS patent applications have earliest effective filing dates falling after June 8, 1995. The basic termof foreign utility patents may vary in accordance with provisions of applicable local law, but is typically 20 years from the earliest effective filing date.INS1007 PatentsThrough our agreement with AstraZeneca, we have licensed US Patent Nos. 9,522,894 and 9,815,805, which have claims directed to INS1007 andmethods for using INS1007. Each expires January 21, 2035 (not taking into account any potential patent term extension). Counterpart patent applications arepending throughout the world and a continuation application is pending in the US.INS1009 PatentsWe own US Patent No. 9,255,064 (expires October 24, 2034), which is the first patent to issue with claims covering hexadecyl-treprostinil, thetreprostinil component of INS1009. Other treprostinil prodrugs are also claimed and described in the15Table of Contentspatent. We also own US Patent No. 9,469,600, which has claims directed to INS1009 and other treprostinil prodrug nanoparticle formulations and expiresOctober 24, 2034. Counterpart patent applications to US Patent Nos. 9,255,064 and 9,469,600 are pending in Europe, Japan and other foreign jurisdictions.We own pending patent applications that relate to methods for using treprostinil prodrugs and nanoparticle formulations comprising the same,including INS1009 in treating patients with PAH and other diseases, as well as methods for manufacturing such treprostinil prodrugs and nanoparticleformulations.TrademarksIn addition to our patents and trade secrets, we have filed applications to register certain trademarks in the US and/or abroad, including INSMEDand ARIKAYCE. At present, we have received either a registration or a notice of allowance for the INSMED and ARIKAYCE marks from the US Patent andTrademark Office. We have also received foreign notices of allowance or registrations for the INSMED and ARIKAYCE marks, among others. The EMA hasindicated it has no objection to our use of the name ARIKAYCE, and the FDA has conditionally approved our use of the name ARIKAYCE as the proposedtrade name for ALIS. Our ability to obtain and maintain trademark registrations will in certain geographical locations depend on making use of the mark incommerce on or in connection with our products and approval of the trademarks for our products by regulatory authorities in each country.License and Other AgreementsALIS-related AgreementsWe currently rely, and will continue to rely, on agreements with a number of third parties in connection with the development and manufacture ofALIS.PARI Pharma GmbHWe have a licensing agreement with PARI for use of the optimized eFlow Nebulizer System for delivery of ALIS in treating patients with NTMlung infections, CF and bronchiectasis. Under the licensing agreement, we have rights under several US and foreign issued patents, and patent applicationsinvolving improvements to the optimized eFlow Nebulizer System, to exploit such system with ALIS for the treatment of such indications, but we cannotmanufacture such nebulizers except as permitted under our Commercialization Agreement with PARI. We currently have rights to use the nebulizers inclinical trials. The eFlow Nebulizer System is labeled as investigational for use in our clinical trials in the US, Japan, Canada and Australia and must receiveregulatory approval before we can market ALIS; the eFlow Nebulizer System has been approved for use in the EU.We have certain obligations under this licensing agreement in relation to specified licensed indications. With respect to CF, we are obligated touse commercially reasonable efforts to develop, obtain regulatory and reimbursement approval, market and sell ALIS in two or more major Europeancountries. With respect to NTM, CF and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve certain developmentaland regulatory milestones by set deadlines. Additionally, for NTM, we are obligated to use commercially reasonable efforts to achieve certain commercialmilestones in the US, Europe and Canada. The consequences of our failing to use commercially reasonable efforts to achieve these milestones are context-specific, but include ending PARI's non-compete obligation, making the license non-exclusive and terminating the license, in each case with respect to theapplicable indication. Termination of the licensing agreement or loss of exclusive rights may occur if we fail to meet our obligations, including payment ofroyalties to PARI, or if we do not meet certain milestones contained in the licensing agreement such as obtaining marketing approval or achieving the firstcommercial sale of ALIS.Under the licensing agreement, we paid PARI an upfront license fee and PARI is entitled to receive milestone payments up to an aggregate of€4.3 million either in cash, qualified stock or a combination of both, at PARI's discretion, based on achievement of certain future milestone events includingfirst acceptance of MAA submission (or equivalent) in the US of ALIS and the device, first receipt of marketing approval in the US for ALIS and the device,and first receipt of marketing approval in a major EU country for ALIS and the device. In addition, PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ALIS pursuant to the licensing agreement, subject to certain specified annual minimum royalties. In October2017, we exercised an option to buy-down the future royalties that will be payable to PARI.This license agreement will remain in effect on a country-by-country basis until the final royalty payments have been made with respect to the lastcountry in which ALIS is sold, or until the agreement is otherwise terminated by either party. We have the right to terminate this license agreement uponwritten notice for PARI's uncured material breach, if PARI is the subject of specified bankruptcy or liquidation events, or if PARI fails to reach certainspecified obligations. PARI has the right to terminate this license agreement upon written notice for our uncured material breach, if we are the subject ofspecified bankruptcy or liquidation events, if we assign or otherwise transfer the agreement to a third party that does not agree to assume all of our rights andobligations set forth in the agreement, or if we fail to reach certain specified milestones.16Table of ContentsIn July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of eFlow nebulizer systems and relatedaccessories (the Device) as optimized for use with ALIS. Under the Commercialization Agreement, PARI manufactures the Device except in the case of certaindefined supply failures, when we will have the right to make the Device and have it made by third parties (but not certain third parties deemed under theCommercialization Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years from the first commercial sale ofALIS pursuant to the licensing agreement (the Initial Term). The term of the Commercialization Agreement may be extended by us for an additional fiveyears by providing written notice to PARI at least one year prior to the expiration of the Initial Term.AltheaIn September 2015, we entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement) with Althea to produce, on a non-exclusive basis, ALIS in finished dosage form at a 50 kg scale. We are obligated to pay a minimum of $2.7 million for the batches of ALIS produced byAlthea each calendar year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and had an initialterm that was to end on December 31, 2017. In 2016, we signed an extension of the Fill/Finish Agreement through December 31, 2019, and it may beextended for additional two-year periods upon mutual written agreement of us and Althea at least one year prior to the expiration of its then-current term. TheCompany has expensed at least the required minimum in each year of the contract.Either we or Althea may terminate the Fill/Finish Agreement upon the occurrence of certain events, including (i) material breach of the Fill/FinishAgreement by either party, provided such breach is not cured within 30 days after receipt by the breaching party of written notice of the breach or(ii) insolvency or bankruptcy of the other party. In addition, we may terminate the Fill/Finish Agreement without cause with 12 months' prior written noticeto Althea, and Althea may terminate the Agreement without cause with 24 months' prior written notice to us.TherapureIn February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of ALIS at a 200 kg scale. Pursuant tothe agreement, we collaborated with Therapure to construct a production area for the manufacture of ALIS in Therapure's existing manufacturing facility inMississauga, Ontario, Canada. Therapure manufactures ALIS for us on a non-exclusive basis. The agreement has an initial term of five years from the first dateon which Therapure delivers ALIS to us after we obtain permits related to the manufacture of ALIS, and will renew automatically for successive periods of twoyears each, unless terminated by either party by providing the required two years' prior written notice to the other party. Notwithstanding the foregoing, theparties have rights and obligations under the agreement prior to the commencement of the initial term. Under the agreement, we are obligated to pay certainminimum amounts for the batches of ALIS produced each calendar year. The agreement allows for termination by either party upon the occurrence of certainevents, including (i) the material breach by the other party of any provision of the agreement or the quality agreement expected to be entered into betweenthe parties, and (ii) the default or bankruptcy of the other party. In addition, we may terminate the agreement for any reason upon no fewer than 180 days'advance notice.Patheon & related agreementsIn October 2017, we entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercialinventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under these agreements, we arerequired to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufactureALIS. Patheon's supply obligations will commence once certain technology transfer and construction services are completed. Our manufacturing and supplyagreement with Patheon will remain in effect for a fixed initial term, after which it will continue for successive renewal terms unless either we or Patheon havegiven written notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services have beencompleted. The agreements may also be terminated under certain other circumstances, including by either party due to a material uncured breach of the otherparty or the other party’s insolvency. These early termination clauses may reduce the amounts due to the relevant parties. The investment in our long-termproduction capacity build-out, including under the Patheon agreements and related agreements or purchase orders with third parties for raw materials andfixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.SynteractHCR, Inc. (Synteract)We entered into a services agreement with Synteract pursuant to which we retained Synteract to perform implementation and management servicesin connection with the 212 study. We may terminate the services agreement or any work order for any reason and without cause with 30 days' written notice.Either party may terminate the agreement in the event of a material breach or, bankruptcy petition by the other party or, if any approval from a regulatoryauthority is revoked, suspended or expires without renewal. We anticipate that aggregate costs relating to all work orders for the 212 study will be17Table of Contentsapproximately $45 million over the period of the study. In April 2015, we entered into a work order with Synteract to perform implementation andmanagement services for the 312 study. We anticipate that aggregate costs relating to all work orders for the 312 study will be approximately $25 millionover the period of the study.Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT)In 2004 and 2009, we entered into research funding agreements with CFFT whereby we received $1.7 million and $2.2 million for each respectiveagreement in research funding for the development of ALIS. If ALIS becomes an approved product for CF in the US, we will owe a payment to CFFT of up to$13.4 million that is payable over a three-year period after approval as a commercialized drug in the US. Furthermore, if certain global sales milestones aremet within five years of the drug commercialization, we would owe an additional payment of $3.9 million. Under the 2009 agreement, in the event weterminate development of ALIS for CF prior to first commercial sale of a product containing ALIS for a period of 360 continuous days, and such terminationis not for reasons outside of our reasonable control, then at CFFT's election and within 180 days of such termination, CFFT (1) may elect to develop ALIS forCF and (2) will have the right to receive from us an exclusive (subject to certain exceptions), royalty-free, sub-licensable license to use, develop, sell andcommercialize a product containing ALIS in the treatment of certain infections in CF patients or pulmonary disease associated with CF.INS1007-related License AgreementIn October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive global rights for the purpose ofdeveloping and commercializing AZD7986 (renamed INS1007). In consideration of the licenses and other rights granted by AstraZeneca, we made an upfrontpayment of $30.0 million in late October 2016. We are obligated to make a series of contingent milestone payments to AstraZeneca totaling up to anadditional $85.0 million upon the achievement of clinical development and regulatory filing milestones. If we elect to develop INS1007 for a secondindication, we will be obligated to make an additional series of contingent milestone payments totaling up to $42.5 million. We are not obligated to makeany additional milestone payments for additional indications. In addition, we have agreed to 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 AZ License Agreement provides AstraZeneca with the option to negotiate a future agreement with us forcommercialization of INS1007 in chronic obstructive pulmonary disease or asthma. If we fail to comply with our obligations under our agreements withAstraZeneca (including, among other things, if we fail to use commercially reasonable efforts to develop and commercialize a product based on INS1007, orwe are subject to a bankruptcy or insolvency), AstraZeneca would have the right to terminate the license.CompetitionThe biotechnology and pharmaceutical industries are highly competitive. We face potential competitors from many different areas includingcommercial pharmaceutical, biotechnology and device companies, academic institutions and scientists, other smaller or earlier stage companies and non-profit organizations developing anti-infective drugs and drugs for respiratory diseases. Many of these companies have greater human and financial resourcesand may have product candidates in more advanced stages of development and may reach the market before our product candidates. Competitors maydevelop products that are more effective, safer or less expensive or that have better tolerability or convenience. We also may face generic competitors wherethird-party payers will encourage use of the generic products. Although we believe that our formulation delivery technology, respiratory and anti-infectiveexpertise, experience and knowledge in our specific areas of focus provide us with competitive advantages, these potential competitors could reduce ourcommercial opportunity. Additionally, there currently are, and in the future there may be, already-approved products for certain of the indications for whichwe are developing, or in the future may choose to develop, our product candidates. For instance, PAH is a competitive indication with established products,including other formulations of treprostinil.NTM lung disease competitive overviewIn the NTM lung disease market, our major competitors include pharmaceutical and biotechnology companies that have approved therapies ortherapies in development for the treatment of chronic lung infections. While some companies have expressed interest in studying their products for NTM, weare not aware of any companies that are currently conducting clinical trials for the treatment of refractory NTM lung disease or of any approved inhaledtherapies specifically indicated for refractory NTM lung infections in North America, Europe or Japan, but, as previously described, there is an ATS/IDSA-recommended treatment regimen that is utilized.Government RegulationOrphan Drug DesignationUnited StatesUnder the Orphan Drug Act (ODA), the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition (for thepurposes of the ODA, "rare" is defined as a disease or condition for which the drug is intended18Table of Contentsaffects fewer than 200,000 people in the US) if it meets certain criteria specified by the ODA and FDA. After the FDA grants orphan drug designation, the drugand the specific intended use(s) for which it has obtained designation are listed by the FDA in a publicly-accessible database. The FDA has designated ALISas an orphan drug for treatment of (i) infections caused by NTM, (ii) bronchiectasis in patients with Pseudomonas aeruginosa or other susceptible microbialpathogens and (iii) bronchopulmonary Pseudomonas aeruginosa infections in CF patients.Orphan drug designation qualifies the sponsor for various development incentives of the ODA, including tax credits for qualified clinical testing,and a waiver of the NDA user fee (unless the application seeks approval for an indication not included in the orphan drug designation). Orphan drugdesignation also affords the company a period of exclusivity for the orphan indication upon approval of the drug. Specifically, the first NDA applicant withan FDA orphan drug designation for a particular active moiety to receive FDA approval of the drug for an indication covered by the orphan designation isentitled to a seven-year exclusive marketing period, often referred to as orphan drug exclusivity, in the US for that drug in that indication. A product that hasseveral separate orphan designations may have several separate exclusivities for separate orphan indications. During the orphan drug exclusivity period, theFDA may not approve any other applications to market the same drug for the same indication for use, except in limited circumstances, such as a showing ofclinical superiority to the product that has orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for thesame disease or condition or the same drug for a different disease or condition, and it does not alter the timing or scope of the regulatory review and approvalprocess; the sponsor must still submit evidence from clinical and non-clinical studies sufficient to demonstrate the safety and effectiveness of the drug.JapanThe MHLW may, after hearing the opinion of the Pharmaceutical Affairs and Food Sanitation Council, grant orphan drug designation to a drugintended to treat a rare disease or condition if the drug meets the following conditions: (i) the number of target patients is less than 50,000 in Japan, (ii) thenecessity of orphan drug designation is high from a medical point of view, (iii) there are sufficient theoretical grounds to use the drug for the target disease,and (iv) the plan for development of the drug is appropriate. Even if a drug is granted orphan drug designation, however, it does not always receive themanufacturing and marketing approval that is necessary for the drug to be sold or marketed in Japan.Pharmaceutical manufacturers or distributors who have received orphan drug designation for a drug may be entitled to: (i) subsidies from theJapanese government through the National Institutes of Biomedical Innovation, Health and Nutrition (NIBIOHN); (ii) guidance and/or advice from theMHLW, PMDA and NIBIOHN for the study research of the drug; (iii) in principle, tax deductibility of 20% of the total research and research expenditures forthe drug; (iv) priority review of their application; and (v) a re-examination interval period of 10 years (in general, drugs are subject to reexamination by theMHLW every eight years after receiving manufacturing/marketing approval).European UnionThe European Commission grants orphan drug designation to promote the development of drugs or biologics (1) for life-threatening or chronicallydebilitating conditions affecting not more than five in 10,000 people in the EU, or (2) for life threatening, seriously debilitating or serious and chroniccondition in the EU where, without incentives, sales of the drug in the European Economic Area (the European Union plus Iceland, Lichtenstein, andNorway) (EEA) are unlikely to be sufficient to justify its development. Orphan drug designation is available either if no other satisfactory method ofdiagnosing, preventing or treating the condition is approved in the EEA or if such a method does exist but the proposed orphan drug will be of significantbenefit to patients. The European Commission has granted an orphan designation for ALIS for the treatment of NTM lung disease.If a drug with an orphan drug designation subsequently receives a marketing authorization for a therapeutic indication which is covered by suchdesignation, the drug is entitled to orphan exclusivity. Orphan exclusivity means that the EMA or a national medicines agency may not accept anotherapplication for authorization, or grant an authorization, for a same or similar drug for the same therapeutic indication. Competitors may receive such amarketing authorization despite orphan exclusivity, provided that they demonstrate that the existing orphan product is not supplied in sufficient quantitiesor that the 'second' drug or biologic is clinically superior to the existing orphan product. The 'second' drug may but need not have an orphan designation aswell. The period of orphan exclusivity is ten years, which can be extended by two years where an agreed pediatric investigation plan has been implemented.The exclusivity period may also be reduced to six years if the designation criteria are no longer met, including where it is shown that the product issufficiently profitable not to justify maintenance of market exclusivity. Each orphan designation carries the potential for one market exclusivity for all thetherapeutic indications that are covered by the designation. A product that has several separate orphan designations may have several separate marketexclusivities.Orphan drug designation also provides opportunities for free protocol assistance and fee reductions for access to the centralized regulatoryprocedure or fee exemptions for companies with a small and medium enterprises status. In addition,19Table of ContentsMember States may provide national benefits to orphan drugs, such as early access to the reimbursement procedure or exemption from any turnover taximposed on pharmaceutical companies.The orphan designation may be applied for at any time during the development of the drug but before the application for marketing authorization.At the time of marketing authorization, the criteria for orphan designation are examined again, and the Commission decides on the maintenance of theorphan designation. The non-maintenance of the orphan designation means that the drug loses its orphan status and thus no longer benefits from orphanexclusivity, fee reductions or exemptions, and national benefits.Drug ApprovalUnited StatesIn the US, pharmaceutical products are subject to extensive regulation by the FDA and other government bodies. The FDCA and other federal andstate statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling,promotion and marketing, distribution, post-approval monitoring and reporting, sampling and import and export of pharmaceutical products. Failure tocomply with applicable US requirements at any time during product development, approval, or after approval may subject a company to a variety ofadministrative or judicial sanctions, such as imposition of clinical holds, FDA refusal to file or approve new drug applications, warning letters, productrecalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution,disgorgement, civil penalties, and criminal prosecution. The description below summarizes the current approval process in the US for our product candidates.Preclinical StudiesPreclinical studies include laboratory evaluation of product chemistry, formulation and toxicity, and pharmacology, as well as animal trials toassess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations andrequirements including the FDA's good laboratory practices (GLP) regulations and the US Department of Agriculture's regulations implementing the AnimalWelfare Act. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinicaldata or literature, and a proposed clinical trial protocol, among other things, to the FDA as part of an IND application. Certain non-clinical tests, such asanimal tests of reproductive toxicity and carcinogenicity, may continue even after the IND is submitted. An IND automatically becomes effective 30 daysafter receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinicaltrial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result,submission of an IND may not result in the FDA allowing clinical trials to commence.Clinical TrialsClinical trials involve the administration of the investigational new drug to human subjects (healthy volunteers or patients) under the supervisionof a qualified investigator. Clinical trials must be conducted (i) in compliance with all applicable federal regulations and guidance, including thosepertaining to good clinical practice (GCP) standards that are meant to protect the rights, safety, and welfare of human subjects and to define the roles ofclinical trial sponsors, investigators, and monitors as well as (ii) under protocols detailing, among other things, the objectives of the trial, the parameters to beused in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing of a new drug in the US (whether in patients orhealthy volunteers) must be included as a submission to the IND, and the FDA must be notified of subsequent protocol amendments, including newprotocols. In addition, the protocol must be reviewed and approved by an institutional review board (IRB), and all study subjects must provide informedconsent. Typically, before any clinical trial, each institution participating in the trial will require review of the protocol before the trial commences at thatinstitution. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and there are additional, more frequentreporting requirements for certain adverse events.A study sponsor might choose to discontinue a clinical trial or a clinical development program for a variety of reasons. The FDA may impose atemporary or permanent clinical hold, or other sanctions, if it believes that the clinical trial either is not being conducted in accordance with the FDArequirements or presents an unacceptable risk to the clinical trial subjects. An IRB may also require the clinical trial at the site to be halted, either temporarilyor permanently, for failure to comply with the IRB's requirements, or may impose other conditions.Clinical trials to support NDAs for marketing approval are typically conducted in three sequential pre-approval phases, but the phases may overlapor be combined. In Phase 1, short term (typically less than a few months) testing is conducted in a small group of subjects (typically 20-100), who may bepatients with the target disease or condition or healthy volunteers, to evaluate its safety, determine a safe dosage range, and identify side effects. In Phase 2,the drug is given to a larger group of subjects (typically up to several hundred) with the target condition to further evaluate its safety and gather preliminaryevidence of efficacy. Phase 3 studies typically last between several months and two years. In Phase 3, the drug is20Table of Contentsgiven to a large group of subjects with the target disease or condition (typically several hundred to several thousand), often at multiple geographical sites, toconfirm its effectiveness, monitor side effects, and collect data to support drug approval. Only a small percentage of investigational drugs complete all threephases of development and obtain marketing approval.NDAAfter completion of the required clinical testing, an NDA can be prepared and submitted to the FDA. FDA approval of the NDA is required beforemarketing of the product may begin in the US. The NDA is a large submission that must include, among other things, the results of all preclinical, clinical andother testing and a compilation of data relating to the product's pharmacology, chemistry, manufacture, and controls. The application also includesrepresentative samples, copies of the proposed product labeling, patent information, and a financial certification or disclosure statement. The cost ofpreparing and submitting an NDA is substantial. Additionally, under federal law (as amended by the most recent reauthorization of the Prescription Drug UserFee Act (PDUFA VI) in the FDA Reauthorization Act of 2017 (FDARA)), most NDAs are subject to a substantial application fee and, upon approval, theapplicant will be assessed an annual prescription drug program fee, both of which are adjusted annually. NDAs for orphan drugs are not subject to anapplication fee, unless the application includes an indication other than the orphan-designated indication. FDA also has the authority to grant waivers ofcertain user fees, pursuant to the FDCA.The FDA has 60 days from its receipt of an NDA to determine whether the application is accepted for filing based on the FDA's thresholddetermination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins a substantive review.The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee,typically a panel that includes outside clinicians and other experts, for review, evaluation and a recommendation as to whether the application should beapproved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA willtypically inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with current goodmanufacturing practices (cGMP) is satisfactory and the NDA contains data that provide substantial evidence of effectiveness for the proposed indication,generally consisting of adequate and well-controlled clinical investigations, and that the drug is safe for use under the conditions of use in the proposedlabeling. The FDA also reviews the proposed labeling submitted with the NDA and typically requires changes in the labeling text.After the FDA evaluates the NDA and the manufacturing and testing facilities, it issues either an approval letter or a complete response letter.Complete response letters generally outline the deficiencies in the submission and delineate the additional testing or information needed in order for the FDAto reconsider the application. If and when those deficiencies have been addressed to the FDA's satisfaction in a resubmission of the NDA, the FDA will issuean approval letter. An approval letter, which may specify post approval requirements, authorizes commercial marketing of the drug for the approvedindication or indications and the other conditions of use set out in the approved prescribing information. Once granted, product approvals may be withdrawnif compliance with regulatory standards is not maintained or problems are identified following initial marketing. Under priority review status, the FDA has180 days from either the 60 day filing date (in the case of NME NDA submissions) or the date of receipt of the NDA (in the case of non-NME original NDAsubmissions) to issue either an approval letter or a complete response letter, unless the review period is adjusted by mutual agreement between the FDA andthe applicant or as a result of the applicant submitting a major amendment. The FDA's current performance goals call for the FDA to complete review of90 percent of standard (non-priority) NDAs within 10 months and priority NDAs within six months of filing.As a condition of NDA approval, the FDA may require substantial post-approval testing, known as phase 4 studies, to be conducted in order togather additional information on the drug's effect in various populations and any side effects associated with long-term use. Beyond routine post marketingsafety surveillance, the FDA may require specific additional surveillance to monitor the drug's safety or efficacy and may impose other conditions, includinglabeling restrictions that can materially affect the potential market and profitability of the drug. As a condition of approval, or after approval, the FDA alsomay require submission of a risk evaluation and mitigation strategy (REMS) to mitigate any identified or suspected serious risks. The REMS may includemedication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patientregistries, or other risk minimization tools. Further post-approval requirements are discussed below.Expedited Review and Approval of Eligible DrugsUnder the FDA's accelerated approval program, the FDA may approve certain drugs for serious or life-threatening conditions on the basis of asurrogate or intermediate endpoint that is reasonably likely to predict clinical benefit, which can substantially reduce time to approval. A surrogate endpointused for accelerated approval is a marker—a laboratory measurement, radiographic image, physical sign or other measure that is thought to predict clinicalbenefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than21Table of Contentsirreversible morbidity and mortality (IMM) that is reasonably likely to predict an effect on IMM or other clinical benefit. The FDA bases its decision onwhether to accept the proposed surrogate or intermediate clinical endpoint on the scientific support for that endpoint.As a condition of accelerated approval, the FDA typically requires certain post-marketing clinical studies to verify and describe clinical benefit ofthe product, and may impose restrictions on distribution to assure safe use. Post marketing studies would usually be required to be studies already underwayat the time of the accelerated approval. In addition, promotional materials for an accelerated approval drug to be used in the first 120 days post-approval mustbe submitted to the FDA prior to approval, and materials to be used after that 120-day period must be submitted 30 days prior to first use. If the required post-marketing studies fail to verify the clinical benefit of the drug, or if the applicant fails to perform the required post-marketing studies with due diligence, theFDA may withdraw approval of the drug under streamlined procedures in accordance with the agency's regulations. The agency may also withdraw approvalof a drug if, among other things, the promotional materials for the product are false or misleading, or other evidence demonstrates that the drug product is notshown to be safe or effective under its conditions of use.The FDA also has various programs—fast track designation, priority review, and breakthrough designation—that are intended to expedite orstreamline the process for the development and FDA review of drugs that meet certain qualifications. The purpose of these programs is to provide importantnew drugs to patients earlier than under standard FDA review procedures. The programs each have different eligibility criteria and provide different benefits,and can be applied either alone or in combination depending on an applicant's circumstances. Fast track designation applies to a drug that is intended to treata serious condition and for which nonclinical or clinical data demonstrate the potential to address unmet medical need. It should be requested at the time ofIND submission or ideally no later than the pre-NDA meeting. The FDA must respond to requests for fast track designation within 60 days of receipt of therequest. If granted, the applicant is eligible for actions to expedite development and review, such as frequent interaction with the review team, as well as forrolling review, meaning that the applicant may submit sections of the application as they are available. The timing of FDA's review of these sections dependson a number of factors, and the review clock does not start running until the agency has received a complete NDA submission. The FDA may withdraw fasttrack designation if the agency determines that the designation is no longer supported by data emerging in the clinical trial process.Priority review applies to an application (both original and efficacy supplement) for a drug that treats a serious condition and that, if approved,would provide a significant improvement in safety or effectiveness. It also applies to any supplement that proposes a labeling change pursuant to a report ona pediatric study. A request for priority review is submitted at the time of NDA or supplemental NDA submission. The FDA must respond within 60 days ofreceipt of the request. If granted, the review time is shortened from the standard 10 months to 6 months, beginning either at the 60 day filing date (in the caseof NME NDA submissions) or the date of receipt (in the case of non-NME original NDA submissions).Breakthrough therapy designation applies to a drug that is intended to treat a serious condition and for which preliminary clinical evidenceindicates that the drug may demonstrate substantial improvement on a clinically significant endpoint(s) over available therapies. It can be requested with theIND submission and ideally no later than the end-of-phase 2 meeting. The FDA must respond within 60 days of receipt of the request. If granted, the applicantreceives intensive guidance on efficient drug development, intensive involvement of senior managers and experienced review and regulatory health projectmanagement staff in a proactive, collaborative, cross-disciplinary review, rolling review, and other actions to expedite review. Designation may be rescindedif the product no longer meets the criteria for breakthrough therapy designation. ALIS has been designated as a breakthrough therapy.Drugs that are designated as QIDPs are eligible for priority review and fast track designation, and well as market exclusivity. A product is eligible ifit is an antibacterial or anti-fungal drug for human use that is intended to treat serious or life-threatening infections, including: those caused by an anti-bacterial or anti-fungal resistant pathogen, including novel or emerging infectious pathogens; or caused by qualifying pathogens listed by the FDA. A drugsponsor may request that the FDA designate its product as a QIDP at any time prior to NDA submission. The FDA must make a QIDP determination within60 days of receiving the designation request. ALIS has been designated as a QIDP for NTM lung disease.ExclusivitiesAfter NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension on a single patent. The allowable patent termextension is calculated as half of the drug's testing phase (the time between IND application and NDA submission) and all of the review phase (the timebetween NDA submission and approval) up to a maximum of five years. The time can be shortened if the FDA determines that the applicant did not pursueapproval with due diligence. The total patent term after the extension may not exceed 14 years. For patents that might expire during the application phase,the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to fourtimes. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the United States Patent andTrademark Office must determine that approval of the drug covered by the patent22Table of Contentsfor which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.A variety of non-patent exclusivity periods are available under the FDCA that can delay the submission or approval of certain applications forcompeting products.A five-year period of non-patent exclusivity within the US is granted to the first applicant to gain approval of an NDA for a new chemical entity(NCE). An NCE is a drug that contains no active moiety (the molecule or ion responsible for the action of the drug substance) that has been approved by theFDA in any other application submitted under section 505(b) of the Act. During the exclusivity period for a NCE, the FDA may not accept for review anabbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company that references (i.e., relies on FDA prior approval of) the NCEdrug. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non-infringement withrespect to a patent listed with the FDA for the reference NDA.A three-year period of non-patent exclusivity is granted for a drug product that contains an active moiety that has been previously approved, whenthe application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor that were essentialto approval of the application, for example, for new indications, dosages, strengths or dosage forms of an existing drug. This three-year exclusivity coversonly the conditions of use associated with the new clinical investigations, which means that the FDA may approve applications for other versions of theoriginal, unmodified drug product. Where this form of exclusivity applies, it prevents FDA approval of an ANDA or 505(b)(2) NDA subject to the exclusivityfor the three-year period; however, the FDA may accept and review ANDAs or 505(b)(2) NDAs during the three-year period.These exclusivities also do not preclude FDA approval of a 505(b)(1) application for a duplicate version of the drug during the period ofexclusivity, provided that the applicant conducts or obtains a right of reference to all of the preclinical studies and adequate and well-controlled clinicaltrials necessary to demonstrate safety and effectiveness.Products with QIDP designation may receive a five-year extension of other non-patent exclusivities for which the drug is also eligible. Theexclusivity does not prevent the FDA from approving a subsequent application for a change to the QIDP-designated drug that results in a new indication,route of administration, dosing, schedule, dosage form, delivery system, delivery device or strength. For example, a drug that has been designated as both anorphan drug and a QIDP for the same indication, like ALIS, could be eligible for a combined 12 years of exclusivity for that indication.Medical Device RegulationMedical devices, such as the eFlow Nebulizer System, may receive marketing authorization from the FDA as stand-alone devices, or in some cases,may receive marketing authorization as part of a combination product. In either case, the ultimate product will need to satisfy FDA requirements. The primarypathways for marketing authorization for devices in the US are 510(k) clearance or premarket approval (PMA).Medical devices are also subject to certain post-clearance, post-approval requirements. Those requirements include continuing Quality SystemRegulation compliance, Medical Device Reporting, Correction and Removal, and requirements governing labeling and promotional advertising.The FDCA permits medical devices intended for investigational use to be shipped to clinical sites if such devices comply with prescribedprocedures and conditions. Devices intended for investigational use may be exempted from premarket notification and premarket approval requirementswhen shipped for use in clinical trials, but they must bear a label indicating that they are for investigational use. This labeling may not represent that thedevice is safe or effective for the purposes for which it is being investigated.Combination ProductsA combination product is a product comprising two or more regulated components (e.g., a drug and device) that are combined into a singleproduct, co-packaged, or sold separately but intended for co-administration, as evidenced by the labeling for the products. A drug that is administered using anebulizer, such as ALIS or INS1009, is an example of a combination drug/device product.The FDA is divided into various Centers, which each have authority over a specific type of product. NDAs are reviewed by personnel within theCenter for Drug Evaluation and Research, while device applications and premarket notifications are reviewed by the Center for Devices and RadiologicalHealth. Combination products, such as drug/device combinations, generally will be reviewed by the Center that regulates the product's primary mode ofaction (PMOA), which is the single mode of a combination product that provides the most important therapeutic action of the combination product. If thePMOA is unclear or in dispute, a sponsor may file a Request for Designation with FDA’s Office of Combination Products (OCP), which will render adetermination and assign a lead Center. OCP generally assigns jurisdiction based on PMOA. If there are two independent modes of action, neither of which issubordinate to the other, the FDA makes a determination as to23Table of Contentswhich Center to assign the product based on consistency with other combination products raising similar types of safety and effectiveness questions or to theCenter with the most expertise in evaluating the most significant safety and effectiveness questions raised by the combination product.When evaluating an application for a combination product, a lead Center may consult other Centers and apply the standards that would beapplicable but still retain reviewing authority, or it may assign review of a specific section of the application to another Center, delegating its reviewauthority for that section. Depending on the type of combination product, approval or clearance could be obtained through submission of a single marketingapplication or through separate applications for the individual constituent parts (e.g., an NDA for the drug and a premarket notification for the device). TheFDCA directs the FDA to conduct a review of a combination product under a single marketing application whenever appropriate. The agency has thediscretion to require separate applications to more than one Center, and applicants may choose to submit separate applications for constituent parts of acombination (unless the FDA determines one application is necessary). One reason to submit multiple applications is if the applicant wishes to receive somebenefit that accrues only from approval under a particular type of application, like new drug product exclusivity. If multiple applications are submitted, eachapplication is generally reviewed by the Center with authority over each application type. For combination products that contain an approved constituentpart (such as a drug-device combination product in which the device has previously received clearance), the FDA may require that the application(s) includeonly such information as is necessary to meet the standard for clearance or approval, taking into account any prior finding of safety or effectiveness for theapproved constituent part.Like their constituent products—e.g., drugs and devices—combination products are highly regulated and subject to a broad range of postmarketing requirements including cGMPs, adverse event reporting, periodic reports, labeling and advertising and promotion requirements and restrictions.Disclosure of Clinical Trial InformationUnder US and certain foreign laws intended to improve clinical trial transparency, sponsors of clinical trials may be required to register anddisclose certain information about their clinical trials. This can include information related to the investigational drug, patient population, phase ofinvestigation, study sites and investigators, and other aspects of the clinical trial. This information is then made publicly available. Under a recently revisedregulation in the US, sponsors are obligated to disclose the results of these trials after completion (prior to the new rulemaking, disclosure of results was onlyrequired if the product or new indication was approved by the FDA). In the US, disclosure of the results of these trials can be delayed for up to two years if thesponsor is seeking approval of the product or a new indication. Competitors may use this publicly-available information to gain knowledge regarding theprogress of development programs.Other Post-approval Regulatory RequirementsOnce an NDA is approved, a product will be subject to certain post-approval requirements, including those relating to advertising, promotion,adverse event reporting, recordkeeping, and cGMP, as well as registration, listing, and inspection. There also are continuing, annual user fee requirements, aswell as new application fees for supplemental applications with clinical data.The FDA regulates the content and format of prescription drug labeling, advertising, and promotion, including direct-to-consumer advertising andpromotional Internet communications. FDA also establishes parameters for permissible non-promotional communications between industry and the medicalcommunity, including industry-supported scientific and educational activities. The FDA and other agencies actively enforce the laws and regulationsprohibiting the promotion for uses not consistent with the approved labeling, and a company that is found to have improperly promoted off-label uses orotherwise not to have met applicable promotion rules may be subject to significant liability under both the FDCA and other statutes, including the FalseClaims Act.Manufacturers are subject to requirements for adverse event reporting and submission of periodic reports following FDA approval of an NDA.All aspects of pharmaceutical manufacture must conform to cGMPs after approval. Drug manufacturers and certain of their subcontractors arerequired to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA duringwhich the FDA inspects manufacturing facilities to assess compliance with cGMPs. Changes to the manufacturing process are strictly regulated and oftenrequire prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and imposereporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly,manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs.Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of theconditions established in an approved application, including changes in indications, labeling, product formulation, or manufacturing processes or facilities,require submission and FDA approval of a new NDA or NDA24Table of Contentssupplement, in some cases before the change may be implemented. An NDA supplement for a new indication typically requires clinical data similar to that inthe original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.As previously mentioned, the FDA also may require phase 4 studies and may require a REMS, which could restrict the distribution or use of theproduct.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act (PDMA), which regulatesthe distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by thestates. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountabilityin distribution.JapanUnder the Japanese regulatory system administered by the MHLW and the PMDA (which is responsible for product review and evaluations under thesupervision of the MHLW), pre-marketing approval and clinical studies are required for all pharmaceutical products. The Law on Securing Quality, Efficacyand Safety of Products Including Pharmaceuticals and Medical Devices (Act No. 145 of 1960) requires a license for marketing authorization when importingto Japan and selling pharmaceutical products manufactured in other countries. It also requires a foreign manufacturer to get each of its manufacturing sitescertified as a manufacturing site of pharmaceutical products to be marketed in Japan. To receive a license for marketing authorization, the manufacturer orseller must, at the very least, employ certain manufacturing marketing, quality and safety personnel. A license for marketing authorization may not be grantedif the quality management methods and post marketing safety management methods applied with respect to the pharmaceutical product fail to conform to thestandards stipulated in the ordinances promulgated by the MHLW. To obtain manufacturing/marketing approval for a new product, a Company must submitan application for approval to the MHLW with results of nonclinical and clinical studies to show the quality, efficacy and safety of the product candidate. Adata compliance review, on-site inspection for good clinical practice, audit and detailed data review for compliance with current good manufacturingpractices are undertaken by the PMDA. The application is then discussed by the committees of the Pharmaceutical Affairs and Food Sanitation Council.Based on the results of these reviews, the final decision on approval is made by the MHLW. The time required for the approval process varies depending onthe product, but it can take years. The product also needs approval for pricing to be applied for redemption of health insurance. The medical products whichonce are approved and marketed are also subject to regular post-marketing vigilance of safety and quality under the standards of Good ManufacturingPractice. In Japan, the National Health Insurance system maintains a Drug Price List specifying which pharmaceutical products are eligible for reimbursement,and the MHLW sets the prices of the products on this list. After receipt of marketing approval, negotiations regarding the reimbursement price with theMHLW would begin. Price would be determined within 60 to 90 days unless the applicant disagrees, which may result in extended pricing negotiations. Thegovernment generally introduces price cut rounds every other year and also mandates price decreases for specific products. New products judged innovativeor useful, that are indicated for pediatric use, or that target orphan or small population diseases, however, may be eligible for a pricing premium. Thegovernment has also promoted the use of generics, where available.European UnionMarketing Authorization ApplicationTo obtain approval of a drug under the EU regulatory system, an application for a marketing authorization may be submitted under a centralized, adecentralized or a national procedure. The centralized procedure, which is compulsory for medicines produced by certain biotechnological processes or fororphan drugs, provides for the grant of a single marketing authorization that is valid for all EU member states, which grants the same rights and obligations ineach member state as a national marketing authorization. As a general rule, only one marketing authorization may be granted for drugs approved through thecentralized procedure and the marketing authorization is also relevant for the EEA countries.Under the centralized procedure, the Committee for Medicinal Products for Human Use (CHMP) is required to adopt an opinion on a validapplication within 210 days, excluding clock stops when additional information is to be provided by the applicant in response to questions. Morespecifically, on day 120 of the procedure, once the CHMP has received the preliminary assessment reports and opinions from the Rapporteur and Co-Rapporteur designated by the CHMP, it adopts a list of questions, which are sent to the applicant together with the CHMP's overall conclusions. Applicantsthen have three months to respond to the CHMP (and can request a three-month extension). The Rapporteur and Co-Rapporteur assess the applicant's replies,revise the assessment report as necessary and may prepare a list of outstanding issues. The revised assessment report and list of outstanding issues are sent tothe applicant together with the CHMP's recommendation by day 180 of the procedure. Applicants then have one month to respond to the CHMP (and canrequest a one or two-month extension). The Rapporteur and Co-Rapporteur assess the applicant's replies, submit them for discussion to the CHMP andprepare a final assessment report.25Table of ContentsOnce its scientific evaluation is completed, the CHMP gives a favorable or unfavorable opinion as to whether to grant the marketing authorization. After theadoption of the CHMP opinion, a decision must be adopted by the European Commission, after consulting the Standing Committee of the Member States.The European Commission prepares a draft decision and circulates it to the member states; if the draft decision differs from the CHMP opinion, theCommission must provide detailed explanations. The European Commission adopts a decision within 15 days of the end of the consultation procedure.Accelerated Procedure, Conditional Approval and Approval Under Exceptional CircumstancesVarious programs, including accelerated procedure, conditional approval and approval under exceptional circumstances, are intended to expediteor simplify the approval of drugs that meet certain qualifications. The purpose of these programs is to provide important new drugs to patients earlier thanunder standard approval procedures.For drugs which are of major interest from the point of view of public health, in particular from the viewpoint of therapeutic innovation, applicantsmay submit a substantiated request for accelerated assessment. If the CHMP accepts the request, the review time is reduced from 210 to 150 days.Furthermore, for certain categories of medicinal products, marketing authorizations may be granted on the basis of less complete data than isnormally required in order to meet unmet medical needs of patients or in the interest of public health. In such cases, the company may request, or the CHMPmay recommend, the granting of a marketing authorization, subject to certain specific obligations; such marketing authorization may be conditional or underexceptional circumstances. The timelines for the centralized procedure described above also apply with respect to applications for a conditional marketingauthorization or marketing authorization under exceptional circumstances.Conditional marketing authorizations may be granted for products designated as orphan medicinal products, if all of the following conditions aremet: (1) the risk-benefit balance of the product is positive, (2) the applicant will likely be in a position to provide the required comprehensive clinical trialdata, (3) the product fulfills unmet medical needs, and (4) the benefit to public health of the immediate availability on the market of the medicinal productconcerned outweighs the risk inherent in the fact that additional data are still required.Conditional marketing authorizations are valid for one year, on a renewable basis until the holder provides a comprehensive data package. Thegranting of conditional marketing authorization depends on the applicant's ability to fulfill the conditions imposed within the agreed upon deadline. Theyare subject to "conditions", i.e. the holder is required to complete ongoing studies or to conduct new studies with a view to confirming that the benefit-riskbalance is positive or to fulfill specific obligations in relation to pharmacovigilance. Once the holder has provided a comprehensive data package, theconditional marketing authorization is replaced by a 'regular' marketing authorization.Marketing authorizations under exceptional circumstances may be granted where the applicant demonstrates that, for objective and verifiablereasons, they are unable to provide comprehensive data on the efficacy and safety of the drug under normal conditions of use. Such marketing authorizationsare subject to certain conditions, in particular relating to safety of the drug, notification of incidents relating to its use or actions to be taken. They are validfor an indefinite period of time, but the conditions upon which they are based are subject to an annual reassessment in order to ensure that the risk-benefitbalance remains positive.ExclusivitiesIf an approved drug contains a new active substance, it is protected by data exclusivity for eight years from the notification of the Commissiondecision granting the marketing authorization and then by marketing protection for an additional two or three years. Overall, the drug is protected for ten oreleven years against generic competition, and no additional exclusivity protection is granted for any new development of the active substance it contains.During the eight-year period of data exclusivity, competitors may not refer to the marketing authorization dossier of the approved drug forregulatory purposes. During the period of marketing protection, competitors may not market their generic drugs. The period of marketing protection isnormally two years but may become three years if, during the eight-year data exclusivity period, a new therapeutic indication is approved that is consideredas bringing a significant clinical benefit over existing therapies.Medical Devices RegulationsIn the EU, the marketing of medical devices is not subject to a prior approval by a health authority, but, depending on the class of device, mayrequire prior review by a Notified Body. Notified Bodies are technical review bodies that are accredited and supervised by national health authorities. Theyconduct conformity assessment procedures of, among others, medical devices.26Table of ContentsMedical devices are generally governed by Directive 93/42/EEC on Medical Devices that harmonizes the conditions for placing medical deviceson the European market. This Directive however does not regulate certain important marketing aspects, such as advertising or pricing and reimbursement,which remain governed by national law.Directive 93/42 requires medical devices to meet the essential requirements which are enumerated in the annexes to the Directive. Compliancewith those requirements is demonstrated by the CE mark as the manufacturer may only affix the CE mark if it may declare conformity with the essentialrequirement for each medical device that is marketed. Directive 93/42 provides recourse to harmonized European standards in order to facilitate compliancewith the essential requirements. Harmonized standards provide a presumption of conformity with the essential requirements.Directive 93/42 institutes several conformity assessment procedures. The relevant conformity assessment procedure depends on the type of medicaldevice and the risks involved. Devices are divided in four groups: Class I, Class IIa, Class IIb, and Class III. Class I devices present the lowest level of risk sothat, for most of these devices the manufacturer can self-certify the product and need not rely on certification by a Notified Body. For the other classes, aNotified Body must review the manufacturer's procedures and/or the product. Every device is initially classified by the manufacturer. However, the NotifiedBody may dispute the classification and assert that the device should be included in a class requiring stricter conformity assessment procedures. Specificrules apply to custom-made medical devices, medical devices that are used in clinical trials, and medical devices that incorporate a medicinal ingredient.For classes of devices other than Class I, a manufacturer must have a Notified Body test and certify conformity of its design and productionprocedures or its products with the essential requirements of Directive 93/42. Certification takes the form of a certificate of conformity issued by the NotifiedBody, which is valid throughout the European Union. Upon certification by the Notified Body, the manufacturer affixes the CE mark to the medical device,which allows the product to move freely within the EU and thus prevents EU Member States from restricting sales and marketing of the devices, unless suchmeasure is justified on the basis of evidence of non-compliance. Ultimately, the manufacturer is responsible for the conformity of the device with theessential requirements and for the affixing of the CE mark. The eFlow Nebulizer System is CE marked by PARI in the EU.Manufacturers of medical devices are subject to materiovigilance obligations that require reporting of incidents or near incidents related to the useof a medical device, which incidents may demonstrate the need for corrective action by the manufacturer. In addition, Notified Bodies regularly re-assess theconformity of a medical device to the essential requirements of Directive 93/42 and may from time to time audit the manufacturer and may, where needed,suspend or withdraw the manufacturer's certificate of conformity.Pediatric InformationUnited StatesUnder the Pediatric Research Equity Act of 2003 (PREA), NDAs and NDA supplements must contain data that are adequate to assess the safety andeffectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatricsubpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of an applicant, grant deferrals for submission ofdata or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation hasbeen granted. Under the Best Pharmaceuticals for Children Act (BPCA), pediatric research is incentivized by the possibility of six additional months ofpediatric exclusivity, which if granted, is added to existing exclusivity periods and patent terms listed for the applicable drug in the FDA's Orange Book atthe time the sponsor satisfies the FDA's "written request" for pediatric research. Sponsors may seek to negotiate the terms of a written request during drugdevelopment. While the sponsor of an orphan designated drug may not be required to perform pediatric studies under PREA, they are eligible to participatein the incentives under the BPCA.JapanIn Japan, there is no statutory rule which imposes any obligation on pharmaceutical manufacturers engaging in pediatric drug development.However, the guidelines of the MHLW (Handling of Pharmaceuticals during the Reexamination Interval Period (Issue No. 107, February 1, 1999 and No.1324, December 27, 2000)) state as follows: (i) since information on pediatric patients obtained in clinical trials may be limited, the MHLW recommends thatpharmaceutical manufacturers conduct adequate post-marketing surveillance during the reexamination interval period and collect as much information aspossible for proper use of drugs for pediatric patients; and (ii) if a pharmaceutical manufacturer plans to conduct a clinical trial to set the dose of a pediatricdrug to prepare application for manufacturing/marketing approval or after receiving the same approval, the reexamination interval period may be extendedup to 10 years. In addition, since 2010 the MHLW has been promoting the development of children’s drugs that have been approved for use in Europe andthe US but are not yet approved in Japan, so that they can be used as early as possible in Japan as well.European Union27Table of ContentsIn the EU, new drugs (i.e. drugs containing a new active substance) for adults, must also be tested in children. This mandatory pediatric testing iscarried out through the implementation of a pediatric investigation plan, or PIP, which is proposed by the applicant and approved by the EMA. A PIPcontains all the studies to be conducted and measures to be taken in order to support the approval of the new drug, including pediatric pharmaceutical forms,in all subsets of the pediatric population. Validation of the marketing authorization application for adults is subject to the implementation of the PIP, subjectto one or more waivers or deferrals. On the one hand, the PIP may allow a deferral for one or more of the studies or measures included therein in order not todelay the approval of the drug in adults, and, on another hand, the EMA may grant either a product-specific waiver for the (adult) disease/condition or one ormore pediatric subsets or a class waiver for the disease/condition. PIPs are subject to modifications from time to time, when they no longer are workable. Priorto obtaining the validation of a marketing authorization application for adults, the applicant has to demonstrate compliance with the PIP at the time ofsubmission of the application. In the case of orphan medicinal products, completion of an approved PIP can result in an extension of the market exclusivityperiod from ten to twelve years.Regulation Outside the US, Japan and EuropeIn addition to regulations in the US, Japan and Europe, we will be subject to a variety of regulations in other jurisdictions governing clinicalstudies of our candidate products, including medical devices. Regardless of whether we obtain FDA approval for a product candidate, we must obtainapproval of the product candidate (including a medical device) by the comparable regulatory authorities of countries outside the US before we cancommence clinical studies or marketing of the product candidate in those countries. The requirements for approval and the approval process vary fromcountry to country, and the time may be longer or shorter than that required for FDA approval. Under certain harmonized medical device approval/clearanceregulations outside the US, reference to US clearance permits fast-tracking of market clearance. Other regions are harmonized with EU standards, and thereforerecognize the CE mark as a declaration of conformity to applicable standards. Furthermore, we must obtain any required pricing approvals in addition toregulatory approval prior to launching a product candidate in the approving country.Health CanadaHealth Canada (HC) is the government agency that provides regulatory and marketing approval for drugs and therapeutic products in Canada. Theongoing Legislative and Regulatory Modernization (LRM) is the most significant drug regulatory system reform in Canada in more than 50 years and isexpected to overhaul Canada's Food and Drugs Act and Regulations. The LRM supports a 'lifecycle' regulatory approach and is focused on strengtheningevidence-based decision making, good regulatory planning, licensing, post-licensing, accountability, authority and enforcement. Through this framework,HC intends to improve the market authorization process and implement necessary regulatory frameworks. In October 2010, HC accelerated its modernizationefforts. This included the proposed regulatory pathways for orphan drugs (harmonized with US/EU regulations).AustraliaThe Therapeutic Goods Administration (TGA) is the regulatory body, under the Australian Department of Health, responsible for conductingassessment and monitoring activities of therapeutic goods in Australia. Products under the jurisdiction of the TGA include prescription medicines, medicaldevices (simple and complex), diagnostic products, vaccines, and biologics. Activities of the TGA include classifying the product based on risk to the person,implementing appropriate regulatory controls for the manufacturing processes, and monitoring approved products with a comprehensive adverse eventreporting program. The TGA requires that a marketing authorization be submitted and reviewed for safety and efficacy, and approved before a medication canbe marketed and provided to patients commercially. A separate regulatory pathway is utilized to conduct clinical trials in Australia. Australia has also anOrphan drug designation.Early Access Programs in the European UnionUnder EU law, member states are authorized to adopt national legal regimes for the supply or use of non-authorized drugs in case of therapeuticneeds. The most common national legal regimes are compassionate use programs and named patient sales, but other national regimes for early access may beavailable, depending on the member state. For drugs that must be approved through the centralized procedure, such as orphan drugs, compassionate useprograms are also regulated at the European level. ALIS is available in certain European countries under early access programs.Special programs can be set up to make available to patients with an unmet medical need a promising drug which has not yet been authorized fortheir condition (compassionate use). As a general rule, compassionate use programs can only be put in place for drugs or biologics that are expected to helppatients with life-threatening, long-lasting or seriously disabling illnesses who currently cannot be treated satisfactorily with authorized medicines, or whohave a disease for which no medicine has yet been authorized. The compassionate use route may be a way for patients who cannot enroll in an ongoingclinical trial to obtain treatment with a potentially life-saving medicine. Compassionate use programs are coordinated and implemented by the EU memberstates, which decide independently how and when to open such programs according to national rules and28Table of Contentslegislation. Generally, doctors who wish to obtain a promising drug for their seriously ill patients will need to contact the relevant national authority in theirrespective country and follow the procedure that has been set up. Typically, the national authority keeps a register of the patients treated with the drug withinthe compassionate use program, and a system is in place to record any side effects reported by the patients or their doctors. Orphan drugs very often aresubject to compassionate use programs due to their very nature (rare diseases are life-threatening, long-lasting or seriously disabling diseases) and the longtime required for both their approval and effective marketing.Doctors can also obtain certain drugs for their patients by requesting a supply of a drug from the manufacturer or a pharmacist located in anothercountry, to be used for an individual patient under their direct responsibility. This is often called treatment on a 'named-patient basis' and is distinct fromcompassionate use programs. In this case, the doctor responsible for the treatment will either contact the manufacturer directly or issue a prescription to befulfilled by a pharmacist. While manufacturers or pharmacists do record what they supply, there is no central register of the patients that are being treated inthis way.Reimbursement of Pharmaceutical ProductsIn the US, many independent third-party payers, as well as the Medicare and state Medicaid programs, reimburse buyers of pharmaceuticalproducts. Medicare is the federal program that provides health care benefits to senior citizens and certain disabled and chronically ill persons. Medicaid is theneed-based federal and state program administered by the states to provide health care benefits to certain persons.As one of the conditions for obtaining Medicaid and Medicare Part B coverage for our marketed pharmaceutical products, we will need to agree topay a rebate to state Medicaid agencies that provide reimbursement for those products. We will also have to agree to sell our commercial products undercontracts with the Department of Veterans Affairs, Department of Defense, Public Health Service, and numerous other federal agencies as well as certainhospitals that are designated by federal statutes to receive drugs at prices that are significantly below the price we charge to commercial pharmaceuticaldistributors. These programs and contracts are highly regulated and will impose restrictions on our business. Failure to comply with these regulations andrestrictions could result in a loss of our ability to continue receiving reimbursement for our drugs once approved.Private healthcare payers also attempt to control costs and influence drug pricing through a variety of mechanisms, including through negotiatingdiscounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over otherswithin a therapeutic class. Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed orotherwise covered. The US President has indicated an interest in having the federal government negotiate drug prices with pharmaceutical manufacturers.Different pricing and reimbursement schemes exist in other countries. In Japan, drugs can be sold on the market if they undergo the PMDA’s reviewof safety, effectiveness and quality and receive manufacturing/marketing approval. However, in order for drugs to be covered by the National HealthInsurance, they must be included in a Drug Price List. The "Drug Pricing Organization," which is a division of the Central Social Insurance Medical Council(CSIMC), calculates the price of drugs, the general meeting of the CSIMC approves the calculated price, and the MHLW includes the drugs and thecalculated price in the Drug Price List. After receiving manufacturing/marketing approval, drugs are included in the Drug Price List within 60 to 90 daysunless the applicant disagrees, which may result in extended pricing negotiations. The MHLW updates the Drug Price List biennially after taking intoaccount the survey result of the actual sales price of drugs and hearing the opinion of the CSIMC.In the EU, governments influence the price of drugs through their pricing and reimbursement rules and control of national health care systems thatfund a large part of the cost of those products to patients. Some jurisdictions operate positive and negative list systems under which drugs may only bemarketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion ofclinical trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. Other member states allow companies to fixtheir own prices for drugs, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs,has become very intense. As a result, increasingly high barriers are being erected to the entry of new drugs. In addition, in some countries, cross-borderimports from low-priced markets exert a commercial pressure on pricing within a country. There can be no assurance that any country that has price controlsor reimbursement limitations for drugs will allow favorable reimbursement and pricing arrangements for any of our products.Fraud and Abuse and Other LawsPhysicians and other healthcare providers and third-party payers (government or private) often play a primary role in the recommendation andprescription of health care products. In the US and most other jurisdictions, numerous detailed requirements apply to government and private health careprograms, and a broad range of fraud and abuse laws, transparency29Table of Contentslaws, and other laws are relevant to pharmaceutical companies. US federal and state healthcare laws and regulations in these areas include the following:•The federal anti-kickback statute;•The federal civil False Claims Act;•The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economicand Clinical Health Act (HITECH);•The federal criminal false statements statute;•The price reporting requirements under the Medicaid Drug Rebate Program and the Veterans Health Care Act of 1992;•The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program; and•Analogous and similar state laws and regulations.Similar restrictions apply in Japan and the member states of the EU, which have been set out by laws or industry codes of conduct.EmployeesAs of December 31, 2017, we had a total of 214 employees, including 98 in research, clinical, regulatory, medical affairs and quality assurance; 20in technical operations, manufacturing and quality control; 42 in general and administrative functions; and 54 in pre-commercial activities. We had 190employees in the US and 24 employees in Europe. We anticipate increasing our headcount in 2018.None of our employees are represented by a labor union and we believe that our relations with our employees are generally good. Generally, ouremployees are at-will employees; however, we have entered into employment agreements with certain of our executive officers.Available InformationWe file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act). We make availableon our website at http://www.insmed.com, free of charge, copies of these reports as soon as reasonably practicable after filing, or furnishing them to, the SEC.The public can also obtain materials that we file with the SEC through the SEC's website at http://www.sec.gov or at the SEC's Public Reference Room at100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.Also available through our website's "Investor Relations Corporate Governance" page are charters for the Audit, Compensation and Nominationsand Governance committees of our board of directors, our Corporate Governance Guidelines, and our Code of Business Conduct and Ethics.The references to our website and the SEC's website are intended to be inactive textual references only. Neither the information in or that can beaccessed through our website, nor the contents of the SEC's website, are incorporated by reference in this Annual Report on Form 10-K.Financial InformationThe financial information required under this Item 1 is incorporated herein by reference to Item 8 of this Annual Report on Form 10-K.30Table of ContentsITEM 1A. RISK FACTORS Our business is subject to substantial risks and uncertainties. Any of the risks and uncertainties described below, either alone or taken together,could materially and adversely affect our business, financial condition, results of operations, prospects for growth, and the value of an investment in ourcommon stock. In addition, these risks and uncertainties could cause actual results to differ materially from those expressed or implied by forward-lookingstatements contained in this Form 10-K (please read the Cautionary Note Regarding Forward-Looking Statements appearing at the beginning of thisForm 10-K). The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations, prospects and the valueof an investment in our common stock and could cause actual results, performance or achievements to differ materially from those expressed or implied byforward-looking statements.Risks Related to Development, Regulatory Approval and Commercialization of our Product CandidatesThe currently reported results of the CONVERT study and the 312 study are based on top-line and interim data for the studies and may differ fromcomplete study results once additional data are received and evaluated.The reported results of our CONVERT study consist of only top-line data from the first six months of the study and interim data regarding durabilityof culture conversion in patients off of all therapy for three months. Top-line data are based on a preliminary analysis of currently available efficacy andsafety data, and therefore these results are subject to change following a comprehensive review of the more extensive data we expect to receive when the fullset of six-month data becomes available. Top-line data are based on important assumptions, estimations, calculations and information currently available tous, and we have not received or had an opportunity to evaluate all of the six‑month data from the CONVERT study. As a result, the top-line six-month resultsmay differ from the full six-month data, or different conclusions or considerations may qualify such top-line results, once the complete six-month data havebeen received and fully evaluated. Similarly, the durability data we have reported from the CONVERT study consist only of interim data for evaluable studyparticipants who have completed treatment and continued in the study off all therapy for three months. The CONVERT study is ongoing, and subsequentdata from the treatment and off-treatment phases of the study may differ from the reported top-line and interim results.The reported results of our 312 study, which are discussed herein, consist only of interim data for evaluable study participants who have completedsix months of treatment under the 312 study as of December 2017. The currently reported results are subject to change following a comprehensive review ofthe more extensive data we expect to receive when this study is completed. The 312 study is a twelve-month study and remains ongoing, and subsequent datafrom the study may differ from the reported interim results.If these top-line and interim data differ from the results of the full six-month data or subsequent data from patients during the remainder of thetreatment phase or the off‑treatment phase of the CONVERT study, or the full twelve-month data from the 312 study, our ability to obtain or maintainapproval for, and commercialize, ALIS may be harmed, which could materially adversely affect our business, financial condition, results of operations andprospects and the value of our common stock.Our prospects are highly dependent on the success of our most advanced product candidate, ALIS. If we are unable to successfully complete thedevelopment of, obtain or subsequently maintain regulatory approval for, and successfully commercialize ALIS, our business, financial condition, resultsof operations and prospects and the value of our common stock will be materially adversely affected.We are investing significant efforts and financial resources in the development of ALIS, our most advanced product candidate. Our ability togenerate product revenue from ALIS will depend heavily on the successful completion of development of, receipt of regulatory approval for, andcommercialization of, ALIS.Positive results from preclinical studies of a product candidate may not be predictive of similar results in human clinical trials, and promising resultsfrom earlier clinical trials of a product candidate may not be replicated in later clinical trials. Many companies in the pharmaceutical and biotechnologyindustries have suffered significant setbacks in late‑stage clinical trials even after achieving promising results in earlier stages of development. Accordingly,even if the full six‑month data for the primary endpoint of the CONVERT study, the interim durability data from the CONVERT study and the interimefficacy data from the 312 study are all positive, such data may not be predictive of the results from the remainder of either the CONVERT study or the 312study, or future trials related to ALIS.31Table of ContentsIn addition, even if we believe our clinical trials for ALIS demonstrate promising results, regulators may decline to grant regulatory approval.Regulators may disagree with our interpretation of data or the study design or execution from our clinical trials and may refuse to accept our application forreview or decline to grant approval based on effectiveness and/or safety concerns. For instance, in the fourth quarter of 2014, we filed a MAA with the EMAfor ALIS as a treatment for, among other things, NTM lung disease in adult patients. The filing was based in part on data from our phase 2 study in patientswith NTM lung disease. We subsequently withdrew our MAA after the CHMP concluded that the data submitted did not provide enough evidence to supportan approval. We currently expect to submit an NDA to the FDA pursuant to Subpart H for ALIS based on the efficacy data from the CONVERT study throughMonth 6. Although we view the top-line six-month results and the interim durability data from the CONVERT study as promising, the FDA may not agreethat the six-month data are sufficient to support submission, or that the six-month data and the available interim durability data are sufficient to supportapproval, of our NDA under Subpart H.Further, even if we obtain approval for ALIS from a regulator, including from the FDA pursuant to Subpart H, confirmatory clinical studies will berequired and could fail to demonstrate sufficient safety and efficacy to support continued approval. For instance, if we obtain approval from the FDA basedon the NDA filing described above, the FDA may nonetheless conclude that the data generated from the remainder of the CONVERT study or the 312 study isnot sufficient to support continued approval for ALIS in its approved indication, and the approval may be withdrawn.We do not expect ALIS to be commercially available in any market until we receive requisite approval from the FDA, MHLW, EMA or an equivalentregulatory agency. The failure to obtain or subsequently maintain such approvals will materially adversely affect our business, financial condition, results ofoperations and prospects and the value of our common stock.We may not be able to obtain regulatory approvals for ALIS or any other products we develop in the US, Japan, Europe or other markets. If we fail toobtain such approvals, we will not be able to commercialize our products.We are required to obtain various regulatory approvals prior to studying our products in humans and then again before we market and distribute ourproducts, and the failure to do so will prevent us from commercializing our products, which would materially adversely affect our business, financialcondition, results of operations and prospects and the value of our common stock. The regulatory review and approval processes in the US, Japan and Europerequire evaluation of preclinical studies and clinical studies, as well as the evaluation of our manufacturing processes and quality systems. Securingregulatory approval to market our products requires the submission of much more extensive preclinical and clinical data, manufacturing and qualityinformation regarding the process and facility, scientific data characterizing our product and other supporting data to the regulatory authorities in order toestablish its safety and effectiveness. These processes are complex, lengthy, expensive, resource intensive and uncertain. We have limited experience insubmitting and pursuing applications necessary to gain these regulatory approvals. In addition, the FDA will conduct a rigorous review of any trade name weintend to use for our product candidates. Even after the FDA approves a trade name, the FDA may request that we adopt an alternative name for the product ifadverse event reports indicate a potential for confusion with other trade names and medication error. If we are required to adopt an alternative name, thecommercialization of ALIS could be delayed or interrupted, which would limit our ability to commercialize ALIS and generate revenues.As described above, data submitted to regulators are subject to varying interpretations that could delay, limit or prevent regulatory agency approval.For example, based on our communications with FDA to date, we need to demonstrate to FDA that our proposed in vitro release test (IVRT) is sufficient toensure that amikacin is consistently released from batch to batch of ALIS and is discriminating of acceptable and unacceptable batches. Although we believethat our proposed testing methodology adequately characterizes the release of amikacin from the liposomal suspension, if FDA does not accept our proposedIVRT, the approval of ALIS could be prevented or delayed.We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a product and theperiod required for review of any application for regulatory agency approval of a particular product. For example, the FDA has designated ALIS for fast track,breakthrough therapy and QIDP status, all programs intended to expedite or streamline the development and regulatory review of the drug. If we were to losethe current designation under one or more of those programs, we could face various consequences, including delays in the FDA review and approval process.In addition, the FDA review and approval process could be delayed in the event of a federal government shutdown. Resolving such delays could force us orthird parties to incur significant costs, could limit our allowed activities or the allowed activities of third parties, could diminish any competitive advantagesthat we or our third parties may attain or could adversely affect our ability to receive royalties, any of which could materially adversely affect our business,financial condition, results of operations and prospects and the value of our common stock. Even with these designations, there is no guarantee we willreceive approval for ALIS on a timely basis, or at all.32Table of ContentsSimilarly, we are currently assessing regulatory strategies which could expedite the development and regulatory review of INS1007 in the US andthe EU, but we may be unsuccessful in pursuing such strategies. The FDA recently denied our request for orphan drug designation for INS1007 in non-CFbronchiectasis. In addition, although we believe that INS1009 could be eligible for approval under Section 505(b)(2), and thus could rely at least in part onstudies not conducted by or for us and for which we do not have a right of reference, we may not obtain approval from the FDA to use this pathway.Approval by the FDA does not ensure approval by the regulatory authorities of other countries. To market our products outside of the US, we, andpotentially our third-party providers, must comply with numerous and varying regulatory requirements of other countries. The approval procedures varyamong countries and can involve additional product testing and administrative review periods. The time required to obtain approval in these other territoriesmight differ from that required to obtain FDA approval. In addition, we may be subject to fines, suspension or withdrawal of regulatory approvals, productrecalls, seizure of products, operating restrictions (including with respect to our target market) and criminal prosecution if we fail to comply with applicableUS or foreign regulatory requirements.We have not completed the research and development stage of ALIS or any other product candidates. If we are unable to successfully develop andcommercialize ALIS or any other products, it will materially adversely affect our business, financial condition, results of operations and prospects and thevalue of our common stock.Our long-term viability and growth depend on the successful commercialization of ALIS and potentially other product candidates. Pharmaceuticalproduct development is an expensive, high risk, lengthy, complicated, resource intensive process. In order to conduct the development programs for ourproducts, we must, among other things, be able to successfully:•Identify potential product candidates;•Design and conduct appropriate laboratory, preclinical and other research;•Submit for and receive regulatory approval to perform clinical studies;•Design and conduct appropriate preclinical and clinical studies according to good laboratory practices and good clinical practices and disease-specific expectations of the FDA and other regulatory bodies;•Select and recruit clinical investigators and subjects for our studies;•Collect, analyze and correctly interpret the data from our studies;•Obtain data establishing adequate safety of our product candidates and demonstrating with statistical significance that our product candidatesare effective for their proposed indications, as indicated by satisfaction of pre-established endpoints;•Submit for and receive regulatory approvals for marketing;•Submit for and receive reimbursement approvals for market access; and•Manufacture the product candidates and device components according to current good manufacturing practices (cGMP) and other applicablestandards and regulations.The development program with respect to any given product will take many years and thus delay our ability to generate profits associated with thatproduct. In addition, potential products that appear promising at early stages of development may fail for a number of reasons, including the possibility thatthe products may require significant additional testing or turn out to be unsafe, ineffective, too difficult or expensive to develop or manufacture, too difficultto administer or unstable, or regulators may require additional testing to substantiate our claims. For instance, as described above, although we view the top-line six-month results from the CONVERT study and the interim data we have reported from the CONVERT study and 312 study as promising, our clinicalstudies of ALIS for refractory NTM lung disease caused by MAC are ongoing, and outcomes from those studies cannot be predicted. If we do not proceedwith the development of our ALIS program in the NTM lung disease or CF indications, certain of our contract counterparties may elect to proceed with thedevelopment of these indications. Even if we are successful in obtaining regulatory approval for our product candidates, including ALIS, we may not obtainlabeling that permits us to market them with commercially viable claims because the final wording of the approved indication may be restrictive, or theavailable clinical data may not provide adequate comparative data with other products.33Table of ContentsFailure to successfully commercialize our products will materially adversely affect our business, financial condition, results of operations and prospects andthe value of our common stock.If our clinical studies do not produce positive results or our clinical trials are delayed, or if serious side effects are identified during drug development, wemay experience delays, incur additional costs and ultimately be unable to commercialize our product candidates in the US, Japan, Europe or othermarkets.Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests todemonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the safety and efficacy of our product candidates in humans.Preclinical and clinical testing is expensive, difficult to design and implement and can take many years to complete. Special challenges can arise inconducting trials in diseases or conditions with small populations, such as difficulties enrolling adequate numbers of patients. Our product developmentcosts have and may continue to increase if we experience further delays in testing or approvals. A failure of one or more of our preclinical studies or clinicaltrials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trialprocess that could delay or prevent our ability to obtain regulatory approval or commercialize our product candidates, including:•Our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conductadditional preclinical testing or clinical trials or we may abandon projects that we expect to be promising;•Regulators, ethics committees or institutional review boards (IRBs) may prevent us from commencing a clinical trial or conducting a clinicaltrial at a prospective trial site;•Enrollment in the clinical trials may take longer than expected or the clinical trials as designed may not allow for sufficient patient accrual tocomplete enrollment of the trial;•We may experience difficulties or delays due to the number of clinical sites involved in our clinical trials;•We may decide to limit or abandon our commercial development programs;•Conditions imposed on us by the FDA or any non-US regulatory authority regarding the scope or design of our clinical trials may require us tocollect and submit information to regulatory authorities, ethics committees, IRBs or others for review and approval;•The number of patients required for our clinical trials may be larger than we anticipate or participants may drop out of our clinical trials at ahigher rate than we anticipate;•Our third-party contractors, contract research organizations (CROs), clinical investigators, clinical laboratories, product suppliers or nebulizersupplier may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner;•We may have to suspend or terminate one or more of our clinical trials if we, regulators, ethics committees or the IRBs determine that theparticipants are being exposed to unacceptable health risks or for other reasons;•We may not be able to claim that a product candidate provides an advantage over current standard of care or future competitive therapies indevelopment because our clinical studies may not have been designed to support such claims;•Regulators, ethics committees or IRBs may require that we hold, suspend or terminate clinical research for various reasons, including potentialsafety concerns or noncompliance with regulatory requirements;•The cost of our clinical trials may be greater than we anticipate;•The supply or quality of product used in clinical trials or other materials necessary to conduct our clinical trials may be insufficient orinadequate or we may not be able to reach agreements on acceptable terms with prospective contract manufacturers or CROs;34Table of Contents•The effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may haveother unexpected characteristics; and•Our competitors may be able to bring products to market before we do.If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if weare unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or ifthere are safety concerns, we may:•Experience increased product development costs, as we have in the past;•Be delayed in obtaining, or be unable to obtain, regulatory approval for one or more of our product candidates;•Obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval orlabeling with black box or other warnings or contraindications;•Have the product removed from the market after obtaining regulatory approval; or•Face a shortened patent protection period during which we may have the exclusive right to commercialize our product candidates.We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatoryapprovals, including approval by the FDA, MHLW, PMDA, EMA and other regulatory agencies.We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatoryapprovals, including approval by the FDA, MHLW, PMDA and EMA, which might prevent us from successfully designing, implementing, or completing theclinical trials required to support regulatory approval of our product candidates. Since our merger with Transave, we have not completed a regulatory filingand review process for, obtained regulatory approval of or commercialized any of our product candidates. The application processes for the FDA, MHLW,PMDA, EMA and other regulatory agencies are complex and difficult and vary by regulatory agency, and we have limited experience in conducting andmanaging the application processes necessary to obtain regulatory approvals in these various jurisdictions and might not be able to demonstrate that ourproduct candidates meet the appropriate standards for regulatory approval. If we are not successful in conducting and managing our preclinical developmentactivities or clinical trials or obtaining regulatory approvals, we might not be able to commercialize ALIS or other product candidates, or might besignificantly delayed in doing so, which may materially adversely affect our business, financial condition, results of operations and prospects and the valueof our common stock.There is little or no precedent for clinical development and regulatory expectations for agents to treat NTM lung disease; as a result, we may encounterchallenges developing clinical endpoints that will ultimately be satisfactory to regulators, which could cause our product candidates not to be approved byregulators, delay commercialization of our product candidates or subject us to the risk of having any approval withdrawn.Based on the top-line six-month data from the CONVERT study, we expect to submit an NDA under Subpart H to request accelerated approval forALIS. The FDA may base accelerated approval for drugs intended to treat serious or life‑threatening illnesses on whether the drug has an effect on a surrogateendpoint or an intermediate clinical endpoint (other than survival or irreversible morbidity). We are using culture conversion as the surrogate endpoint in ourCONVERT study. While we have discussed our protocol for potential accelerated approval under Subpart H with the FDA, the FDA has not indicated itsagreement or disagreement with the protocol. In addition, the FDA has indicated that the results of the six-minute walk test, a secondary endpoint in theCONVERT study, will be important in assessing the clinical benefit of ALIS in this patient population. Developing clinical endpoints that are unsatisfactoryto regulators could delay clinical trials and the FDA approval process, which could materially adversely affect our business, financial condition, results ofoperations and prospects and the value of our common stock.Additionally, if ALIS or any of our other product candidates is approved based on a surrogate endpoint or an intermediate clinical endpoint underthe accelerated approval program, the approval will be subject to the requirement that we study the product candidate further to verify and describe itsclinical benefit. Thus, even if we are successful in obtaining accelerated approval in the US or under comparable pathways in other jurisdictions, we may facerequirements and limitations that will adversely affect our prospects. For example, we may be approved only for a very limited indication, we may not35Table of Contentssuccessfully complete required post-approval trials, or such trials may not confirm the clinical benefit of our drug, and approval of the drug may bewithdrawn.For ALIS to be successfully developed and commercialized in a given market, in addition to regulatory approvals required for ALIS, the eFlow NebulizerSystem must satisfy certain regulatory requirements and its use as a delivery system for ALIS must be approved or cleared by regulators.ALIS is administered using the eFlow Nebulizer System. As such, the eFlow Nebulizer System must receive regulatory approval or clearance on itsown or in conjunction with ALIS as a combination product in order for us to develop and commercialize ALIS. Although the eFlow Nebulizer System is CEmarked by PARI in the EU, outside the EU, it is labeled as investigational for use in our clinical trials, including in the US, Japan, Canada and Australia. TheeFlow Nebulizer System is not approved for commercial use in the US, Japan, Canada or certain other markets in which we may seek to commercialize ALIS.In the US, we plan to seek approval of the eFlow Nebulizer System in conjunction with ALIS as a combination product through a single NDAsubmission, and the increased complexity of the review process in this circumstance may delay approval. Additionally, while we continue to work closelywith PARI to coordinate efforts regarding regulatory requirements, we will be responsible for this NDA submission, and we, in consultation and collaborationwith PARI, may not be successful in meeting the regulatory requirements for the eFlow Nebulizer System, which would prevent or delay our ability to bringALIS to market or to market it successfully. Failure of PARI to successfully supply, or to maintain regulatory approval or clearance, of the eFlow NebulizerSystem could result in increased development costs, delays in or failure to obtain regulatory approval, and associated delays in ALIS reaching the market.Further, based on our discussions to date with the FDA, we conducted a human factors study for the eFlow Nebulizer System in preparation for submission ofour NDA for ALIS. If the FDA does not find the results of that study to be acceptable, that might delay or prevent the approval of ALIS.We may not be able to enroll enough patients to complete our clinical trials or retain a sufficient number of patients in our clinical trials to generate thedata necessary for regulatory approval of our product candidates.The completion rate of our clinical studies is dependent on, among other factors, the patient enrollment rate. Patient enrollment is a function ofmany factors, including:•Investigator identification and recruitment;•Regulatory approvals to initiate study sites;•Patient population size;•The nature of the protocol to be used in the trial;•Patient proximity to clinical sites;•Eligibility criteria for the study;•The patients’ willingness to participate in the study;•Discontinuation rates; and•Competition from other companies’ potential clinical studies for the same patient population.Delays in patient enrollment for our clinical trials, including in the WILLOW study, our global phase 2 study of INS1007 in non-CF bronchiectasisthat currently is enrolling patients, such as those we encountered in enrolling the CONVERT study, could increase costs and delay ultimatecommercialization and sales, if any, of our products. Once enrolled, patients may elect to discontinue participation in a clinical trial at any time. If patientselect to discontinue participation in our clinical trials at a higher rate than expected, we may be unable to generate the data required by regulators forapproval of our product candidates.36Table of ContentsEven if we obtain regulatory approval for ALIS or any of our other product candidates, we will continue to face extensive regulatory requirements and ourproducts may face future development and regulatory difficulties.Even if regulatory approval in the US is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing,including risk evaluation and mitigation strategies (REMS), or may impose ongoing requirements on us or our contract partners, including with respect to:•Labeling, such as a boxed warning or other warnings or contraindications;•Post-market surveillance, post-market studies or post-market clinical trials;•Packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other postmarketinformation;•Monitoring and reporting complaints, adverse events and instances of the failure of a product to meet specifications;•Compliance with cGMPs and certain quality systems requirements for device components;•Changes to the approved product, product labeling or manufacturing process;•Advertising and other promotional material; and•Disclosure of clinical trial results on publicly available databases.In addition, the distribution, sale and marketing of our products are subject to a number of additional requirements, including:•State wholesale drug distribution laws and the distribution of our product samples to physicians must comply with the requirements of thePrescription Drug Marketing Act of 1987;•Sales, marketing and promotion, scientific exchange, speaker programs, charitable donations and educational grant programs must comply withfederal and state laws; and•Pricing and rebate arrangements must comply with reporting and payment obligations under the Medicaid drug rebate program, and additionallaws and regulations apply to making products available to authorized users of the Federal Supply Schedule of the General ServicesAdministration.All of these activities also may be subject to federal and state consumer protection and unfair competition laws.If we fail to comply with applicable regulatory requirements, a regulatory agency may:•Issue warning letters or untitled letters asserting that we are in violation of the law;•Seek an injunction or impose civil monetary penalties or pursue civil or criminal prosecutions and fines against our company or responsibleofficers;•Suspend or withdraw regulatory approval;•Suspend or terminate any ongoing clinical trials;•Refuse to approve pending applications or supplements to applications submitted by us;•Suspend or impose restrictions on operations, including costly new manufacturing requirements;•Seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; and/or•Refuse to allow us to enter into supply contracts, including government contracts.37Table of ContentsAny government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generatenegative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generaterevenues.The commercial success of ALIS or any other product candidates that we may develop will depend upon many factors, including the degree of marketacceptance by physicians, patients, third-party payers and others in the medical community.Even if we are able to successfully complete development of, obtain regulatory approval for, and bring to market our product candidates, they maynot gain market acceptance by physicians, patients, third‑party payers and others in the medical community. If ALIS, or any other product candidate we bringto market, does not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degreeof market acceptance of ALIS and any other product candidates, if approved for commercial sale, will depend on a number of factors, including:•The prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;•The efficacy and potential advantages over alternative treatments;•The pricing of our products;•Relative convenience and ease of administration;•The willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;•The strength of marketing and distribution support and timing of market introduction of competitive products;•Publicity concerning our products or competing products and treatments, including competing products becoming subject to generic pricing;and•Sufficient third-party insurance coverage and reimbursement.Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will notbe known until after it is launched. For example, if a clinical trial is not designed to demonstrate advantages over alternative treatments, we may beprohibited from promoting our product candidates on any such advantages. Our efforts to educate the medical community and third-party payers on thebenefits of our product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require moreresources than are required to commercialize more established technologies marketed by our competitors.We currently are building our marketing and sales organization, and we have limited experience as a company in marketing drug products. If we areunable to successfully market and sell our products after they are approved, our ability to generate product revenues will be adversely affected.We are building our commercial organization for the marketing, market access, sales and distribution of our products. In order to commercializeALIS or any other product candidates, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales anddistribution of our products. The establishment and development of our own sales force is and will continue to be expensive and time consuming and coulddelay any product launch, and we may be unable to successfully develop this capability. As a result, we may seek one or more partners to handle some or allof the sales and marketing of ALIS in certain markets. However, we may not be able to enter into arrangements with third parties to sell ALIS on favorableterms or at all. In the event we are unable to develop our own marketing, market access, and sales force or collaborate with a third-party marketing, marketaccess, and sales organization, we may not be able to successfully commercialize ALIS or any other product candidates that we develop, which wouldadversely affect our ability to generate product revenues. Further, whether we commercialize products on our own or rely on a third party to do so, our abilityto generate revenue will be dependent on the effectiveness of the sales force.38Table of ContentsIf estimates of the size of the potential markets for our product candidates, including ALIS, are overstated or regulators limit the proposed treatmentpopulation for our product candidates, our ability to commercialize such product candidates successfully or achieve sufficient revenue to support ourbusiness could be materially adversely affected.We have relied on currently available information from external sources, including market research funded by us and third parties, and internalanalyses and calculations to estimate the potential market opportunities for NTM lung disease in 2018 in the US, Japan and the EU5. The externally sourcedinformation used to develop these estimates has been obtained from sources we believe to be reliable, but we have not verified the data from such sources,and their accuracy and completeness cannot be assured. Similarly, our internal analyses and calculations are based upon management’s understanding andassessment of numerous inputs and market conditions, including, but not limited to, the projected increase in prevalence of NTM lung disease, Medicarepatient population growth and ongoing population shifts to geographies with increased rates of NTM lung disease. These understandings and assessmentsnecessarily require assumptions subject to significant judgment and may prove to be inaccurate. As a result, our estimates of the size of these potentialmarkets for ALIS could prove to be overstated, perhaps materially. In addition, while we believe we have identified the physicians who treat the majority ofthe NTM lung disease patients in the US, we are relying on third party data to identify those physicians and to determine how to deploy our resources tomarket to those physicians. We cannot ensure that we are marketing our products to all appropriate physicians and we may therefore be limiting our marketopportunity. We also cannot ensure that physicians will prescribe our products to the appropriate patients.We may develop estimates with respect to market opportunities for other product candidates in the future, and such estimates would be subject tosimilar risks. In addition, a potential market opportunity could be reduced if a regulator limits the proposed treatment population for one of our productcandidates. In either circumstance, even if we obtain regulatory approval for a product candidate, we may be unable to commercialize it on a scale sufficientto generate material revenues, which could have a material adverse effect on our business, financial condition, results of operations and prospects and thevalue of our common stock.Risks Related to Our Reliance on Third PartiesWe rely on third parties including collaborators, CROs, clinical and analytical laboratories, CMOs and other providers for many services that are criticalto our business. If we are unable to form and sustain these relationships, or if any third-party arrangements that we may enter into are unsuccessful,including due to non-compliance by such third parties with our agreements or applicable law, our ability to develop and commercialize our products maybe materially adversely affected.We currently rely, and expect that we will in the future continue to rely, on third parties for significant research, analytical services, preclinicaldevelopment, clinical development and manufacturing of our product candidates. For example, almost all of our clinical trial work is done by CROs, such asSynteractHCR, Inc., our CRO for both the CONVERT and 312 studies, and clinical laboratories. Reliance on these third parties poses a number of risks,including the following:•Significant competition in seeking appropriate partners;•The complex and time-consuming nature of negotiation, documentation and implementation of agreements with third parties in thepharmaceutical industry;•Our potential inability to establish and implement collaborations or other alternative arrangements that we might pursue on favorable terms;•Our potential inability to control whether third parties devote sufficient resources to our programs or products, including with respect tomeeting contractual deadlines;•Our potential inability to control the regulatory and contractual compliance of third parties, including their quality systems, processes andprocedures, systems utilized to collect and analyze data, and equipment used to test drug product and/or clinical supplies;•Disagreements with third parties, including CROs, that result in a dispute over and loss of intellectual property rights, delay or termination ofresearch, development, or commercialization of product candidates or litigation or arbitration;•Contracts with our collaborators that fail to provide sufficient protection of our intellectual property; and39Table of Contents•Difficulty enforcing the contracts if one of these third parties fails to perform.We also rely on third parties to select and enter into agreements with clinical investigators to conduct clinical trials to support approval of ourproduct candidates, and the failure of these third parties to appropriately carry out such evaluation and selection can adversely affect the quality of the datafrom these studies and, potentially, the approval of our products. In particular, as part of future drug approval submissions to the FDA, we must disclosecertain financial interests of investigators who participated in any of the clinical studies being submitted in support of approval, or must certify to theabsence of such financial interests. The FDA evaluates the information contained in such disclosures to determine whether disclosed interests may have animpact on the reliability of a study. If the FDA determines that financial interests of any clinical investigator raise serious questions of data integrity, the FDAcan institute a data audit, request that we submit further data analyses, conduct additional independent studies to confirm the results of the questioned study,or refuse to use the data from the questioned study as a basis for approval. A finding by the FDA that a financial relationship of an investigator raises seriousquestions of data integrity, could delay or otherwise adversely affect approval of our products.Such risks could materially harm our business, financial condition, results of operations and prospects and the value of our common stock.We may not have, or may be unable to obtain, sufficient quantities of our product candidates to meet our required supply for clinical studies orcommercialization requirements, which would materially harm our business.We do not have any in‑house manufacturing capability other than for small-scale pre-clinical development programs and depend completely on asmall number of third-party manufacturers and suppliers for the manufacture of our product candidates on a clinical or commercial scale. For instance, we areand expect to remain dependent upon Therapure, Althea and eventually Patheon and other suppliers being able to provide an adequate supply of ALIS bothfor our clinical trials and for commercial sale in the event ALIS receives regulatory approvals. Althea currently manufactures ALIS at a relatively small scale.In order to meet potential commercial demand, if ALIS is approved, we funded a manufacturing expansion at Therapure in Canada that operates at a largerscale than Althea and have entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercialinventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. However, Patheon’s supplyobligations will commence only after certain technology transfer and construction services are completed. Any delay in Patheon’s supply obligationscommencing, whether due to delays in technology transfer and construction or from adding Patheon to our NDA as a contract manufacturer, would increasethe risks associated with either Therapure or Althea being unable to provide us with an adequate supply of ALIS.We are also dependent upon PARI being able to provide an adequate supply of nebulizers both for our clinical trials and for commercial sale in theevent ALIS receives regulatory approval, as PARI is the sole manufacturer of the eFlow Nebulizer System. We have no alternative supplier for the nebulizer,and we do not intend to seek an alternative or secondary supplier. Significant effort and time were expended in the optimization of the nebulizer for use withALIS. In the event PARI cannot provide us with sufficient quantities of the nebulizer, replication of the optimized device by another party may requireconsiderable time and additional regulatory approval. In the case of certain defined supply failures, we will have the right under our CommercializationAgreement with PARI to make the nebulizer and have it made by certain third parties, but not those deemed under the Commercialization Agreement tocompete with PARI.We do not have long-term commercial agreements with all of our suppliers and if any of our suppliers are unable or unwilling to perform for anyreason, we may not be able to locate suppliers or enter into favorable agreements with them. In such circumstances, an inadequate supply of ALIS or thenebulizer could delay, impair or prevent clinical trials, the development and commercialization of ALIS and adversely affect our business, financialcondition, results of operations and prospects and the value of our common stock.Risks Related to Our Financial Condition and Future Capital RequirementsWe have a history of operating losses, and we currently have no material source of revenue. We expect to incur operating losses for the foreseeable futureand may never achieve or maintain profitability.We have incurred losses each previous year of our operation, except in 2009, when we sold our manufacturing facility and certain other assets toMerck, and we did not generate material revenue during the years ended December 31, 2017, 2016, 2015 or 2014. We expect to continue incurring operatinglosses for the foreseeable future. The process of developing and commercializing our products requires significant pre-clinical and clinical testing as well asregulatory approvals for commercialization and marketing before we are allowed to begin product sales. In addition, we are significantly expanding our salesand marketing organization and establishing contractual relationships to enable product manufacturing and other related40Table of Contentsactivities to support commercialization of ALIS and our other product candidates, if approved. We expect that our activities, together with our general andadministrative expenses, will continue to result in substantial operating losses for the foreseeable future. As of December 31, 2017, our accumulated deficitwas $957.9 million. For the years ended December 31, 2017 and 2016, our consolidated net loss was $192.6 million and $176.3 million, respectively. Toachieve and maintain profitability, we need to generate significant revenues from future product sales. The process of developing and commercializing ourproducts will require significant expenditures for pre-clinical and clinical testing, regulatory approvals for commercialization and marketing, development ofan internal or external sales and marketing organization and other related activities. Because of the numerous risks and uncertainties associated with drugdevelopment and commercialization, we are unable to predict the extent of any future losses, and we may never generate significant future revenues orachieve and sustain profitability.We may need additional funds in the future to continue our operations, but we face uncertainties with respect to our ability to access capital.Our operations have consumed substantial amounts of cash since our inception. We expect to continue to incur substantial research anddevelopment expenses, and we expect to expend substantial financial resources to complete development of, seek regulatory approval for, and prepare forcommercialization of ALIS. In addition, if we obtain regulatory approval for ALIS or any of our other product candidates, we expect to incur significantcommercialization expenses related to product sales, marketing, manufacturing and distribution. We may need additional capital to fund these expenses andour other research and development activities, including due to changes in our product development plans or misjudgment of expected costs, fund corporatedevelopment, maintain our intellectual property portfolio or resolve litigation. As of December 31, 2017, we had $381.2 million of cash and cash equivalentson hand. In January 2018, we completed a public offering of $450.0 million of convertible debt which resulted in net proceeds of approximately $435.8million after underwriting fees and expenses. We expect our operating expenses, capital expenditures and long-term investments will be significantly higherin 2018 than in 2017, reflecting our investment in the build-out of our commercial organization to support global expansion activities for ALIS, includingthe potential launch of ALIS in the US in late 2018; the build-up of third-party manufacturing capacity and preparation of commercial inventory, whichincludes capital and long term investments; and continued investment in research and development (primarily associated with our ongoing and futureclinical trials and clinical studies for ALIS and ongoing phase 2 program for INS 1007, along with advancement of other pipeline programs, including INS1009) as well as general and administrative expenses. We do not know whether additional financing will be available when needed, or, if available, that theterms will be favorable. If adequate funds are not available to us when needed, we will be forced to delay, restrict or eliminate all or a portion of ourdevelopment programs or commercialization efforts.Our loan agreement with Hercules contains covenants and other provisions that impose restrictions on our operations, which may adversely affect ourability to optimally operate our business or to maximize shareholder value.Our loan agreement with Hercules, under which we had outstanding indebtedness of $55.6 million as of December 31, 2017, contains variousrestrictive covenants, including restrictions on our ability to incur additional debt, transfer or place a lien or security interest on our assets, including ourintellectual property, merge with or acquire other companies, redeem or repurchase any shares of our capital stock or pay cash dividends to our shareholders.The loan agreement also contains certain other covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends). Uponthe occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Hercules may terminateits lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the loan agreement. Theinterest-only period under the loan agreement extends through May 1, 2019. The maturity date of the loan facility is October 1, 2020. In February 2018, wenotified Hercules that we will repay the A&R Loan Agreement in full on February 28, 2018. The total aggregate cash payable to Hercules for the earlyprepayment of debt, inclusive of accrued interest, the backend fee and an early payment penalty will be approximately $58.0 million.Our borrowings under the loan agreement are secured by a lien on our assets, excluding our intellectual property, and in the event of a default on theloan, Hercules may have the right to seize the assets securing our obligations under the loan agreement. The terms and restrictions provided in the loanagreement may inhibit our ability to conduct our business and to maximize shareholder value. Future debt securities or other financing arrangements couldcontain negative covenants similar to, or even more restrictive than, the Hercules loan agreement.We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing ourstrategy, and dilute the ownership interest of our existing shareholders. In January 2018, we completed an underwritten public offering of 1.75% convertible senior notes due 2025 (the Convertible Notes). TheConvertible Notes may be convertible into common stock at an initial conversion rate of 25.5384 shares of common stock per $1,000 principal amount ofConvertible Notes. We sold $450.0 million aggregate principal amount41Table of Contentsof the Convertible Notes, including the exercise in full of the underwriters’ option to purchase additional Convertible Notes. Our net proceeds from theoffering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million were approximately $435.8 million. Holdersof the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediatelypreceding October 15, 2024 only under certain circumstances. On or after October 15, 2024 until the close of business on the second scheduled trading dayimmediately preceding the maturity date, holders may convert their Convertible Notes at any time. Upon conversion of the Convertible Notes, we will delivercash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The degree to which we are leveraged could havenegative consequences such as the following:•we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changingeconomic conditions;•our ability to obtain financing in the future may be limited;•a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existingindebtedness when it becomes due;•we may elect to make cash payments upon conversion, which would reduce our available cash.Our ability to pay principal or interest on or to refinance our indebtedness, including the indebtedness incurred as a result of the issuance of theConvertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond ourcontrol. Our business may not generate cash flow from operations in the future sufficient to satisfy any obligations under the Convertible Notes to make cashpayments to noteholders or our obligations under any future indebtedness we may incur. If we are unable to generate such cash flow, we may be required toadopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equitycapital on terms that may be onerous or highly dilutive. Our ability to refinance the Convertible Notes or future indebtedness will depend on the capitalmarkets. If we do not meet our debt obligations, it could materially adversely affect our results of operations, financial condition and the value of ourcommon stock.The conversion of some or all of the Convertible Notes will dilute the ownership interests of existing shareholders to the extent we deliver sharesupon conversion of any of the Convertible Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affectprevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participantsbecause the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our commonstock could depress the price of our common stock.The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, may have a material effect on ourreported financial results.Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity mustseparately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely orpartially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the ConvertibleNotes is that the equity component is required to be included in the additional paid-in capital section of shareholders' equity on our consolidated balancesheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of theConvertible Notes. As a result, we may be required to record a greater amount of non-cash interest expense in current periods presented as a result of theamortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We may report lower netincome (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period's amortization of the debt discountand the instrument's coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and thetrading price of the Convertible Notes. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding October15, 2024 only under certain circumstances. For example, holders may convert their Convertible Notes at their option during any quarter commencing afterthe quarter ending March 31, 2018 (and only during such quarter) if the last reported sale price of our common stock for at least 20 trading days (whether ornot consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equalto 130% of the conversion price on each applicable trading day. If the Convertible Notes become convertible prior to October 15, 2024, we would berequired to reclassify our Convertible Notes and the related debt issuance costs as current liabilities and certain portions of our equity outside of equity tomezzanine equity, which would have an adverse impact on our reported financial results for such quarter, and could have an adverse impact on the marketprice of our common stock and the trading price of the Convertible Notes.42Table of Contents In addition, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizingthe treasury stock method if we have the ability and intent to settle in cash, the effect of which is that the shares issuable upon conversion of the ConvertibleNotes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds theirprincipal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares ofcommon stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will be able tocontinue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of the treasurystock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then ourdiluted earnings per share would be adversely affected.In-process research and development (IPRD) comprised approximately 13% of our total assets as of December 31, 2017. A reduction in the value of ourIPRD could have a material adverse effect on our results of operations, financial condition and the value of our common stock.As a result of the merger with Transave, Inc. in 2010, we recorded an intangible IPRD asset of $77.9 million and goodwill of $6.3 million on ourbalance sheet. As a result of the clinical hold on ALIS announced in late 2011, we recorded a charge of $26.0 million in the fourth quarter of 2011 thatreduced the value of IPRD to $58.2 million and reduced goodwill to zero. Potential future activities or results could result in additional writedowns of IPRD,which could materially adversely affect our results of operations, financial condition and the value of our common stock.We may be unable to use certain of our net operating losses and other tax assets.We have substantial tax loss carry forwards for US federal income tax and state income tax purposes, and beginning in 2015, we had tax loss carryforwards in Ireland as well. In general, our net operating losses and tax credits have been fully offset by a valuation allowance due to uncertaintiessurrounding our ability to realize these tax benefits. In particular, our ability to fully use certain US tax loss carry forwards and general business tax creditcarry forwards recorded prior to December 2010 to offset future income or tax liability is limited under section 382 of the Internal Revenue Code of 1986, asamended (the Code). Changes in the ownership of our stock, including those resulting from the issuance of shares of our common stock offerings or uponexercise of outstanding options, may limit or eliminate our ability to use certain net operating losses and tax credit carry forwards in the future.Comprehensive tax reform legislation could adversely affect our business and financial condition.On December 22, 2017, the US government signed into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act).The Tax Act introduced significant changes to the US tax laws.The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a topmarginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income in respect of losses arising in taxable years beginningafter 2017 and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many businessdeductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseasesor conditions generally referred to as “orphan drugs”). Our federal net operating loss carryovers for taxable years beginning after 2017 will be carried forwardindefinitely pursuant to the Tax Act.The Tax Act did not have a material impact on our financial statements because our deferred temporary differences are fully offset by a valuationallowance and we do not have any significant offshore earnings from which to record the mandatory transition tax. However, given the significantcomplexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additional guidance from theSEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. We continue to examine the impact the Tax Actmay have on our business. Notwithstanding the reduction in the federal corporate income tax rate, the overall impact of the Tax Act is uncertain and ourbusiness and financial condition could be adversely affected.43Table of ContentsAny acquisitions we make, or collaborative relationships we enter into, may require a significant amount of our available cash and may not be clinicallyor commercially successful.As part of our business strategy, we may effect acquisitions to obtain additional businesses, products, technologies, capabilities and personnel, butwe cannot assure you that we will identify suitable products or enter into such acquisitions on acceptable terms.Acquisitions involve a number of operational risks, including:•Failure to achieve expected synergies;•Difficulty and expense of assimilating the operations, technology and personnel of the acquired business;•Our inability to retain the management, key personnel and other employees of the acquired business;•Our inability to maintain the acquired company’s relationship with key third parties, such as alliance partners;•Exposure to legal claims for activities of the acquired business prior to the acquisition;•The diversion of our management’s attention from our core business; and•The potential impairment of goodwill and write-off of IPRD costs, adversely affecting our reported results of operations and financial condition.We also may enter into collaborative relationships that would involve our collaborators conducting proprietary development programs. Any conflictwith our collaborators could limit our ability to obtain future collaboration agreements and negatively influence our relationship with existing collaborators.Disagreements with collaborators may also develop over the rights to our intellectual property.If we make one or more significant acquisitions or enter into a significant collaboration in which the consideration includes cash, we may berequired to use a substantial portion of our available cash and/or need to raise additional capital. For instance, in September and October of 2016 weborrowed $30.0 million under our loan agreement with Hercules to fund the payment due under the license agreement with AstraZeneca and thisinvestment, as with any acquisition or collaboration, may not be successful.Risks Related to Regulatory MattersThe manufacturing facilities of our third-party manufacturers are subject to significant government regulations and approvals, which are often costly andcould result in adverse consequences to our business if we and our manufacturing partners fail to comply with the regulations or maintain the approvals.Manufacturers of our product candidates are subject to cGMP and similar standards, and while we have policies and procedures in place to selectmanufacturers that adhere, and monitor their adherence to, such standards, they may nonetheless fail to do so. If one of them fails to obtain or maintaincompliance or experiences problems in the scale-up of commercial production, the production of our product candidates could be interrupted, resulting indelays, additional costs or restrictions on the marketing or sale of our products. These manufacturers and their facilities will be subject to pre-approval cGMPinspection by the FDA and other regulatory authorities, and the findings of the cGMP inspection could result in a failure to obtain, or a delay in obtaining,regulatory approval. In addition, these manufacturers and their facilities will be subject to continual review and periodic inspections by the FDA and otherregulatory authorities following regulatory approval, if any, of our product candidates. For instance, to monitor compliance with applicable regulations, theFDA routinely conducts inspections of facilities and may identify potential deficiencies. The FDA issues what are referred to as “FDA Form 483s” that setforth observations and concerns that are identified during its inspections. Failure to satisfactorily address the concerns or potential deficiencies identified in aForm 483 could result in the issuance of a warning letter, which is a notice of the issues that the FDA believes to be significant regulatory violations requiringprompt corrective actions. Failure to respond adequately to a warning letter, or to otherwise fail to comply with applicable regulatory requirements couldresult in enforcement, remedial and/or punitive actions by the FDA or other regulatory authorities.44Table of ContentsEven if we obtain regulatory approval for ALIS or any of our other product candidates, adverse effects discovered after approval could limit thecommercial profile of any approved product.If we obtain regulatory approval for ALIS or any other product candidate that we develop, such products will be used by a larger number of patientsand for longer periods of time than they were used in clinical trials. For these or other reasons, we or others may later discover that our products have adverseevent profiles that limit their usefulness or require their withdrawal. This discovery could have a number of potentially significant negative consequences,including:•Regulatory authorities may withdraw their approval or clearance of the product and may require recall of product in distribution;•Regulatory authorities may require the addition of labeling statements, such as black box or other warnings or contraindications, or the issuanceof “Dear Doctor Letters” or similar communications to healthcare professionals;•Regulatory authorities may impose additional restrictions on marketing and distribution of the products, or other risk management measures,such as a REMS;•We may be required to change the way the product is administered, conduct additional clinical studies or restrict the distribution of the product;•We could be sued and held liable for harm caused to subjects; and•We could be subject to negative publicity, including communications issued by regulatory authorities.Any of these events could prevent us from maintaining market acceptance of the affected product, cause substantial reduction in sales orsubstantially increase the costs of commercializing our product candidates, cause significant financial losses or result in significant reputational damage.If we are unable to obtain adequate reimbursement from governments or third-party payers for ALIS or any other products that we may develop or if weare unable to obtain acceptable prices for those products, our prospects for generating revenue and achieving profitability may be materially adverselyaffected.Our prospects for generating revenue and achieving profitability depend heavily upon the availability of adequate reimbursement for the use of ourapproved products from governmental and other third-party payers, both in the US and in other markets. We expect a substantial majority of potential futureALIS revenues would come from Medicare reimbursement. Reimbursement by a third-party payer may depend upon a number of factors, including the third-party payer’s determination that use of a product is:•A covered benefit under its health plan;•Safe, effective and medically necessary;•Appropriate for the specific patient;•Cost-effective; and•Neither experimental nor investigational.Obtaining a determination of coverage and reimbursement for a product from each government or other third-party payer is a time consuming andcostly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payer. We may notbe able to provide data sufficient to gain a positive coverage and reimbursement determination or we might need to conduct post‑marketing studies in orderto demonstrate the cost-effectiveness of any future products to such payers’ satisfaction. Such studies might require us to commit a significant amount ofmanagement time and financial and other resources. Even when a payer determines that a product is eligible for reimbursement, the payer may imposecoverage limitations that preclude payment for some uses that are approved by the FDA or non-US regulatory authorities. Moreover, eligibility for coveragedoes not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for newproducts, if applicable, also may not be sufficient to cover our costs and may not be made permanent. Subsequent approvals of competitive products couldresult in a detrimental change to the reimbursement of our products.45Table of ContentsThere is a significant focus in the US healthcare industry and elsewhere on cost containment and value. We expect changes in the Medicare programand state Medicaid programs, as well as managed care organizations and other third-party payers, to continue to put pressure on pharmaceutical productpricing. For instance, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) expanded Medicare outpatient prescription drugcoverage for the elderly through Part D prescription drug plans sponsored by private entities and authorized such plans to use formularies where they canlimit the number of drugs that will be covered in any therapeutic class. The plans generally negotiate significant price concessions as a condition offormulary placement. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs, which isgenerally believed to have resulted in lower Medicare reimbursement for physician-administered drugs. These cost reduction initiatives and other provisionsof this legislation provide additional pressure to contain and reduce drug prices and could decrease the coverage and price that we receive for any approvedproducts and could seriously harm our business. Although the MMA applies only to drug benefits for Medicare beneficiaries, private payers often followMedicare coverage policy and payment limitations when setting their own reimbursement rates, and any reimbursement reduction resulting from the MMAmay result in a similar reduction in payments from private payers. Additionally, the Patient Protection and Affordable Care Act (ACA) revised the definitionof “average manufacturer price” for reporting purposes and increased the minimum percentage for Medicaid drug rebates to states, and has imposed asignificant annual fee on companies that manufacture or import branded prescription drug products. We believe it is likely that the ACA, or any legislationenacted to amend or replace it, will continue the pressure on pharmaceutical pricing, especially under the Medicare program, and also may increase ourregulatory burdens and operating costs. If one or more of our product candidates reaches commercialization, such changes may have a significant impact onour ability to set a price we believe is fair for our products and may adversely affect our ability to generate revenue and achieve or maintain profitability. Weexpect further federal and state proposals and health care reforms to continue to be proposed by legislators and/or the US President, which could limit theprices that can be charged for the products we develop and may limit our commercial opportunity. In addition, any reduction of assistance from independentcharitable organizations that provide co-pay assistance to Medicare patients could limit the ability of the primarily elderly NTM lung disease patientpopulation to afford ALIS.Moreover, in markets outside the US, including Japan, Canada and the countries in the EU, pricing of pharmaceutical products is subject togovernmental control. Evaluation criteria used by many EU government agencies for the purposes of pricing and reimbursement typically focus on aproduct’s degree of innovation and its ability to meet a clinical need unfulfilled by currently available therapies. The ACA created a similar entity, thePatient-Centered Outcomes Research Institute (PCORI) designed to review the effectiveness of treatments and medications in federally-funded health careprograms. The PCORI began its first research initiatives recently, and an adverse result may result in a treatment or product being removed from Medicare orMedicare coverage. The decisions of such governmental agencies could affect our ability to sell our products profitably.Government health care reform could increase our costs, and could materially adversely affect our business, financial condition, results of operations andprospects and the value of our common stock.Our industry is highly regulated and changes in or revisions to laws and regulations that make gaining regulatory approval, reimbursement andpricing more difficult or subject to different criteria and standards may adversely impact our business, operations or financial results. For example, under theACA, drug manufacturers are required to report information on payments or transfers of value to US physicians and teaching hospitals as well as investmentinterests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties. The reporteddata are posted in searchable form on a public website.The Administration and the majority party in both Houses of Congress have indicated their ongoing desire to repeal the ACA. It is unclear whether,when and how that repeal may be effectuated and what the effect on the healthcare sector will be. The US President has indicated an interest in having thefederal government negotiate drug prices with pharmaceutical manufacturers. Changes to the ACA, to the Medicare or Medicaid programs, or to the ability ofthe federal government to negotiate drug prices, or other federal legislation regarding healthcare access, financing or legislation in individual states, couldaffect our business, financial condition, results of operations and prospects and the value of our common stock.If we are found in violation of federal or state “fraud and abuse” laws, we may be required to pay a penalty or may be suspended from participation infederal or state health care programs, which may adversely affect our business, financial condition, results of operations and prospects and the value ofour common stock.In the US, we are subject to various federal and state health care “fraud and abuse” laws, including anti‑kickback laws, false claims laws and otherlaws intended to reduce fraud and abuse in federal and state health care programs. Although we seek to structure our business arrangements in compliancewith all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specificcircumstances. Accordingly, it is possible that our practices may be challenged under these laws. Violations of fraud and abuse laws may be punishable bycriminal and/46Table of Contentsor civil sanctions, including fines or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment fromcontracting with the US government, and our business, financial condition, results of operations and prospects and the value of our common stock may beadversely affected. Our reputation could also suffer. In addition, private individuals have the ability to bring actions on behalf of the government under thefederal False Claims Act as well as under the false claims laws of several states.Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state.Some states, as well as other countries, including France, require the disclosure of certain payments to health care professionals. Health record privacy lawsmay limit access to information identifying those individuals who may be prospective users. There are ambiguities as to what is required to comply withthese state requirements, and we could be subject to penalties if a state determines that we have failed to comply with an applicable state law requirement.Risks Related to Our Intellectual PropertyIf we are unable to protect our intellectual property rights adequately, the value of our product candidates could be diminished.The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal, technical, scientificand factual questions, and our success depends in large part on our ability to protect our proprietary technology and to obtain patent protection for ourproducts, prevent third parties from infringing on our patents, both domestically and internationally. We have sought to protect our proprietary position byfiling patent applications in the US and abroad related to our novel technologies and products that are important to our business. This process is expensiveand time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Itis also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Ourexisting patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technologies or from developing competingproducts and technologies.Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningfulprotection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Any conclusions we may reach regardingnon-infringement, inapplicability or invalidity of a third party’s intellectual property vis-à-vis our proprietary rights, or those of a licensor, are based insignificant part on a review of publicly available databases and other information. There may be information not available to us or otherwise not reviewed byus that could render these conclusions inaccurate. Our competitors may also be able to circumvent our owned or licensed patents by developing similar oralternative technologies or products in a non-infringing manner.Additionally, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented throughlitigation, which could limit our ability to stop competitors from marketing similar products or reduce the term of patent protection we may have for ourproducts. US patents and patent applications may also be subject to interference or derivation proceedings, and US patents may be subject to re‑examinationproceedings, reissue, post-grant review and/or inter partes review in the PTO. Foreign patents may be subject to opposition or comparable proceedings in thecorresponding foreign patent office, which could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of oneor more of the claims of the patent or patent application. See Intellectual Property - ALIS Patents and Trade Secrets in Item 1 of Part I of this Annual Reporton Form 10‑K for the year ended December 31, 2017 (2017 Annual Report) for more information on our European patent that was previously opposed, thedecision of which is now under appeal by Generics (UK) Ltd. Another of our European patents has been opposed by Generics (UK) Ltd., and was revoked inNovember 2017. We intend to appeal that decision, and the patent remains enforceable during the appeal. These European patents have statutory expirationdates in 2026 and 2023, respectively, not including additional term that might be added via a Supplementary Protection Certificate.Changes in either patent laws or in interpretations of patent laws in the US and other countries may also diminish the value of our intellectualproperty or narrow the scope of our patent protection, including making it easier for competitors to challenge our patents. For example, the America InventsAct included a number of changes to established practices, including the transition to a first-inventor-to-file system and new procedures for challengingpatents and implementation of different methods for invalidating patents.47Table of ContentsIf we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our product candidates could besignificantly diminished.We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable.However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, advisors, collaborators, andother third parties and partners to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure ofconfidential information or may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, thirdparties may independently develop or discover our trade secrets and proprietary information. Regulators also may disclose information we consider to beproprietary to third parties under certain circumstances, including in response to third-party requests for such disclosure under the Freedom of InformationAct or comparable laws. Additionally, the FDA, as part of its Transparency Initiative, continues to consider whether to make additional information publiclyavailable on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the presenttime whether and how the FDA’s disclosure policies may change in the future.We may not be able to enforce our intellectual property rights throughout the world.The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the US Many companies haveencountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of somecountries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating tolife sciences. This could make it difficult for us to stop the infringement of our patents or in-licensed patents or the misappropriation of our other intellectualproperty rights. For example, many foreign countries have compulsory licensing laws under which a patent owner may be required to grant licenses to thirdparties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. Inthese countries, patents may provide limited or no benefit.Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from otheraspects of our business. Our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legaldecisions by courts in the US and foreign countries may affect our ability to obtain adequate protection for our technology and to enforce intellectualproperty rights.The drug research and development industry has a history of intellectual property litigation, and we may be involved in costly intellectual propertydisputes which may prevent or delay our product development efforts, prevent us from commercializing our products or increase the costs ofcommercializing our products.Third parties may claim that we have infringed upon or misappropriated their proprietary rights. Any existing third-party patents, or patents that maylater issue to third parties, could negatively affect our commercialization of ALIS, INS1007, INS1009 or any other product. For instance, PAH is a competitiveindication with established products, including other formulations of treprostinil. Our supply of the active pharmaceutical ingredient for INS1009 isdependent upon a single supplier. The supplier owns patents on its manufacturing process, and we have filed patent applications for INS1009; however, acompetitor in the PAH indication may claim that we or our supplier have infringed upon or misappropriated its proprietary rights. Moreover, in the event thatwe pursue approval of INS1009, or any other product candidate, via the 505(b)(2) regulatory pathway, we will be required to file a certification against anyunexpired patents listed in the Orange Book for the third party drug we rely upon as part of our regulatory submission. This certification process may lead tolitigation and could delay also launch of a product candidate.In the event of a successful claim against us for infringement or misappropriation of a third party’s proprietary rights, we may be required to takeactions including but not limited to the following:•Pay damages, including up to treble damages, royalties, and the other party’s attorneys’ fees, which may be substantial;•Cease the development, manufacture, marketing and sale of products or use of processes that infringe the proprietary rights of others;•Expend significant resources to redesign our products or our processes so that they do not infringe the proprietary rights of others, which maynot be possible;48Table of Contents•Redesign our products or processes to avoid third-party proprietary rights, which means we may suffer significant regulatory delays associatedwith conducting additional clinical trials or other steps to obtain regulatory approval; and/or•Obtain one or more licenses arising out of a settlement of litigation or otherwise from third parties which license(s) may not be available to us onacceptable terms or at all.We may also have to undertake costly litigation or engage in other proceedings, such as interference or inter partes review, to enforce any patentsissued or licensed to us, to confirm the scope and validity of our or a licensor’s proprietary rights or to defend against allegations that we have infringed athird party’s intellectual property rights. Such proceedings are likely to be time consuming and may divert management attention from operation of ourbusiness, and could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our commonstock.Certain of our existing license agreements include, and our future license agreements also may include, restrictions on our ability to freely develop orcommercialize the product candidates that are subject to those agreements. If we fail to comply with our obligations under these agreements, or if theselicense agreements are terminated for other reasons, we could lose license rights that are important to our business.We are a party to licensing agreements with PARI and AstraZeneca, which we view as material to our business. For additional information regardingthe terms of these agreements, see Business - License and Other Agreements in Item 1 of Part I of this 2017 Annual Report. Under our license agreement withAstraZeneca, AstraZeneca retains a right of first negotiation pursuant to which it may exclusively negotiate with us before we can negotiate with a third partyregarding any transaction to develop or commercialize INS1007, subject to certain exceptions. While this right of first negotiation is not triggered by achange of control, it may impede or delay our ability to consummate certain other transactions involving INS1007.Additionally, if we fail to comply with our obligations under the agreements with PARI and AstraZeneca, our counterparty may have the right totake action against us, up to and including termination of the relevant license. For instance, under our licensing agreement with PARI, with respect to NTM,CF and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve certain developmental and regulatory milestones byset deadlines. Additionally, for NTM, we are obligated to use commercially reasonable efforts to achieve certain commercial milestones in the US andEurope. The consequences of our failing to use commercially reasonable efforts to achieve certain commercial milestones are context-specific, but includeending PARI’s non-compete obligation, making the license non-exclusive and terminating the license, in each case with respect to the applicable indication.Similarly, under our license agreement with AstraZeneca, AstraZeneca may terminate our license to INS1007 if we fail to use commercially reasonable effortsto develop and commercialize a product based on INS1007, or we are subject to a bankruptcy or insolvency. Reduction or elimination of our licensed rightsmay result in our having to negotiate new or reinstated licenses with less favorable terms and may materially harm our business.Risks Related to Our IndustryWe operate in a highly competitive and changing environment, and if we are unable to adapt to our environment, we may be unable to competesuccessfully.Biotechnology and related pharmaceutical technology have undergone and are likely to continue to experience rapid and significant change. Weexpect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future success will depend inlarge part on our ability to maintain a competitive position with respect to these technologies and to obtain and maintain protection for our intellectualproperty. Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with theirdevelopment. In each of our potential product areas, we face substantial competition from pharmaceutical, biotechnology and other companies, universitiesand research institutions. Relative to us, most of these entities have substantially greater capital resources, research and development staffs, facilities andexperience in conducting clinical studies and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many ofour competitors may achieve product commercialization or obtain patent protection earlier than us. Furthermore, we believe that our competitors have used,and may continue to use, litigation to gain a competitive advantage. Our competitors may also use different technologies or approaches to the developmentof products similar to the products we are seeking to develop.We expect that competing successfully will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope ofregulatory approval and price. Specifically, we expect crucial factors will include the relative speed with which we can develop products, complete theclinical testing and regulatory approval processes and supply49Table of Contentscommercial quantities of the product to the market. We expect competition to increase as technological advances are made and commercial applicationsbroaden. There are potential competitive products, both approved and in development, which include oral, systemic, or inhaled antibiotic products to treatchronic respiratory infections. For instance, certain entities have expressed interest in studying their products for NTM lung disease and are seeking toadvance studies in NTM lung disease caused by mycobacterial species other than MAC; however, we are not aware that any such entities are currentlyconducting clinical trials for the treatment of refractory NTM lung disease caused by MAC or of any approved inhaled therapies specifically indicated forNTM lung disease in North America, Japan or Europe. If any of our competitors develops a product that is more effective, safe, tolerable or, convenient or lessexpensive than ALIS or our other product candidates, it would likely materially adversely affect our ability to generate revenues. We also may face lowerpriced generic competitors if third-party payers encourage use of generic or lower-priced versions of our product or if competing products are imported intothe US or other countries where we may sell ALIS.In addition, there are other amikacin products that have been approved by the FDA, MHLW and other regulatory agencies for use in otherindications, and physicians may elect to prescribe those products rather than ALIS to treat the indications for which ALIS may receive approval, which iscommonly referred to as off-label use. Although regulations prohibit a drug company from promoting off-label use of its product, the FDA and otherregulatory agencies do not regulate the practice of medicine and cannot direct physicians as to what product to prescribe to their patients. As a result, wewould have limited ability to prevent any off-label use of a competitor’s product to treat diseases for which we have received FDA or other regulatory agencyapproval, even if such use violates our patents or any statutory exclusivities that FDA may grant for the use of amikacin to treat such diseases. If we areunable to compete successfully, it will materially adversely affect our business, financial condition, results of operations and prospects and the value of ourcommon stock.If another party obtains orphan drug exclusivity for a product that is essentially the same as a product we are developing for a particular indication, wemay be precluded or delayed from commercializing the product in that indication.Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition. The company thatobtains the first regulatory approval from the FDA for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drugfor the designated condition for a period of seven years. Similar laws exist in the EU with a term of ten years. See Business - Government Regulation - OrphanDrugs in Item 1 of Part I of this 2017 Annual Report for additional information. If a competitor obtains approval of the same drug for the same indication ordisease before us, and the FDA grants such orphan drug exclusivity, we would be prohibited from obtaining approval for our product for seven or more years,unless our product can be shown to be clinically superior. In addition, even if we obtain orphan exclusivity, the FDA may approve another product duringour orphan exclusivity period for the same indication under certain circumstances.Our research, development and manufacturing activities used in the production of ALIS involve the use of hazardous materials, which could expose us todamages, fines, penalties and sanctions and materially adversely affect our results of operations and financial condition.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and thehandling, use, storage, treatment and disposal of hazardous materials and wastes. Our research and development program and manufacturing activities forALIS and our other product candidates involve the controlled use of hazardous materials and chemicals. We generally contract with third parties for thedisposal of these materials and wastes. Although we strive to comply with all pertinent regulations, we cannot eliminate the risk of environmentalcontamination, damage to facilities or injury to personnel from the accidental or improper use or control of these materials. In addition to any liability wecould have for any misuse by us of hazardous materials and chemicals, we could also potentially be liable for activities of our CMOs or other third parties.Any such liability, or even allegations of such liability, could materially adversely affect our results of operations and financial condition. We also couldincur significant costs associated with civil or criminal fines and penalties.In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Thesecurrent or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also mayresult in substantial fines, penalties or other sanctions.We may be subject to product liability claims, and we have only limited product liability insurance.The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims, which can lead to significant adversepublicity and obligations to pay damages. We currently have only limited product liability insurance for our products. We do not know if we will be able tomaintain existing, or obtain additional, product liability50Table of Contentsinsurance on acceptable terms or with adequate coverage against potential liabilities. This type of insurance is expensive and may not be available onacceptable terms. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential productliability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of our insurance coverage,if any, may require us to pay substantial amounts and may materially adversely affect our business, financial condition, results of operations and prospectsand the value of our common stock.Risks Related to Employee Matters and Managing GrowthWe are dependent upon retaining and attracting key personnel, the loss of whose services could materially adversely affect our business, financialcondition, results of operations and prospects and the value of our common stock.We depend heavily on our management team and our principal clinical and commercial personnel, the loss of whose services might significantlydelay or prevent the achievement of our research, development or business objectives. Our success depends, in large part, on our ability to attract and retainqualified management, clinical and commercial personnel, and on our ability to develop and maintain important relationships with commercial partners,leading research institutions and key distributors. We plan to hire additional personnel in anticipation of seeking regulatory approval for and commerciallaunch of ALIS.Competition for skilled personnel in our industry and market is very intense because of the numerous pharmaceutical and biotechnology companiesthat seek similar personnel. These companies may have greater financial and other resources, offer a greater opportunity for career advancement and have alonger history in the industry than we do. We also experience competition for the hiring of our clinical and commercial personnel from universities, researchinstitutions, and other third parties. We cannot assure that we will attract and retain such persons or maintain such relationships. Our inability to retain andattract qualified employees would materially harm our business, financial condition, results of operations and prospects and the value of our common stock.We expect to expand our development, manufacturing, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations.We expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmentalapprovals, manufacturing, sales, marketing and distribution will place additional requirements on our management, operational and financial resources.Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate andintegrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities anddevote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, whichmay result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivityamong remaining employees.The anticipated commercialization of ALIS and the development of additional product candidates will require significant expenditures by us andplace a strain on our resources. If our management is unable to effectively manage our activities in anticipation of commercialization, as well as ourdevelopment efforts, we may incur higher than expected expenditures or other expenses and our business may otherwise be adversely affected.Risks Related to Our Common Stock and Listing on the Nasdaq Global Select MarketThe market price of our stock has been and may continue to be highly volatile.Our common stock is listed on the Nasdaq Global Select Market under the ticker symbol “INSM”. The market price of our stock has been and maycontinue to be highly volatile, and could be subject to wide fluctuations in price in response to various factors, including those discussed herein, many ofwhich are beyond our control. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which haveparticularly affected the market prices for emerging biotechnology and pharmaceutical companies like us, and which have often been unrelated to theiroperating performance. These broad market fluctuations may adversely affect the market price of our common stock. Historically, when the market price of astock has been volatile, shareholders are more likely to institute securities and derivative class action litigation against the issuer of such stock. As describedbelow, a securities class action lawsuit was initiated against us during 2016 following a decline in our stock price.51Table of ContentsWe, certain of our executive officers and directors and the underwriters from a prior securities offering were subject to a recently dismissed securities classaction lawsuit, which, if a second amended complaint is filed, may require significant management and board time and attention and significant expenseto us and result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations andprospects and the value of our common stock. We, certain of our executive officers and directors and the underwriters from a prior securities offering were named as defendants in a securities classaction lawsuit initially filed on July 15, 2016. The amended complaint, filed December 15, 2016, alleged that we and certain of our executive officers anddirectors violated Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and that we, certain of our executive officers and theunderwriters violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder of the Exchange Act, by making materially false andmisleading statements and omissions relating to the development of ALIS and/or related requests for regulatory approval. It also alleged that the defendantofficers and directors violated Section 15 of the Securities Act and that the defendant officers violated Section 20(a) of the Exchange Act. On February 15,2018, the Court issued a decision granting our motion and dismissing the amended complaint without prejudice. The lead plaintiff has until March 19, 2018to file a second amended complaint. For additional information, see Note 11, Commitments and Contingencies, in Item 1 of Part I of this 2017 AnnualReport. While we believe that we have substantial legal and factual defenses to the claims that were asserted in the class action and intend to continuevigorously defend the case if a second amended complaint is filed, this lawsuit could divert our management’s and board’s attention from other businessmatters, the outcome of the litigation is difficult to predict and quantify, and the defense against the underlying claims will likely be costly. The ultimateresolution of this matter could result in payments of monetary damages or other costs, materially and adversely affect our business, financial condition andresults of operations, and adversely affect our reputation and prospects, and consequently, could negatively impact the value of our common stock. We have insurance policies related to some of the risks associated with our business, including directors’ and officers’ liability insurance policies.However, there is no assurance that our insurance coverage will be sufficient or that our insurance carriers will cover all claims in that litigation. If we are notsuccessful in our defense of the claims asserted in the putative action and those claims are not covered by insurance or exceed our insurance coverage, wemay have to pay damage awards, indemnify our executive officers and directors from damage awards that may be entered against them and pay the costs andexpenses incurred in defense of, or in any settlement of, such claims. In addition, we are indemnifying the underwriters that are party to this action against theclaims asserted against them, and these costs and expenses might not be covered by insurance. In addition, there is the potential for additional shareholder litigation against us, and we could be materially and adversely affected by such matters.Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements between us and our employees couldhamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of us.Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements with our employees couldhamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of, us or limit the price that investors might be willing topay for shares of our common stock. These provisions or arrangements include:•The ability to issue preferred stock with rights senior to those of our common stock without any further vote or action by the holders of ourcommon stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of ourcommon stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. In certaincircumstances, such issuance could have the effect of decreasing the market price of our common stock.•The existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, thus expandingthe time required to change the composition of a majority of directors.•The requirement that shareholders provide advance notice when nominating director candidates to serve on our Board of Directors.•The inability of shareholders to convene a shareholders’ meeting without the chairman of the board, the president or a majority of the board ofdirectors first calling the meeting.52Table of Contents•The prohibition against entering into a business combination with the beneficial owner of 10% or more of our outstanding voting stock for aperiod of three years after the 10% or greater owner first reached that level of stock ownership, unless certain criteria are met.•In addition to severance agreements with our officers and provisions in our incentive plans that permit acceleration of equity awards upon achange in control, a severance plan for eligible full-time employees that provides such employees with severance equal to six months of theirthen-current base salaries in connection with a termination of employment without cause upon, or within 18 months following, a change incontrol.We previously had a shareholder rights plan, or “poison pill”, which expired in May 2011. Under Virginia law, our Board of Directors mayimplement a new shareholders’ rights plan without shareholder approval. Our Board of Directors intends to regularly consider this matter, even in the absenceof specific circumstances or takeover proposals, to facilitate its future ability to quickly and effectively protect shareholder value.Other Risks Related to Our BusinessWe have limited experience operating internationally, are subject to a number of risks associated with our international activities and operations and maynot be successful in our efforts to expand internationally.We currently have limited operations outside of the US. As of December 31, 2017, we had 24 employees located in Europe, and we have supplierslocated around the world. In order to meet our long‑term goals, we will need to grow our international operations over the next several years, including inJapan, and continue to source material used in the manufacture of our product candidates from abroad. Consequently, we are and will continue to be subjectto additional risks related to operating in foreign countries, including:•Our limited experience operating our business internationally;•An inability to achieve the optimal pricing and reimbursement for ALIS or subsequent changes in reimbursement, pricing and other regulatoryrequirements;•Any implementation of, or changes to, tariffs, trade barriers and other import-export regulations in the US or other countries in which we, or ourthird-party partners, operate;•Unexpected adverse events related to ALIS or our other product candidates occurring in foreign markets that we have not experienced in the US;•Economic and political conditions, including geopolitical events, such as war and terrorism, foreign currency fluctuations and inflation, whichcould result in increased or unpredictable operating expenses and reduced revenues and other obligations incident to doing business in, or witha company located in, another country;•Changes resulting from (i) the uncertainty and instability in economic and market conditions caused by the UK’s vote to exit the EuropeanUnion; and (ii) the uncertainty regarding how the UK’s access to the EU Single Market and the wider trading, legal, regulatory and laborenvironments will be impacted by the UK’s vote to exit the European Union, including the resulting impact on our business; and•Compliance with foreign or US laws, rules and regulations, including data privacy requirements, labor relations laws, tax laws, anti-competitionregulations, import, export and trade restrictions, anti-bribery/anti-corruption laws, regulations or rules, which could lead to actions by us or ourlicensees, distributors, manufacturers, other third parties who act on our behalf or with whom we do business in foreign countries or ouremployees who are working abroad that could subject us to investigation or prosecution under such foreign or US laws.These and other risks associated with our international operations may materially adversely affect our business, financial condition, results ofoperations and prospects and the value of our common stock.Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in amaterial disruption of our business operations, including our drug development programs.Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants arevulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism,53Table of Contentswar and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a materialadverse effect on our business operations, including a material disruption of our drug development programs. Unauthorized disclosure of sensitive orconfidential client or employee data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, orotherwise, could damage our reputation. Similarly, unauthorized access to or through our information systems and networks, whether by our employees orthird parties, could result in negative publicity, legal liability and damage to our reputation. For example, the loss of clinical trial data from completed orongoing clinical trials for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs torecover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could bedelayed.Although we have general liability insurance coverage, including coverage for errors and omissions, our insurance may not cover all claims,continue to be available on reasonable terms or be sufficient in amount to cover one or more large claims; additionally, the insurer may disclaim coverage asto any future claim. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in ourinsurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect onour business, financial condition, results of operations and prospects and the value of our common stock.We are subject to the US Foreign Corrupt Practices Act, the UK Bribery Act and other anti-corruption laws and trade control laws, as well as other lawsgoverning our operations. If we fail to comply with these laws, we could be subject to negative publicity, civil or criminal penalties, other remedialmeasures, and legal expenses, which could adversely affect our business, financial condition, results of operations and prospects and the value of ourcommon stock.Our operations are subject to anti-corruption laws, including the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other anti-corruption laws that apply in countries where we do business. The FCPA, UK Bribery Act and these other laws generally prohibit us, our employees and ourintermediaries from making prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage.The CONVERT study includes more than 125 sites in 18 countries, and we are conducting the 312 study and plan to conduct the WILLOW study, our globalphase 2 study of INS1007 in non-CF bronchiectasis, at a broad range of trial sites around the world. Certain of these jurisdictions pose a risk of potentialFCPA violations, and we have relationships with third parties whose actions could potentially subject us to liability under the FCPA or local anti-corruptionlaws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or themanner in which existing laws might be administered or interpreted.We are also subject to other laws and regulations governing our international operations, including regulations administered by the US Departmentof Commerce’s Bureau of Industry and Security, the US Department of Treasury’s Office of Foreign Assets Control, and various non-US government entities,including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations andtransfer pricing regulations (collectively, Trade Control laws).We may not be effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements,including Trade Control laws. If we are not in compliance with the FCPA and other anti‑corruption laws or Trade Control laws, we may be subject to criminaland civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business,financial condition, results of operations and prospects and the value of our common stock. Likewise, even an investigation by US or foreign authorities ofpotential violations of the FCPA other anti-corruption laws or Trade Control laws could have an adverse impact on our reputation, business, financialcondition, results of operations and prospects and the value of our common stock.54Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNone.55Table of ContentsITEM 2. PROPERTIESWe currently lease 56,617 square feet of laboratory and office space in Bridgewater, New Jersey. The initial term of the lease will expire inNovember 2019, and we have the option to extend the lease for two additional five year periods beyond the initial term. We also lease 14,311 square feet ofadditional laboratory space located in Bridgewater, NJ for which the initial lease term expires in September 2021. In addition, we lease office space in Ireland,the Netherlands and Japan.ITEM 3. LEGAL PROCEEDINGSOn July 15, 2016, a lawsuit captioned Hoey v. Insmed Incorporated, et al, No. 3:16-cv-04323-FLW-TJB (D.N.J. July 15, 2016) was filed in the USDistrict Court for the District of New Jersey on behalf of a putative class of investors who purchased our common stock from March 18, 2013 through June 8,2016. The complaint alleged that we and certain of our executives violated Sections 10(b) and 20(a) of the Exchange Act by misrepresenting and/or omittingthe likelihood of the EMA approving our European MAA for use of ALIS in the treatment of NTM lung disease and the likelihood of commercialization ofALIS in Europe. On October 25, 2016, the Court issued an order appointing Bucks County Employees Retirement Fund as lead plaintiff for the putative class. OnDecember 15, 2016, the lead plaintiff filed an amended complaint that shortens the putative class period for the Exchange Act claims to March 26, 2014through June 8, 2016 and adds claims under Sections 11, 12, and 15 of the Securities Act on behalf of a putative class of investors who purchased commonstock in or traceable to our March 31, 2015 public offering. The amended complaint names as defendants in the Securities Act claims the Company, certaindirectors and officers, and the investment banks who served as underwriters in connection with the secondary offering. The amended complaint allegesdefendants violated the Securities Act by using a purportedly misleading definition of “culture conversion” and supposedly failing to disclose in the offeringmaterials purported flaws in its Phase 2 study that made the secondary offering risky or speculative. The amended complaint seeks damages in an unspecifiedamount. We moved to dismiss the amended complaint on March 1, 2017. The lead plaintiff opposed the motion on May 17, 2017 and we provided our replybrief on July 11, 2017. On July 20, 2017, the plaintiff asked for leave to file a sur-reply in further opposition to our motion to dismiss the amended complaint,which we had opposed.On February 15, 2018, the Court issued a decision granting our motion and dismissing the amended complaint without prejudice. The lead plaintiffhas until March 19, 2018 to file a second amended complaint. If a second amended complaint is filed, we intend to continue to defend the lawsuitvigorously; however, there can be no assurance regarding the ultimate outcome of the lawsuit. From time to time, we are a party to various other lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While theoutcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on ourconsolidated financial position, results of operations or cash flows.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.56Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOur trading symbol is "INSM." Our common stock currently trades on the Nasdaq Global Select Market. Until February 3, 2014, our common stocktraded on the Nasdaq Capital Market. The following table lists the high and low sale prices per share for our common stock on a quarterly basis for both 2017and 2016.Fiscal Year 2017 High LowFourth Quarter $32.94 $25.81Third Quarter $31.39 $11.49Second Quarter $19.35 $14.61First Quarter $17.51 $12.74Fiscal Year 2016 High LowFourth Quarter $15.49 $10.21Third Quarter $15.35 $9.75Second Quarter $14.53 $9.02First Quarter $18.60 $10.53On February 1, 2018, the last reported sale price for our common stock on the Nasdaq Global Select Market was $26.37 per share. As of February 1,2018, there were 138 holders of record of our common stock.We have never declared or paid cash dividends on our common stock. We anticipate that we will retain all earnings, if any, to support operationsand to finance the growth and development of our business for the foreseeable future. Under the terms of our loan agreement with Hercules, we are prohibitedfrom declaring or paying any cash dividend or making a cash distribution on any class of our stock or on other equity interest, except that our subsidiaries(defined in the loan agreement as a corporate entity in which we control more than 50% of the voting securities) may pay dividends or make distributions totheir equity owners. Any future determination as to the payment of dividends will be dependent upon these and any contractual or other restrictions to whichwe may be subject and, to the extent permissible thereunder, will be at the sole discretion of our board of directors and will depend on our financialcondition, results of operations, capital requirements and other factors our board of directors deems relevant at that time.57Table of ContentsCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Insmed Incorporated, the NASDAQ Composite Index,the S&P 500 Index, the NASDAQ Pharmaceutical Index and the NASDAQ Biotechnology Index_________________________________* $100 invested on 12/31/12 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.ITEM 6. SELECTED FINANCIAL DATAThe following selected financial data reflects our consolidated statements of operations and consolidated balance sheets as of and for the yearsended December 31, 2017, 2016, 2015, 2014 and 2013. The data below should be read in conjunction with, and is qualified by reference to, Management'sDiscussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto contained elsewherein this Annual Report on Form 10-K.58Table of Contents Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except per share data) Historical Statement of Operations Data: Revenues$— $— $— $— $11,500 Operating expenses: Research and development109,749 122,721 74,277 56,292 44,279 General and administrative79,171 50,679 43,216 31,073 22,236 Total operating expenses188,920 173,400 117,493 87,365 66,515 Operating loss(188,920) (173,400) (117,493) (87,365) (55,015) Investment income1,624 604 261 58 166 Interest expense(5,925) (3,498) (2,889) (2,415) (2,412) Other income (expense), net300 119 (33) 141 (33) Loss before income taxes(192,921) (176,175) (120,154) (89,581) (57,294) Income tax (benefit) provision(272) 98 (1,971) (10,422) (1,221) Net loss$(192,649) $(176,273) $(118,183) $(79,159) $(56,073) Basic and diluted net loss per share$(2.89) $(2.85) $(2.02) $(1.84) $(1.60) Weighted average basic and diluted common shares outstanding66,576 61,892 58,633 43,095 34,980 Historical Balance Sheet Data: Cash, cash equivalents and short-term investments$381,165 $162,591 $282,876 $159,226 $113,894 Total assets$462,047 $237,956 $356,556 $230,864 $176,498 Current portion of long-term debt$— $— $3,113 $— $3,283 Debt, long-term$55,567 $54,791 $22,027 $24,856 $16,338 Total shareholders' equity$361,059 $154,483 $311,698 $186,237 $143,324 59Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion also should be read in conjunction with our consolidated financial statements and the notes thereto contained elsewherein this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors,such as those set forth under the section entitled Risk Factors, Cautionary Note Regarding Forward-Looking Statements and elsewhere herein, our actualresults may differ materially from those anticipated in these forward-looking statements.EXECUTIVE OVERVIEWInsmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. Our operations are based on thetechnology and products historically developed by Transave. We have legal entities in the US, Ireland, Germany, France, the United Kingdom (UK), theNetherlands and Japan.We have not generated material revenue to date, except for in 2013, and through December 31, 2017, we had an accumulated deficit of $957.9million. We have financed our operations primarily through the public offerings of our equity securities and debt financings. Although it is difficult topredict our future funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents as of December 31, 2017will enable us to fund our operations for at least the next 12 months.We expect that over the next few years we will continue to incur losses from operations as we increase our expenditures in research anddevelopment in connection with our ongoing and future clinical trials, and for expenses related to the preparation for the commercial launch of ALISglobally, if approved.PIPELINE PROGRESSALIS for Patients with NTM Lung Disease Our lead product candidate is ALIS, a novel, once-daily liposomal formulation of amikacin that is in late-stage clinical development for adultpatients with treatment refractory NTM lung disease caused by MAC, a rare and often chronic infection that can cause irreversible lung damage and can befatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the needto administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenousadministration, our advanced liposome technology uses charge-neutral liposomes to deliver amikacin directly to the lung where it is taken up by the lungmacrophages where the NTM infection resides. This technology prolongs the release of amikacin in the lungs, while minimizing systemic exposure thereby,offering the potential for decreased systemic toxicities. ALIS’s ability to deliver high levels of amikacin directly to the lung distinguishes it from intravenousamikacin. ALIS is administered once-daily, using a portable aerosol delivery system, via an optimized, investigational eFlow® Nebulizer Systemmanufactured by PARI. The FDA has designated ALIS as an orphan drug, a breakthrough therapy, and a QIDP for NTM lung disease. Orphan designation features sevenyears of post-approval marketing exclusivity in the approved indication, and QIDP features an additional five years of post-approval exclusivity in theapproved indication. As a result, ALIS could have 12 years of post-approval marketing exclusivity in the US, if approved. A QIDP-designated product iseligible for fast track status and is often granted priority review status. A priority review designation for a drug which is not a NME means the FDA’s goal is totake action on the NDA within six months following the receipt of the NDA. The CONVERT Study and 312 Study CONVERT Top-Line Efficacy DataWe announced top-line data for the CONVERT study on September 5, 2017. The CONVERT study enrolled 336 adult patients with NTM lungdisease caused by MAC who were refractory to at least six months of treatment on current GBT of a multi-drug regimen. After a screening period of up to10 weeks, eligible patients were randomized 2:1 to once-daily ALIS plus GBT or GBT only. The primary endpoint of the study was the proportion of patientsachieving culture conversion, which we defined as three consecutive monthly negative sputum cultures, by month six. Based on top-line results, theCONVERT study met its primary endpoint, with 29% of patients in the ALIS plus GBT arm achieving culture conversion, compared to 9% of patients in theGBT-only arm (p<0.0001).60Table of ContentsWe also reported top-line data for certain secondary and exploratory endpoints for the first six months of the study. Top-line data for the six-minutewalk test indicated no statistically significant difference between patients in the two arms of the study. However, an analysis of these data (per a pre-specifiedexploratory endpoint) showed that patients who achieved culture conversion in either arm demonstrated an improvement in six-minute walk distance whencompared to patients who did not culture convert (p=0.0108). Top-line data for the secondary endpoint of time to conversion demonstrated that patients inthe GBT-only arm took approximately 30% longer to convert when compared to patients on ALIS plus GBT (p<0.0001). We are continuing our analysis ofthe impact of conversion on a variety of other clinical measures.The protocol for the CONVERT study incorporates feedback from the FDA and the EMA via its scientific advice working party process, as well aslocal health authorities in other countries, including Japan’s PMDA. Because the CONVERT study met the primary endpoint of culture conversion at monthsix based on the top-line results, we plan to submit an NDA for ALIS to the FDA by the end of March 2018 pursuant to Subpart H, which permits the FDA toapprove a product candidate based on a surrogate or intermediate endpoint subject to the requirement that we conduct post-approval studies to verify anddescribe the clinical benefit of the product. We expect to receive a six-month priority review from the FDA. We believe that efficacy data from the CONVERTstudy at month six will be sufficient to support the accelerated approval of ALIS. We expect that full approval would be contingent on FDA review of, amongother things, the final analyses of durability of culture conversion for converters.CONVERT Top-Line Safety and Tolerability DataApproximately 98% of patients in the ALIS plus GBT arm of the CONVERT study experienced at least one treatment-emergent adverse event(TEAE), compared to 91% of patients in the GBT-only arm, with most events being mild or moderate in severity. A greater percentage of patients in the ALISplus GBT arm than in the GBT-only arm experienced TEAEs involving dysphonia, cough, haemoptysis, dyspnoea, oropharyngeal pain, diarrhea, nausea, andfatigue. Based on our review of the top‑line study safety data, the incidence of dysphonia, cough and dyspnoea among patients in the ALIS plus GBT armgenerally decreased after the second study month. Approximately 20% and 18% of patients in the ALIS plus GBT arm and GBT-only arm of the study,respectively, experienced at least one serious treatment emergent adverse event (STEAE). The table below provides additional information regarding certainSTEAEs experienced by patients in the CONVERT study. 2:1 RandomizationPatients Reporting STEAEs >3% in Either Arm ALIS + GBT (n=223)GBT (n=112)Patients Reporting At Least One STEAE 20.2% (45)17.9% (20)System Organ Class Preferred Term Respiratory, Thoracic, Mediastinal Disorders 11.7% (26)9.8% (11) Hemoptysis2.7% (6)4.5% (5) COPD (exacerbation)3.1% (7)0.9% (1)Infections and Infestations 9.0% (20)5.4% (6) Pneumonia3.6% (8)1.8% (2)Cardiac Disorders 0.4% (1)4.5% (5)Patient Deaths 2.7% (6)4.5% (5)There were no distinctions between treatment arms for adverse events of hearing loss or renal impairment, side effects commonly associated with theintravenous use of amikacin. As of September 2017, the overall dropout rate in the CONVERT study was 16.1%, with an 8.9% dropout rate in the GBT-onlyarm and a 19.6% dropout rate in the ALIS plus GBT arm. As of December 2017, the overall dropout rate in the CONVERT study was 18% (n=60/336). CONVERT Long-Term Durability DataWe also recently announced interim data on the durability of culture conversion, as defined by patients that have completed treatment andcontinued in the CONVERT study off all therapy for three months, which we expect will be the endpoint necessary to support full regulatory approval in theUS. The following data are interim results observed through December 2017, and have not been further analyzed. As of December 2017, of the 75 patientsachieving culture conversion in the CONVERT study, 53 of these patients were evaluable for durability of culture conversion three months after thecompletion of treatment. Interim data for durability of culture conversion as of December 2017 on these 53 patients are detailed below:61Table of Contents Evaluable Number of Patientsas of December 2017 (At Least Three MonthsPost Treatment) *Percent with Durable CultureConversion Three MonthsAfter Completionof All TreatmentConverters in the ALIS + GBT arm (n=65)4660.9% (28/46)Converters in the GBT‑only arm (n=10)70.0% (0/7)* Evaluable number of patients includes all patients who reached three months post-treatment and all patients who discontinued prior to three months post-treatment.312 Study All non-converters in the CONVERT study, as determined at the month eight visit, may be eligible to enter the 312 study, which is a separate 12-month, single-arm, open-label study. The purpose of the 312 study is to evaluate the safety and tolerability of longer-term treatment with ALIS added to GBT.The secondary endpoints of the 312 study include evaluating the proportion of patients achieving culture conversion (three consecutive monthly negativesputum cultures) by month six and the proportion of patients achieving culture conversion by month 12 (end of treatment).312 Study Interim Efficacy DataWe recently announced interim data for the 312 study, which enrolled 163 adult patients with NTM lung disease caused by MAC who completedsix months of treatment in the CONVERT study, but did not demonstrate culture conversion by Month 6. The following data are interim results observedthrough December 2017, and have not been further analyzed. Patients in the ALIS plus GBT arm of the CONVERT study and patients in the GBT-only arm ofthe CONVERT study who did not achieve culture conversion by Month 6 had the option to enroll in the 312 study at Month 8. Under the study protocol,patients from both arms of the CONVERT study will receive 12 months of ALIS plus GBT in the 312 study. We will also use the data from this trial to furtherassess the impact of the addition of ALIS to background GBT on sputum culture conversion, by Month 6.As of December 2017, of the 163 patients enrolled in the 312 study, 124 patients were evaluable for culture conversion. Descriptive interim cultureconversion data as of December 2017 for these 124 patients are detailed below. The interim culture conversion data has not been statistically analyzed. Number of Patients Completing Six Months ofTreatment in the 312 study as of December2017 **Percent Achieving SputumCulture Conversion byMonth 6 in the 312 studyPatients who received GBT only in the 212 study and crossedover to receive six months of treatment with ALIS + GBT(n=90)6728.4% (19/67)Patients who received ALIS + GBT in the 212 study andcrossed over to continue treatment in the 312 study, to receivea combined total of 14 months of ALIS + GBT treatment inboth studies (n=73)5712.3% (7/57)** Includes all patients completing six months of treatment, all patients who discontinued prior to six months and for all ongoing patients prior to six months who completed twomonths of treatment.312 Study Interim Safety and Tolerability DataWe have not yet performed a final analysis of any safety data for the 312 study. However, based on an interim review of data available from the 312study, we believe that STEAEs were similar to the STEAEs we reported in September 2017 as part of our top-line data results for the 212 study. As ofDecember 2017, the overall dropout rate in the 312 study was 24% (n=39/163).62Table of ContentsFurther Research and Lifecycle Management for ALIS We are currently exploring and supporting research and lifecycle management programs for ALIS beyond refractory NTM lung infections caused byMAC. Specifically, we are evaluating future study designs focusing on the MAC disease treatment pathway, including front-line treatment and monotherapymaintenance to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease. In addition, we are evaluating non-MAC NTM species, suchas M. abscessus. If the data from the CONVERT study are sufficient to support our MAAs and regulatory bodies approve ALIS, such lifecycle managementstudies could enable us to reach more potential patients. These initiatives may include new clinical studies sponsored by us or investigator-initiated studies,which are clinical studies initiated and sponsored by physicians or research institutions with funding from us. INS1007INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we in-licensed from AstraZeneca in October 2016. DPP1 is an enzymeresponsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type ofwhite blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the neutrophil serine proteases,neutrophil elastase, proteinase 3, and cathepsin G, that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases,neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 maydecrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases.Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection.Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis. The WILLOW Study The WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess theefficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. Wecommenced enrollment in the WILLOW study in December 2017. In addition, we are exploring the potential of INS1007 in various neutrophil-driveninflammatory conditions. INS1009INS1009 is an investigational sustained-release inhaled treprostinil prodrug nanoparticle formulation that has the potential to address certain of thecurrent limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greaterconsistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for thetreatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may beassociated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial druglevels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile forrare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaleddry powder formulation.Other Development ActivitiesOur earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, includingmethicillin-resistant staph aureus (MRSA) and NTM. To complement our internal research and development, we actively evaluate in-licensing andacquisition opportunities for a broad range of rare diseases.KEY COMPONENTS OF OUR RESULTS OF OPERATIONSResearch and Development (R&D) ExpensesR&D expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research anddevelopment functions, including medical affairs. Expenses also include other internal operating expenses, the cost of manufacturing our drugcandidate(s) for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, our R&Dexpenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as for INS1007. Our expensesrelated to63Table of Contentsmanufacturing our drug candidate(s) for clinical study are primarily related to activities at CMOs that manufacture our product candidates for our use,including purchases of active pharmaceutical ingredients. Our expenses related to clinical trials are primarily related to activities at contract researchorganizations that conduct and manage clinical trials on our behalf.Since 2011, we have focused our development activities principally on our proprietary, advanced liposomal technology designed specifically forinhalation lung delivery. In 2015, we commenced the CONVERT study for ALIS for adult patients with treatment refractory NTM lung disease. In 2015, wealso completed an open-label extension study in which CF patients that completed our phase 3 trial received ALIS for a period of two years. The majority ofour research and development expenses have been for our ALIS development programs. Our development efforts in 2017 and 2016 principally related to thedevelopment of ALIS in the NTM lung disease indication described above.General and Administrative ExpensesGeneral and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our non-employee directors and 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 services, including feesincurred in connection with the securities litigation filed against us and patent-related expenses, consulting services including for pre-commercial planningactivities such as non-branded disease awareness, insurance, board of director fees, tax and accounting services.Investment Income and Interest ExpenseInvestment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense consists primarily of interestcosts and amortization of debt issuance costs related to our debt obligations. Debt issuance costs are amortized to interest expense using the effective interestrate method over the term of the debt. Our balance sheet reflects debt, net of debt issuance costs paid to the lender and other third party costs. Unamortizeddebt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.RESULTS OF OPERATIONSComparison of the Years Ended December 31, 2017 and 2016Net LossNet loss for the year ended December 31, 2017 was $192.6 million, or $2.89 per common share—basic and diluted, compared with a net loss of$176.3 million, or $2.85 per common share—basic and diluted, for the year ended December 31, 2016. The $16.4 million increase in our net loss for the yearended December 31, 2017 as compared to the same period in 2016 was due to:•Decreased R&D expenses of $13.0 million primarily resulting from the $30.0 million upfront payment for the license agreement entered into withAstraZeneca for exclusive global rights to INS1007 in October 2016, offset in part by, an increase in expenses related to the WILLOW study andhigher compensation and related expenses due to an increase in headcount; and•Increased general and administrative expenses of $28.5 million resulting from an increase in pre-commercial planning activities, including externalconsulting expenses, and higher compensation and related expenses due to an increase in headcount.In addition, there was a $2.4 million increase in interest expense resulting from the increase in our debt in the second half of 2016.R&D ExpensesR&D expenses for the years ended December 31, 2017 and 2016 were comprised of the following (in thousands):64Table of Contents Years Ended December 31, Increase (decrease) 2017 2016 $ %External Expenses Clinical development and research $40,511 $35,890 $4,621 12.9%INS1007 license payment — 30,000 (30,000) (100.0)%Manufacturing 19,808 17,313 2,495 14.4%Regulatory, quality assurance, and medical affairs 7,308 4,064 3,244 79.8%Subtotal—external expenses $67,627 $87,267 $(19,640) (22.5)%Internal Expenses Compensation and related expenses $34,180 $28,513 $5,667 19.9%Other internal operating expenses 7,942 6,941 1,001 14.4%Subtotal—internal expenses $42,122 $35,454 $6,668 18.8%Total $109,749 $122,721 $(12,972) (10.6)%R&D expenses decreased to $109.7 million during the year ended December 31, 2017 from $122.7 million in the same period in 2016. The $13.0million decrease was due to a $30.0 million upfront payment under the AZ License Agreement related to INS1007 in October 2016 and a $3.7 milliondecrease in expenses relating to INS1009. These decreases were partially offset by a $10.2 million increase in raw materials purchases and expenses related tothe WILLOW trial for INS1007 and a $5.7 million increase in compensation and related expenses, including stock-based compensation, due to an increase inheadcount. There was also an increase of $3.2 million due to increased regulatory, quality assurance and medical affairs consulting expenses and medicalgrants.General and Administrative ExpensesGeneral and administrative expenses for the year ended December 31, 2017 and 2016 were comprised of the following (in thousands): Years Ended December 31, Increase (decrease) 2017 2016 $ %General & administrative $46,249 $35,291 $10,958 31.1%Pre-commercial expenses 32,922 15,388 17,534 113.9%Total general & administrative expenses $79,171 $50,679 $28,492 56.2%General and administrative expenses increased to $79.2 million during the year ended December 31, 2017 from $50.7 million in the same period in2016. The $28.5 million increase was primarily due to an increase of $12.8 million in consulting fees relating to pre-commercial planning activities, anincrease of $7.7 million due to higher compensation costs related to an increase in headcount, and a one-time payment in October 2017 related to the buy-down of future royalties payable to PARI on the global net sales of ALIS, if approved.Interest ExpenseInterest expense was $5.9 million during the year ended December 31, 2017 as compared to $3.5 million in the same period in 2016. The $2.4million increase in interest expense in 2017 relates primarily to an increase in our borrowings from Hercules in September and October of 2016. We enteredinto an Amended and Restated Loan Agreement (A&R Loan Agreement) with Hercules which increased our borrowing capacity by an additional$30.0 million to an aggregate total of $55.0 million. The increase in borrowings under the A&R Loan Agreement was used to fund the upfront payment owedunder the AZ License Agreement for the exclusive global rights to INS1007.Income tax (benefit) provisionThe income tax (benefit) provision was $(0.3) million and $0.1 million for the years ended December 31, 2017 and 2016, respectively. The incometax (benefit) for the year ended December 31, 2017 reflects the reversal of the valuation allowance related to alternative minimum tax (AMT) that we paid in2009. As a result of the Tax Act, we recorded a noncurrent receivable to reflect the tax amount due to us in future periods relating to a refund due for the priorAMT paid. In addition, the income tax (benefit) provision for the years ended December 31, 2017 and 2016 reflects current income tax expense recorded as aresult of taxable income in certain of our subsidiaries in Europe.65Table of ContentsOn December 22, 2017 the Tax Act was signed into law. The Tax Act introduced significant changes to the Code. The Tax Act, among other things,contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%,limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for netoperating losses to 80% of current year taxable income in respect of losses arising in taxable years beginning after 2017 and elimination of net operating losscarrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain newinvestments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducingthe business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as“orphan drugs”). Our federal net operating loss carryovers for taxable years beginning after 2017 will be carried forward indefinitely pursuant to the Tax Act.Notwithstanding the reduction in the federal corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financialcondition could be adversely affected. The Tax Act did not have a material impact on our financial statements because our deferred temporary differences arefully offset by a valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax. However, giventhe significant complexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additionalguidance from the SEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. We continue to examine theimpact the Tax Act may have on our business.Comparison of the Years Ended December 31, 2016 and 2015Net LossNet loss for the year ended December 31, 2016 was $176.3 million, or $2.85 per common share—basic and diluted, compared with a net loss of$118.2 million, or $2.02 per common share—basic and diluted, for the year ended December 31, 2015. The $58.1 million increase in our net loss for the yearended December 31, 2016 as compared to the same period in 2015 was due to:•Increased R&D expenses of $48.4 million primarily resulting from a $30.0 million upfront payment for the license agreement entered into withAstraZeneca for exclusive global rights to INS1007 in October 2016 (AZ License Agreement), an increase in clinical trial expenses related to theCONVERT study and higher compensation and related expenses due to an increase in headcount; and•Increased general and administrative expenses of $7.5 million resulting from an increase in pre-commercial planning activities, legal and consultingexpenses and higher compensation and related expenses, including an increase in noncash stock-based compensation, related to an increase inheadcount.In addition, there was a $2.1 million decrease in the income tax benefit resulting from the sale of a portion of our New Jersey State net operatinglosses (NOLs) under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the Program) for cash of $2.0 million in 2015.R&D ExpensesR&D expenses for the years ended December 31, 2016 and 2015 were comprised of the following: Years Ended December 31, Increase (decrease) 2016 2015 $ % External Expenses Clinical development and research $35,890 $24,972 $10,918 43.7 % INS1007 license payment 30,000 — 30,000 nm Manufacturing 17,313 22,121 (4,808) (21.7)% Regulatory, quality assurance, and medical affairs 4,064 4,173 (109) (2.6)% Subtotal—external expenses $87,267 $51,266 $36,001 70.2 % Internal Expenses Compensation and related expenses $28,513 $18,666 $9,847 52.8 % Other internal operating expenses 6,941 4,345 2,596 59.7 % Subtotal—internal expenses $35,454 $23,011 $12,443 54.1 % Total $122,721 $74,277 $48,444 65.2 % 66Table of ContentsR&D expenses increased to $122.7 million during the year ended December 31, 2016 from $74.3 million in the same period in 2015. The$48.4 million increase was due to a $30.0 million upfront payment under the AZ License Agreement related to INS1007 in October 2016, a $10.9 millionincrease in external clinical development expenses primarily related to the CONVERT study and a $9.8 million increase in compensation and relatedexpenses, including stock-based compensation, due to an increase in headcount. These increases were partially offset by a $4.8 million decrease inmanufacturing expenses primarily due to the completion of the build-out of our production area at Therapure's facility in 2015.General and Administrative ExpensesGeneral and administrative expenses for the year ended December 31, 2016 and 2015 were comprised of the following (in thousands): Years Ended December 31, Increase (decrease) 2016 2015 $ % General & administrative $35,291 $30,614 $4,677 15.3% Pre-commercial expenses 15,388 12,602 2,786 22.1% Total general & administrative expenses $50,679 $43,216 $7,463 17.3% General and administrative expenses increased to $50.7 million during the year ended December 31, 2016 from $43.2 million in the same period in2015. The $7.5 million increase was primarily due to an increase of $3.7 million in consulting fees relating to pre-commercial planning activities, legal andconsulting expenses and an increase of $3.7 million due to higher compensation costs, including stock-based compensation, related to an increase inheadcount.Interest ExpenseInterest expense was $3.5 million during the year ended December 31, 2016 as compared to $2.9 million in the same period in 2015. The$0.6 million increase in interest expense in 2016 relates primarily to an increase in our borrowings from Hercules in September and October of 2016. Weentered into an Amended and Restated Loan Agreement (A&R Loan Agreement) with Hercules which increased our borrowing capacity by an additional$30.0 million to an aggregate total of $55.0 million. The increase in borrowings under the A&R Loan Agreement was used to fund the upfront payment owedunder the AZ License Agreement for the exclusive global rights to INS1007.Income tax (benefit) provisionThe income tax (benefit) provision was $0.1 million and $(2.0) million for the years ended December 31, 2016 and 2015, respectively. The incometax provision for the year ended December 31, 2016 reflects current income tax expense recorded as a result of taxable income in certain our subsidiaries inEurope. The income tax benefit recorded for the year ended December 31, 2015 primarily reflects the reversal of a valuation allowance previously recordedagainst our New Jersey State NOLs that resulted from the sale of a portion of our New Jersey State NOLs under the Program for cash of $2.0 million, net ofcommissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined researchand development tax credits for cash. In 2015, we reached the lifetime maximum cap of NOLs that can be sold to the State of New Jersey. Therefore, wereceived no cash proceeds from the Program in 2016 and will not receive cash proceeds from the Program in the future.LIQUIDITY AND CAPITAL RESOURCESOverviewThere is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point of regulatory approval andcommercialization. In recent years, we have funded our operations through public offerings of equity securities and debt financings. We expect to continue toincur losses both in our US and certain international entities, as we plan to fund research and development activities and commercial launch activities.We may need to raise additional capital to fund our operations, to develop and commercialize ALIS if approved, to develop INS1007 and INS1009,and to develop, acquire, in-license or co-promote other products that address orphan or rare diseases. We believe we currently have sufficient funds to meetour financial needs for at least the next 12 months. We may opportunistically raise additional capital and may do so through equity or debt financing(s),strategic transactions or otherwise. We expect such additional funding, if any, would be used to continue to develop our potential product candidates, topursue the67Table of Contentslicense or purchase of other technologies, to commercialize our product candidates or to purchase other products. During 2018, we plan to continue to fundfurther clinical development of ALIS and INS1007, support efforts to obtain regulatory approvals, and prepare for commercialization of ALIS. Our cashrequirements in 2018 will be impacted by a number of factors, the most significant of which are expenses related to the CONVERT and 312 studies and pre-commercialization efforts for ALIS, and to a lesser extent, expenses related to INS1007 and future ALIS clinical trials. We expect our operating expenses in2018 to increase significantly as compared to 2017.In January 2018, we completed an underwritten public offering of 1.75% convertible senior notes due 2025. We sold $450.0 million aggregateprincipal amount of the Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. Our netproceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were $435.8 million. In September 2017, we completed an underwritten public offering of 14,123,150 shares of our common stock, which included the underwriter’sexercise in full of its over-allotment option of 1,842,150 shares, at a price to the public of $28.50 per share. Our net proceeds from the sale of the shares, afterdeducting underwriting discounts and offering expenses of $24.8 million, were $377.7 million.In April 2015, we completed an underwritten public offering of 11,500,000 shares of our common stock, which included the underwriter's exercisein full of its over-allotment option of 1,500,000 shares, at a price to the public of $20.65 per share. Our net proceeds from the sale of the shares, afterdeducting underwriting discounts and offering expenses of $14.5 million, were $222.9 million.Cash FlowsAs of December 31, 2017, we had total cash and cash equivalents of $381.2 million, as compared with $162.6 million as of December 31, 2016.The $218.6 million increase was due to the cash provided by financing activities in excess of our operating activities. Our working capital was $344.8million as of December 31, 2017 as compared with $140.4 million as of December 31, 2016.Net cash used in operating activities was $159.6 million and $146.7 million for the years ended December 31, 2017 and 2016, respectively. Thenet cash used in operating activities during 2017 and 2016 was primarily for the clinical, regulatory, manufacturing and pre-commercial activities related toALIS, including in 2017 the exercise of an option to buy-down the future royalties payable to PARI. In 2017, there were increases in raw materials purchasesand expenses related to the WILLOW study for INS1007. In addition, in the fourth quarter of 2016, we made a payment of $30.0 million to AstraZeneca underthe AZ License Agreement for INS1007.Net cash used in investing activities was $3.0 million and $4.2 million for the years ended December 31, 2017 and 2016, respectively. The net cashused in investing activities during 2017 was primarily related to the investment in our long-term production capacity build-out at Patheon and for the buildout of our lab facility in Bridgewater, New Jersey. Net cash used in investing activities during 2016 was primarily related to payments for the build out of ourheadquarters and lab facility in Bridgewater, New Jersey.Net cash provided by financing activities was $381.1 million and $30.7 million for the years ended December 31, 2017 and 2016, respectively. Netcash provided by financing activities during 2017 included net cash proceeds of $377.7 million from our issuance of 14.1 million shares of common stock inSeptember 2017 and cash proceeds received from stock option exercises. Net cash provided by financing activities for the year ended December 31, 2016 wasprimarily net cash proceeds from the issuance of debt.Contractual ObligationsOn June 29, 2012, we and our domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement with Hercules TechnologyGrowth Capital, Inc. (as subsequently amended, the Prior Loan Agreement) under which we borrowed an aggregate of $25.0 million at an interest rate of9.25%. We paid an "end of term" charge of $390,000 in January 2016, which was charged to interest expense (and accreted to the debt) using the effectiveinterest method over the life of the Prior Loan Agreement.On September 30, 2016, we and our domestic subsidiaries, as co-borrowers, entered into the A&R Loan Agreement with Hercules. The A&R LoanAgreement included a total commitment from Hercules of up to $55.0 million, of which $25.0 million was previously outstanding. The amount of borrowingswas 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 ouroption through June 30, 2017 subject to certain conditions, including the payment of a facility fee of 0.375%. We exercised this option in early October2016 and borrowed an additional $20.0 million in connection with the upfront payment obligation under the AZ License Agreement.68Table of ContentsThe 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 abackend fee of 4.15% of the aggregate principal amount outstanding and an aggregate facility fee of $337,500. The interest-only period extends throughNovember 1, 2018, but can be extended up to six months under certain conditions. The maturity date of the loan facility was also extended to October 1,2020. In connection with the Company generating and announcing top-line data from the CONVERT study on September 5, 2017 that supports the filing ofan NDA, along with the completion of the equity financing, the interest-only period was automatically extended through May 1, 2019 and the requirement tohave a consolidated minimum cash liquidity in an amount no less than $25.0 million was eliminated.In connection with the A&R Loan Agreement, we granted Hercules a first position lien on all of our 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 principalbalance 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 the lender were recorded as a discount on the debt and are being amortized to interest expense using the effective interest methodover the life of the A&R Loan Agreement. In February 2018, we notified Hercules that we will repay the A&R Loan Agreement in full on February 28, 2018.The total aggregate cash payable to Hercules for the early prepayment of debt, inclusive of accrued interest, the backend fee and an early payment penaltywill be approximately $58.0 million.We have an operating lease for office and laboratory space located in Bridgewater, NJ, our corporate headquarters, for which the initial lease termexpires in November 2019. Future minimum rental payments under this lease total approximately $2.0 million. In July 2016, we signed an operating lease foradditional laboratory space located in Bridgewater, NJ for which the initial lease term expires in September 2021. Future minimum rental payments under thislease are $1.9 million.In September 2015, we entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement) with Althea, for Althea to produce,on a non-exclusive basis, ALIS in finished dosage form at a 50 kg scale. Under the Fill/Finish Agreement, we are obligated to pay a minimum of $2.7 millionfor the batches of ALIS produced each calendar year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement was effective as of January 1,2015, and had an initial term that was to end on December 31, 2017. In 2016, we signed an extension of the agreement through December 31, 2019 and itmay be extended for additional two-year periods upon mutual written agreement of the Company and Althea at least one year prior to the expiration of itsthen-current term.As of December 31, 2017, future payments under our long-term debt agreements, minimum future payments under non-cancellable operating leasesand minimum future payment obligations are as follows: As of December 31, 2017Payments Due By Period Total Less than1 year 1 - 3 Years 3 - 5 Years More than 5Years (in thousands)Debt obligations Debt maturities $55,000 $— $55,000 $— $—Contractual interest 14,871 5,158 9,713 — —Operating leases 3,917 1,521 1,898 498 —Purchase obligations 5,400 2,700 2,700 — —Total contractual obligations $79,188 $9,379 $69,311 $498 $—This table does not include: (a) any milestone payments which may become payable to third parties under our license and collaborationagreements as the timing and likelihood of such payments are not known; (b) any royalty payments to third parties as the amounts of such payments, timingand/or the likelihood of such payments are not known; (c) contracts that are entered into in the ordinary course of business which are not material in theaggregate in any period presented above; (d) the January 2018 underwritten public offering of 1.75% convertible senior notes due 2025 in the aggregateprincipal amount of $450.0 million; or (e) any payments related to the agreements mentioned below.We currently have a licensing agreement with PARI for the use of the optimized eFlow Nebulizer System for delivery of ALIS in treating patientswith NTM lung infections, CF and bronchiectasis. Under the licensing agreement, we have rights under several US and foreign issued patents, and patentapplications involving improvements to the optimized eFlow Nebulizer System, to exploit such system with ALIS for the treatment of such indications, butwe cannot manufacture such69Table of Contentsnebulizers except as permitted under our Commercialization Agreement with PARI. Under the licensing agreement, we paid PARI an upfront license fee andPARI is entitled to receive milestone payments up to an aggregate of €4.3 million either in cash, qualified stock or a combination of both, at PARI'sdiscretion, based on achievement of certain future milestone events including, first acceptance of MAA submission (or equivalent) in the US of ALIS and thedevice, first receipt of marketing approval in the US for ALIS and the device, and first receipt of marketing approval in a major EU country for ALIS and thedevice. In addition, PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ALIS pursuant to the licensingagreement, subject to certain specified annual minimum royalties. In October 2017, we exercised an option to buy-down the future royalties that will bepayable to PARI. The payment to PARI was included as a component of general and administrative expenses in the fourth quarter of 2017.In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of eFlow nebulizer systems and relatedaccessories (the Device) as optimized for use with ALIS. Under the Commercialization Agreement, PARI manufactures the Device except in the case of certaindefined supply failures, when the Company will have the right to make the Device and have it made by third parties (but not certain third parties deemedunder the Commercialization Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years from the first commercialsale of ALIS pursuant to the licensing agreement (the Initial Term). The term of the Commercialization Agreement may be extended by us for an additionalfive years by providing written notice to PARI at least one year prior to the expiration of the Initial Term.In October 2017, we entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercialinventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under these agreements, we arerequired to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufactureALIS. Patheon's supply obligations will commence once certain technology transfer and construction services are completed. Our manufacturing and supplyagreement with Patheon will remain in effect for a fixed initial term, after which it will continue for successive renewal terms unless either we or Patheon havegiven written notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services have beencompleted. The agreements may also be terminated under certain other circumstances, including by either party due to a material uncured breach of the otherparty or the other party’s insolvency. These early termination clauses may reduce the amounts due to the relevant parties. The investment in our long-termproduction capacity build-out, including under the Patheon agreements and related agreements or purchase orders with third parties for raw materials andfixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.In October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive global rights for the purpose ofdeveloping and commercializing AZD7986 (which we renamed INS1007). In consideration of the licenses and other rights granted by AstraZeneca, we madean upfront payment of $30.0 million, which was included as research and development expense in the fourth quarter of 2016. We are obligated to make aseries of contingent milestone payments to AstraZeneca totaling up to an additional $85.0 million upon the achievement of clinical development andregulatory filing milestones. If we elect to develop INS1007 for a second indication, we will be obligated to make an additional series of contingentmilestone payments totaling up to $42.5 million. We are not obligated to make any additional milestone payments for any additional indications. Inaddition, we have agreed to pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teen on net sales of any approved product based onINS1007 and one additional payment of $35.0 million upon the first achievement of $1 billion in annual net sales. The AZ License Agreement providesAstraZeneca with the option to negotiate a future agreement with us for commercialization of INS1007 in chronic obstructive pulmonary disease or asthma.In December 2014, we entered into a services agreement with SynteractHCR, Inc. (Synteract) pursuant to which we retained Synteract to performimplementation and management services in connection with the 212 study. We anticipate that aggregate costs relating to all work orders for the 212 studywill be approximately $45 million over the period of the study. In April 2015, we entered into a work order with Synteract to perform implementation andmanagement services for the 312 study. We anticipate that aggregate costs relating to all work orders for the 312 study will be approximately $25 millionover the period of the study.In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of ALIS at a 200 kg scale. Pursuant tothe agreement, we collaborated with Therapure to construct a production area for the manufacture of ALIS in Therapure's existing manufacturing facility inCanada. Therapure manufactures ALIS for us on a non-exclusive basis. The agreement has an initial term of five years from the first date on which Therapuredelivers ALIS to us after we obtain permits related to the manufacture of ALIS, and will renew automatically for successive periods of two years each, unlessterminated by either party by providing the required two years' prior written notice to the other party. Under the agreement, we are obligated to pay certainminimum amounts for the batches of ALIS produced each calendar year.70Table of ContentsIn 2004 and 2009, we entered into research funding agreements with Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT) whereby we received$1.7 million and $2.2 million for each respective agreement in research funding for the development of ALIS. If ALIS becomes an approved product forpatients with CF in the US, we will owe a payment to CFFT of up to $13.4 million that is payable over a three-year period after approval as a commercializeddrug in the US. Furthermore, if certain global sales milestones are met within five years of the drug's commercialization, we would owe an additional paymentof $3.9 million. Since there is significant development and regulatory risk associated with ALIS, including with respect to the CF indication, we have notaccrued these obligations.Future Funding RequirementsTo date, we have not generated material revenue from ALIS, and we do not know when, or if, we will generate such revenue. We do not expect togenerate such revenue unless or until we obtain marketing approval of, secure reimbursement for, and commercialize, ALIS. We may need to raise additionalcapital to fund our operations, to develop and commercialize ALIS, to develop INS1007 and INS1009, and to develop, acquire, in-license or co-promoteother products that address orphan or rare diseases. Our future capital requirements may be substantial and will depend on many factors, including:•the timing and cost of our anticipated clinical trials of ALIS for the treatment of patients with NTM lung infections;•the decisions of the FDA, MHLW, PMDA and EMA with respect to our applications for marketing approval of ALIS in the US, Japan and Europe; thecosts of activities related to the regulatory approval process; and the timing of approvals, if received;•the cost of putting in place the sales and marketing capabilities necessary to be prepared for a potential commercial launch of ALIS, if approved;•the cost of filing, prosecuting, defending, and enforcing patent claims;•the timing and cost of our anticipated clinical trials, including INS1007 and the related milestone payments due to AstraZeneca;•the costs of our manufacturing-related activities;•the costs associated with commercializing ALIS, if we receive marketing approval; and•subject to receipt of marketing approval, the levels, timing and collection of revenue received from sales of approved products, if any, in the future.In April 2015, we generated net proceeds of $222.9 million from the issuance of 11.5 million shares of common stock. In September 2017, wecompleted an underwritten public offering of 14,123,150 shares of our common stock, which included the underwriter’s exercise in full of its over-allotmentoption of 1,842,150 shares, at a price to the public of $28.50 per share. Our net proceeds from the sale of the shares, after deducting the underwriter’sdiscount and offering expenses of $24.8 million, were $377.7 million. In January 2018, we completed an underwritten public offering of 1.75% convertiblesenior notes due 2025. We sold $450.0 million aggregate principal amount of the Convertible Notes, including the exercise in full of the underwriters' optionto purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offeringexpenses of $14.2 million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July15 of each year, beginning on July 15, 2018. We believe that we have sufficient capital resources to support scheduled interest payments on this debt. OnSeptember 30, 2016, the total committed amount under the A&R Loan Agreement with Hercules was increased to $55.0 million, $25.0 million of which waspreviously outstanding. During the fourth quarter of 2016, we drew down the remaining commitment. In February 2018, we notified Hercules that we willrepay the A&R Loan Agreement in full on February 28, 2018. We believe we currently have sufficient funds to meet our financial needs for at least the next12 months. However, our business strategy may require us to raise additional capital at any time through equity or debt financing(s), strategic transactions orotherwise.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or futurematerial effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have anyinterest in special purpose entities, structured finance entities or other variable interest entities.CRITICAL ACCOUNTING POLICIESPreparation of financial statements in accordance with generally accepted accounting principles in the US requires us to make estimates andassumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use ourhistorical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions.The amounts of assets and liabilities reported in our consolidated balance sheets and the amounts of revenue reported in our consolidated statements of71Table of Contentscomprehensive loss are affected by estimates and assumptions, which are used for, but not limited to, the accounting for research and development, stock-based compensation, identifiable intangible assets, and accrued expenses. The accounting policies discussed below are considered critical to anunderstanding of our consolidated financial statements because their application places the most significant demands on our judgment. Actual results coulddiffer from our estimates. For additional accounting policies, see Note 2 to our Consolidated Financial Statements—Summary of Significant AccountingPolicies.Research and DevelopmentResearch and development expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, forpersonnel serving our research and development functions, and other internal operating expenses, the cost of manufacturing our drug candidate for clinicalstudy, including the medical devices for drug delivery, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities.In addition, research and development expenses include payments to third parties for the license rights to products in development (prior to marketingapproval). Our expenses related to manufacturing our drug candidate and medical devices for clinical study are primarily related to activities at CMOs thatmanufacture ALIS, and to a lesser extent, our other clinical product requirements. Our expenses related to clinical trials are primarily related to activities atCROs 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 patientenrolled. Payments under these contracts depend on performance criteria such as the successful enrollment of patients or the completion of clinical trialmilestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity accordingto the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for future research and developmentactivities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, orwhen the goods or services are no longer expected to be provided.Stock-Based CompensationWe recognize stock-based compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value ofthose awards. The grant-date fair value of the award is recognized as compensation expense ratably over the requisite service period, which generally equalsthe vesting period of the award, and if applicable, is adjusted for expected forfeitures. We also grant performance-based stock options to employees. Thegrant-date fair value of the performance-based stock options is recognized as compensation expense over the implicit service period using the acceleratedattribution method once it is probable that the performance condition will be achieved. Stock-based compensation expense is included in both research anddevelopment expenses and general and administrative expenses in the Consolidated Statements of Comprehensive Loss.The following table summarizes the assumptions used in determining the fair value of stock options granted during the years ended December 31,2017, 2016 and 2015: 2017 2016 2015Volatility 71% - 79% 74% - 77% 78% - 82%Risk-free interest rate 1.73% - 2.13% 1.00% - 1.90% 1.31% - 1.75%Dividend yield 0.0% 0.0% 0.0%Expected option term (in years) 6.25 6.25 6.25For the years ended December 31, 2017, 2016 and 2015, the volatility factor was based on our historical volatility during the expected term orsince the closing of our merger with Transave, Inc. in December 2010. The risk-free interest rate is based on the US Treasury yield in effect at the date of grant.Estimated forfeitures were based on the actual percentage of option forfeitures since the closing of the Company’s merger with Transave, Inc. inDecember 2010 for the years ended December 31, 2016 and 2015. Beginning with the year ended December 31, 2017, estimated forfeitures were based on theactual percentage of option forfeitures over the expected option term.Identifiable Intangible AssetsIdentifiable intangible assets are measured at their respective fair values and are not amortized until commercialization. Once commercializationoccurs, these intangible assets will be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on reasonableestimates and assumptions given available facts and circumstances. Unanticipated events or circumstances may occur that may require us to review the assetsfor impairment. Events or circumstances that may require an impairment assessment include negative clinical trial results, the non-approval of a new drugapplication by a regulatory agency, material delays in our development program or a sustained decline in market capitalization.72Table of ContentsIndefinite-lived intangible assets are not subject to periodic amortization. Rather, indefinite-lived intangibles are reviewed for impairment byapplying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred. Events orcircumstances that may require an interim impairment assessment are consistent with those described above. We perform our annual impairment test as ofOctober 1 of each year.We use the income approach to derive the fair value of in-process research and development assets. This approach calculates fair value byestimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. A marketbased valuation approach was not considered given a lack of revenues and profits by us. This approach requires significant management judgment withrespect to unobservable inputs such as future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and otherassumptions and estimates. The estimates and assumptions used are consistent with our business plans.Accrued ExpensesWe are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level ofservice performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examplesof areas in which subjective judgments may be required include costs associated with services provided by contract organizations for preclinicaldevelopment, clinical trials and manufacturing of clinical materials. We accrue for expenses associated with these external services by determining the totalcost of a given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of thetrials and the invoices received from our external service providers. In the case of clinical trials, the estimated cost normally relates to the projected costs ofhaving subjects enrolled in our trials, which we recognize over the estimated term of the trial according to the number of subjects enrolled in the trial on anongoing basis, beginning with subject enrollment. As actual costs become known to us, we adjust our accruals. To date, the number of clinical trials andrelated research service agreements has been relatively limited and our estimates have not differed significantly from the actual costs incurred.New Accounting Pronouncements—AdoptedIn August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation ofFinancial Statements—Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires managementto evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, provide certain footnote disclosures. ThisASU was effective for the annual period ended December 31, 2016, and interim reporting periods thereafter. The adoption of this standard did not have animpact on our consolidated financial statements and related footnote disclosures.In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which updated andsimplified the presentation of deferred income taxes. Current generally accepted accounting principles require an entity to separate deferred income taxliabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred incometaxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods withinthose annual periods. Earlier application was permitted and we adopted the update effective with our annual reporting period ended December 31, 2015. Theadoption of this update did not have a significant impact on our consolidated financial statements.In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting, which amends Accounting StandardsCodification (ASC) Topic 718, Compensation—Stock Compensation. ASU 2016-9 simplifies several aspects of the accounting for share-based paymenttransactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.ASU 2016-9 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU2016-9 in the first quarter of 2017. The impact of the adoption was not material to the consolidated financial statements.Recent Accounting Pronouncements—Not Yet AdoptedIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accountingstandards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers,in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date forannual reporting periods beginning73Table of Contentsafter December 15, 2017. We will adopt ASU 2014-09 in the first quarter of 2018 and the impact of adoption will not be material to our consolidatedfinancial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations byrecognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requiresthat a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying assetfor the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within thoseperiods) using a modified retrospective approach and early adoption is permitted. We expect to adopt ASU 2016-02 in the first quarter of 2019 and are in theprocess of evaluating the impact of adoption on our consolidated financial statements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAs of December 31, 2017, our cash and cash equivalents were in cash accounts or were invested in money funds. Such accounts or investments arenot insured by the federal government.As of December 31, 2017, we had $55.0 million of fixed rate borrowings bearing interest at 9.25% outstanding under the A&R Loan Agreementwith Hercules. If a 10% change in interest rates was to have occurred on December 31, 2017, this change would not have had a material effect on the fairvalue of our debt as of that date, nor would it have had a material effect on our future earnings or cash flows.The majority of our business is conducted in US dollars. However, we do conduct certain transactions in other currencies, including Euros, BritishPounds and Japanese Yen. Fluctuations in foreign currency exchange rates do not materially affect our results of operations. During 2017, 2016 and 2015,our results of operations were not materially affected by fluctuations in foreign currency exchange rates.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by Item 8 is included in our Financial Statements and Supplementary Data listed in Item 15 of Part IV of this 2017Annual Report.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of ourdisclosure controls and procedures as of December 31, 2017. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d- 15(e)under the Exchange Act, means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed byus in the periodic reports that we file or submit with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC'srules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, as of December 31, 2017, our ChiefExecutive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.Management's Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act , as a process designed by, or under the supervision of, our principal executiveand principal financial and accounting officers and effected by our board of directors and management to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that:74Table of Contents•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with USgenerally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizationsof our management and board of directors; and•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluationof effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as ofDecember 31, 2017, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is areasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.Based on management's assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31,2017.Ernst & Young LLP, our independent registered public accounting firm, issued an attestation report on our internal control over financialreporting. The report of Ernst & Young LLP is contained in Item 15 of Part IV of this Annual Report on Form 10-K.ITEM 9B. OTHER INFORMATIONNone75Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Electionof Directors, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement for our 2018 annualmeeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captionsCompensation Discussion and Analysis, Compensation Committee Report, Compensation Committee Interlocks and Insider Participation and DirectorCompensation in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close ofthe fiscal year covered by this Annual Report.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captionsCompensation Discussion and Analysis, Security Ownership of Certain Beneficial Owners, Directors and Management in our definitive proxy statement forour 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information required by Item 13 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Electionof Class II Directors and Certain Relationships and Related Transactions in our definitive proxy statement for our 2018 annual meeting of shareholders tobe filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 of Form 10-K is incorporated by reference from the discussion responsive thereto under the caption CorporateGovernance and Ratification of Independent Registered Public Accounting Firm in our definitive proxy statement for our 2018 annual meeting ofshareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.76Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)Documents filed as part of this report.1. FINANCIAL STATEMENTS. The following consolidated financial statements of the Company are set forth herein, beginning on page 84:(i)Reports of Independent Registered Public Accounting Firm(ii)Consolidated Balance Sheets as of December 31, 2017 and 2016(iii)Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2017, 2016 and 2015(iv)Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2017, 2016 and 2015(v)Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015(vi)Notes to Consolidated Financial Statements2. FINANCIAL STATEMENT SCHEDULES.None required.3. EXHIBITS.The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.EXHIBIT INDEX2.1 Agreement and Plan of Merger, dated December 1, 2010, among Insmed Incorporated, River Acquisition Co.,Transave, LLC Transave, Inc. and TVM V Life Science Ventures GmbH & Co. KG (incorporated by reference fromExhibit 2.1 to Insmed Incorporated's Current Report on Form 8-K filed on December 2, 2010 (SEC file no. 000-30739)). 3.1 Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012 (incorporated by reference fromExhibit 3.1 to Insmed Incorporated's Annual Report on Form 10-K filed on March 18, 2013). 3.2 Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to InsmedIncorporated's Quarterly Report on Form 10-Q filed on August 6, 2015). 4.1 Specimen stock certificate representing common stock, $0.01 par value per share, of the Registrant (incorporated byreference from Exhibit 4.2 to Insmed Incorporated's Registration Statement on Form S-4/A (Registration No. 333-30098) filed on March 24, 2000). 4.2 Indenture, dated as of January 26, 2018, by and between the Company and Wells Fargo Bank, National Association(incorporated by reference from Exhibit 4.1 to Insmed Incorporated’s Current Report on Form 8-K filed on January26, 2018). 4.3 First Supplemental Indenture, dated as of January 26, 2018, by and between the Company and Wells Fargo Bank,National Association (incorporated by reference from Exhibit 4.2 to Insmed Incorporated’s Current Report on Form8-K filed on January 26, 2018). 4.4 Form of 1.75% Convertible Senior Note due 2025 (included in Exhibit 4.3). 10.1** Insmed Incorporated Amended and Restated 2000 Stock Incentive Plan (incorporated by reference from Exhibit 10.3to Insmed Incorporated's Form 10-Q filed on May 7, 2013). 10.2** Insmed Incorporated 2013 Incentive Plan (incorporated by reference from Exhibit 99.1 to Insmed Incorporated'sRegistration Statement on Form S-8 filed on May 24, 2013). 10.3** Insmed Incorporated 2015 Incentive Plan (incorporated by reference from Exhibit 99.1 to Insmed Incorporated'sRegistration Statement on Form S-8 filed on May 28, 2015). 77Table of Contents10.4** Insmed Incorporated 2017 Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed Incorporated’sForm 10-Q filed August 3, 2017). 10.5** Form of Award Agreement for Restricted Stock Units issued to employees pursuant to the Insmed Incorporated 2013Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed Incorporated's Form 10-K filed on March 6,2014). 10.6** Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2013Incentive Plan (incorporated by reference from Exhibit 10.4 to Insmed Incorporated's Form 10-K filed on March 6,2014). 10.7** Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2015Incentive Plan (incorporated by reference from Exhibit 10.1 to Insmed Incorporated’s Form 10-Q filed May 3, 2017). 10.8** Form of Restricted Unit Award Agreement under the Insmed Incorporated 2017 Incentive Plan (incorporated byreference from Exhibit 10.4 to Insmed Incorporated’s Form 10-Q filed August 3, 2017). 10.9** Form of Award Agreement for an Incentive Stock Option pursuant to the Insmed Incorporated 2013 Incentive Plan(incorporated by reference from Exhibit 10.5 to Insmed Incorporated's Form 10-K filed on March 6, 2014). 10.10** Form of Award Agreement for a Non-Qualified Stock Option pursuant to the Insmed Incorporated 2013 IncentivePlan (incorporated by reference from Exhibit 10.6 to Insmed Incorporated's Form 10-K filed on March 6, 2014). 10.11** Form of Award Agreement for a Non-Qualified Stock Option pursuant to the Insmed Incorporated 2015 IncentivePlan (incorporated by reference from Exhibit 10.2 to Insmed Incorporated’s Form 10-Q filed May 3, 2017). 10.12** Form of Non-Qualified Stock Option Agreement Under the Insmed Incorporated 2017 Incentive Plan (incorporatedby reference from Exhibit 10.5 to Insmed Incorporated’s Form 10-Q filed August 3, 2017). 10.13** Form of Non-Qualified Stock Option Inducement Award Agreement (incorporated by reference from Exhibit 10.6 toInsmed Incorporated’s Form 10-Q filed August 3, 2017). 10.14** Employment Agreement, effective as of September 10, 2012, between Insmed Incorporated and William Lewis(incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Current Report on Form 8-K filed onSeptember 11, 2012). 10.15 Amended and Restated Loan and Security Agreement, dated as of September 30, 2016, by and between InsmedIncorporated, Celtrix Pharmaceuticals, the subsidiaries joined thereto, the lenders party thereto and HerculesCapital, Inc., as agent (incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Quarterly Report onForm 10-Q filed on November 3, 2016). 10.16 Settlement, license and development agreement, dated March 5, 2007, between Insmed Incorporated, InsmedTherapeutic Proteins, Inc., Celtrix Pharmaceuticals, Tercica Inc., and Genentech, Inc. (incorporated by reference fromExhibit 10.1 to Insmed Incorporated's Quarterly Report on 10-Q filed on May 10, 2007 (SEC file no. 000-30739)). 10.17 License agreement, dated April 25, 2008, between Transave, Inc. and PARI Pharma GmbH, and Amendments No. 1-4thereto (incorporated by reference from Exhibit 10.22 to Insmed Incorporated's Annual Report on Form 10-K filed onMarch 18, 2013). 10.17.1 Amendment No. 5 to License Agreement between Transave, Inc. and PARI Pharma GmbH, effective as of October 5,2015 (incorporated by reference from Exhibit 10.14.1 to Insmed Incorporated's Annual Report on Form 10-K filed onFebruary 25, 2016). 10.17.2 Amendment No. 6 to License Agreement between Transave, Inc. and PARI Pharma GmbH, effective as of October 9,2015 (incorporated by reference from Exhibit 10.14.2 to Insmed Incorporated's Annual Report on Form 10-K filed onFebruary 25, 2016). 10.18** Employment Agreement, effective as of July 29, 2013, between Insmed Incorporated and Christine Pellizzari(incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Form 10-Q filed on November 5, 2013). 10.19** Insmed Incorporated Senior Executive Bonus Plan (incorporated by reference from Exhibit 10.2 to InsmedIncorporated's Form 10-Q filed on November 5, 2013). 78Table of Contents10.20 Lease, dated December 31, 2013, between Denver Road, LLC and Insmed Incorporated (incorporated by referencefrom Exhibit 10.1 to Insmed Incorporated's Current Report on Form 8-K filed on January 3, 2014). 10.20.1 First Amendment to Lease, dated April 29, 2014, between Denver Road, LLC and Insmed Incorporated (incorporatedby reference from Exhibit 10.17.1 to Insmed Incorporated's Annual Report on Form 10-K filed on February 25,2016). 10.20.2 Second Amendment to Lease, dated November 20, 2015, between Denver Road, LLC and Insmed Incorporated(incorporated by reference from Exhibit 10.17.2 to Insmed Incorporated's Annual Report on Form 10-K filed onFebruary 25, 2016). 10.21 Form of Indemnification Agreement entered into with each of the Company's directors and officers (incorporated byreference from Exhibit 10.1 to Insmed Incorporated's Current Report on Form 8-K filed on January 16, 2014). 10.22 Contract Manufacturing Agreement, dated February 7, 2014, between Insmed Incorporated and TherapureBiopharma Inc. (incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Form 10-Q filed on May 8,2014). 10.23 Amending Agreement, dated March 13, 2014, between Insmed Incorporated and Therapure Biopharma Inc.(incorporated by reference from Exhibit 10.2 to Insmed Incorporated's Form 10-Q filed on May 8, 2014). 10.24 Commercialization Agreement dated July 8, 2014 between Insmed Incorporated and PARI Pharma GmbH(incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Form 10-Q filed on November 6, 2014). 10.25 Stock Purchase Agreement, dated as of December 15, 2014, by and between Insmed Incorporated and HerculesTechnology Growth Capital, Inc. (incorporated by reference from Exhibit 10.28 to Insmed Incorporated's Form 10-Kfiled on February 27, 2015). 10.26 Master Agreement for Services, dated as of August 27, 2014, by and between Insmed Incorporated andSynteractHCR, Inc. (incorporated by reference from Exhibit 10.29 to Insmed Incorporated's Form 10-K filed onFebruary 27, 2015). 10.27 Work Order 1, dated as of December 30, 2014, by and between Insmed Incorporated and SynteractHCR, Inc.(incorporated by reference from Exhibit 10.30 to Insmed Incorporated's Form 10-K filed on February 27, 2015). 10.28 Change in Scope 1 to Work Order 1, dated as of May 27, 2016, by and between Insmed Incorporated andSynteractHCR, Inc. (incorporated by reference from Exhibit 10.2 to Insmed Incorporated's Form 10-Q filed August 4,2016). 10.29** Employment Agreement, effective as of January 2, 2013, between Insmed Incorporated and S. Nicole Schaeffer(incorporated by reference from Exhibit 10.2 to Insmed Incorporated's Form 10-Q filed on May 7, 2015). 10.30 Commercial Fill/Finish Services Agreement between Insmed Incorporated and Ajinomoto Althea, Inc., dated as ofSeptember 15, 2015 (incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Form 10-Q filedNovember 6, 2015). 10.31 Lease Agreement, effective as of July 1, 2016, by and between Insmed Incorporated and CIP II/AR BridgewaterHoldings, LLC (incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Form 10-Q filed August 4,2016). 10.32** Employment Agreement, effective as of September 27, 2016, between Insmed Incorporated and Roger Adsett(incorporated by reference from Exhibit 10.2 to Insmed Incorporated's Form 10-Q filed November 3, 2016). 10.33* License Agreement, dated October 4, 2016, between Insmed Incorporated and AstraZeneca AB (incorporated byreference from Exhibit 10.29 to Insmed Incorporated’s Form 10-K filed February 23, 2017). 10.34 Extension of Commercial Fill/Finish Services Agreement between Insmed Incorporated and Ajinomoto Althea, Inc.,dated as of November 30, 2016 (incorporated by reference from Exhibit 10.30 to Insmed Incorporated’s Form 10-Kfiled February 23, 2017). 10.35 Amendment to Employment Agreement, effective as of September 26, 2016, between Insmed Incorporated andChristine Pellizzari (incorporated by reference from Exhibit 10.31 to Insmed Incorporated’s Form 10-K filedFebruary 23, 2017). 79Table of Contents10.36 Amendment to Employment Agreement, effective as of September 26, 2016, between Insmed Incorporated and S.Nicole Schaeffer (incorporated by reference from Exhibit 10.32 to Insmed Incorporated’s Form 10-K filed February23, 2017). 10.37 Employment Agreement, effective as of June 1, 2017, between Insmed Incorporated and Paolo Tombesi(incorporated by reference from Exhibit 10.1 to Insmed Incorporated’s Form 10-Q filed August 3, 2017). 10.38 Employment Agreement, effective as of June 1, 2017, between Insmed Incorporated and Paul D. Streck (incorporatedby reference from Exhibit 10.2 to Insmed Incorporated’s Form 10-Q filed August 3, 2017). 10.39* Manufacturing and Supply Agreement between Insmed Incorporated and Patheon UK Limited, dated as ofOctober 20, 2017 (filed herewith). 10.40* Technology Transfer Agreement between Insmed Incorporated and Patheon UK Limited, dated as of October 20,2017 (filed herewith). 21.1 Subsidiaries of Insmed Incorporated (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 31.1 Certification of William H. Lewis, Chief Executive Officer of Insmed Incorporated, pursuant to Rules 13a-14(a) and15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes Oxley Act of 2003 (filed herewith). 31.2 Certification of William H. Lewis, Chief Executive Officer of Insmed Incorporated, pursuant to 18 USCSection 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2003 (filed herewith). 32.1 Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of InsmedIncorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, asadopted pursuant to Section 302 of the Sarbanes Oxley Act of 2003 (filed herewith). 32.2 Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of InsmedIncorporated, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of2003 (filed herewith). 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *Confidential treatment has been requested for certain portions of this exhibit. The confidential portions of this exhibithave been omitted and filed separately with the Securities and Exchange Commission. **Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit.ITEM 16. FORM 10-K SUMMARYNot applicable.80Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized on February 23, 2018. INSMED INCORPORATEDa Virginia corporation(Registrant) By:/s/ WILLIAM H. LEWIS William H. Lewis President and Chief Executive Officer (Principal Executive Officer) andDirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities indicated on February 23, 2018.Signature Title /s/ WILLIAM H. LEWIS President and Chief Executive Officer (Principal Executive Officer) andDirectorWilliam H. Lewis /s/ PAOLO TOMBESI Chief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer)Paolo Tombesi /s/ DONALD HAYDEN, JR. Chairman of the Board of DirectorsDonald Hayden, Jr. /s/ ALFRED F. ALTOMARI DirectorAlfred F. Altomari /s/ DAVID R. BRENNAN DirectorDavid R. Brennan /s/ STEINAR J. ENGELSEN, M.D. DirectorSteinar J. Engelsen, M.D. /s/ DAVID W.J. MCGIRR DirectorDavid W.J. McGirr /s/ MYRTLE POTTER DirectorMyrtle Potter /s/ MELVIN SHAROKY, M.D. DirectorMelvin Sharoky, M.D. 81Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Insmed IncorporatedOpinion of the Financial StatementsWe have audited the accompanying consolidated balance sheets of Insmed Incorporated (the Company) as of December 31, 2017 and 2016, the relatedconsolidated statements of comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, andthe related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, theconsolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework), as and our report dated February 23, 2018 expressed an unqualifiedopinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLP We have served as the Company’s auditor since at least 1999, but we are unable to determine the specific year.Iselin, New JerseyFebruary 23, 201882Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Insmed IncorporatedOpinion on Internal Control over Financial ReportingWe have audited Insmed Incorporated’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In ouropinion, Insmed Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2017 and 2016, and the consolidated statements of comprehensive loss, shareholders' equity and cashflows for each of the three years in the period ended December 31, 2017 of the Company and our report dated February 23, 2018 expressed an unqualifiedopinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ Ernst & Young LLP Iselin, New JerseyFebruary 23, 201883Table of ContentsINSMED INCORPORATEDConsolidated Balance Sheets(in thousands, except par value and share data) As of December 31, 2017 2016Assets Current assets: Cash and cash equivalents $381,165 $162,591Prepaid expenses and other current assets 8,279 5,816Total current assets 389,444 168,407 In-process research and development 58,200 58,200Fixed assets, net 12,432 10,020Other assets 1,971 1,329Total assets $462,047 $237,956 Liabilities and shareholders' equity Current liabilities: Accounts payable $14,671 $10,439Accrued expenses 29,339 16,822Other current liabilities 646 728Total current liabilities 44,656 27,989 Debt, long-term 55,567 54,791Other long-term liabilities 765 693Total liabilities 100,988 83,473 Shareholders' equity: Common stock, $0.01 par value; 500,000,000 authorized shares, 76,610,508 and 62,019,889issued and outstanding shares at December 31, 2017 and December 31, 2016, respectively 766 620Additional paid-in capital 1,318,181 919,164Accumulated deficit (957,885) (765,236)Accumulated other comprehensive loss (3) (65)Total shareholders' equity 361,059 154,483Total liabilities and shareholders' equity $462,047 $237,956 See accompanying notes to consolidated financial statements84Table of ContentsINSMED INCORPORATEDConsolidated Statements of Comprehensive Loss(in thousands, except per share data) 2017 2016 2015Revenues$— $— $— Operating expenses: Research and development109,749 122,721 74,277General and administrative79,171 50,679 43,216Total operating expenses188,920 173,400 117,493 Operating loss(188,920) (173,400) (117,493) Investment income1,624 604 261Interest expense(5,925) (3,498) (2,889)Other income (expense), net300 119 (33)Loss before income taxes(192,921) (176,175) (120,154) Income tax (benefit) provision(272) 98 (1,971) Net loss$(192,649) $(176,273) $(118,183) Basic and diluted net loss per share$(2.89) $(2.85) $(2.02) Weighted average basic and diluted common shares outstanding66,576 61,892 58,633 Net loss$(192,649) $(176,273) $(118,183) Other comprehensive income (loss): Foreign currency translation gains (losses)62 (65) —Total comprehensive loss$(192,587) $(176,338) $(118,183) See accompanying notes to audited consolidated financial statements85Table of ContentsINSMED INCORPORATEDConsolidated Statements of Shareholders' Equity(in thousands) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss TotalShares Amount Balance at January 1, 201549,806 $498 $656,519 $(470,780) $— $186,237Comprehensive loss: Net loss (118,183) (118,183)Exercise of stock options481 5 5,107 5,112Net proceeds from issuance of common stock11,500 115 222,827 222,942Issuance of common stock for vesting ofRSUs27 —Stock compensation expense 15,590 15,590Balance at December 31, 201561,814 $618 $900,043 $(588,963) $— $311,698Comprehensive loss: Net loss (176,273) (176,273)Other comprehensive loss (65) (65)Exercise of stock options162 2 1,082 1,084Issuance of common stock for vesting ofRSUs44 —Stock compensation expense 18,039 18,039Balance at December 31, 201662,020 $620 $919,164 $(765,236) $(65) $154,483Comprehensive loss: Net loss (192,649) (192,649)Other comprehensive income 62 62Exercise of stock options379 4 3,429 3,433Net proceeds from issuance of common stock14,123 141 377,515 377,656Issuance of common stock for vesting ofRSUs89 1 1Stock compensation expense 18,073 18,073Balance at December 31, 201776,611 $766 $1,318,181 $(957,885) $(3) $361,059 See accompanying notes to audited consolidated financial statements86Table of ContentsINSMED INCORPORATEDConsolidated Statements of Cash Flows(in thousands) Years ended December 31, 201720162015Operating activities Net loss$(192,649) $(176,273) $(118,183)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization2,901 2,438 1,982Stock-based compensation expense18,073 18,039 15,590Amortization of debt issuance costs118 281 458Accrual of the end of term charge on the debt 658 171 76Changes in operating assets and liabilities: Prepaid expenses and other assets(2,783) 191 (1,484)Accounts payable3,604 2,767 (1,781)Accrued expenses and other10,461 5,678 2,642Net cash used in operating activities(159,617) (146,708) (100,700)Investing activities Purchase of fixed assets(3,001) (4,200) (3,454)Net cash used in investing activities(3,001) (4,200) (3,454)Financing activities Proceeds from issuance of debt— 30,000 —Proceeds from issuance of common stock 377,656 — 222,942Proceeds from exercise of stock options3,433 1,084 5,112Payment of debt issuance costs— (411) (250)Net cash provided by financing activities 381,089 30,673 227,804Effect of exchange rates on cash and cash equivalents103 (50) —Net increase (decrease) in cash and cash equivalents218,574 (120,285) 123,650Cash and cash equivalents at beginning of period162,591 282,876 159,226Cash and cash equivalents at end of period$381,165 $162,591 $282,876Supplemental disclosures of cash flow information: Cash paid for interest$5,165 $3,608 $2,948Cash paid (received) for income taxes, net$166 $85 $(3,008) See accompanying notes to audited consolidated financial statements87Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Description of Business and Basis of PresentationDescription of Business—Insmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. TheCompany's lead product candidate is amikacin liposome inhalation suspension (ALIS) (formerly known as liposomal amikacin for inhalation), which is inlate-stage development for adult patients with treatment refractory nontuberculous mycobacteria (NTM) lung disease caused by Mycobacterium aviumcomplex (MAC), a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The Company's earlier clinical-stage pipelineincludes INS1007, a novel oral reversible inhibitor of dipeptidyl peptidase 1, and INS1009, an inhaled nanoparticle formulation of a treprostinil prodrug.In recent years, the Company has funded its operations through public offerings of securities and debt financings. The Company expects tocontinue to incur losses both in its US and certain international entities, as the Company plans to fund research and development activities and commerciallaunch activities. The Company may need to raise additional capital to fund its operations, to develop and commercialize ALIS, to develop INS1007 andINS1009, and to develop, acquire, in-license or co-promote other products that address orphan or rare diseases. The Company believes it currently hassufficient funds to meet its financial needs for at least the next 12 months.The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located inBridgewater, New Jersey. The Company has legal entities in the United States (US), Ireland, Germany, France, the United Kingdom (UK), the Netherlands andJapan.Basis of Presentation—The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, InsmedLimited, Celtrix Pharmaceuticals, Inc., Insmed Holdings Limited, Insmed Ireland Limited, Insmed France SAS, Insmed Germany GmbH, InsmedNetherlands B.V. and Insmed Godo Kaisha. All intercompany transactions and balances have been eliminated in consolidation.2. Summary of Significant Accounting PoliciesUse of Estimates—The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in theUnited States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements andaccompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions. The amounts of assets andliabilities reported in the Company's balance sheets and the amounts of expenses reported for each period presented are affected by estimates andassumptions, which are used for, but not limited to, the accounting for stock-based compensation, income taxes, loss contingencies, and accounting forresearch and development costs. Actual results could differ from those estimates.Investment Income and Interest Expense—Investment income consists of interest and dividend income earned on the Company's cash and cashequivalents. Interest expense consists primarily of interest costs related to the Company's debt.Cash and Cash Equivalents—The Company considers cash equivalents to be highly liquid investments with maturities of three months or lessfrom the date of purchase.Fixed Assets, Net—Fixed assets are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.Estimated useful lives of three years to five years are used for computer equipment. Estimated useful lives of seven years are used for laboratory equipment,office equipment, manufacturing equipment and furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or theestimated useful life of the asset. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset toestimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.Identifiable Intangible Assets—Identifiable intangible assets are measured at their respective fair values and are not amortized untilcommercialization. Once commercialization occurs, these intangible assets will be amortized over their estimated useful lives. The fair values assigned to theCompany's intangible assets are based on reasonable estimates and assumptions given available facts and circumstances. Unanticipated events orcircumstances may occur that may require the Company to review the assets for impairment. Events or circumstances that may require an impairmentassessment include88Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Summary of Significant Accounting Policies (Continued)negative clinical trial results, the non-approval of a new drug application by a regulatory agency, material delays in the Company's development program ora sustained decline in market capitalization.Indefinite-lived intangible assets are not subject to periodic amortization. Rather, indefinite-lived intangibles are reviewed for impairment byapplying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred. Events orcircumstances that may require an interim impairment assessment are consistent with those described above. The Company performs its annual impairmenttest as of October 1 of each year.The Company uses the income approach to derive the fair value of in-process research and development assets. This approach calculates fair valueby estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. Thisapproach requires significant management judgment with respect to unobservable inputs such as future volume, revenue and expense growth rates, changesin working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with theCompany's business plans. A market based valuation approach was not considered given a lack of revenues and profits for the Company.Debt Issuance Costs—Debt issuance costs are amortized to interest expense using the effective interest rate method over the term of the debt. Debtissuance costs paid to the lender and third parties are reflected as a discount to the debt in the consolidated balance sheets. Unamortized debt issuance costsassociated with extinguished debt are expensed in the period of the extinguishment.Fair Value Measurements—The Company categorizes its financial assets and liabilities measured and reported at fair value in the financialstatements on a recurring basis based upon the level of judgments associated with the inputs used to measure their fair value. Hierarchical levels, which aredirectly 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 throughcorrelation 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 is categorized based upon the lowest level ofsignificant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use ofunobservable 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 December 31, 2017 and December 31, 2016 were its cash andcash equivalents of $381.2 million and $162.6 million, respectively. These amounts were measured at Level 1 using quoted prices in active markets foridentical assets at the measurement date. The Company's cash and cash equivalents permit daily redemption and the fair values of these investments are basedupon the quoted prices in active markets provided by the holding financial institutions. Cash equivalents consist of liquid investments with a maturity ofthree months or less from the date of purchase and the short-term investments consist of instruments with maturities greater than three months.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 outof Level 1, Level 2 or Level 3 during 2017 and 2016.As of December 31, 2017 and 2016, the Company held no securities that were in an unrealized loss or gain position.The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making itsdetermination, the Company considers a number of factors, including: (1) the significance of the decline; (2) whether the securities were rated belowinvestment 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 asufficient period of time for it to recover.89Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Summary of Significant Accounting Policies (Continued)Foreign Currency—The Company has operations in the US, Ireland, Germany, France, the UK and the Netherlands. The results of its non-US dollarbased functional currency operations are translated to US dollars at the average exchange rates during the period. Assets and liabilities are translated at theexchange rate prevailing at the balance sheet date. Equity is translated at the prevailing exchange rate at the date of the equity transaction. Translationadjustments are included in shareholders' equity, as a component of other comprehensive loss.The Company realizes foreign currency transaction gains (losses) in the normal course of business based on movements in the applicable exchangerates. These gains (losses) are included as a component of other income (expense), net.Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily ofcash and cash equivalents. The Company places its cash equivalents with high credit-quality financial institutions and may invest its short-term investmentsin US treasury securities, mutual funds and government agency bonds. The Company has established guidelines relative to credit ratings and maturities thatseek to maintain safety and liquidity.The Company relies on third-party manufacturers and suppliers for manufacturing and supply of its products. The inability of the suppliers ormanufacturers to fulfill supply requirements of the Company could materially impact future operating results. A change in the relationship with the suppliersor manufacturer, or an adverse change in their business, could materially impact future operating results.Other Income—In 2015, the French National Agency for Medicines and Health Products Safety (ANSM) granted ALIS a Temporary Authorizationsfor Use (Autorisation Temporaire d'Utilisation or ATU). Pursuant to this program, the Company shipped product to pharmacies after receiving requests fromphysicians for patients in France. For the years ended December 31, 2017, 2016 and 2015, the revenue recorded was immaterial and is included as acomponent of other income (expense), net. The Company is initiating expanded access programs (EAPs) in other select territories in Europe, some of whichmay be fully reimbursed. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance withlocal regulations.Research and Development—Research and development expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in the Company's research and development functions, and other internal operating expenses, the cost ofmanufacturing a drug candidate, including the medical devices for drug delivery, for clinical study, the cost of conducting clinical studies, and the cost ofconducting preclinical and research activities. In addition, research and development expenses include payments to third parties for the license rights toproducts in development (prior to marketing approval). The Company's expenses related to manufacturing its drug candidate and medical devices for clinicalstudy are primarily related to activities at contract manufacturing organizations that manufacture ALIS, INS1007, and INS1009 and the medical devices forthe Company's use. The Company's expenses related to clinical trials are primarily related to activities at contract research organizations that conduct andmanage clinical trials on the Company's 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 trialmilestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity accordingto the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for future research and developmentactivities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, orwhen the goods or services are no longer expected to be provided.Stock-Based Compensation—The Company recognizes stock-based compensation expense for awards of equity instruments to employees anddirectors based on the grant-date fair value of those awards. The grant-date fair value of the award is recognized as compensation expense ratably over therequisite service period, which generally equals the vesting period of the award, and if applicable, is adjusted for expected forfeitures. The Company alsogrants performance-based stock options to employees. The grant-date fair value of the performance-based stock options is recognized as compensationexpense over the implicit service period using the accelerated attribution method once it is probable that the performance condition will be achieved. Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the ConsolidatedStatements of Comprehensive Loss.Income Taxes—The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financial statement carrying90Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Summary of Significant Accounting Policies (Continued)amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.A valuation allowance is recorded to reduce the deferred tax assets to the amount that is expected to be realized. In evaluating the need for avaluation allowance, the Company takes into account various factors, including the expected level of future taxable income and available tax planningstrategies. If actual results differ from the assumptions made in the evaluation of a valuation allowance, the Company records a change in valuationallowance through income tax expense in the period such determination is made.The Company uses a comprehensive model for how it measures, presents and discloses an uncertain tax position taken or expected to be taken in atax return. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustainedon examination by taxing authorities, based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such aposition should be measured based on the largest benefit that has a greater than 50% likelihood to be sustained upon ultimate settlement. The Company hadno uncertain tax positions as of December 31, 2017 and 2016 that qualified for either recognition or disclosure in the consolidated financial statements.The Company's policy for interest and penalties related to income tax exposures is to recognize interest and penalties as a component of the incometax (benefit) provision in the Consolidated Statements of Comprehensive Loss.Tax Cuts and Jobs ActOn December 22, 2017, the US government enacted comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act). The TaxAct significantly revises US tax law by, among other provisions, lowering the US federal statutory income tax rate from 35% to 21%, imposing a mandatoryone-time transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.ASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due tothe complexity and significance of the Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows companies torecord the tax effects of the Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during alimited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed theinformation necessary to finalize its accounting, but cannot extend beyond one year from enactment.The provisional amounts recorded for the Tax Act did not have a material impact on the Company's financial statements as of December 31, 2017,because its deferred temporary differences are fully offset by a valuation allowance and the Company does not have any significant offshore earnings fromwhich to record the mandatory transition tax. However, given the significant complexity of the Tax Act, anticipated guidance from the US Treasury aboutimplementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act, these estimates may be adjustedduring the measurement period. The provisional amounts disclosed in our footnotes were based on the Company’s present interpretations of the Tax Act andcurrent available information, including assumptions and expectations about future events, such as its projected financial performance, and are subject tofurther refinement as additional information becomes available (including the Company’s actual full Fiscal 2018 results of operations, as well as potentialnew or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and further analyses are completed. The Companycontinues to analyze the changes in certain income tax deductions, assess calculations of earnings and profits in certain foreign subsidiaries, including ifthose earnings are held in cash or other assets and gather additional data to compute the full impacts on the Company’s deferred and current tax assets andliabilities.Net Loss Per Common Share—Basic net loss per common share is computed by dividing net loss attributable to common shareholders by theweighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by theweighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock optionsand restricted stock units would be anti-dilutive as the Company incurred a net loss in all periods presented. Potentially dilutive common shares resultingfrom the assumed exercise of outstanding stock options are determined based on the treasury stock method.91Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Summary of Significant Accounting Policies (Continued)The following table sets forth the reconciliation of the weighted average number of shares used to compute basic and diluted net loss per share forthe years ended December 31, 2017, 2016 and 2015. Years Ended December 31,2017 2016 2015(in thousands, except per share amounts)Numerator: Net loss$(192,649) $(176,273) $(118,183)Denominator: Weighted average common shares used in calculation of basic net loss per share:66,576 61,892 58,633Effect of dilutive securities: Common stock options— — —Restricted stock and restricted stock units — — —Weighted average common shares outstanding used in calculation of diluted net loss pershare66,576 61,892 58,633Net loss per share: Basic and Diluted$(2.89) $(2.85) $(2.02)The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstandingas of December 31, 2017, 2016 and 2015 as their effect would have been anti-dilutive (in thousands). 2017 2016 2015Stock options to purchase common stock8,609 7,117 5,274Restricted stock and restricted stock units47 89 44Segment Information—The Company currently operates in one business segment, which is the development and commercialization of therapiesfor patients with rare diseases. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. TheCompany does not operate separate lines of business with respect to its products or product candidates. Accordingly, the Company does not have separatereportable segments.New Accounting Pronouncements (Adopted)—In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as aGoing Concern, which requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so,provide certain footnote disclosures. This ASU was effective for the annual period ended December 31, 2016, and interim reporting periods thereafter. Theadoption of this standard did not have an impact on the Company's consolidated financial statements and related footnote disclosures.In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718,Compensation—Stock Compensation. ASU 2016-9 simplifies several aspects of the accounting for share-based payment transactions, including the incometax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-9 is effective for fiscalyears beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-9 in the first quarter of 2017. ASU2016-9 did not have a material impact on its consolidated financial statements.New Accounting Pronouncements (Not Yet Adopted)—In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers(Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-9 establishes principles for recognizing revenue upon thetransfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. InJuly 2015, the FASB deferred the92Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Summary of Significant Accounting Policies (Continued)effective date for annual reporting periods beginning after December 15, 2017. The Company will adopt ASU 2014-9 in the first quarter of 2018 and expectsthe impact of adoption will not be material to its consolidated financial statements.In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842) in order to increase transparency and comparability among organizations byrecognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-2 requiresthat a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying assetfor the lease term on the balance sheet. ASU 2016-2 is effective for fiscal years beginning after December 15, 2018 (including interim periods within thoseperiods) using a modified retrospective approach and early adoption is permitted. The Company expects to adopt ASU 2016-2 in the first quarter of 2019 andis in the process of evaluating the impact of adoption on its consolidated financial statements.93Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. Accrued ExpensesAccrued expenses consist of the following: As of December 31,2017 2016(in thousands)Accrued clinical trial expenses$7,837 $6,683Accrued compensation12,197 6,937Accrued professional fees4,500 1,992Accrued technical operation expenses2,182 591Accrued interest payable423 438Accrued construction costs1,719 —Other accrued expenses481 181 $29,339 $16,8224. Identifiable Intangible AssetsThe Company's only identifiable intangible asset was in-process research and development (IPRD) related to ALIS as of December 31, 2017 and2016. The total intangible IPRD asset was $58.2 million as of December 31, 2017 and 2016, which resulted from the initial amount recorded at the time of theCompany's merger with Transave in 2010 and subsequent adjustments in the value. The Company uses the income approach to derive the fair value of in-process research and development assets. This approach calculates fair value by estimating future cash flows attributable to the assets and then discountingthese cash flows to a present value using a risk-adjusted discount rate. Identifiable intangible assets are measured at their respective fair values and will not beamortized until commercialization. If commercialization occurs, intangible assets will be amortized over their estimated useful lives. As of December 31,2017, the Company did not identify any indicators of impairment of its in-process research and development intangible assets and the implied value of theintangible assets was more than 100% greater than the book value.5. Fixed Assets, netFixed assets are stated at cost and depreciated using the straight-line method, based on useful lives as follows: EstimatedUseful Life (years) As of December 31,Asset Description 2017 2016 (in thousands)Lab equipment7 $7,055 $5,662Furniture and fixtures7 1,937 1,903Computer hardware and software3 - 5 2,325 2,251Office equipment7 65 65Manufacturing equipment7 1,436 1,148Leasehold improvementslease term 6,939 6,735Construction in Progress (CIP)—3,320— 23,077 17,764Less accumulated depreciation (10,645) (7,744)Fixed assets, net $12,432 $10,020Depreciation expense was $2.9 million, $2.4 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.94Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. DebtOn June 29, 2012, the Company and its domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement with HerculesTechnology Growth Capital, Inc. (as subsequently amended, the Prior Loan Agreement) under which the Company borrowed an aggregate of $25.0 million atan interest rate of 9.25%. The Company was required to pay an "end of term" charge of $390,000 in January of 2016, which was charged to interest expense(and accreted to the debt) using the effective interest method over the life of the Prior Loan Agreement.On September 30, 2016, the Company and its domestic subsidiaries, as co-borrowers, entered into an Amended and Restated Loan and SecurityAgreement (the A&R Loan Agreement) with Hercules Capital, Inc. (Hercules). The A&R Loan Agreement included a total commitment from Hercules of up to$55.0 million, of which $25.0 million was previously outstanding. The amount of borrowings was increased by $10.0 million to an aggregate total of $35.0million 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 inconnection with its upfront payment obligation under the License Agreement with AstraZeneca (see Note 10). The interest rate for the term is floating and isdefined 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 principalamount outstanding and an aggregate facility fee of $337,500. The maturity date of the loan facility was also extended to October 1, 2020. In connectionwith the Company generating and announcing top-line data from the CONVERT study on September 5, 2017 that supports the filing of a New DrugApplication (NDA), along with the completion of the equity financing, the interest-only period was automatically extended through May 1, 2019 and theCompany's requirement to have a consolidated minimum cash liquidity in an amount no less than $25.0 million was eliminated.In connection with the A&R Loan Agreement, the Company granted Hercules a first position lien on all of the Company's assets, excludingintellectual 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 aggregateoutstanding principal balance will be charged to interest expense (and accreted to the debt) using the effective interest method over the original life of theA&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 theeffective interest method over the life of the A&R Loan Agreement.The A&R Loan Agreement also contains representations and warranties by the Company and Hercules and indemnification provisions in favor ofHercules and customary covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends, and a minimum liquiditycovenant), and events of default (including payment defaults, breaches of covenants following any applicable cure period, a material impairment in theperfection or priority of the lender's security interest or in the collateral, and events relating to bankruptcy or insolvency). Upon the occurrence of an event ofdefault, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the lender may terminate its lending commitment,declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the A&R Loan Agreement.The following table presents the components of the Company's debt balance as of December 31, 2017 (in thousands):Debt: Note payable under A&R Loan Agreement$55,000Accretion of end of term charge828Issuance fees paid to lender(261)Current portion of long-term debt—Long-term debt$55,56795Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. Debt (Continued)Future principal repayments of the Company's long-term debt are as follows (in thousands):Year Ending in December 31: 2018$—201913,399202041,601 $55,000The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current marketfactors and the ability of the Company to obtain debt at comparable terms to those that are currently in place. As of December 31, 2017 and 2016, the fairvalue of the Company's debt approximates the carrying amount.In February 2018, the Company notified Hercules that it will repay the A&R Loan Agreement in full on February 28, 2018. The total aggregatecash payable to Hercules for the early prepayment of debt, inclusive of accrued interest, the backend fee and an early payment penalty will be approximately$58.0 million.7. Shareholders' EquityCommon Stock—As of December 31, 2017, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 and76,610,508 shares of common stock issued and outstanding. In addition, as of December 31, 2017, the Company had reserved 8,608,921 shares of commonstock for issuance upon the exercise of outstanding common stock options and 46,914 shares of common stock for issuance upon the vesting of restrictedstock units.In September 2017, the Company completed an underwritten public offering of 14,123,150 shares of the Company’s common stock, which includedthe underwriter’s exercise in full of its over-allotment option of 1,842,150 shares, at a price to the public of $28.50 per share. The Company’s net proceedsfrom the sale of the shares, after deducting underwriting discounts and offering expenses of $24.8 million, were approximately $377.7 million.In April 2015, the Company completed an underwritten public offering of 11,500,000 shares of the Company's common stock, which included theunderwriter'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 fromthe sale of the shares, after deducting underwriting discounts and offering expenses of $14.5 million, were approximately $222.9 million.Preferred Stock—As of December 31, 2017 and 2016, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01and no shares of preferred stock were issued and outstanding.8. Stock-Based CompensationThe Company’s current equity compensation plan, the 2017 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting ofShareholders on May 18, 2017. The 2017 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Underthe terms of the 2017 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), RSUs, performance options/shares and other stock awards, as well as pay incentive bonuses toeligible employees and non-employee directors. On May 18, 2017, upon the approval of the 2017 Incentive Plan by shareholders, 5,000,000 shares wereauthorized for issuance thereunder, plus any shares subject to then-outstanding awards under the 2015 Incentive Plan and the 2013 Incentive Plan thatsubsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. Asof December 31, 2017, 4,910,002 shares remained for future issuance under the 2017 Incentive Plan. The 2017 Incentive Plan will terminate on April 3, 2027unless it is extended or terminated earlier pursuant to its terms. In addition, from time to time, the Company makes inducement grants of stock options. Theseawards are made pursuant to the Nasdaq inducement grant exception as a component of new hires’ employment compensation in connection with theCompany’s equity grant program. During the twelve months ended December 31, 2017 and 2016, the Company granted inducement stock options covering266,230 and 88,060, respectively, shares of the Company's common stock to new employees.96Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-Based Compensation (Continued)Stock Options—The Company calculates the fair value of stock options granted using the Black-Scholes valuation model. The following tablesummarizes the grant date fair value and assumptions used in determining the fair value of all stock options granted, including grants of inducement options,during the years ended December 31, 2017, 2016 and 2015. 2017 2016 2015Volatility71% - 79% 74% - 77% 78% - 82%Risk-free interest rate1.73% - 2.13% 1.00% - 1.90% 1.31% - 1.75%Dividend yield0.0% 0.0% 0.0%Expected option term (in years)6.25 6.25 6.25Weighted average fair value of stock options granted$10.52 $8.77 $14.20For the years ended December 31, 2017, 2016 and 2015, the volatility factor was based on the Company’s historical volatility during the expectedoption term. Estimated forfeitures were based on the actual percentage of option forfeitures since the closing of the Company’s merger with Transave, Inc. inDecember 2010 for the years ended December 31, 2016 and 2015. Beginning with the year ended December 31, 2017, estimated forfeitures were based on theactual percentage of option forfeitures over the expected option term.From time to time, the Company grants performance-condition options to certain employees. Vesting of these options is subject to the Companyachieving certain performance criteria established at the date of grant and the individuals fulfilling a service condition (continued employment). As a resultof the Marketing Authorization Application (MAA) acceptance for ALIS, which was received from the European Medicines Agency (EMA) in February 2015,the vesting of performance options totaling $1.5 million were recorded as non-cash compensation expense in the first quarter of 2015. As of December 31,2017, the Company had performance options totaling 133,334 shares outstanding.97Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-Based Compensation (Continued)The following table summarizes stock option activity for stock options granted for the years ended December 31, 2017, 2016 and 2015 as follows: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualLife in Years AggregateIntrinsicValue(in '000)Options outstanding at January 1, 20154,400,106 $10.59 Granted1,902,850 20.45 Exercised(481,140) 10.62 Forfeited and expired(548,094) 15.43 Options outstanding at December 31, 20155,273,722 $13.64 Vested and expected to vest at December 31, 20155,059,645 13.46 Exercisable at December 31, 20151,991,141 8.70 Options outstanding at December 31, 20155,273,722 $13.64 Granted2,532,675 12.96 Exercised(162,340) 6.68 Forfeited and expired(527,351) 17.08 Options outstanding at December 31, 20167,116,706 $13.30 Vested and expected to vest at December 31, 20166,850,658 13.25 Exercisable at December 31, 20163,113,998 11.28 Options outstanding at December 31, 20167,116,706 $13.30 Granted2,284,710 15.92 Exercised(378,275) 9.08 Forfeited and expired(414,220) 15.50 Options outstanding at December 31, 20178,608,921 $14.08 7.4 $147,260Vested and expected to vest at December 31, 20178,325,255 $14.03 7.4 $142,783Exercisable at December 31, 20174,229,478 $12.71 6.3 $78,138The total intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $4.3 million, $1.0 million and$4.7 million, respectively.As of December 31, 2017, there was $29.7 million of unrecognized compensation expense related to unvested stock options, which is expected tobe recognized over a weighted average period of 2.6 years. Included above in unrecognized compensation expense was $1.1 million related to outstandingperformance-based options. The following table summarizes the range of exercise prices and the number of stock options outstanding and exercisable as ofDecember 31, 2017:98Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-Based Compensation (Continued)Outstanding as of December 31, 2017 Exercisable as ofDecember 31, 2017Range ofExercise Prices Number ofOptions WeightedAverageRemainingContractual Term(in years) WeightedAverageExercise Price Number ofOptions WeightedAverageExercisePrice$3.03 $4.55 973,195 4.65 $3.60 973,195 $3.60$6.90 $6.90 137,577 5.22 $6.90 100,077 $6.90$6.96 $10.85 1,077,621 8.29 $10.76 420,374 $10.62$11.14 $12.58 1,088,035 6.39 $12.17 781,991 $12.18$12.66 $13.67 1,043,273 8.74 $13.59 101,126 $13.26$13.94 $15.91 862,300 7.76 $14.97 406,441 $14.53$16.07 $16.16 1,008,750 7.69 $16.13 463,629 $16.12$16.35 $17.24 868,650 9.24 $17.13 23,999 $16.85$17.36 $22.76 1,415,700 7.14 $21.18 927,334 $21.23$22.84 $31.78 133,820 8.86 $27.47 31,312 $23.74Restricted Stock and Restricted Stock Units—The Company may grant Restricted Stock (RS) and Restricted Stock Units (RSUs) to employees andnon-employee directors. Each share of RS vests upon and each RSU represents a right to receive one share of the Company's common stock upon thecompletion 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 theCompany's common stock on the date of grant. The Company recognizes noncash compensation expense for the fair values of these RS and RSUs on astraight-line basis over the requisite service period of these awards.The following table summarizes RSU awards granted during the years ended December 31, 2017, 2016 and 2015: Number ofRSUs WeightedAverageGrant PriceOutstanding at January 1, 201520,502 $19.47Granted49,776 16.07Released(26,724) (18.68)Forfeited— —Outstanding at December 31, 201543,554 $19.47Granted89,194 10.85Released(43,554) (16.07)Forfeited— —Outstanding at December 31, 201689,194 $10.85Granted46,914 17.16Released(89,194) (10.85)Forfeited— —Outstanding at December 31, 201746,914 $17.1699Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-Based Compensation (Continued)The following table summarizes the stock-based compensation recorded in the Consolidated Statements of Comprehensive Loss related to stockoptions and RSUs during the years ended December 31, 2017, 2016 and 2015: 2017 2016 2015 (in millions)Research and development expenses$6.5 $6.2 $4.0General and administrative expenses11.6 11.8 11.6Total (1)$18.1 $18.0 $15.6_________________________________(1)Includes $0.0 million, $1.7 million and $2.3 million for the years ended December 31, 2017, 2016 and 2015, respectively, for the remeasurement ofcertain stock options and RSUs that occurred during May 2013.9. Income TaxesThe income tax (benefit) provision was $(0.3) million, $0.1 million and $(2.0) million and the effective rates were approximately 0%, 0% and 2%for the years ended December 31, 2017, 2016 and 2015, respectively. The income tax (benefit) for the year ended December 31, 2017 reflects the reversal ofthe valuation allowance related to alternative minimum tax (AMT) that the Company paid in 2009. As a result of the Tax Act, the Company recorded anoncurrent receivable to reflect the refund due to the Company in future periods relating to the previously paid AMT. In addition, the income tax (benefit)provision for the years ended December 31, 2017 and 2016 reflected current income tax expense recorded as a result of the taxable income in certain of theCompany's subsidiaries in Europe. The income tax benefit recorded and the effective tax rates for the year ended December 31, 2015 primarily reflected thereversal of valuation allowances previously recorded against the Company's New Jersey State net operating losses (NOLs) that resulted from the Company'ssale of $24.3 million of its New Jersey State NOLs under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the Program) forcash of $2.0 million, respectively, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unusedamounts of NOLs and defined research and development tax credits for cash. In 2015, the Company reached the lifetime maximum cap of NOLs that can besold to the State of New Jersey.The Company is subject to US federal and state income taxes and the statute of limitations for tax audit is open for the federal tax returns for theyears ended 2014 and later, and is generally open for certain states for the years 2013 and later. The Company has incurred net operating losses sinceinception, except for the year ended December 31, 2009. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized,notwithstanding the year of origin.The Company's policy is to recognize interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company hasrecorded no such expense. As of December 31, 2017 and 2016, the Company has recorded no reserves for unrecognized income tax benefits, nor has itrecorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount ofunrecognized tax positions over the next 12 months.For the years ended December 31, 2017 and 2016, the Company was also subject to foreign income taxes as a result of legal entities established foractivities in Europe. The Company's loss before income taxes in the US and globally was as follows (in thousands): Years Ended December 31,2017 2016 2015US$(136,682) $(140,354) $(100,278)Foreign(56,239) (35,821) (19,876)Total$(192,921) $(176,175) $(120,154)100Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Income Taxes (Continued)The Company's income tax (benefit) provision consisted of the following (in thousands): Years Ended December 31, 2017 2016 2015Current: Federal$— $— $—State3 3 (2,015)Foreign142 95 44 145 98 (1,971)Deferred: Federal(417) — —State— — —Foreign— — — (417) — —Total$(272) $98 $(1,971)The reconciliation between the federal statutory tax rate of 34% and the Company's effective tax rate is as follows: Years Ended December 31, 2017 2016 2015Statutory federal tax rate34 % 34 % 34 %Permanent items(3)% (3)% (4)%State income taxes, net of federal benefit4 % 4 % 4 %R&D and other tax credits8 % 8 % 12 %Foreign income taxes(6)% (4)% (1)%Impact of 2017 Tax Act(49)% — % — %Change in valuation allowance12 % (39)% (43)%Other— % — % — %Effective tax rate— % — % 2 %101Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Income Taxes (Continued)Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effectfor the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities consist of the following: As of December 31, 2017 2016Deferred tax assets: Net operating loss carryforwards$186,342 $228,729General business credits66,371 50,648Product license7,730 11,783Alternative minimum tax (AMT) credit— 418Other17,217 16,265Gross deferred tax assets$277,660 $307,843Deferred tax liabilities: In-process research and development$(16,360) $(23,245)Deferred tax liabilities$(16,360) $(23,245)Net deferred tax assets$261,300 $284,598Valuation allowance(261,300) (284,598)Net deferred tax assets$— $—The net deferred tax assets (prior to applying the valuation allowance) of $261.3 million and $284.6 million at December 31, 2017 and 2016,respectively, primarily consist of net operating loss carryforwards for income tax purposes. Due to the Company's history of operating losses, the Companyrecorded a full valuation allowance on its net deferred tax assets by decreasing the valuation allowance by $23.3 million in 2017 and increasing by $68.4million in 2016, respectively, as it was more likely than not that such tax benefits will not be realized. As of December 31, 2017, the Company's grossdeferred tax assets were also impacted by the Tax Act which required the change to a 21% US tax rate (see below for further discussion on the Tax Act).At December 31, 2017, the Company had federal net operating loss carryforwards for income tax purposes of approximately $721.8 million. Due tothe limitation on NOLs as more fully discussed below, $544.0 million of the NOLs are available to offset future taxable income, if any. The NOL carryoversand general business tax credits expire in various years beginning in 2018. For state tax purposes, the Company has approximately $296.0 million of NewJersey NOLs available to offset against future taxable income. The Company also has California and Virginia NOLs that are entirely limited due toSection 382 (as discussed below), in addition to changing state apportionment allocations, as the Company is now 100% resident in New Jersey.During 2014, the Company completed an Internal Revenue Code Section 382 (Section 382) analysis in order to determine the amount of lossesthat are currently available for potential offset against future taxable income, if any. It was determined that the utilization of the Company's NOL and generalbusiness tax credit carryforwards generated in tax periods up to and including December 2010 were subject to substantial limitations under Section 382 dueto ownership changes that occurred at various points from the Company's original organization through December 2010. In general, an ownership change, asdefined by Section 382, results from transactions increasing the ownership of shareholders that own, directly or indirectly, 5% or more of a corporation'sstock, in the stock of a corporation by more than 50 percentage points over a testing period (usually 3 years). Since the Company's formation, it has raisedcapital through the issuance of common stock on several occasions which, combined with the purchasing shareholders' subsequent disposition of thoseshares, resulted in multiple changes in ownership, as defined by Section 382 since the Company's formation in 1999. These ownership changes resulted insubstantial limitations on the use of the Company's NOLs and general business tax credit carryforwards up to and including December 2010. The Companycontinues to track all of its NOLs and tax credit carryforwards but has provided a full valuation allowance to offset those amounts.102Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Income Taxes (Continued)On December 22, 2017, the US government enacted the Tax Act. The Tax Act significantly revises US tax law by, among other provisions, loweringthe US federal statutory income tax rate from 35% to 21%, imposing a mandatory one-time transition tax on previously deferred foreign earnings, andeliminating or reducing certain income tax deductions.The Tax ActASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due tothe complexity and significance of the Tax Act’s provisions, the SEC staff issued SAB 118, which allows companies to record the tax effects of the Tax Acton a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as moreinformation becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize itsaccounting, but cannot extend beyond one year from enactment.The Tax Act did not have a material impact on the Company's financial statements because its deferred temporary differences are fully offset by avaluation allowance and the Company does not have any significant offshore earnings from which to record the mandatory transition tax. However, given thesignificant complexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additional guidancefrom the SEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. The provisional amounts disclosed in ourfootnotes were based on the Company’s present interpretations of the Tax Act and current available information, including assumptions and expectationsabout future events, such as its projected financial performance, and are subject to further refinement as additional information becomes available (includingthe Company’s actual full year 2018 results of operations, as well as potential new or interpretative guidance issued by the FASB or the Internal RevenueService and other tax agencies) and further analyses are completed. The Company continues to analyze the changes in certain income tax deductions, assesscalculations of earnings and profits in certain foreign subsidiaries, including if those earnings are held in cash or other assets, and gather additional data tocompute the full impacts on the Company’s deferred and current tax assets and liabilities.103Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. License and Other AgreementsIn-License AgreementsPARI Pharma GmbH—In April 2008, the Company entered into a licensing agreement with PARI Pharma GmbH (PARI) for use of the optimizedeFlow Nebulizer System for delivery of ALIS in treating patients with NTM lung infections, CF and bronchiectasis. Under the licensing agreement, theCompany has rights under several US and foreign issued patents and patent applications involving improvements to the optimized eFlow Nebulizer System,to exploit such system with ALIS for the treatment of such indications, but the Company cannot manufacture such nebulizers except as permitted under theCommercialization Agreement with PARI. Under the licensing agreement, the Company paid PARI an upfront license fee and PARI is entitled to receivemilestone payments up to an aggregate of €4.3 million either in cash, qualified stock or a combination of both, at PARI's discretion, based on achievement ofcertain future milestone events including first acceptance of MAA submission (or equivalent) in the US of ALIS and the device, first receipt of marketingapproval in the US for ALIS and the device, and first receipt of marketing approval in a major EU country for ALIS and the device. In addition, PARI isentitled to receive royalty payments in the mid-single digits on the annual global net sales of ALIS, pursuant to the licensing agreement, subject to certainspecified annual minimum royalties. In October 2017, the Company exercised an option to buy-down the future royalties that will be payable to PARI onALIS net sales, if approved. The royalty buy-down will reduce the Company's future royalty payments due to PARI. The payment to PARI was included as acomponent of general and administrative expenses in the fourth quarter of 2017. See below for information related to the commercialization agreement withPARI.Other AgreementsCystic Fibrosis Foundation Therapeutics, Inc.—In 2004 and 2009, the Company entered into research funding agreements with Cystic FibrosisFoundation Therapeutics, Inc. (CFFT) whereby it received $1.7 million and $2.2 million for each respective agreement in research funding for thedevelopment of ALIS. If ALIS becomes an approved product for CF in the US, the Company will owe a payment to CFFT of up to $13.4 million that ispayable over a three-year period after approval as a commercialized drug in the US. Furthermore, if certain global sales milestones are met within five years ofthe drug's commercialization, the Company would owe an additional payment of $3.9 million. Since there is significant development and regulatory riskassociated with ALIS, including with respect to the CF indication, the Company has not accrued these obligations.Therapure Biopharma Inc.—In February 2014, the Company entered into a contract manufacturing agreement with Therapure Biopharma Inc.(Therapure) for the manufacture of ALIS at a 200 kg scale. Pursuant to the agreement, the Company and Therapure collaborated to construct a production areafor the manufacture of ALIS in Therapure's existing manufacturing facility in Canada. Therapure manufactures ALIS for the Company on a non-exclusivebasis. The agreement has an initial term of five years from the first date on which Therapure delivers ALIS to the Company after it obtains permits related tothe manufacture of ALIS, and will renew automatically for successive periods of two years each, unless terminated by either party by providing the requiredtwo years' prior written notice to the other party. Notwithstanding the foregoing, the parties have rights and obligations under the agreement prior to thecommencement of the initial term. Under the agreement, the Company is obligated to pay certain minimum amounts for the batches of ALIS produced eachcalendar year. Costs incurred under this agreement will be recorded as a component of research and development expense until such time as the Companyreceives regulatory approvals for ALIS.PARI Pharma GmbH—In July 2014, the Company entered into a Commercialization Agreement with PARI for the manufacture and supply ofeFlow nebulizer systems and related accessories (the Device) as optimized for use with ALIS. Under the Commercialization Agreement, PARI manufacturesthe Device except in the case of certain defined supply failures, when the Company will have the right to make the Device and have it made by third parties(but not certain third parties deemed under the Commercialization Agreement to compete with PARI). The Commercialization Agreement has an initial termof fifteen years from the first commercial sale of ALIS pursuant to the licensing agreement (the Initial Term). The term of the agreement may be extended bythe Company for an additional five years by providing written notice to PARI at least one year prior to the expiration of the Initial Term. Notwithstanding theforegoing, the parties have certain rights and obligations under the agreement prior to the commencement of the Initial Term.SynteractHCR, Inc.—In December 2014, the Company entered into a services agreement with SynteractHCR, Inc. (Synteract) pursuant to which theCompany retained Synteract to perform implementation and management services in connection with the 212 study. The Company anticipates that aggregatecosts relating to all work orders for the 212 study will104Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. License and Other Agreements (Continued)be approximately $45 million over the period of the study. In April 2015, the Company entered into a work order with Synteract to perform implementationand management services for the 312 study. The Company anticipates that aggregate costs relating to all work orders for the 312 study will be approximately$25 million over the period of the study.Ajinomoto Althea, Inc.—In September 2015, the Company entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement)with Ajinomoto Althea, Inc., a Delaware corporation (Althea), for Althea to produce, on a non-exclusive basis, ALIS in finished dosage form at a 50 kg scale.Under the Fill/Finish Agreement, the Company is obligated to pay a minimum of $2.7 million for the batches of ALIS produced by Althea each calendar yearduring the term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and had an initial term that was to end onDecember 31, 2017. In 2016, the Company signed an extension of the Fill/Finish Agreement through December 31, 2019, and it may be extended foradditional two year periods upon mutual written agreement of the Company and Althea at least one year prior to the expiration of its then-current term. TheCompany has expensed at least the required minimum in each year of the contract.AstraZeneca—In October 2016, the Company entered into a license agreement (AZ License Agreement) with AstraZeneca AB, a Swedishcorporation (AstraZeneca). Pursuant to the terms of the AZ License Agreement, AstraZeneca granted the Company exclusive global rights for the purpose ofdeveloping and commercializing AZD7986 (renamed INS 1007). In consideration of the licenses and other rights granted by AstraZeneca, the Companymade an upfront payment of $30.0 million, which was included as research and development expense in the fourth quarter of 2016. The Company is alsoobligated to make a series of contingent milestone payments totaling up to an additional $85.0 million upon the achievement of clinical development andregulatory filing milestones. If the Company elects to develop INS1007 for a second indication, the Company will be obligated to make an additional seriesof contingent milestone payments to AstraZeneca totaling up to $42.5 million. The Company is not obligated to make any additional milestone payments foradditional indications. In addition, the Company will pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teen on net sales of anyapproved product based on INS1007 and one additional payment of $35.0 million upon the first achievement of $1.0 billion in annual net sales. The AZLicense Agreement provides AstraZeneca with the option to negotiate a future agreement with the Company for commercialization of INS1007 in chronicobstructive pulmonary disease or asthma.Patheon UK Limited—In October 2017, the Company entered into certain agreements with Patheon UK Limited (Patheon) related to increasing itslong-term production capacity for ALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for its anticipatedcommercial needs. Under these agreements, the Company is required to deliver to Patheon the required raw materials, including active pharmaceuticalingredients, and certain fixed assets needed to manufacture ALIS. Patheon's supply obligations will commence once certain technology transfer andconstruction services are completed. The Company's manufacturing and supply agreement with Patheon will remain in effect for a fixed initial term, afterwhich it will continue for successive renewal terms unless either we or Patheon have given written notice of termination. The technology transfer agreementwill expire when the parties agree that the technology transfer services have been completed. The agreements may also be terminated under certain othercircumstances, including by either party due to a material uncured breach of the other party or the other party’s insolvency. These early termination clausesmay reduce the amounts due to the relevant parties. The investment in our long-term production capacity build-out, including under the Patheon agreementsand related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $60.0 million and will beincurred over the next three to four years.11. Commitments and ContingenciesCommitmentsThe Company has an operating lease for office and laboratory space located in Bridgewater, NJ for which the initial lease term expires in November2019. Future minimum rental payments under this lease are $2.0 million. In July 2016, the Company signed an operating lease for additional laboratoryspace located in Bridgewater, NJ for which the initial lease term expires in September 2021. Future minimum rental payments under this lease are $1.9million.Rent expense charged to operations was $1.5 million, $1.2 million, and $0.8 million for the years ended December 31, 2017, 2016 and 2015,respectively. Rent expense is recorded on a straight-line basis over the term of the105Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. Commitments and Contingencies (Continued)applicable leases. Future minimum rental cash payments required under the Company's operating leases as of December 31, 2017 are as follows (inthousands):Year Ending on December 31: 2018$1,52120191,421202047720214982022— $3,917Legal ProceedingsOn July 15, 2016, a lawsuit captioned Hoey v. Insmed Incorporated, et al, No. 3:16-cv-04323-FLW-TJB (D.N.J. July 15, 2016) was filed in the USDistrict Court for the District of New Jersey on behalf of a putative class of investors who purchased the Company’s common stock from March 18, 2013through June 8, 2016. The complaint alleged that the Company and certain of its executives violated Sections 10(b) and 20(a) of the Securities Exchange Actof 1934 (Exchange Act) by misrepresenting and/or omitting the likelihood of the European Medicines Agency (EMA) approving the Company’s Europeanmarketing authorization application (MAA) for use of ALIS in the treatment of NTM lung disease and the likelihood of commercialization of ALIS in Europe. On October 25, 2016, the Court issued an order appointing Bucks County Employees Retirement Fund as lead plaintiff for the putative class. OnDecember 15, 2016, the lead plaintiff filed an amended complaint that shortens the putative class period for the Exchange Act claims to March 26, 2014through June 8, 2016 and adds claims under Sections 11, 12, and 15 of the Securities Act of 1933 (Securities Act) on behalf of a putative class of investorswho purchased common stock in or traceable to the Company’s March 31, 2015 public offering. The amended complaint names as defendants in theSecurities Act claims the Company, certain directors and officers, and the investment banks who served as underwriters in connection with the secondaryoffering. The amended complaint alleges defendants violated the Securities Act by using a purportedly misleading definition of “culture conversion” andsupposedly failing to disclose in the offering materials purported flaws in its Phase 2 study that made the secondary offering risky or speculative. Theamended complaint seeks damages in an unspecified amount. The Company moved to dismiss the amended complaint on March 1, 2017. The lead plaintiffopposed the motion on May 17, 2017 and the Company provided its reply brief on July 11, 2017. On July 20, 2017, the plaintiff asked for leave to file a sur-reply in further opposition to the Company’s motion to dismiss the amended complaint, which the Company had opposed.On February 15, 2018, the Court issued a decision granting the Company’s motion and dismissing the amended complaint without prejudice. Thelead plaintiff has until March 19, 2018 to file a second amended complaint. If a second amended complaint is filed, the Company intends to continue todefend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of the lawsuit. From time to time, the Company is a party to various other lawsuits, claims and other legal proceedings that arise in the ordinary course of business.While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverseeffect on the Company’s consolidated financial position, results of operations or cash flows.12. Quarterly Financial Data (Unaudited)The following table summarizes unaudited quarterly financial data for the years ended December 31, 2017 and 2016 (in thousands, except pershare data).106Table of ContentsINSMED INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter* Total*Revenues$— $— $— $— $—Operating loss$(35,969) $(43,515) $(44,083) $(65,353) $(188,920)Net loss$(37,414) $(44,672) $(45,179) $(65,384) $(192,649)Basic and diluted net loss per share$(0.60) $(0.72) $(0.69) $(0.85) $(2.89) 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter** Total**Revenues$— $— $— $— $—Operating loss$(33,067) $(36,133) $(37,149) $(67,051) $(173,400)Net loss$(33,532) $(36,579) $(37,760) $(68,402) $(176,273)Basic and diluted net loss per share$(0.54) $(0.59) $(0.61) $(1.10) $(2.85)________________* Includes a one-time payment in October 2017 related to the buy-down of future royalties payable to PARI on the global net sales of ALIS, ifapproved.** Includes a $30.0 million upfront payment to AstraZeneca under the AZ License Agreement related to INS1007, which was included as acomponent of research and development expense.Basic and diluted net loss per share amounts included in the above table were computed independently for each of the quarters presented.Accordingly, the sum of the quarterly basic and diluted net loss per share amounts may not agree to the total for the year.13. Retirement PlanThe Company has a 401(k) defined contribution plan for the benefit for all US employees and permits voluntary contributions by employeessubject to IRS-imposed limitations. Beginning in April 2015, the Company matched 100% of eligible employee contributions on the first 3% of employeesalary (up to the IRS maximum). Employer contributions for the year ended December 31, 2017, 2016 and 2015 were $0.8 million, $0.6 million and $0.4million, respectively. Effective January 1, 2018, the Company is matching 100% of eligible employee contributions on the first 4% of employee salary (up tothe IRS maximum).107Table of Contents14. Subsequent EventIn January 2018, the Company completed an underwritten public offering of 1.75% convertible senior notes due 2025 (the Convertible Notes)pursuant to an indenture dated as of January 26, 2018, between the Company and Wells Fargo Bank, National Association (Wells Fargo), as trustee, assupplemented by the first supplemental indenture, dated January 26, 2018 between the Company and Wells Fargo (as supplemented, the Indenture). TheCompany sold $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriters' option to purchaseadditional Convertible Notes of $50.0 million. The Company's net proceeds from the offering, after deducting underwriting discounts and commissions andother offering expenses of $14.2 million, were approximately $435.8 million. The Company is currently evaluating the accounting for the debt and equitycomponents of the offering.The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. TheConvertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased. The Convertible Notes are convertible into commonshares of the Company under certain circumstances described in the Indenture. The initial conversion rate is 25.5384 shares of common stock per $1,000principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $39.16 per share of common stock). The conversion ratewill be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.108ConfidentialEXHIBIT 10.39CONFIDENTIAL TREATMENT HAS BEEN REQUESTED AS TO CERTAIN PORTIONS OF THIS DOCUMENT.EACH SUCH PORTION, WHICH HAS BEEN OMITTED HEREIN AND REPLACED WITH ASTERISKS (***), HASBEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.MANUFACTURING AND SUPPLY AGREEMENT1MANUFACTURING AND SUPPLY AGREEMENTThis MANUFACTURING AND SUPPLY AGREEMENT (this “Agreement”) dated as of 20 October 2017 (the“Effective Date”) is made by and between Insmed Incorporated, a Virginia corporation having its principal place of business at 10Finderne Avenue, Building 10, Bridgewater, New Jersey 08807, USA (“Client”), and Patheon UK Limited, a company incorporatedin England and Wales having its principal place of business at Kingfisher Drive, Covingham, Swindon, SN35BZ, United Kingdom(“Patheon”). Client and Patheon are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”RECITALSWHEREAS, Client has a commercial interest in the manufacture and commercialization of Amikacin Liposome InhalationSuspension (ARIKAYCE®), a sterile, aqueous liposomal suspension designed for oral inhalation via nebulization which ismanufactured using the Client Manufacturing Process (the “Product”);WHEREAS, Patheon has expertise and experience in manufacturing and packaging sterile pharmaceutical products and isinterested in providing manufacturing services to Client in connection with the Product;WHEREAS, in anticipation of this Agreement and the services that Patheon will supply hereunder, the Parties are executingan agreement pursuant to which Patheon would undertake certain technology transfer and construction services in order to validateClient’s technology package and prepare Patheon’s facilities for the manufacture of the Product; andNOW, THEREFORE, in consideration of the foregoing, the mutual promises and covenants of the Parties contained hereinand other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intendingto be legally bound, do hereby agree as follows:ARTICLE I. DEFINITIONSThe following terms shall have the meanings set forth below. Unless the context indicates otherwise, the singular shall includethe plural and the plural shall include the singular.“Additional Services” means any services requested and approved by Client that supplement Patheon’s regular performance ofthe Manufacturing Services pursuant to this Agreement or that supplement Patheon’s regular performance of the TransferServices pursuant to the Technology Transfer Agreement, as applicable, as described in Schedule B.“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries,controls, is controlled by, or is under common control with, such Person. For the purposes of this definition only, a Person willbe regarded as in control of another Person if such Person owns, or directly or indirectly controls, more than 50% of the votingsecurities (or comparable equity interests) or other ownership interests2*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.of the other Person, or if such Person directly or indirectly possesses the power to direct or cause the direction of themanagement or policies of the other Person, whether through the ownership of voting securities, by contract, or any othermeans whatsoever.“Agreed Delivery Date” has the meaning set forth in Section 2.3(f).“Agreement” has the meaning set forth in the Preamble hereto.“API” means the active pharmaceutical ingredient amikacin sulfate.“Applicable Law” means applicable United States and foreign federal, state, and local laws, orders, rules, regulations,guidelines, standards, customs and ordinances, including, without limitation, those (to the extent they are applicable) of theFDA and comparable foreign Regulatory Authorities, including the FDA Act.“Base Fee” means the monthly fee paid by Client, as more specifically set forth in Schedule B. For the avoidance of doubt,Base Fees do not include Technology Transfer Fees or Capital Expenditures (both as defined in the Technology TransferAgreement), Product Fees, Material Costs, Maintenance Costs, Disposal Costs or charges for Bill Back Items or AdditionalServices.“Basic Engineering Design” means the basic engineering design to be conducted by Patheon as described in the LetterAgreement entered into by the Parties dated 16 June 2017.“Bill Back Items” means the items and services set forth in Schedule B or other project-specific items that are used or necessaryin connection with the Manufacture of the Products and that are not included as Materials.“Certificate of Analysis” means a certificate evidencing the analytical tests conducted on a specific batch of Product or Materialand setting forth, inter alia, the items tested, specifications, and test results.“Certificate of Compliance” means a certificate stating that a specific batch of Product has been Manufactured in compliancewith GMP and the Specifications.“Claim” has the meaning set forth in Section 9.3(a).“Client” has the meaning set forth in the Preamble hereto.“Client Indemnified Parties” has the meaning set forth in Section 9.2.“Client Manufacturing Equipment” means process equipment necessary to Manufacture the bulk Product that consists ofequipment for the bulk Manufacturing, vial preparation, fill/finish, and in-process control testing of the Product and itsintermediates as more fully set forth in Exhibit F of the Technology Transfer Agreement.3*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Client Manufacturing Process” means the proprietary process owned or Controlled by Client for Manufacturing the Product,as disclosed by Client to Patheon, and each intermediate of the Product, as established as of the Effective Date, includingwithout limitation, as set forth in the investigational new drug application filed with the FDA, and, when applicable, as set forthin the NDA as may be filed with, and approved by, the FDA.“Client Manufacturing Process Improvements” has the meaning set forth in Section 5.1(e)(i).“Client On Site Representative” has the meaning set forth in Section 3.5(a).“Client Product Improvements” has the meaning set forth in Section 5.1(e)(i).“Client Specification Improvements” has the meaning set forth in Section 5.1(e)(i).“Client-Supplied Materials” has the meaning set forth in Section 2.2(a).“Commercially Reasonable Efforts” means, with respect to the efforts to be expended by a Party to achieve any objective, thereasonable, diligent efforts to accomplish such objective as a similarly situated party (with respect to size, resources and assets)in the pharmaceutical industry would normally use to accomplish a similar objective in its own interests under similarcircumstances.“Confidentiality Agreement” has the meaning set forth in Section 7.1.“Confidential Information” has the meaning set out in the Confidentiality Agreement.“Control” or “Controlled” means ownership or the right by a Party to assign or grant a license or sublicense under IntellectualProperty rights to the other Party of the scope set forth herein, without breaching the terms of any agreement with a Third Party.“Deficiency Notice” has the meaning set forth in Section 2.8(b).“Discretionary Manufacturing Changes” has the meaning set forth in Section 2.10(b)(ii).“Disposal Costs” means the cost charged by a Third Party for disposal of waste from the Manufacture of the Product plus an[***]% handling fee.“Effective Date” has the meaning set forth in the Preamble hereto“EMA” means the European Medicines Agency.“Equipment” means any equipment used in the Manufacture of the Product as more fully set forth in Exhibit F of theTechnology Transfer Agreement.“Existing Client Intellectual Property” has the meaning set forth in Section 5.1(a).“Existing Patheon Intellectual Property” has the meaning set forth in Section 5.1(b).4*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Expected Yield” has the meaning set forth in Section 2.9(a).“Expert” has the meaning set forth in Section 2.8(d)(vi).“Exploit” means to make, have made, import, use, sell, offer for sale, receive or otherwise dispose of a product or process,including the research, development (including the conduct of clinical trials), registration, modification, enhancement,improvement, Manufacture, storage, formulation, optimization, export, transport, distribution, promotion, or marketing of aproduct or process.“Facility” means the facility of Patheon located at Kingfisher Drive, Swindon, Wiltshire SN3 5BZ, United Kingdom, or suchother facility approved in accordance with Section 3.4(a).“FDA” means the United States Food and Drug Administration and any successor organization thereto and all agencies underits direct control.“FDA Act” means the US Federal Food, Drug, and Cosmetic Act, as amended.“FDA Approval Date” means the date of receipt by Client of Regulatory Approval in the United States for ProductsManufactured at the Manufacturing Suite.“Filing Party” has the meaning set forth in Section 3.17(d).“Final Filing” has the meaning set forth in Section 3.17(g).“Forecast” has the meaning set forth in Section 2.3(a).“GMP” means the current good manufacturing practices applicable from time to time to the Manufacturing of the Product, orany intermediate of the Product, pursuant to Applicable Law, including those promulgated under the FDA Act at 21 C.F.R.(Parts 210 and 211 and Part 4 as relevant for combination products), and those promulgated under Directive 2001/83/EC (asamended by Directive 2004/27/EC), Directive 2003/94/EC and EudraLex - Volume 4 of the Rules Governing MedicinalProducts in the European Union entitled “EU Guidelines to Good Manufacturing Practice Medicinal Products for Human andVeterinary Use”, together with the latest FDA, EMA and European Commission guidance documents pertaining tomanufacturing and quality control practice, all as updated, amended and revised from time to time. Guidance in draft status willbe considered as in effect for the purposes of this definition if this guidance has been adopted by Patheon at the Facility inrelation to all its other clients and included as part of Patheon’s Standard Operating Procedures or if it is agreed to be adoptedby the Commercial Steering Committee.“Indemnified Party” has the meaning set forth in Section 9.3(a).“Indemnifying Party” has the meaning set forth in Section 9.3(a).5*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Initial Draft” has the meaning set forth in Section 3.17(e).“Initial Term” has the meaning set forth in Section 8.1.“Intellectual Property” includes, without limitation, rights in patents, patent applications, formulae, trademarks, trademarkapplications, trade-names, Inventions, copyrights, designs, trade secrets, databases and rights in know how (whether or not anyof these is registered or capable of registration and including applications for registration of any such thing) and all other similarrights or forms of protection of a similar nature or having equivalent or similar effect to any of these which may subsistanywhere in the world.“Invention” means information about any innovation, improvement, development, discovery, computer program, device, tradesecret, method, know-how, process, technique or the like, whether or not written or otherwise fixed in any form or medium,regardless of the media on which it is contained and whether or not patentable or copyrightable.“Loss” means any claims, lawsuits, losses, damages, liabilities, penalties, costs, and expenses (including reasonable attorneys’fees and disbursements).“Maintenance” means the maintenance of Equipment and the Facility in satisfactory operating condition, including theperformance of systematic inspection and service of Equipment pursuant to the applicable Standard Operating Procedures ofPatheon, as reviewed and agreed to by Client (the “Equipment Standard Operating Procedures”), or the manufacturer’s termsof operation and recommended procedures.“Maintenance Costs” means the cost charged by a Third Party for (a) routine Maintenance; or (b) revalidation of theEquipment, plus an [***]% handling fee.“Make Good Costs” has the meaning set forth in Section 8.3(d).“Manufacture” and “Manufacturing Services” means the manufacture of the Products, including without limitation theplanning, purchasing and receipt of Patheon-Supplied Materials, planning (based on the Forecast), receipt of Client-SuppliedMaterials and the manufacturing, processing, formulating, filling, bulk packaging, bulk labelling, storage, handling, qualityrelease of Products (Certificate of Compliance), together with all agreed sample retention, stability testing, quality control andassurance and waste disposal.“Manufacturing Services Termination Costs” has the meaning set forth in Section 8.3(e).“Manufacturing Suite” means the manufacturing suite at the Facility, whose footprint was determined pursuant to theTechnology Transfer Agreement.6*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Marketing Authorization” means an approved New Drug Application as defined in the FDA Act and the regulationspromulgated thereunder, or any corresponding foreign application, registration, or certification, necessary or reasonably usefulto market any Product in a country or regulatory jurisdiction other than the United States, including applicable pricing andreimbursement approvals, and all supplements and amendments thereto.“Material Costs” has the meaning set forth in Section 2.2(b).“Materials” means all API, excipients and processing aids, and processing, filling and packaging components listed in ScheduleC, as amended from time to time by agreement in writing.“NDA” means the US new drug application for a product, including the Product, requesting permission to place a drug on themarket in accordance with 21 C.F.R. Part 314, and all supplements (SNDA) filed pursuant to the requirements of the FDA,including all documents, data, and other information filed concerning such product that are necessary for FDA approval tomarket such product in the Territory.“Non-Conforming Product” means (a) a batch of Product that fails, or is aborted during processing; or (b) a ProductManufactured by Patheon that fails to [***].“Non-Filing Party” has the meaning set forth in Section 3.17(d).“Party” and “Parties” have the meanings set forth in the Preamble hereto.“Patheon” has the meaning set forth in the Preamble hereto.“Patheon Indemnified Parties” has the meaning set forth in Section 9.1.“Patheon Independent Manufacturing Equipment Improvements” has the meaning set forth in Section 5.1(f)(i).“Patheon Manufacturing Equipment” means any equipment, other than the Client Manufacturing Equipment, necessary toManufacture the Product including as more fully set forth in Exhibit F of the Technology Transfer Agreement, waste handlingsystems and all building infrastructure and any and all improvements or additions made thereto, as approved in writing byClient.“Patheon Nonconformance” has the meaning set forth in Section 2.8(d)(i).“Patheon-Supplied Materials” has the meaning set forth in Section 2.2(a).7*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation,limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, or other similarentity or organization, including a government or political subdivision, department, or agency of a government.“Product” has the meaning set forth in the Recitals hereto in finished, bulk-packaged form according to the Specifications asdescribed in Schedule A, as the same may be amended from time to time.“Product Fee” has the meaning set forth in Section 2.4.“Project Manager” and “Project Managers” have the meaning set forth in Section 3.5(b).“Purchase Order” means a written purchase order that sets forth (a) the quantities of each presentation of Product to bedelivered by Patheon to Client, (b) the requested delivery dates therefor, and (c) the bulk packaging to be used for suchProduct.“Quality Agreement” has the meaning set forth in Section 3.1.“Regulatory Approval” means any and all approvals (including pricing and reimbursement approvals), licenses, registrations, orauthorizations of any Regulatory Authority necessary to Exploit the Product in any country in the Territory, including anyapproval of a Product, Marketing Authorization and supplements and amendments thereto.“Regulatory Authority” means any applicable supra-national, federal, national, regional, state, provincial, or local regulatoryagencies, departments, bureaus, commissions, councils, or other government entities regulating or otherwise exercisingauthority with respect to the Exploitation of a Product in the Territory.“Regulatory Filings” has the meaning set forth in Section 3.17.“Regulatory Obligations” has the meaning set forth in Section 3.17.“Remediation Period” has the meaning set forth in Section 8.2(a)(vii).“Reports” has the meaning set forth in Section 3.13.“Required Manufacturing Changes” has the meaning set forth in Section 2.10(b)(i).“Shipment Costs” has the meaning set forth in Section 2.8(d)(ii).“Specifications” means the specifications for each presentation of Product (i.e., the dosage forms in Schedule A) given byClient to Patheon relating to the specifications of the Materials; the manufacturing specifications, directions and processes; thestorage requirements; all environmental, health and safety information for the Product including material safety data sheets andthe finished Product specifications, specifications for bulk8*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.and primary packaging and shipping requirements for the Product, as amended, modified, or supplemented from time to time.“Technology Transfer Agreement” means the agreement executed on the date hereof between Client and Patheon in order forPatheon to be able to Manufacture the Products, as described in more detail in the third Recital.“Term” has the meaning set forth in Section 8.1.“Territory” means the United States and other territories agreed by the Parties pursuant to Section 2.2(t) from time to time.“Third Party” means a Person who is neither a Party nor an Affiliate of a Party.“Third Party Losses” means Losses incurred as a result of claims brought by Third Parties.“Third Party Subcontractors” has the meaning set forth in Section 3.16.ARTICLE II. MANUFACTURING SERVICES2.1 Supply Obligations.(a) Subject to the completion of the technology transfer and construction services under the Technology TransferAgreement to validate Client’s technology package and prepare Patheon’s facilities for the manufacture of the Product, and the termsand conditions hereof, and in consideration for the payments set forth in Schedule B, Client appoints Patheon as a non-exclusivesupplier of the Products and Patheon shall provide the Manufacturing Services and shall supply the Product to Client.(b) Pursuant to the Technology Transfer Agreement, Client will develop and Patheon will confirm the ClientManufacturing Process. The Client Manufacturing Process is the Confidential Information of Client, subject to the terms of theConfidentiality Agreement, and accordingly Patheon may not allow Third Parties (other than relevant Regulatory Authorities or ThirdParty Subcontractors) to access the Manufacturing Suite or view documentation so describing the Manufacturing Process withoutClient’s prior written consent, provided that third parties may view the filling line from outside the room in which it is housed.(c) Patheon shall Manufacture all Products delivered hereunder:(i) at the Manufacturing Suite;(ii) in accordance with the Specifications, this Agreement and the Quality Agreement; and(iii) in compliance with GMP and Applicable Laws.9*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(d) Patheon shall ensure that sufficient numbers of adequately educated and experienced staff are retained at theFacility in order to Manufacture the volumes of Product set out in the Forecast. Patheon shall perform all activities necessary tomaintain a GMP compliant status of the manufacturing lines and areas of the Facility applicable to the Manufacture of the Product.2.2 Materials, Bill Back Items and Additional Services.(a) All Materials necessary for the Manufacture of the Product are set forth in Schedule C. Materials that will bepurchased by Client and shipped to Patheon (“Client-Supplied Materials”) are listed in Part A of Schedule C. Materials that will bepurchased by Patheon (“Patheon-Supplied Materials”) are listed in Part B of Schedule C.(b) Patheon-Supplied Materials will be invoiced to Client [***] at the time of purchase by Patheon at cost plus an[***]% handling fee, in accordance with the invoicing procedure set forth in Article IV (“Material Costs”). Patheon shall obtain theprior written approval of Client on the cost of such Patheon-Supplied Materials if the cost of any individual item of Patheon-SuppliedMaterial increases by more than (i) [***]%; or (ii) £[***], whichever is the lower. Where Client nominates a particular supplier tosupply certain Patheon-Supplied Materials, Patheon shall purchase those Materials from that supplier subject to Section 2.2(d). Allpurchases of Patheon-Supplied Materials by Patheon shall be made on Patheon’s own behalf and not as an agent for Client.(c) Patheon shall store, handle, and protect the Materials with a reasonable level of care, which shall include taking allreasonable precautions to ensure that the Materials are not subject to contamination, deterioration, destruction, or theft. Patheon shallkeep adequate records of its usage of the Materials during the Term.(d) Client acknowledges that Patheon is required under GMP to follow certain verification and approval processes forall vendors used by Patheon in the procurement of Materials. In the event that Client requests Patheon to procure Materials from avendor that is not currently verified by Patheon, Client will be liable for Patheon’s fees for the performance of any auditing andverification activities by Patheon under this Section 2.2(d) as an Additional Service. Client will be responsible for validation ofsuppliers of Client-Supplied Materials unless otherwise agreed. Patheon will be responsible for validation of suppliers of Patheon-Supplied Materials. Any changes to a supplier of Materials proposed by either Party shall be subject to the change control procedureset out in Section 2.10(b) and may not be used until, as applicable, submission has been filed to necessary health authorities and whereappropriate approvals obtained.(e) Patheon shall be responsible for ordering and paying for the relevant quantities of Patheon-Supplied Materialsnecessary for the Manufacture of Products on such terms and conditions as Patheon may agree with relevant suppliers.10*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(f) The Commercial Steering Committee shall discuss and agree the process by which Patheon shall order from Clientthe relevant quantities of Client-Supplied Materials necessary for the Manufacture of Products during the Term. Client will keepPatheon informed of the standard lead time for and cost of Client-Supplied Materials and shall supply such Client-Supplied Materialsfree of charge on a consignment basis in response to orders placed by Patheon under this Agreement.(g) Client will at its sole cost and expense, deliver Client-Supplied Materials to the Facility DDP (Incoterms 2010) atno cost to Patheon (with any VAT paid by Client) in the quantities and on the dates agreed with Patheon in response to orders placedpursuant to the process agreed under Section 2.2(f). If the Client-Supplied Materials are not received on the agreed date, Patheon maydelay the Manufacture of Product for a period of time proportionate to such delay.(h) All shipments of Client-Supplied Materials, if required, will be accompanied by Certificate(s) of Analysis from theMaterial manufacturer or Client confirming its compliance with the Material’s specifications, together with all required documentationas specified in the Quality Agreement. Client or Client’s designee will be the “Importer of Record” for Client-Supplied Materialsimported to the Facility. Client-Supplied Materials will be held by Patheon on behalf of Client as set forth in this Agreement.(i) Title to Client-Supplied Materials will at all times remain the property of Client. Risk in the Client-SuppliedMaterials shall remain with Patheon at all times from the point when the Client-Supplied Materials are delivered to Patheon untildelivery of the Products to Client (or return of the Client-Supplied Materials to Client), at which time it shall pass to Client (or itsrelevant Affiliate). The transfer of risk in the Client-Supplied Materials to Patheon shall be without prejudice to Section 9.5 (to theextent that the terms and conditions of Patheon’s policies of insurance do not cover any type of loss or damage to the Client-SuppliedMaterials) and shall be subject to any amounts recoverable by Patheon from its insurer provided that Patheon shall only insure Client-Supplied Materials up to the values recommended and provided to Patheon by Client. Patheon shall not be liable for any unrecoverablelosses caused by the under-estimation of such values. The transfer of risk shall further be subject to any deductible amounts applied byPatheon’s insurer and the terms and conditions and exclusions of Patheon’s policies of insurance.(j) Client-Supplied Materials will only be used by Patheon to perform the Manufacturing Services or associatedactivities necessary to perform the Manufacturing Services.(k) Client shall supply the Client-Supplied Materials in accordance with the requirements of the Quality Agreement,the Specifications, the Marketing Authorization, and GMP.(l) Patheon shall notify Client promptly in writing if, after having carried out the analysis and testing of Client-Supplied Materials as set out in the Quality Agreement or the11*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Specifications it considers that any delivered Client-Supplied Materials do not comply with Section 2.2(k), and shall provide samplesof such delivery together with copies of any relevant analysis records. Upon receipt of notification pursuant to this Section 2.2(l) byClient, the Parties will use Commercially Reasonable Efforts to agree (each acting in good faith) whether or not the Client-SuppliedMaterials in question are compliant with the requirements set out in Section 2.2(k) and:(i) Client shall be entitled at all reasonable times to inspect and/or analyse the delivery in question;(ii) Patheon shall not use any of the Client-Supplied Materials in question in the Manufacture of Product untilthe matter has been resolved in accordance with this Section 2.2(l) and Section 2.2(m) unless agreed otherwise; and(iii) at Patheon’s request, Client shall deliver to Patheon replacement Client-Supplied Materials as soon aspracticable, using Commercially Reasonable Efforts to enable continuity of Patheon’s Manufacture of the relevantProducts.(m) In the event that the Parties do not agree on whether the Client-Supplied Materials in question are compliant withthe requirements set out in Section 2.2(k), the matter may be referred to an Expert in accordance with the procedure in Section 2.8(d)(vi).(n) If Client-Supplied Materials are not compliant (or are determined to be non-compliant) with the requirements setout in Section 2.2(k) and Patheon does not have sufficient quantity of released Client-Supplied Materials that are compliant, thenPatheon will have no liability to Client if this results in delayed performance of any Manufacturing Services or cancellation orrescheduling of any manufacturing slots, provided that the non-compliance has not been caused by a breach of this Agreement byPatheon. Client will pay Patheon for the Purchase Order in accordance with Section 2.4 which payment will be credited against theProduct Fees that are payable for future Purchase Orders.(o) Where Patheon fails to carry out incoming analysis of Client-Supplied Materials in accordance with theSpecifications and uses the Client-Supplied Materials in question in the Manufacture of Product and any such Client-SuppliedMaterials thereafter are agreed or determined pursuant to Section 2.8(d)(vi) to not comply with the requirements set out in Section2.2(k), Patheon shall:(i) provide the remedies set out in Section 2.8(d)(ii) for any Non-Conforming Product that is caused by such afailure (Patheon’s obligation to reimburse Client-Supplied Materials incorporated into Non-Conforming Product causedby such a failure will be captured and calculated in the Yield Reimbursement Payment under Section 2.9 which shall besubject to the limitation of liability in Section 9.5(a)); and(ii) at Client’s option, subject to completion of any quality investigation, any sample retention requirements andthe provisions of the Quality Agreement, take12*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.all necessary action (at its own expense), to rework, reprocess (both of which shall be done promptly) or destroy anyNon-Conforming Products caused by such a failure.(p) Client will be responsible for paying for all Non-Conforming Product that arises from Client-Supplied Materialsthat do not comply with the requirements set out in Section 2.2(k) that could not be detected by Patheon carrying out the incominganalysis of Client-Supplied Materials in accordance with the Specifications.(q) Patheon will provide free of charge sufficient storage capacity to support storage of the required quantity ofMaterials for the longer of up to [***] or the amount of time set forth for the applicable Material on Schedule C. Patheon will alsoprovide free of charge sufficient storage capacity to support storage of Product for up to [***] after the release of the relevant Product. Any additional storage, or storage of Materials or Product beyond the applicable period stated herein, will be subject to the mutualagreement of the Parties to include the fees relating thereto. Patheon’s standard storage fees as of the Effective Date are [***] perpallet, per [***] for storing the Materials or finished Product. Storage fees for Materials or Product that contain controlled substances orrequire refrigeration are charged at [***] per pallet per [***]. Storage fees are subject to a one pallet minimum charge per [***].Storage fees will not apply to (i) any [***] for up to [***] after the Marketing Authorization for the United States has been granted;and (ii) any stocks of Products Manufactured during the first [***] after the Effective Date in anticipation of launch in the US,provided that where Patheon is unable to accommodate all or some of such launch quantities it may engage a Third PartySubcontractor to do so in accordance with Section 3.16.(r) Bill Back Items will be charged to Client at Patheon’s cost plus a [***] handling fee. Patheon shall invoice Client[***] for any Bill Back Items used in connection with the Manufacture of the Products during the preceding [***] in accordance withARTICLE IV. Patheon may only invoice Bill Back Items that have been quoted to and approved in writing by an authorized person ofClient in advance. The cost of any Bill Back Items where use is shared between Client and Patheon or other clients of Patheon will beapportioned in good faith in proportion to their use.(s) If Client is interested in having Patheon perform Additional Services, Client will provide Patheon with a writtenrequest containing sufficient detail to enable Patheon to provide Client with a quote and proposal to provide such Additional Services.Patheon may only invoice for Additional Services that have been quoted to and approved in writing by an authorized person of Clientin advance. Where a rate for Additional Services has been specified in Schedule B, such rates are calculated as at the Effective Date.These fees will be adjusted on 1st January of each year (first review [***]) to reflect any increase in the UK Consumer Price Index: AllItems Index published by the Office for National Statistics (as published at www .ons.gov.uk) during the previous twelve (12) months(based on the average of the monthly changes over the 12-month period), provided that if the increase in the index exceeds [***] it willbe implemented but the Parties shall meet and negotiate in good faith measures to mitigate the effect of the fee increase. Patheon shallinvoice Client monthly for any Additional Services performed by Patheon during the preceding month in accordance with Article IV.13*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(t) If Client decides to have Patheon perform Manufacturing Services for the Product for a territory outside the UnitedStates, Japan and/or the European Union (including the United Kingdom), then Client will inform Patheon of the additionalrequirements for each new country and Patheon will prepare a quotation for consideration by Client of any additional costs for theProduct destined for each new country. The agreed additional requirements and change to any Product Fees will be set out in a writtenamendment to this Agreement. The Product Fees for products supplied to Japan or the European Union (including the UnitedKingdom) shall be consistent with those for the United States save to the extent Additional Services are required in respect of suchProducts, e.g., extra visual inspection for Japan, which shall be subject to Section 2.2(s).(u) Patheon-Supplied Materials.(i) If the Parties agree that Patheon is to source all or any of the Materials, Client understands andacknowledges that Patheon will rely on Client’s Purchase Orders and Forecasts in ordering the Patheon-SuppliedMaterials required to meet the Purchase Orders. Accordingly, Client authorizes Patheon to purchase Patheon-SuppliedMaterials to satisfy the Manufacturing Services requirements for Products for the first [***] contemplated in the mostrecent Forecast or as set out in Schedule C. Patheon may make other purchases of Patheon-Supplied Materials to meetManufacturing Services requirements for longer periods if agreed to in writing by the Parties. Client will give Patheonwritten authorization to order Patheon-Supplied Materials for any launch quantities of Product requested by Clientwhich will be considered a Purchase Order when accepted by Patheon.(ii) Client will reimburse Patheon for any destruction costs of any Patheon-Supplied Materials ordered byPatheon under Purchase Orders or under Section 2.2(u)(i) that are not included in finished Products Manufactured forClient on or before [***] after the forecasted month for which the purchases have been made (or for a longer period asthe Parties may agree). If any non-expired Patheon-Supplied Materials are used in Products subsequently manufacturedfor Client, Client will receive credit for any costs of those Patheon-Supplied Materials previously paid to Patheon byClient.(v) Waste Disposal. Patheon shall dispose of waste arising from the Manufacture of the Product. Disposal Costs willbe invoiced to Client [***] in accordance with the invoicing procedure set forth in ARTICLE IV. Patheon may only invoice DisposalCosts that have been quoted to and approved in writing by an authorized person of Client in advance.2.3 Forecasting, Order, and Delivery of Products.14*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(a) No later than [***] prior to the anticipated FDA Approval Date and thereafter at least [***] during the Term,Client shall deliver to Patheon a written good faith [***] forecast, calculated monthly for the first [***] and quarterly thereafter,estimating the quantities of each presentation of Product that Client expects to order from Patheon during such period (each, a“Forecast”).(b) If Patheon is unable to accommodate any portion of the Forecast, it will notify Client in writing setting out thereasons and the Parties will agree on any revisions to the Forecast. Without prejudice to Client’s other rights and remedies under thisAgreement, Patheon shall take all such actions as may be reasonably requested by Client to minimize the damage to Client (if any)caused by Patheon’s inability to accommodate any portion of the Forecast, [***]. Taking these actions will not constitute an admissionof liability by Patheon or any acceptance that an inability to accommodate any portion of the Forecast will cause damage to Client.(c) Client shall update the Forecast on or before the first day of each calendar month on a rolling forward basis. Clientshall also update the Forecast prior to the next monthly deadline if it determines that the volumes estimated in such Forecast havechanged (or will change) by more than [***]. The most recent Forecast will prevail. Except as set forth in Section 2.3(e) below, eachForecast shall be non-binding and shall be used by Patheon for planning purposes only.(d) When this Agreement is executed, Client will give Patheon a written [***] for strategic purposes, of the volume ofProduct Client then anticipates to purchase from Patheon for each year during such period (the “Long Term Forecast”). The LongTerm Forecast will thereafter be updated every six months (as of June 1 and December 1) during the Term. If Patheon is unable toaccommodate any portion of the Long Term Forecast, it will notify Client and the Parties will agree on any revisions to the Long TermForecast.(e) The first [***] of each Forecast shall be considered binding firm orders. Client will issue corresponding PurchaseOrder(s) on a monthly basis to purchase and, when accepted by Patheon, for Patheon to Manufacture and deliver the agreed quantityof the Product for each month of such [***] period, provided that the delivery lead time must be at least [***] from the date ofPatheon’s acceptance (or deemed acceptance) of the Purchase Order pursuant to Section 2.3(f) below. Expedited Purchase Orders willbe subject to additional fees on reasonable terms that are consistent with those generally offered to Patheon’s other customers.(f) Patheon shall accept Purchase Orders by sending an acknowledgement to Client on or before [***] business daysof its receipt of the Purchase Order. The acknowledgement will include confirmation of the quantity of Product ordered as set out inthe Purchase Order and the delivery date(s) for the Product ordered as set out in the Purchase Order (“Agreed Delivery Date”). Uponreceipt of such acknowledgement, each Purchase Order will be regarded by the Parties as a binding irrevocable commitment by Clientto purchase from Patheon, and for Patheon to Manufacture and supply to Client, the relevant quantity of Product according to therequirements set out in such Purchase Order.15*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(g) Patheon shall only be required to provide a delivery month for any Purchase Orders or part thereof that do notrelate to the first [***] of the applicable Forecast. The Agreed Delivery Date may be amended by agreement of the Parties. If Patheonfails to acknowledge receipt of a Purchase Order on or before the [***] business day period, the Purchase Order will be deemed tohave been accepted by Patheon.(h) Patheon shall deliver Product to Client EXW the Facility (as defined in Incoterms 2010) by the Agreed DeliveryDate and in the quantities specified in the relevant Purchase Order. Client may accept deliveries in advance of the Agreed DeliveryDate at its discretion. All Product shall be packed for shipping in accordance with the Specifications.(i) Title to the Products shall vest in Client from [***]. Risk of loss to Product shall pass to Client (or a designatedClient Affiliate) at the time when Patheon loads the Product onto the carrier’s vehicle for shipment at the shipping point at the Facility.Neither payment for the Products by Client, nor passing of risk in the Products to Client, shall be deemed to constitute acceptance ofsuch Products by Client.(j) Each delivery of Product shall be accompanied by a Certificate of Analysis and a Certificate of Compliance andsuch other documents as may be required pursuant to the Quality Agreement. All Products shall be released for delivery on or before aquarterly average of [***], and no later than at [***], after the date that the API is combined with the excipients for the Product inaccordance with the Client Manufacturing Process. If the quarterly average is greater than [***], the Parties shall engage in good faithdiscussions to agree a remediation plan describing the steps to be taken to improve shelf life performance. Patheon shall useCommercially Reasonable Efforts to implement such plan. If Product is released later than [***], Client may reject the same if in itsreasonable opinion it will not be able to [***] that has been so released safely and at commercially reasonable rates. Any such rejectedProduct shall be regarded as [***]. The costs of all freight, insurance, handling fees, taxes, and other costs associated with the shipmentof Product, as well as export licenses, import license, and customs formalities for the import and export of goods will be borne byClient. Client shall collect shipments from the Facility on the date specified in the relevant Purchase Order or otherwise followingnotification of availability for delivery from Patheon and agreement of a revised delivery date.(k) If Client cancels any Purchase Order after acceptance thereof by Patheon or deemed acceptance as described inSection 2.3(f) or (g), Client will pay Patheon [***] of the Product Fee for the Purchase Order which payment will be credited againstthe Product Fees that are payable for future Purchase Orders.(l) Patheon shall use Commercially Reasonable Efforts to satisfy, any changes in quantity, delivery phasing or datesrequested by Client in respect of Purchase Orders or any additional orders. Any additional fees to reflect additional activities requiredto be conducted by Patheon as a result of these changes or additional orders shall be agreed by the Parties in advance.2.4 Product Fees. The purchase price for Products Manufactured hereunder (the “Product Fee”) shall be calculatedaccording to the model as set forth in Schedule B. This means that the Product Fee payable per Product varies on an incremental basisas further described in16*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Schedule B. All purchases of Products will be invoiced at the applicable Product Fee based on the volume of Products expected to besupplied in that calendar year (or part thereof) based on most recent Forecast at the start of the calendar year. If the volume ofProducts ordered by Client during such calendar year falls into a different volume band then Patheon shall issue a correspondinginvoice or credit note (as the case may be) by 31 March in the following calendar year. For the avoidance of doubt no Product Feesshall be payable for the aggregate total of [***] that are included in the Transfer Services as described in Exhibit C of the TechnologyTransfer Agreement. [***] are not included in the Technology Transfer Fees and therefore Product Fees shall be payable for thesebatches; any additional [***] shall be charged at the price specified in the Technology Transfer Agreement. Patheon shall invoiceClient for the relevant Product Fee after the Products have been released by Patheon for delivery in accordance with Section 2.3(h).All Product Fees will be due and payable in accordance with the invoicing procedures set forth in ARTICLE IV.2.5 Base Fees. Patheon will invoice Client [***] in advance for the Base Fees set forth Schedule B. All Base Fees will bedue and payable in accordance with the invoicing procedures set forth in Article IV.2.1 Fee Adjustment.(a) The Base Fee and Product Fee stated herein are calculated as at the Effective Date and shall be fixed until [***].Thereafter, starting on [***] the Base Fee and Product Fee shall be adjusted annually to reflect any change in the UK Consumer PriceIndex: All Items Index published by the Office for National Statistics (as published at www .ons.gov.uk) during the preceding twelve(12) months (based on the average of the monthly changes over the 12-month period) provided that if the increase in the index exceeds[***] it will be implemented but the Parties shall meet and negotiate in good faith measures to mitigate the effect of the fee increase.(b) Patheon, in collaboration with Client, shall use Commercially Reasonable Efforts to identify and target potentialareas of cost reduction (e.g., efficiency savings as a result of increasing volumes, or changes in process, formulation or componentsrelating to the Products) and process improvements (e.g., cycle time reductions, inventory reductions, yield improvements orcollaborative procurement) relating to its performance under this Agreement. The net benefits of cost savings and improved efficienciesachieved as a result of the same shall be allocated as follows:(i) where benefits of cost reductions and improved efficiencies are only applicable to the Manufacture of theProduct(s), the amount of such benefits shall be [***]; and(ii) where benefits of cost reductions and improved efficiencies are applicable to the general manufacturing andsupply chain costs of Patheon, such that Patheon and/or its customers generally benefit, the allocation of such benefitsshall be [***].(c) Exchange Rate Fluctuations17*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(i) Fees. On or before 1 November of each year the Parties will agree a forward exchange rate to be applied forthe following year, effective 1 January, as defined by the Bloomberg.com one Year Forward Rate. Patheon will adjustthe Base Fee, Product Fees, Technology Transfer Fees, any batch fees under the Technology Transfer Agreement andany other agreed fees such as fees for Additional Services to reflect the forward exchange rate (GBP value per contractat the forward rate) for each calendar year. The first adjustment will be effective from 1 January 2018. Prior to this date,Patheon will adjust the fees to reflect the USD/GBP exchange rate for the month in which the invoice is issued to Clientas set out in Section 2.6(c)(ii).At the end of the calendar year, the Parties will perform a true up based upon, (i) actual fees using the forwardexchange rate and (ii) the theoretical fees had the Parties applied the monthly average USD/GBP exchange rate aspublished on OANDA.com during the calendar year. An example of the calculation is set out in Schedule G. Wherethe true up results in a positive or negative balance, Patheon shall issue a corresponding invoice or credit note in respectof the balance by 31 March in the following calendar year. Patheon will provide a report with its true up calculation forthe year for Client to review and comment before any invoice or credit note is triggered. The first true up will beperformed after 31 December 2018.(ii) Costs. Patheon will also adjust the Capital Expenditures (as defined in the Technology TransferAgreement), Material Costs, Maintenance Costs, Disposal Costs, charges for Bill Back Items and any other costs thatare passed through to Client to reflect the USD/GBP exchange rate as published on Bloomberg.com for the month inwhich the invoice is issued to Client. This adjustment will be made and communicated to Client prior to being invoicedby Patheon.2.2 Failure or Inability to Supply Product.(a) Patheon shall ensure that Product is Manufactured and delivered to Client on a timely basis consistent with theterms of this Agreement (including the Forecast and Purchase Order procedures set forth in Section 2.3). In the event that Patheon, atany time during the Term, is unable or shall have reason to believe that it will be unable to supply Client with the full quantity ofProduct forecasted to be ordered or actually ordered by Client in a timely manner and in conformity with the warranty set forth inSection 6.3 (whether by reason of force majeure or otherwise), Patheon shall notify Client thereof in writing on or before [***]business days setting out the reasons for such inability to supply. Promptly thereafter, the Parties shall meet to discuss how Client shallobtain such full quantity of conforming Product and Patheon will take all such actions as may be reasonably agreed by the Parties tominimise any delay. Compliance by Patheon with this Section 2.7(a) shall not relieve Patheon of any other obligation or liability underthis Agreement, including any obligation or liability under Section 2.7(c) below. If Patheon’s inability to supply is partial, Patheon shallfulfill Purchase Orders with such quantities of Product as are available and the Client’s payment obligations relating to the Product Feeshall be reduced accordingly. In the event Patheon’s inability to meet Purchase Orders or forecasts is due to a shortage18*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.of production capacity in the Manufacturing Suite, Patheon shall in addition to the foregoing requirements, promptly notify Client ofsuch shortage of production capacity and the estimated date such shortage of production capacity is to end.(b) The Parties acknowledge that following Completion of the Tech Transfer (as defined in the Technology TransferAgreement), (i) the engineering approach and footprint agreed by the Parties for the Manufacturing Suite and utility requirements isintended to provide capacity for the Manufacture of [***] vials of Product per [***] and (ii) the provision of personnel supporting theManufacturing Suite is intended to support the Manufacture of the volumes of Product as set out in the relevant Forecast. Patheonundertakes to maintain such capacity and associated support processes for the Term in order to be able to ramp up to manufacture of atleast [***] vials of Product per year within any [***] period, subject to Client’s provision of Forecasts for such volumes in accordancewith Section 2.3(a). Patheon shall not without Client’s prior written consent take any step that might reduce this capacity.(c) If Patheon fails to Manufacture the full quantity of Product specified in a Purchase Order by the Agreed DeliveryDate and in conformity with the warranty set forth in Section 6.3 (and such failure is directly due to the acts or omissions of Patheonwhere such acts or omission does not constitute a force majeure event pursuant to the terms of Section 10.2), and Patheon is unable tocure such failure on or before [***] days, in full and final settlement of such failure, Client, at its option, may cancel the unfulfilledportion of such Purchase Order, in which event Client shall have no liability with respect to the portion of such Purchase Order socancelled. The cancelled portion of the Purchase Order shall count as ordered Product for the purposes of measuring On Time In FullDelivery Performance in accordance with Schedule D.(d) On Time In Full Delivery. The Parties shall measure the delivery performance of Patheon under this Agreementafter each anniversary of the initial batch of commercial Manufacture of Product, and make any shortfall or bonus credit based onPatheon’s delivery performance as set out in Schedule D.2.3 Non-Conforming Product.(a) In the event Patheon discovers a potential Non-Conforming Product prior to delivery of such Product to Client,Patheon shall suspend any planned release or delivery of such Products in accordance with the Quality Agreement and provide writtennotice to Client as soon as practicable describing in detail the Non-Conforming Product and the potential cause of such Non-Conforming Product.19*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b) Client will perform a customary inspection of the Products Manufactured by Patheon on receipt. Such inspectionwill be limited to a visual inspection of the shipment-ready packaged Products (and associated shipping documentation) and Client willnot be obliged to perform any testing of the Product. Client shall (i) on or before [***] days after delivery thereof by Patheon or (ii) onor before [***] days after Client discovers or is informed of a discovery of nonconformity that could not reasonably have been detectedby the customary inspection on delivery (but not after the expiration date of the Product), give Patheon notice of any Non-ConformingProduct (including a sample of such Non-Conforming Product, if applicable) (a “Deficiency Notice”). Should Client fail to givePatheon the Deficiency Notice on or before the expiry of the applicable notice period, then the delivery will be deemed to have beenaccepted by Client. Patheon will have no liability whether pursuant to this Section 2.8, Section 3.12 or Section 3.14 or otherwise forany Non-Conforming Product for which it has not received a Deficiency Notice on or before the expiry of the applicable notice period.(c) Following receipt of a Deficiency Notice Patheon shall conduct a root-cause analysis to verify whether a Productconstitutes a Non-Conforming Product and, if found, to determine the cause of such Non-Conforming Product (including byundertaking an appropriate evaluation of a Non-Conforming Product sample, as applicable). Client shall provide reasonablecooperation to Patheon in connection with any such root-cause analysis and the payment obligation in relation to the Product Fee forsuch Product shall be suspended pending resolution of the issue. Patheon shall notify Client in writing of its determination regardingwhether the Product constitutes a Non-Conforming Product on or before [***] days after either discovery of the Non-ConformingProduct or receipt of such Deficiency Notice from Client, as applicable. Such notification shall include Patheon’s good faithdetermination of the cause of the Non-Conforming Product. At Client’s request and following the issue of a Purchase Order fromClient, Patheon will use Commercially Reasonable Efforts to deliver a replacement delivery of the Product to Client as soon aspracticable after receipt of the Deficiency Notice (subject to Client supplying Patheon with Client-Supplied Materials, if required) inorder to ensure continuity of supply, and Client shall pay Patheon for such delivery in accordance with the terms of this Agreement.(d) Patheon Nonconformance(i) “Patheon Nonconformance” shall mean Patheon’s failure to [***].(ii) In the event of a Non-Conforming Product caused by a Patheon Nonconformance, Patheon shall reimburseClient for:1.the Product Fees in respect of Non-Conforming Products; and2.any shipment costs incurred by Client in the event that the Non-Conforming Product wasshipped from the Facility at the time of the discovery of the Patheon Nonconformance(“Shipment Costs”); and20*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.3.cost of losses of [***] incorporated into Non-Conforming Product,in each case, to the extent applicable and/or already paid by Client.(iii) Patheon’s obligation to reimburse Client for Client-Supplied Materials incorporated into Non-ConformingProduct caused by a Patheon Nonconformance will be captured and calculated in the Yield Reimbursement Paymentunder Section 2.9 which shall be subject to the limitation of liability in Section 9.5(a) herein.(iv) [***] shall not apply in relation to (A) the internal expenses incurred by Patheon to supply conformingProduct to Client pursuant to Section 2.8(c) if this is to replace Non-Conforming Product caused by a PatheonNonconformance, or (B) the cost of any [***] or any Shipment Costs or the reimbursement of the Product Fee pursuantto Section 2.8(d)(ii). Client will not be liable to pay Product Fees for Non-Conforming Product caused by a PatheonNonconformance and Patheon shall have no obligation to reimburse any unpaid Product Fees for Non-ConformingProduct caused by a Patheon Nonconformance.(v) If the Non-Conforming Product was caused by any reason other than a Patheon Nonconformance, as maybe determined by an Expert in accordance with Section 2.8(d)(vi), Client shall be liable for all expected Product Feesfor such Non-Conforming Product (to the extent not already paid), provided that where the cause of non-conformanceis not identifiable but a Patheon Nonconformance has occurred, then Client shall be liable for [***] of the Product Fees.(vi) If, following the root-cause analysis described in Section 2.8(c), Patheon notifies Client that it does notbelieve the Product is a Non-Conforming Product, or if the Parties disagree as to the cause of a Non-ConformingProduct, the Parties shall first submit such dispute to the Project Managers for prompt resolution. If the ProjectManagers cannot resolve the dispute, the Parties shall submit the dispute to an independent expert or (if mutually agreedto by the Parties) a testing lab agreed by the Parties (an “Expert”) for evaluation, provided that both Parties shall beentitled to observe and obtain copies of all results of such evaluation. The Expert shall determine (i) whether theProduct is a Non-Conforming Product and (ii) the cause (or likely cause) of the Non-Conforming Product. Both Partiesshall cooperate with the Expert’s reasonable requests for assistance in connection with its evaluation hereunder. Thefindings of the Expert shall be binding on the Parties, absent fraud or manifest error. The Expert shall act as an expertand not as an arbitrator and (unless the Expert otherwise determines) the fees and expenses of the Expert shall be borne(1) by Patheon if the testing confirms the Non-Conforming Product and the cause or likely cause is found to be aPatheon Nonconformance; (2) by Client if the testing confirms the Non-Conforming Product and the cause or likelycause is found not to be a Patheon Nonconformance or if the cause or likely cause of such non-conformance is notidentifiable; or (3) by the Party stating the Product was Non-21*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Conforming Product in the event the testing concludes that the Product meets the warranty set forth in Section 6.3.Costs of dealing with Product complaints and inquiries will be dealt with in accordance with Section 3.12. Costs ofrecalls will be dealt with in accordance with Section 3.14. Patheon shall have no liability for any Non-ConformingProduct unless such Non-Conforming Product is identified as being due to a Patheon Nonconformance.2.4 Yield reconciliation(a) During its performance of the Manufacturing Services, on an annual basis Patheon is expected to produce a certainyield of Product using Client-Supplied Material (the “Expected Yield”). The initial Expected Yield shall be calculated and mutuallyagreed by the Parties after the first [***] batches of commercial Product Manufactured by Patheon. Pending such agreement, theExpected Yield shall be [***], but shall not be contractually binding and the Parties acknowledge that this may not be attainable due tothe limited experience that Patheon will have in Manufacturing commercial Product. Accordingly the Yield Reimbursement Paymentand credit set out in Section 2.9(c) shall not apply to the first [***] batches of commercial Product Manufactured by Patheon.(b) On a [***] basis during the Term, Patheon shall provide Client with a report in respect of the previous [***] and[***] to date showing:(i) the number of vials of Products released to be delivered to Client in accordance with the terms of thisAgreement in the applicable periods;(ii) Patheon’s inventory of Client-Supplied Materials, quantity of Client-Supplied Materials that complies withSection 2.2(k) received at the Facility, Quantity Dispensed, Quantity Converted, and such additional information as theParties may agree; and(iii) the Achieved Yield in [***] and year to date, where “Achieved Yield” shall be calculated pursuant to anequation to be agreed by the Steering Committee taking into account Client-Supplied Materials that have expired as aresult of a Patheon act or omission and any Client-Supplied Materials lost in the warehouse prior to and duringManufacture, but excluding (i) Client-Supplied Materials retained by Patheon as samples; (ii) Client-Supplied Materialscontained in Product retained as samples; (iii) Client-Supplied Materials used in testing (if applicable); (iv) any agreedyield reductions arising from specific market related requirements such as visual inspection of the Product that are notpart of normal processing and (v) Client-Supplied Materials received and used by Patheon pursuant to the TechnicalTransfer Agreement.(c) In the event the Achieved Yield in any year after the date of Manufacture of the [***] of commercial Product ismore than [***]% lower than the then-current Expected Yield for such year, (i) Patheon and Client will engage in good faithdiscussions to agree a remediation plan describing the steps to be taken to achieve the then-current Expected Yield and22*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(ii) Patheon will reimburse Client for excess [***] used by Patheon as a result of Patheon’s failure to meet the Expected Yield in suchbatches (i.e., reimbursement to Client for the actual costs of any [***]) subject to the limitation of liability in Section 9.5(a) (the “YieldReimbursement Payment”). In the event the Achieved Yield in any year is more than [***]% greater than the then-current ExpectedYield for such year, Patheon shall be entitled to reduce any Yield Reimbursement Payment to be made in the next year by an amountequal to the value of the excess [***] that would have been used by Patheon if the Achieved Yield for such calendar year was equal tothe then-current Expected Yield in such batches.(d) Patheon shall use Commercially Reasonable Efforts to drive year on year improvements in the Achieved Yield andthe Expected Yield.2.5 Equipment and Amendment of Product Specifications, Manufacturing Process, Equipment and Formulation.(a) Equipment.(i) Title to all Client Manufacturing Equipment will be held by Client or a Client Affiliate. Title to all PatheonManufacturing Equipment will be held by Patheon.(ii) Patheon is authorized to use the Client Manufacturing Equipment for the purposes of performing theManufacturing Services for Client. Patheon may not move the Client Manufacturing Equipment from the Facility noruse the Client Manufacturing Equipment to perform manufacturing services for other clients without the Client’s priorwritten consent.(iii) Patheon will not sell or offer to sell, assign, pledge, lease or otherwise transfer or encumber the ClientManufacturing Equipment or any interest therein, without the prior written consent of Client. Patheon will not createany adverse lien, security interest or encumbrance in relation to the Client Manufacturing Equipment.(iv) Patheon will use the Client Manufacturing Equipment in accordance with the Equipment StandardOperating Procedures or the relevant manufacturer’s instructions and Client’s direction (where agreed by the Parties, ifany).(v) During the Term, Patheon shall, at its cost, keep the Client Manufacturing Equipment secure.(vi) Client shall be responsible for additions and replacement cost of any (i) Client Manufacturing Equipmentand (ii) Patheon Manufacturing Equipment that is used only in connection with the Manufacture of the Product or thatis used for Client and other clients of Patheon (the cost of any additions and replacement for Patheon ManufacturingEquipment that is used for Client and other clients of Patheon will be apportioned in good faith in proportion to theiruse). All replacement parts and repairs to the Client Manufacturing Equipment will become Client’s property.23*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Patheon will not make any material alterations to the Equipment, the Manufacturing Suite or the Client ManufacturingProcess used in the Manufacture of the Products without Client’s prior written consent.(vii) During the Term, Patheon shall provide all Maintenance for the Equipment and the Facility. MaintenanceCosts will be invoiced to Client [***] in accordance with the invoicing procedure set forth in Article IV, provided thatPatheon may only invoice Maintenance Costs that have been quoted to and approved in writing by an authorizedperson of Client in advance. Maintenance Costs relating to Patheon Manufacturing Equipment that is used for Clientand other clients of Patheon will be apportioned in good faith in proportion to their use. Notwithstanding the foregoing,with respect to the Client Manufacturing Equipment and Patheon Manufacturing Equipment, Maintenance Costs do notinclude (A) the cost of spare parts (provided that Patheon shall keep such inventory of original manufacturer spare partsas the Parties agree is reasonably necessary to maintain the Client Manufacturing Equipment, to include at a minimumall critical spares recommended by the manufacturer of the Client Manufacturing Equipment), (B) Equipmentbreakdowns caused by any reason outside of Patheon’s reasonable control (other than breakdowns caused by Patheon’sgross negligence or failure to maintain the Equipment in accordance with the applicable Equipment Standard OperatingProcedures of Patheon or the manufacturer’s terms of operation and recommended procedures), or (C) specializedmaintenance services not within Patheon’s technical expertise or that requires specialist equipment where Patheon isrequired to utilize a Third Party contractor. Patheon’s costs associated with such spare parts, Equipment breakdownsand Third Party contractors will be reimbursed by Client as a Bill Back Item, provided that where such spare parts,Equipment breakdowns and Third Party contractors relate to Patheon Manufacturing Equipment that is used for Clientand other clients of Patheon, the costs will be apportioned in good faith in proportion to their use.(viii) Patheon shall not be liable for ordinary wear and tear of the Client Manufacturing Equipment or PatheonManufacturing Equipment; Patheon shall only be liable for the repair or replacement of any damage caused to ClientManufacturing Equipment or Patheon Manufacturing Equipment where such damage arises due to its gross negligenceor willful misconduct or its failure to maintain Client Manufacturing Equipment or Patheon Manufacturing Equipmentpursuant to the applicable Equipment Standard Operating Procedures of Patheon or the manufacturer’s terms ofoperation and recommended procedures. Where this Section refers to costs relating to any Patheon ManufacturingEquipment, if the Patheon Manufacturing Equipment is used for Client and other clients of Patheon, these costs will beapportioned in good faith in proportion to their use.(ix) Throughout the Term of this Agreement, Patheon shall maintain property insurance on all Equipment inthe amount equal to at least the replacement value of such Equipment.24*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(x) Client may examine and inspect the Client Manufacturing Equipment at any reasonable time (whereversuch Client Manufacturing Equipment is located in the Facility) so that Client can check the Client ManufacturingEquipment’s existence, condition and proper maintenance.(xi) Patheon shall ensure that at all times the Client Manufacturing Equipment is clearly marked in such a wayas to identify that it is owned by Client. All Client Manufacturing Equipment shall be marked in such a way as toidentify that it is for use only for Client.(xii) If any item of the Client Manufacturing Equipment is lost, stolen or damaged, Patheon will promptlynotify Client of such event.(xiii) Client shall ensure that on delivery the Client Manufacturing Equipment complies with all EU mandatoryrequirements including without limitation, Supply of Machinery (Safety) Regulations 2008 (UK Regulations,Secondary UK Legislation), Electrical equipment of machines (General requirements BS EN 60204-1:2006+A1:2009)(British Product Standards), Machinery Directive 2006/42/EC (European Union Directive), Low Voltage Directive(LVD) 2006/95/EC (European Union Directive), and Electromagnetic Compatibility (EMC) Directive 2004/108/EC(European Union Directive).(b) Change control(i) For changes to the Specifications, Quality Agreement, the Client Manufacturing Process, the Equipment,the Manufacturing Services to be provided pursuant hereto, the Transfer Services to be provided pursuant to theTechnology Transfer Agreement or the formulation of the Product that are required by Applicable Law (collectively,“Required Manufacturing Changes”), Patheon and Client shall cooperate to promptly make such changes within therequired timeline and assess filing implications (prior approval, changes being effected, etc.).(ii) For changes to the Specifications, Quality Agreement, the Client Manufacturing Process, the Equipment,the Manufacturing Services to be provided hereto, the Transfer Services to be provided pursuant to the TechnologyTransfer Agreement, or the formulation of the Product that are not Required Manufacturing Changes (collectively,“Discretionary Manufacturing Changes”), Patheon shall provide Client with an estimate of the timeframe and costrequired to implement the same. Patheon and Client must each agree to any Discretionary Manufacturing Changes andshall cooperate in making such changes, and each agrees that it shall not unreasonably withhold or delay its consent tosuch Discretionary Manufacturing Changes. Once Client has approved the estimate in writing, Patheon shall implementthe change within the agreed timeframe. Together Parties will assess filing implications, as for example, annualreportable status.25*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(iii) Notwithstanding the foregoing, all internal and external costs, including, without limitation, costs ofobsolete Materials, work-in-process and Product associated with Required Manufacturing Changes shall be allocatedbetween the Parties as follows: (x) to the extent that the change relates to the Product, the Specifications, the ClientManufacturing Process, the Equipment, the Manufacturing Services or the Manufacturing Suite or the Transfer Servicesto be provided pursuant to the Technology Transfer Agreement, Client shall pay the costs and expenses ofimplementing such change together with the actual cost of write-off (including waste disposal costs) of any inventory ofProducts or Materials rendered obsolete as a result of the change, provided that Client shall not be liable for the write-off costs of any Materials purchased in excess of those amounts needed to meet Purchase Orders or as otherwise agreedpursuant to Section 2.2(u); and (y) to the extent that the change results from a change in GMP or Applicable Laws thatrequires changes to the Facility or Manufacturing process (other than as a direct result of changes to the Product, theSpecifications, the Client Manufacturing Process, the Equipment, the Manufacturing Services or the ManufacturingSuite or the Transfer Services to be provided pursuant to the Technology Transfer Agreement), the allocation of suchbenefits shall be discussed in good faith and allocated between the Parties as agreed at the time, having regard to anyother Patheon customers who will benefit from the change.(iv) The cost of implementing Discretionary Manufacturing Changes will be agreed by the Parties. (v) In the event that Client changes the Specifications, Quality Agreement, the Client Manufacturing Process,the Equipment, the Manufacturing Services to be provided hereto, the Transfer Services to be provided pursuant to theTechnology Transfer Agreement or the formulation of the Product, or consents to any change by Patheon, Patheonshall provide to Client at Client’s cost as an Additional Service any such documentation or other information withrespect thereto as they relate to the Manufacturing Services as Client may reasonably request in order to obtain ormaintain any Regulatory Approval or comply with GMP or other Applicable Law.(vi) Patheon shall not change the Specifications, the Materials or the Client Manufacturing Process used in theManufacture of the Products, or make any other change which may reasonably be expected to have a regulatory impacton the Product, affect the Marketing Authorization or affect the quality or physical characteristics of the Product,without first obtaining written consent from Client.ARTICLE III. REGULATORY, ACCESS, AND OTHER MATTERS3.1 Quality Agreement. Prior to the expiry of the Technology Transfer Agreement, the Parties shall enter into a mutuallyagreed upon quality agreement (“Quality Agreement”). If there is any inconsistency between this Agreement and the QualityAgreement, the terms of the Quality26*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Agreement shall control solely with respect to quality issues, and this Agreement shall control with respect to all other issues.3.2 Quality Assurance.(a) Patheon shall at all times ensure that agreed quality assurance tests are adopted and that reference and retentionsamples are taken, analysed and retained in accordance with the Quality Agreement. Such samples shall (notwithstanding anytermination of this Agreement) be retained by Patheon for the periods prescribed in the Quality Agreement at no additional cost.(b) Unless otherwise specified in the Quality Agreement, Patheon shall provide to Client, in a timely manner,sufficient quantities of reference standards for the Products to enable Client to carry out and/or maintain the necessary testing capabilityto comply with its Regulatory Obligations and the obligations set out in the Quality Agreement throughout the Term.(c) Patheon shall institute and maintain process controls during the Manufacture of the Products in accordance withGMP and shall maintain full records of such process controls which shall be made available to Client on request together with retainedin-process samples. Such records must align with documentation set out in the Specifications and samples shall be retained by thePatheon for such period as may be specified in the Quality Agreement or as otherwise required by Applicable Law at no additionalcost.3.1 Release. All Product shall be released in accordance with the terms of the Quality Agreement.3.2 Maintenance of Facility.(a) Patheon shall Manufacture the Product exclusively at the Facility, unless Client has granted prior written consent toManufacture the Product at any other facility, such consent to be granted by Client in its sole discretion.(b) Subject to Section 2.10(b), Patheon shall at its own cost ensure that any and all necessary licenses, registrations,and (subject to any payments required under Section 3.10(b)) Regulatory Authority approvals have been obtained in connection withthe Facility and Equipment used in connection with the Manufacture of the Product by Patheon.(c) Subject to Section 2.10, Patheon shall maintain the Facility and Equipment in a state of repair and operatingefficiency consistent with the requirements of the Specifications, the Regulatory Approvals, the Client Manufacturing Process, GMP,and all other Applicable Law. Prior to each use of Equipment in Manufacturing the Product, Patheon shall ensure that such Equipmentis cleaned and consistent with any procedures reasonably established by Client and notified to Patheon, the Specifications, theRegulatory Approvals, the Client Manufacturing Process, GMP, and all other Applicable Law. Without limitation of the foregoing,Patheon agrees to implement, in connection with the Manufacture of the Product, quality assurance and quality27*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.control procedures, including validation protocols and process change procedures that are reasonably satisfactory to Client.(d) Patheon shall maintain in the Facility an adequate GMP and temperature controlled area for the Product, allintermediates thereof and Materials used in Manufacturing the Product in accordance with the Specifications, the RegulatoryApprovals, the Client Manufacturing Process, any risk mitigation plan, the Quality Agreement, GMP, and all Applicable Law. AllProduct, intermediates and Materials (as applicable) shall be held by Patheon in a GMP and temperature controlled area (on a separatepallet and SAP reference from other products) until delivery to Client. In order for Patheon and Client to identify any potential effectson quality, safety or efficacy of the Products, subject to obligations of confidentiality that Patheon owes to Third Parties, Patheon shalldisclose to Client (on a no-names basis) information relating to the nature of any other [***]. Client agrees that Patheon may, discloseinformation (on a no-names basis and subject to ARTICLE VII) relating to the nature of Client’s Product to other clients of Patheon atthe Facility if requested.(e) Patheon shall only use qualified disposal services or sites that have appropriate environmental and operatingpermits and are in compliance with the Quality Agreement and Applicable Law.(f) Patheon shall develop and put in place a disaster recovery and business continuity plan in respect of theManufacture of Products at the Manufacturing Suite by 30 June 2018, and provide Client with a copy of the same on request. Clientwill provide Patheon with details of its requirements for these plans within a reasonable period from the Effective Date.3.3 Client On Site Representatives; Project Managers; Steering Committee Meetings.(a) For so long as Patheon is obliged to Manufacture and supply the Product for Client, Client shall have the right at alltimes throughout the Term to have [***] representatives present (or other number as mutually agreed to by the Parties) (each, a “ClientOn Site Representative”) in that portion of Patheon’s Manufacturing facilities that is being used to Manufacture the Product or storeMaterials to observe the procedures and processes used to Manufacture the Product. Subject to the following sentence, suchrepresentatives shall have full access to the Manufacturing Suite, to any other parts of the Facility that relate to the Manufacture of theProduct, and to all non-financial records that relate to the Product, the Materials and Bill Back Items. Patheon shall provide reasonable(semi-permanent) on-site accommodations at the Facility for the Client On Site Representatives (e.g., office space) provided that Clientcomplies with the terms set out in Schedule E. For the avoidance of doubt, the term “non-financial records” as used in this Agreementdoes not include the Reports (defined in Section 3.13 below). Client On Site Representatives shall be appropriately trained by Client(e.g., GMP training) and shall observe at all times Patheon’s policies and procedures (as amended from time-to-time) as they pertain tothe Facility, including policies relating to health and safety and compliance with GMP, and comply with all reasonable directions ofPatheon in relation to the same; provided that Client is given notice of such policies and given a reasonable period of time to reviewand implement such policies. Patheon may refuse or limit in its sole discretion at any time admission to the Facility by any Client OnSite Representative who fails to observe such policies or comply with such reasonable directions.28*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Client On Site Representatives shall have (i) no management authority over any Patheon employee and (ii) no authority to concludecontracts on behalf of Client.(b) Patheon and Client will each appoint a project manager (each, a “Project Manager” and, together, the “ProjectManagers”), who will meet as needed to resolve any issues or problems arising in the performance of this Agreement. Client’s ProjectManager may be one of the Client On Site Representatives.(c) Following completion of registration batches the Parties shall establish a steering committee in respect ofcommercial supply (the “Commercial Steering Committee”), which shall meet at least quarterly in order to manage the long termmanufacturing and supply aspects of this Agreement. The responsibilities of the Commercial Steering Committee shall include withoutlimitation:(i) reviewing any ongoing development activities for the Products that may lead to changes in demand;(ii) reviewing and discussing any trends or concerns in relation to delivery performance, Achieved Yields,usage of Client-Supplied Materials, quality related issues or plans to improve performance under the Agreement;(iii) reviewing any potential restrictions on the availability of additional space within the Facility, which shallbe notified by Patheon sufficiently far in advance of any proposed agreement with a Third Party in order for Client tobe able assess its likely future requirements and for the Parties to have the opportunity to negotiate in good faith anyreservation of the same; and(iv) performing such other responsibilities as the Parties may agree.Unless otherwise agreed by the Parties the Commercial Steering Committee shall follow the membership and proceduralarrangements agreed for the steering committee under the Technology Transfer Agreement.3.4 Notification of Regulatory Inspections. Patheon shall notify Client by telephone on or before [***], and in writing on orbefore [***], after learning of any proposed or unannounced visit or inspection of any part of the Facility which relates to theManufacture of the Product by any Regulatory Authority, including the Occupational Safety and Health Administration or anyequivalent governmental agencies of the country of Manufacture, and provide all relevant information known to Patheon regardingsuch investigation. Patheon shall permit Client or its agents to be present at the Facility to support Patheon during such visit orinspection if it impacts the Product or affects the Manufacturing Suite. The responsibility for conducting the inspection rests withPatheon. Patheon shall provide to Client in so far as it affects the Product or the Manufacturing Suite either a copy of or a summary ofany report and other written communications received from such Regulatory Authority in connection with any visit or inspection,including FDA Form 483 observations and responses (or any equivalent observations and responses from any Regulatory Authorityunder Applicable Law). Such copy or summary shall be provided to29*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Client on or before [***] business days of Patheon’s receipt thereof (and may be redacted as Patheon acting reasonably deemsnecessary to protect the confidentiality of matters not affecting the Product or the Manufacturing Suite or which are confidential toPatheon or to other clients of Patheon). Client shall have the right to review and comment on any communications with suchRegulatory Authority pertaining to such inspection as set forth in Section 3.17. In the event that Client is subject to an inspection byany Regulatory Authority that relates to the Products or Patheon’s performance of its obligations under this Agreement, Patheon shallprovide Client and such Regulatory Authority with access to Patheon’s non-financial records, the Products and those portions of theFacility used in the Manufacture of the Products or storage, testing, handling or receiving of the Materials as required by thisAgreement or otherwise by Applicable Law, in each case subject to payment by Client of the fees set out in Section 3.10(b).3.5 Manufacturing Records. Patheon shall maintain, or cause to be maintained, (a) all records necessary to comply withGMP and all other Applicable Law relating to the Manufacture of Product, (b) all Manufacturing records, standard operatingprocedures, equipment log books, batch records, laboratory notebooks, and all raw data relating to the Manufacturing of the Product,and (c) such other records as Client may reasonably require in order to ensure compliance by Patheon with the terms of thisAgreement. The template, form and style of all records referred to herein are the exclusive property of Patheon; Client ConfidentialInformation and all Product-specific related information contained in these records shall be deemed Confidential Information of Clientand be retained for such period as may be required by GMP and all other Applicable Law.3.6 Bulk Packaging. Client shall specify all bulk packaging to be used for the Product. Patheon agrees to use only such bulkpackaging on the Product as set out in the Specifications.3.7 Compliance with Applicable Laws. Patheon shall comply and shall cause each of its Materials and Bill Back Itemssuppliers to comply with the Quality Agreement, GMP and Applicable Law in carrying out the Manufacturing of the Product and itsother duties and obligations under this Agreement.3.8 Compliance Audits.(a) With the exception of “for cause” audits (e.g., audits arising in the event of regulatory issues or material Productconformity issues), Client and its designated representatives shall have the right to audit [***] all applicable non-financial records ofPatheon for the purpose of determining Patheon’s compliance with the obligations set forth in this Agreement, including Sections2.2(a) and 6.2, and the terms of any Purchase Order. Such audit right shall include the right to inspect: (a) the Materials used in theManufacture of the Product, (b) the holding facilities for such Materials, (c) the Manufacturing Suite and all Equipment used in theManufacture of the Product, (d) all non-financial records relating to the Manufacturing Suite and the Manufacturing of the Product(subject to any other restrictions set forth in this Agreement) and (e) all other documentation set forth in the Quality Agreement, inorder to carry out a GMP, quality and/or compliance audit of those parts of the Facility involved in, or which could affect, theManufacture of the Products. Client shall provide Patheon with [***] days prior advance notice of its intention to conduct such auditand the Parties will determine a mutually agreeable date for such30*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.audit. Client shall include no more than [***] of Client’s representatives in each such audit, with each such audit lasting no more than[***] days, in each case without Patheon’s prior written consent. Client shall also have the right to carry out follow up audits subject topayment by Client of the fees set out in Section 3.10(b) if any observations have been noted during any audit carried out pursuant tothis Section 3.10(a) (excluding any “for cause” audits as described above or any audits where critical or major observations have beennoted).(b) Client may request additional GMP-type audits, additional audit days, or the participation of additional auditorssubject to payment to Patheon of a fee of [***] for each additional audit day and [***] per audit day for each additional auditor.Patheon will support the first Product approval, including its inspection if required, of the FDA or equivalent regulatory launch forother jurisdictions (where applicable). Additional support (including, without limitation, subsequent regulatory launches or Productapproval inspections/resulting reports for other jurisdictions) will be subject to additional fees.(c) Patheon shall use Commercially Reasonable Efforts to ensure that any corrective or preventative actions identifiedin any audit carried out pursuant to this Section 3.10 that are agreed by the Parties are carried out in accordance with any agreedtimeline and subject to payment by Client of any agreed fees.(d) Patheon shall be responsible for ensuring the GMP compliance status of any authorised sub-contractors used inrelation to the performance of its obligations under this Agreement as described in Section 2.2(d). Patheon shall assess each sub-contractor using Patheon’s standard vendor assurance programme and shall report its findings to Client within [***] business days of arequest from Client.3.9 Inventory Reviews. Without limiting the foregoing, Client shall have the right, with Patheon’s assistance, to conduct anannual inventory count of the Materials and of the Products. Following an audit or inventory, Client may discuss its observations andconclusions with Patheon, and Patheon shall promptly implement such corrective actions after notification thereof by Client. In theevent the Parties are unable to agree upon whether or not corrective actions are necessary, such dispute shall be resolved pursuant tothe terms of Section 10.10.3.10 Product Inquiries and Complaints.(a) With respect to Products Manufactured by Patheon, Patheon will promptly submit to Client any Product safety andefficacy inquiries, Product quality complaints, and adverse drug event reports that it receives, together with all available evidence andother information relating thereto, in accordance with procedures to be agreed upon by the Parties. Patheon will promptly advise Clientof any occurrence or information which arises out of the Manufacture of Products which has or could be reasonably expected to haveadverse regulatory compliance and/or reporting consequences concerning the Products, and provide relevant information to Clientupon request. Except as otherwise required by, or to comply with, Applicable Law or the terms of this Agreement, Client, as the Partyholding the applicable Marketing Authorization, will be responsible for investigating and responding to all such inquiries, complaints,and adverse events regarding the Product, and reporting to the FDA or any other Regulatory Authority.31*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b) Pursuant to any reported complaint, adverse drug event or other issue which may pertain to the Manufacture of theProducts Patheon will promptly conduct all such necessary internal investigations as may be necessary to determine the validity of suchcomplaint, including performing analytical testing of corresponding Products or retention samples, and shall provide the results theretoto Client as soon as reasonably practicable, but no later than [***] days after Client’s request. Such testing shall be performed usingapproved testing procedures as set forth in the applicable Regulatory Approval or the Quality Agreement. If such investigation oranalytical testing concludes that the reported complaint or adverse drug event was the result of a Patheon Nonconformance, subject toClient having provided to Patheon a Deficiency Notice in accordance with the provisions of Section 2.8(b) including as to timing,Patheon shall [***] associated with such complaint or adverse drug event and incurred by Client with respect to such Non-ConformingProduct, including reasonable [***]. Costs of recalls will be dealt with in accordance with Section 3.14. If such investigation oranalytical testing concludes that the reported complaint or adverse drug event was not the result of a Patheon Nonconformance, Clientshall compensate Patheon for all costs associated with such complaint or adverse drug event and incurred by Patheon with respect tosuch Non-Conforming Product, including costs of recalls, market withdrawals, returns, and destruction.(c) If the Parties disagree as to which Party is responsible, Patheon and Client representatives shall attempt to resolvesuch dispute. If the representatives cannot resolve such dispute on or before [***] days, the retention samples shall be submitted byPatheon and Client to an Expert and Section 2.8(d)(vi) shall apply.3.11 Reports. Prior to the start of Patheon’s commercial Manufacture of the Product (or as reasonably requested by Clientprior to such date), Patheon and Client will work together in good faith to develop and agree upon Patheon’s ordinary coursereporting obligations. Such reports (“Reports”) will include those reports as necessary for Client to (a) manage Product inventory; (b)measure the Achieved Yield and whether all Products on agreed Purchase Orders order are delivered on time and in full; (c) manageits financial close and reporting; (d) monitor on-going Product and process performance for its internal analysis and reporting; and (e)comply with Applicable Law. Patheon will deliver such reports via electronic delivery methods, including by utilizing Patheon’sexisting IT systems as practicable.3.12 Product Recalls.(a) In the event (i) any Regulatory Authority issues a request, directive, or order that Product be recalled, (ii) a court ofcompetent jurisdiction orders such a recall, or (iii) Client as holder of the applicable Marketing Authorization shall reasonablydetermine that Product should be recalled, withdrawn, or a field correction issued, the Parties shall take all appropriate correctiveactions, and shall cooperate in the investigations surrounding the recall. In the event that Client or a Regulatory Authority determinesthat Product should be recalled, the recall strategy shall be developed by Client in consultation with Patheon to the extent possible andfollowed by Patheon. In the event of any Product recall, withdrawal, or field correction resulting from a Patheon Nonconformance,Patheon shall [***] associated with such recall, withdrawal, or field correction, which shall include [***] of the recalled Product andall other documented [***] incurred32*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.in connection with such recall, plus reasonable [***] costs incurred by Client with respect to such Product, up to the maximum liabilitylimits set forth in Section 9.5. In all other circumstances, all costs associated with any Product recall, withdrawal, or field correctionshall be borne by Client.(b) If there is any dispute concerning which Party’s acts or omissions gave rise to such recall of Product, Patheon andClient representatives shall attempt to resolve such dispute. If the representatives cannot resolve such dispute on or before [***] days,the matter shall be submitted by Patheon and Client to an Expert and Section 2.8(d)(vi) shall apply.3.13 Payment Audits.(a) Upon [***] days’ prior written notice, Client may audit any Third Party invoices subsequently invoiced to Clientpertaining to Patheon’s provision of Equipment, Materials, Bill Back Items and Additional Services hereunder; provided, however, thatClient will not be entitled to more than one audit during any [***] month period. Such audits will be conducted during normal businesshours, without undue disruption to Patheon’s business, and may be conducted by Client, or by an independent public accounting firmdesignated by Client who is bound by confidentiality obligations at least as stringent as those set forth in the ConfidentialityAgreement. Client will bear the full cost of the performance of any such audit.(b) If, as a result of any audit of the Third Party invoices, it is shown that the payments or credits from one Party to theother under this Agreement with respect to the period of time audited were less than or more than the amount that should have beenpaid or credited, then the Parties will reconcile the amounts owed by each Party to the other.3.14 Subcontractors. Patheon may arrange for Third Party subcontractors (“Third Party Subcontractors”) to perform specificManufacturing Services (such as testing or analysis) under this Agreement with Client’s written consent or at Client’s request.Patheon’s liability for Third Party Subcontractors will remain subject to all limitations on Patheon’s liability as set out in thisAgreement. Patheon will have no liability arising from the performance of Manufacturing Services by Third Party Subcontractors, (i)to the extent that the Third Party Subcontractor is following the direct instructions of Client, or (ii) that are chosen or requested byClient and that provide a service or materials pursuant to their standard legal terms, provided that Patheon has used CommerciallyReasonable Efforts to enforce such terms or (at Client’s discretion and where possible to do so) to support Client in enforcing suchterms. Patheon shall not be obliged to use a Third Party Subcontractor requested by Client if it does not comply with Patheon’ssupplier qualification requirements.3.15 Regulatory Filing Obligations. (a) Except as otherwise set forth in this Agreement or the Technology TransferAgreement, each Party will be responsible for all routine filings and communications with Regulatory Authorities (“RegulatoryFilings”) required with respect to such Party’s Regulatory Obligations hereunder.(a) “Regulatory Obligations” shall mean:33*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(i) with respect to Client, any Regulatory Filings pertaining to Regulatory Approvals; and(ii) with respect to Patheon, any Regulatory Filings pertaining to the Manufacture of the Products at theFacility, including in connection with a Facility inspection by a Regulatory Authority (e.g., those described inSection 3.6).(b) Each Party shall have the sole responsibility for Regulatory Filings in respect of its Regulatory Obligations andshall provide the other with a copy of any Regulatory Approval relevant to this Agreement on request, to the extent reasonablyrequired for its Regulatory Filings or in order to satisfy its obligations under Applicable Laws.(c) Cooperation. Each Party (“Non-Filing Party”) will provide reasonable assistance and cooperation free of charge tothe other Party (“Filing Party”) in connection with the Filing Party’s Regulatory Obligations consistent with the terms of this Section3.17 and the Non-Filing Party’s obligations under this Agreement. The Filing Party shall notify the Non-Filing Party in writing of anywritten communications received by the Filing Party from a Regulatory Authority related to the other Party’s Regulatory Obligationson or before [***] business days after receipt thereof. The Filing Party shall consult with the Non-Filing Party concerning the responseof the Filing Party to each such communication, unless such filing is not relevant to the Non-Filing Party’s Regulatory Obligations.(d) Verification of Data. Prior to filing any documents or communications with a Regulatory Authority thatincorporate or uses data generated by the Non-Filing Party or otherwise relate to the Non-Filing Party’s Regulatory Obligations, theFiling Party will give the Non-Filing Party a draft of such document or communication (“Initial Draft”) to give the Non-Filing Party theopportunity to verify the accuracy and regulatory validity of such Initial Draft. The Non-Filing Party shall be given a minimum of[***] calendar days to review the Initial Draft, but the Parties may mutually agree to a different time for the review as needed under thecircumstances. The Initial Draft may be redacted by the Filing Party as reasonably deems necessary to protect the confidentiality ofmatters not affecting the Non-Filing Party or which are confidential to the Filing Party or to other clients or customers of the Non-Filing Party. The Parties agree that in reviewing the Initial Draft, the Non-Filing Party’s role will be limited to verifying the accuracy ofthe description of its Regulatory Obligations or accuracy of its data or information in the Initial Draft.(e) Inaccuracies. If the Non-Filing Party determines that any of its data or information in the Initial Draft is inaccurateor any other errors relating to the Non-Filing Party’s Regulatory Obligations, the Non-Filing Party will notify Filing Party in writing ofsuch inaccuracy and provide a recommendation to remediate the Initial Draft. Such notice shall also include documentation and datasufficient to substantiate the Non-Filing Party’s claim that the Initial Draft is inaccurate to the Filing Party’s reasonable satisfaction. TheNon-Filing Party shall provide comments to the Initial Draft no later than [***] prior to the required filing date with the applicableRegulatory Authority. If the Non-Filing Party does not provide comments or notify the Filing Party of inaccuracies on or before such[***] period, the Non-Filing Party will be deemed to have approved any data or language related to its Regulatory Obligations in theInitial Draft. The Filing Party shall be required to incorporate the Non-Filing Party’s recommendations to the extent they directly relate34*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.to an error in the Non-Filing Party’s data or information or the Non-Filing Party’s Regulatory Obligations. The Parties will worktogether in good faith to resolve any inaccuracies contained in the Initial Draft as soon as practicable under the circumstances toprevent a delay or postponement of such filing (or any related inspections by such Regulatory Authority to which the filing relates).(f) Responsibilities. The Filing Party shall deliver a copy of the final version of the filing (“Final Filing”) to the Non-Filing Party at least [***] prior to the required filing date. Subject to the foregoing, the Non-Filing Party will not assume anyresponsibility for the accuracy of any other materials submitted by the Filing Party to a Regulatory Authority in connection with thisAgreement. Except as otherwise set forth in this Agreement or the Technology Transfer Agreement, the Filing Party is solelyresponsible for the preparation and filing of any materials required by a Regulatory Authority with respect to such Party’s RegulatoryObligations hereunder and any relevant costs will be borne by the Filing Party.ARTICLE IV. FEES AND INVOICING4.1 General. Patheon shall invoice Client for all applicable fees and charges incurred by Patheon. All invoices shall be sentelectronically to [***]. Payment shall be due [***] days after receipt an undisputed invoice. All fees and costs in this Agreement areshown in British Pounds (GBP) but which shall be adjusted as described in Section 2.6(c) so that all invoices from Patheon andpayments from Client to Patheon hereunder shall be in United States Dollars (USD).4.2 Late Fees. In relation to all invoices issued by Patheon pursuant to this Agreement, if Client fails to make any paymentdue to Patheon by the due date for payment, then, without limiting Patheon’s remedies under Article VIII or at law, Patheon maycharge interest on past due accounts at [***] above the Bank of England Official Bank Rate per annum.4.3 Disputed Invoices. If Client disputes any portion of an invoice, (a) Client shall provide Patheon with written notice of thedisputed portion on or before [***] of receipt by Client of Patheon’s invoice and its reasons therefor and shall not be obliged to paysuch disputed portion unless and until such disputed portion is determined to be due and owing, and (b) Patheon shall cancel suchinvoice and issue a new invoice reflecting the undisputed invoiced amount, which shall be paid by Client on or before [***] after thedate thereof. The Parties shall use Commercially Reasonable Efforts to resolve the dispute regarding the disputed amount promptlyand in good faith, and if the Parties agree that a balance is due, Patheon shall issue an invoice for such balance, and payment shall bedue [***] after receipt of such invoice. In the event of any inconsistency between an invoice and this Agreement, the terms of thisAgreement shall control.4.4 Taxes.(a) VAT.35*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(i) Any payment due to Patheon under this Agreement in consideration for the provision of ManufacturingServices to Client by Patheon or any payment due to Patheon under the Technology Transfer Agreement inconsideration for the provision of Transfer Services to Client by Patheon is exclusive of value added taxes, turnovertaxes, sales taxes or similar taxes, including any related interest and penalties (hereinafter all referred to as “VAT”). Ifany VAT is payable on a Manufacturing Service supplied by Patheon to Client under this Agreement or a TransferService supplied by Patheon to Client under the Technology Transfer Agreement, this VAT will be added to theinvoice amount and will be for the account of (and reimbursable to Patheon by) the Client.(ii) If VAT on the supplies by Patheon is payable by Client under a reverse charge or withholding procedure(i.e., shifting of liability, accounting or payment requirement to recipient of supplies), Client will ensure that Patheonwill not effectively be held liable for this VAT by the relevant taxing authorities or other parties.(iii) Where applicable, Patheon will use its Commercially Reasonable Efforts to ensure that its invoices toClient are issued in such a way that these invoices meet the requirements for deduction of input VAT by Client, ifClient is permitted by law to do so.(iv) Each Party will provide the other with reasonable assistance to enable the recovery, as permitted byApplicable Law, of VAT resulting from payments made under this Agreement or the Technology Transfer Agreement,such recovery to be for the benefit of the Party bearing such VAT.(v) If Patheon is acting as Client’s buying agent, Patheon will always charge to the Client VAT in the relevantterritory in addition to the amount paid by Patheon to supplier.(vi) Reference to the Manufacturing Services or the Transfer Services in this Section also includes any element(or the entirety) of the Manufacturing Services or the Transfer Services characterised as a supply of goods by Patheon,its Third Party Subcontractors or any tax authority for VAT purposes.(b) Duties. Client will bear the cost of all duties, levies, tariffs and similar charges (and any related interest andpenalties) (together “Duties”) however designated, arising from the performance of the Manufacturing Services or the TransferServices by Patheon, including (without limitation) those imposed as a result of the shipping of Materials or Product to, from orbetween Patheon site(s). If these Duties are incurred by Patheon, then Patheon shall be entitled to invoice Client for these Duties at thetime that they are incurred.36*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(c) Withholding Tax.(i) Where any sum due to be paid to Patheon under this Agreement or the Technology Transfer Agreement issubject to any withholding or similar tax, Client will pay such withholding or similar tax to the appropriate governmentauthority and deduct the amount paid from the amount then due to Patheon, in a timely manner and promptly transmit toPatheon an official tax certificate or other evidence of such withholding sufficient to enable Patheon to claim suchpayment of taxes. The Parties agree to cooperate with one another and use Commercially Reasonable Efforts to reduceor eliminate tax withholding or similar obligations in respect of royalties, milestone payments, and other payments madeby Client to Patheon under this Agreement or the Technology Transfer Agreement.(ii) Patheon will provide Client any tax forms that may be reasonably necessary in order for Client not towithhold tax or to withhold tax at a reduced rate under an applicable bilateral income tax treaty.(iii) Each Party will provide the other with reasonable assistance to enable the recovery, as permitted byApplicable Law, of withholding taxes, or similar obligations resulting from payments made under this Agreement or theTechnology Transfer Agreement, such recovery to be for the benefit of the Party bearing such withholding tax.(d) No Offset. Any tax or Duty that Client pays, or is required to pay, but which Client believes should properly bepaid by Patheon pursuant to this Agreement or the Technology Transfer Agreement may not be offset against sums due by Client toPatheon whether due pursuant to this Agreement or the Technology Transfer Agreement or otherwise.ARTICLE V. INTELLECTUAL PROPERTY5.1 Ownership.(a) Client shall maintain ownership and Control of all of its technology and Intellectual Property rights existing prior tothe Effective Date (“Existing Client Intellectual Property”).(b) Patheon shall maintain ownership and Control of all of its technology and Intellectual Property rights existing priorto the Effective Date (“Existing Patheon Intellectual Property”).(c) Existing Client Intellectual Property shall include and Client shall own all right, title, and interest in and to (i) theProduct, (ii) the Specifications, and (iii) the Client Manufacturing Process.(d) Existing Patheon Intellectual Property shall include and Patheon shall own all right, title, and interest in and to thePatheon Manufacturing Equipment as of the Effective Date.37*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(e) Client shall own all right, title, and interest in and to, all Intellectual Property with respect to, and any data withrespect to:(i) (A) any improvement of, modification of, change of, enhancement of, new indication for, new formula for,new formulation for, new ingredients for, new dosage for, new dosage strength for, new means of delivery for, or newpackaging for, the Product (“Client Product Improvements”); (B) any improvement of, modification of, change of, orenhancement of the Specifications (“Client Specification Improvements”); (C) any improvement of, modification of,change of, enhancement of, new process for, new procedure for, new step for the Client Manufacturing Process (the“Client Manufacturing Process Improvements”); and (D) any improvements of, modification of, change of orenhancement of Client Manufacturing Equipment (the “Client Manufacturing Equipment Improvements”) in each ofcase (A), (B), (C) and (D), (1) that is developed, conceived, or created after the Effective Date specifically as a result ofor in connection with this Agreement, including Patheon’s Manufacturing of the Product hereunder, (2) whether or notpatentable, (3) whether developed, conceived, or created by employees of, or consultants to, Client or Patheon, alone orjointly with each other or with permitted Third Parties (including permitted sublicensees and subcontractors), and (4)that relates exclusively to the Product, Specifications, the Client Manufacturing Process or the Client ManufacturingEquipment as applicable; and(ii) any Intellectual Property developed, conceived, or created by Client, alone or jointly with Third Parties(other than Patheon or its Affiliates, or their respective employees and consultants), in the course of conductingactivities outside the scope of this Agreement and without any use of any Existing Patheon Intellectual Property,Patheon Improvements or Patheon Independent Manufacturing Equipment Improvements (as defined hereunder).(f) Patheon shall own all right, title, and interest in and to, all Intellectual Property with respect to, and any data withrespect to:(i) any improvement of, modification of, change of, enhancement of any Patheon Manufacturing Equipment,(1) that is developed, conceived, or created as a result of or in connection with this Agreement, including Patheon’sManufacturing of the Product hereunder, (2) whether or not patentable, (3) whether developed, conceived, or createdby employees of, or consultants to, Client or Patheon, alone or jointly with each other or with permitted Third Parties(including permitted sublicensees), and (4) that is of generic application rather than a specific solution that only hasapplicability to the Product, (“Patheon Independent Manufacturing Equipment Improvements”);(ii) any improvement of, modification of, change of, enhancement of manufacturing, processing, formulating,filling or packaging technology or equipment which is (x) generated or derived by Patheon, alone or jointly, and (y) of38*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.generic application rather than specific to the Product (“Patheon Improvement”); and(iii) any Intellectual Property developed, conceived, or created by Patheon, alone or jointly with Third Parties,in the course of conducting activities outside the scope of this Agreement and without any use of any Existing ClientIntellectual Property, Client Product Improvements, Client Specification Improvements, Client Manufacturing ProcessImprovements or Client Manufacturing Equipment Improvements.(g) Patheon shall, and shall cause its Affiliates to, promptly disclose in writing and in reasonable detail to Client anyClient Product Improvements, Client Specification Improvements, Client Manufacturing Process Improvements or ClientManufacturing Equipment Improvements developed, conceived, or created by employees, consultants, or subcontractors of Patheon orits Affiliates, alone or jointly with employees, consultants or subcontractors of Client or its Affiliates. Such written notice will betreated as the Confidential Information of Client hereunder.(h) Client shall, and shall cause its Affiliates to promptly disclose in writing and in reasonable detail to Patheon anypotential Patheon Independent Manufacturing Equipment Improvements or Patheon Improvement developed, conceived, or created byemployees, consultants, or subcontractors of Client or its Affiliates, alone or jointly with employees, consultants, or subcontractors ofPatheon or its Affiliates. Such written notice will be treated as the Confidential Information of Patheon hereunder.(i) The Specifications, the Client Manufacturing Process, and any and all information or material related to the ExistingClient Intellectual Property, Client Product Improvements, Client Specification Improvements, Client Manufacturing ProcessImprovements or Client Manufacturing Equipment Improvements shall constitute Confidential Information of Client, which shall bedeemed the disclosing party with respect to such Confidential Information.(j) The Patheon Manufacturing Equipment and any and all information or material related to the Existing PatheonIntellectual Property, the Patheon Independent Manufacturing Equipment Improvements or Patheon Improvements shall constituteConfidential Information of Patheon, which shall be deemed the Disclosing Party with respect to such Confidential Information.5.2 Licenses.(a) Client hereby grants, for the purposes of this Agreement only, to Patheon a fully paid-up worldwide, non-exclusivelicense, under Client’s entire right, title, and interest in and to the Existing Client Intellectual Property for Patheon to Manufacture theProducts solely pursuant to the terms of this Agreement.(b) Client hereby grants, for the purposes of this Agreement only, to Patheon a fully paid-up worldwide, non-exclusivelicense, under Client’s entire right, title, and interest in and39*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.to the Client Product Improvements, Client Specification Improvements, Client Manufacturing Process Improvements and ClientManufacturing Equipment Improvements, in each case to make Products solely pursuant to the terms of this Agreement.(c) Patheon hereby grants to Client a fully paid-up perpetual worldwide, non-exclusive license, with the right tosublicense to Affiliates only, under Patheon’s entire right, title, and interest in and to the Patheon Independent ManufacturingEquipment Improvements, the Existing Patheon Intellectual Property (to the extent incorporated in, or used in the Manufacture of, theProduct) and the Patheon Improvements (to the extent incorporated in, or used in the Manufacture of, the Product) to make, use, offerfor sale, sell, import, and otherwise dispose of the Product only.5.3 Technology Transfer.(a) Upon the request of Client at any time during the [***] period prior to expiry of this Agreement or in the event of afailure by Patheon to supply Products in accordance with the terms of this Agreement for a period exceeding [***] following notice ofbreach by Client and period of remedy by Patheon pursuant to Section 8.2(a)(vii), Patheon shall, at Client’s cost (i) have itsrepresentatives meet with representatives of Client or its designee to enable Client or such designee to Manufacture the Product, and (ii)provide such other assistance as Client may reasonably request to enable Client or such designee to Manufacture the Product. Clientshall reimburse Patheon for its fees and all documented out-of-pocket expenses reasonably incurred by Patheon in connection withsuch technology transfer, save where the technical transfer arises from a termination of this Agreement by Client pursuant to Section8.2(a)(vii) following a uncured failure by Patheon to supply Products in accordance with the terms of this Agreement for a periodexceeding [***], in which case Patheon will provide a [***] on its quotation referred to below up to a maximum of [***]. Such [***]shall count towards the Maximum Liability for that year pursuant to Section 9.5(a). Patheon will provide a quotation for the serviceswhich Client requires pursuant to this Section 5.3 as Additional Services and on acceptance by Client of the same, Patheon willprovide the services stated therein. This Section is without prejudice to Client’s obligations in Section 2.1(a).(b) Following a request for technical transfer services pursuant to Section 5.3(a), Patheon shall:(i) provide to Client copies of all technical documentation, Specifications, procedures and know-how in theirpossession or control that are reasonably required for the Manufacture of the Products in each case as agreed by theParties in advance pursuant to Section 5.3;(ii) make available to Client the services of such qualified and experienced scientists, production and qualityassurance personnel, engineers, and quality checking personnel as may be necessary to support the technical transferprocess and the establishment of the Manufacturing process for the Products in each case as agreed by the Parties inadvance pursuant to Section 5.3, and at such convenient times as the Parties may reasonably agree; and40*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(iii) provide Client or its designee (but not any competitor of Patheon (i.e. a business that derives greater than[***] of its revenues from performing contract pharmaceutical development or commercial manufacturing services),with reasonable access to the Facility to observe the Manufacture of the Products at such times as the Parties may agree.ARTICLE VI. REPRESENTATIONS AND WARRANTIES6.1 Representations and Warranties of Each Party. Each Party hereby represents and warrants to the other Party as follows:(a) Such Party (i) is duly formed and in good standing under the laws of the jurisdiction of its formation, (ii) has thepower and authority and the legal right to enter into this Agreement and perform its obligations hereunder, and (iii) has taken allnecessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligationshereunder. This Agreement has been duly executed and delivered on behalf of such Party and constitutes a legal, valid, and bindingobligation of such Party and is enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency, orother similar laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability ofspecific performance and general principles of equity, whether enforceability is considered a proceeding at law or equity.(b) From FDA Approval Date, all necessary consents, approvals, and authorizations of all Regulatory Authorities,other governmental authorities, and other Persons required to be obtained by such Party in connection with the execution and deliveryof this Agreement and the performance of its obligations hereunder have been obtained.(c) The execution and delivery of this Agreement and the performance of such Party’s obligations hereunder (i) do notand will not conflict with or violate any requirement of Applicable Law or any provision of the articles of incorporation, bylaws limitedpartnership agreement, or other constituent document of such Party and (ii) do not and will not conflict with, violate, or breach, orconstitute a default or require any consent under, any contractual obligation or court or administrative order by which such Party isbound.6.2 Additional Representations, Warranties, and Covenants of Patheon. Patheon warrants, represents, and covenants that:(a) it has facilities, personnel, experience, and expertise sufficient in quality and quantity to perform its obligationshereunder;(b) it shall perform its obligations hereunder in conformity with GMPs where applicable;(c) it will comply with the Quality Agreement and comply with all agreed upon quality assurance, quality controls,and review procedures in the performance of its obligations hereunder;41*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(d) it has at the Effective Date and shall, during the Term of this Agreement and at its cost (subject to Section 2.10(b)),in connection with this Agreement, observe and comply with all Applicable Laws, including federal, state, and local laws, orders,regulations, rules, customs, and ordinances now in force or that may hereafter be in force, pertaining to the Facility and theperformance of the Manufacturing Services and including, without limitation, (i) labor laws, orders, regulations, rules, customs, andordinances of the country of Manufacture and (ii) those of the FDA pertaining to the Manufacturing Services and the Facility (but notthose pertaining to non-Manufacturing matters relating to the Product, compliance with which shall be the responsibility of Client), andany laws, orders, regulations, rules, or ordinances issued in addition to, as a supplement to or as a replacement of Applicable Laws.(e) as at the Effective Date, it has received no warning letter from any Regulatory Authority in relation to the Facilityin the [***] period prior to the Effective Date (including in relation to the compliance of that Facility with all applicable requirementsof GMP);(f) as at the Effective Date, there are no outstanding FDA Form 483 observations (or any equivalent observations fromany Regulatory Authority under Applicable Law) in relation to the Facility;(g) none of it, its Affiliates, nor any Person under its direction or control (including Third Party Subcontractors), hasever been, nor will it engage suppliers which have to its actual knowledge, after due inquiry, been, (i) debarred or convicted of a crimefor which a person can be debarred, under Section 335(a) or 335(b) of the FDA Act, or any equivalent Applicable Law of the countryof Manufacture, (ii) threatened to be debarred under the FDA Act or any equivalent Applicable Law of the country of Manufacture or(iii) indicted for a crime or otherwise (to its actual knowledge after due inquiry) engaged in conduct for which a person can be debarredby the FDA or any equivalent Regulatory Authority pursuant to Applicable Law of the country of Manufacture, and Patheon agreesthat it will promptly notify Client in the event it receives notification of any such debarment, conviction, threat or indictment. ShouldPatheon become aware of any suspected non-compliance with the foregoing, Patheon will notify Client in writing of such issue on orbefore [***]. For the purpose of this Section 6.2, suppliers and subcontractors engaged by Patheon to undertake the Manufacture of theProduct shall be deemed to be under Patheon’s direction or control;(h) none of it, its Affiliates, nor any Person under its direction or control is currently excluded from a federal or statehealth care program under Sections 1128 or 1156 of the Social Security Act, 42 U.S.C. §§ 1320a-7, 1320c-5 or any equivalentApplicable Law of the country of Manufacture, as may be amended or supplemented;(i) none of it, its Affiliates, nor any Person under its direction or control is otherwise currently excluded fromcontracting with the U.S. federal government or the government of the country of Manufacture;(j) none of it, its Affiliates, nor any Person under its direction or control is otherwise currently excluded, suspended, ordebarred from any U.S. or foreign governmental program;42*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(k) it shall immediately notify Client if, at any time during the Term, Patheon, its Affiliates, or any Person under itsdirection or control is convicted of an offense that would subject it or Client to exclusion, suspension, or debarment from any U.S. orforeign governmental program;(l) it agrees to keep the Equipment free from all liens and encumbrances; and(m) it will not enter into any agreement or arrangement with any other Third Party that would prevent its ability toperform its obligations hereunder6.3 Warranty. Patheon warrants that:(a) Products will be Manufactured in accordance with Section 2.1(c) of this Agreement, Quality Agreement, GMP,and all other Applicable Law;(b) without prejudice to Section 2.8, at the time of delivery the Products will conform with the Specifications inaccordance with the testing regime set out therein and will conform with the Certificate of Analysis therefor provided pursuant toSection 2.3(j);(c) at the time of delivery title to such Product will pass to Client as provided herein free and clear of any securityinterest, lien, or other encumbrance;(d) at the time of delivery such Product will not be adulterated or misbranded within the meaning of the FDA Act as aresult of a Patheon Nonconformance; and(e) at the time of delivery such Product will not be an article that, under the provisions of the FDA Act, may not beintroduced into interstate commerce as a result of a Patheon Nonconformance.6.4 Additional Representations, Warranties, and Covenants of Client. Client warrants, represents, and covenants that:(a) Non-Infringement.(i) to its knowledge, as at the Effective Date (1) it or its Affiliates Control all right, title, and interest in allIntellectual Property in the Client Manufacturing Process, the Client Manufacturing Equipment, the Product and theSpecifications necessary for performance of the Manufacturing Services; and (2) it has the right to authorize Patheon toperform the Manufacturing Services, in each case in accordance with the terms and conditions hereof;(ii) to its knowledge, as at the Effective Date, the performance of the Manufacturing Services hereunder, inaccordance with the terms and conditions hereof and using the Client Manufacturing Process, or the manufacture, use,supply or other disposition of the Product by Patheon as may be required to perform its obligations under thisAgreement or by Client, does not and will not result, in the infringement or misappropriation of any Third Party’sIntellectual Property rights;43*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(iii) Client or its Affiliates Control and have the right to lawfully disclose the Specifications to Patheon and toauthorize Patheon to use the Specification to perform the Manufacturing Services;(iv) as of the Effective Date, so far as Client is aware there are no actions or other legal proceedings pendingconcerning the infringement of Third Party Intellectual Property rights related to any of the Specifications, the ClientManufacturing Process or any of the Materials, or the supply, use, or other disposition of any Product made inaccordance with the Specifications.(b) Quality and Compliance.(i) during the Term, the Product, if Manufactured in accordance with the Specifications and in compliance withthe Quality Agreement, applicable GMP and Applicable Laws, may be lawfully sold and distributed in everyjurisdiction in which Client markets the Product; and(ii) during the Term, on the date of shipment, the Client-Supplied Materials will conform to the specificationsfor the Client-Supplied Materials that Client has given to Patheon and the Client-Supplied Materials will be adequatelycontained, packaged, and labelled and will conform to the affirmations of fact on the container, provided that this shallnot negate Patheon’s obligations to perform any incoming inspections of Client-Supplied Materials as set out in theSpecifications or the Quality Agreement.(c) Client agrees that, as a pre-condition to the adding of any country to the Territory pursuant to Section 2.2(t), Clientshall repeat the warranties above as at the date on which the country is added to the Territory.6.5 DISCLAIMER. THE FOREGOING EXPRESS WARRANTIES SET FORTH IN THIS ARTICLE VI AREIN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OFMERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT, AND ALLOTHER WARRANTIES ARE HEREBY DISCLAIMED AND EXCLUDED BY EACH PARTY.ARTICLE VII. CONFIDENTIALITY7.1 Confidentiality Obligations. The Parties agree that the terms of the Confidentiality Agreement dated 28 September 2016between Client and Patheon Inc. (an Affiliate of Patheon), shall apply to all Confidential Information disclosed by a Party or itsAffiliates to the other Party and are incorporated herein by this reference (the “Confidentiality Agreement”), provided that paragraph5 of the Confidentiality Agreement shall be replaced with the following:“Required Disclosure. The receiving Party may disclose Confidential Information to the extent that it is required by law ororder of any governmental authority or agency or the rules and regulations of any securities authority or stock exchange on whichsecurities issued by a Party or44*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.its Affiliates are traded, including the Securities and Exchange Commission; provided that the receiving Party, using good faith efforts,shall apply for confidential treatment of such Confidential Information including Confidential Information contained in this Agreementor the Technology Transfer Agreement (if redacted versions of these agreements are required to be disclosed), shall provide the otherParty a copy of the confidential treatment request far enough in advance and at least [***] business days, if possible, of its filing to givethe other Party a meaningful opportunity to comment thereon and in order to provide the disclosing Party an opportunity to seek aprotective order or the like with respect to certain Confidential Information, and shall incorporate in such confidential treatment requestany reasonable comments of the other Party, in each case to the fullest extent permitted under applicable laws, rules or regulations.”7.2 Injunctive Relief. Each Party acknowledges that a breach by either Party of the Confidentiality Agreement or of thisArticle VII may not reasonably or adequately be compensated in damages in an action at law and that such a breach may cause theother Party irreparable injury and damage. By reason thereof, each Party agrees that the other Party may be entitled, in addition to anyother remedies it may have under this Agreement or otherwise, to apply for preliminary and permanent injunctive and other equitablerelief to prevent or curtail any breach of the Confidentiality Agreement or this Article VII; provided, however, that no specification inthis Agreement of a specific legal or equitable remedy will be construed as a waiver or prohibition against the pursuing of other legalor equitable remedies in the event of such a breach. Each Party agrees that the existence of any claim, demand, or cause of action of itagainst the other Party, whether predicated upon this Agreement, or otherwise, will not constitute a defense to the enforcement by theother Party, or its successors or assigns, of the covenants contained in the Confidentiality Agreement and this Article VII.ARTICLE VIII. TERM AND TERMINATION8.1 Term. This Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with theterms hereof, shall expire on the seventh (7th) anniversary of the FDA Approval Date (the “Initial Term”). Notwithstanding theforegoing, by mutual agreement, the Parties may commence discussions three (3) years prior to the end of the Initial Term with aview to extending the Initial Term for periods of two (2) years each (collectively, the Initial Term and any extensions thereof, the“Term”).8.2 Termination. In addition to any other provision of this Agreement expressly providing for termination of this Agreement,this Agreement may be terminated as follows:(a) Client may terminate this Agreement by notice in writing to Patheon:(i) at any time prior to the grant of the Marketing Authorization for the Product in the United States, by givingPatheon [***] prior written notice if: (A) Client’s application for Marketing Authorization in the United States isrejected, or (B) any Regulatory Authority causes the clinical hold or permanent withdrawal of the Product;45*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(ii) at any time after the grant of the Marketing Authorization for the Product in the United States, by givingPatheon [***] prior written notice in the event that the Product is discontinued or withdrawn from (1) the United States,or (2) any other market in a country or countries of the Territory that represent [***] or more of Client’s overall Productsales, for safety, quality or regulatory reasons;(iii) if any Regulatory Approval naming Patheon as the Manufacturer of the Product is withdrawn by theapplicable Regulatory Authority in relation to (1) the United States or (2) any other market in a country or countries ofthe Territory that represent [***] or more of Client’s overall Product sales (for clarity, this does not refer to Patheon’smanufacturer licence issued by the Medicines and Healthcare products Regulatory Agency in the United Kingdom);(iv) if Patheon challenges Client’s ownership of, or right to use, the Existing Client Intellectual Property bysubmission to a governmental authority responsible for Intellectual Property rights or to a court with jurisdiction overIntellectual Property rights provided that the performance of manufacturing or development services for other clientsshall not be regarded as a challenge to Client’s ownership of, or right to use, the Existing Client Intellectual Property;(v) for convenience, at any time prior to the FDA Approval Date, with [***] written notice to Patheon;(vi) for convenience, at any time after the FDA Approval Date, by giving Patheon (1) in the first [***] fromthe FDA Approval Date, [***] prior written notice; (2) in the [***] from the FDA Approval Date, [***] prior writtennotice; (3) in the [***] from the FDA Approval Date, [***] prior written notice; and (4) in any extension of thisAgreement after the Initial Term, [***] prior written notice; or(vii) at any time upon written notice in the event of any material default by Patheon in the performance of anyof its obligations hereunder, which material default has not been cured by Patheon on or before [***] after receivingwritten notice thereof (“Remediation Period”), provided that (i) the Parties shall use Commercially Reasonable Effortsto agree a plan to remedy the material default within [***] days after written notice is given to Patheon and (ii) Patheonshall continue performing hereunder pursuant to the terms of Section 8.4 below. Client’s right to terminate thisAgreement for a particular breach under this Section 8.2(a)(vii) may only be exercised for a period of [***] followingthe expiry of the Remediation Period (where the breach has not been remedied) and, if the termination right is notexercised during this period, then Client will be deemed to have waived its right to terminate this Agreement for suchbreach.(b) Patheon may terminate this Agreement at any time upon written notice in the event of (i) any material default byClient in the performance of any of its obligations hereunder (excluding payment), which default has not been cured by Client on orbefore [***] after receiving written notice thereof; or (ii) Client’s default of its payment obligations in accordance with Article46*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.IV in relation to undisputed invoices which default has not been cured by Client on or before [***] after receiving written noticethereof; provided, however, that, if Client fails to cure such payment default, Patheon may not terminate without first providing asecond notice to the attention of Client’s Chief Executive Officer and an additional [***] cure period.(c) This Agreement may be terminated at any time by either Party immediately upon written notice to the other Party(A) pursuant to Section 10.2, in the event of a force majeure that remains uncured for the period provided in Section 10.2, or (B) if theother Party shall file in any court or agency, pursuant to any statute or regulation of any state or country, a petition in bankruptcy orinsolvency or for reorganization or for arrangement or for the appointment of a receiver or trustee of the other Party or of its assets, or ifthe other Party proposes a written agreement of composition of its debts, or if the other Party shall be served with an involuntarypetition against it, filed in any insolvency proceeding, and such petition is consented to by such Party or is not dismissed on or before[***] after the filing thereof, or if the other Party shall propose or be a party to any dissolution or liquidation, or if the other Party shallmake an assignment for the benefit of its creditors.(d) This Agreement will automatically terminate should either Client or Patheon exercise its right to terminate theTechnology Transfer Agreement (but not in the event of an expiration of such agreement as set forth in Section 8.2 thereof) prior to theFDA Approval Date, in which case, any payment to Patheon will be made in accordance with the Technology Transfer Agreement.8.3 Effect of Termination.(a) The expiration or termination of this Agreement shall be without prejudice to any rights or obligations of the Partiesthat may have accrued prior to such termination, and the provisions of Sections 2.8, 3.7, 3.12, 3.14, 8.3 and 8.4, and ARTICLE I,ARTICLE IV, ARTICLE V, ARTICLE VII, ARTICLE IX and ARTICLE X shall survive the expiration or termination of thisAgreement. Except as otherwise expressly provided herein, termination of this Agreement in accordance with the provisions hereofshall not limit remedies that may otherwise be available in law or equity.(b) Upon expiration or termination of this Agreement, subject to the Parties’ obligations under Section 8.4 below, eachParty, at the request of the other, shall return all data, files, records, and other materials in its possession or control containing orcomprising the other Party’s Confidential Information.(c) Upon expiration or termination of this Agreement for any reason, subject to the Parties’ obligations under Section8.4 below:(i) all submitted but unfilled Purchase Orders with respect to which Patheon has (1) not begun Manufacture ofProduct shall be cancelled, or (2) begun Manufacture of the Product shall be completed, unless otherwise agreed;47*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(ii) Patheon will dismantle the Client Manufacturing Equipment and prepare and make it available forcollection from the Facility according to a procedure agreed by the Parties (acting reasonably), following which Clientshall remove all Client Manufacturing Equipment, Product and Materials from the Facility on or before the day [***]after the completion of said procedure, failing which Client will pay a fee equivalent to the aggregate monthly Base Feefor the Manufacturing Suite for each month or part month the Client Manufacturing Equipment, Product or Materialsremain at the Facility after [***] post termination;(iii) if Patheon has Manufactured any stocks of finished Product in addition to those ordered pursuant to aPurchase Order, or has ordered any Patheon-Supplied Materials in addition to those ordered as set out in Section 2.2(u),Client shall at its option place an order with Patheon for any of such finished Products and/or Patheon-SuppliedMaterials in accordance with the terms of this Agreement;(iv) Patheon shall submit an invoice for any unpaid Material Costs, Maintenance Costs, Disposal Costs or anyBill Back Items which were ordered, purchased, produced or maintained by Patheon in contemplation of theManufacture of the Product prior to the date of termination in accordance with Section 2.2, provided that Client shallnot be liable for the costs of any Materials purchased in excess of those amounts needed to meet Purchase Orders (orsuch longer period as the Parties may have otherwise agreed);(v) Client shall pay Patheon any earned but unpaid Product Fees, including those under any outstandingPurchase Order as described in Section 8.3(c)(i);(vi) Client shall pay for any earned but undisputed and unpaid Base Fees, or fees for Additional Services; and(vii) Client shall pay all due and outstanding invoices under Article IV.(d) Upon expiration or termination of this Agreement for any reason other than by [***] pursuant to [***], subject tothe Parties’ obligations under Section 8.4 below, Client shall pay to Patheon all and any (i) dismantling costs, (ii) removal costs and (iii)Make Good Costs associated with the cessation of the Manufacturing Services or removal of the Client Manufacturing Equipmentfrom the Facility. “Make Good Costs” means the reasonable costs required to clean, decontaminate or repair the Facility and return it toa clean, safe and useable area based on the contamination caused by the Manufacturing Services or repair of damage caused by theinstallation or removal of Client Manufacturing Equipment.48*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(e) Upon expiration or termination of this Agreement for any reason other than by [***] pursuant to [***], subject tothe Parties’ obligations under Section 8.4 below, Client shall pay to Patheon the following costs (“Manufacturing Services TerminationCosts”): (i) all actual costs incurred by Patheon to complete activities associated with the completion, expiry or termination including,without limitation, disposal fees that may be payable for any Materials and supplies owned by Client to be disposed of by Patheon; and(ii) all and any direct costs and expenses, or wasted costs and expenses, or termination or cancellation fees payable by Patheon as aconsequence of or arising from the termination of this Agreement, to include but not limited to, all and any redundancy costs ofemployees employed by Patheon to work solely or mainly in providing the Manufacturing Services and/or Manufacturing the Product,all and any termination costs in relation to subcontractors and agency staff working solely or mainly in providing the ManufacturingServices and/or Manufacturing the Product, any termination or cancellation fees payable to Third Party suppliers. Patheon will useCommercially Reasonable Efforts to mitigate the Manufacturing Services Termination Costs. Patheon will further provide Client withdocumentation in order to substantiate the Manufacturing Services Termination Costs.(f) Upon termination (in whole) or expiry of this Agreement for any reason:(i) the licences granted in Sections 5.2(a) and 5.2(b) shall terminate and Patheon shall not make any use for anypurpose whatsoever of any of Client’s Intellectual Property or any of Client’s Confidential Information contained in theQuality Agreement except to the extent necessary to fulfil any Purchase Order or order placed by Client in accordancewith Section 8.3(c)(iii) or to perform any other obligation under this Agreement;(ii) any Yield Reimbursement Payment shall be paid which may be pro rata basis for any part year asapplicable and which may be offset by any undisputed amounts owing to Patheon under this Agreement.(g) Client acknowledges that no Patheon competitor (being a Person that derives greater than [***] of its revenuesfrom performing contract pharmaceutical or biopharmaceutical development or commercial manufacturing services) will be permittedaccess to the Facility.(h) In relation to any representatives of Client that are permitted access to the Facility pursuant to Section 8.3 or 8.4,Client shall ensure that such representatives are appropriately trained by Client (e.g., GMP training) and shall observe at all timesPatheon’s policies and procedures (as amended from time-to-time) as they pertain to the Facility, including policies relating to healthand safety and compliance with GMP, and comply with all reasonable directions of Patheon in relation to the same; provided thatClient is given notice of such policies and given a reasonable period of time to review and implement such policies. Patheon mayrefuse or limit in its sole discretion at any time admission to the Facility by any of Client’s representatives who fail to observe suchpolicies or comply with such reasonable directions.49*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(i) The Parties agree that if any fees or charges are duplicated under this Agreement and the Technology TransferAgreement, Client shall only be obligated to make such payment once.8.4 Transition Assistance. Upon the delivery by either Party of a notice of termination of this Agreement for any reasonother than by Patheon pursuant to Section 8.2(b) or (c), upon the request of Client, and subject to terms set forth in this Agreement,Patheon shall provide Client with the reasonable assistance of its staff and reasonable access to its other internal resources to provideClient with a reasonable level of technical assistance and consultation to transfer the Manufacture and the regulatory qualification ofthe Product to a supplier of Client’s election, provided that Client will reimburse Patheon for its fees and all documented costs andout-of-pocket expenses incurred in connection with such assistance (Patheon would provide a quotation for the services which Clientrequires pursuant to this Section 8.4 as Additional Services and on acceptance by Client of the same, Patheon will provide theservices stated therein).ARTICLE IX. INDEMNIFICATION9.1 Client Indemnification Obligations. Client shall indemnify Patheon, its Affiliates, and their respective directors, officers,employees, and agents (the “Patheon Indemnified Parties”), and defend and save each of them harmless, from and against:(a) any and all Third Party Losses incurred by any of them in connection with, arising from, or occurring as a result of:(i) any gross negligence or willful misconduct by Client or any of its Affiliates; (ii) any claim made by any Person that the Manufactureand supply of the Product using the Client Manufacturing Process or any of Client’s Intellectual Property, in each case in accordancewith the terms hereof, infringes or misappropriates the Intellectual Property rights of such Person (other than to the extent arising as aresult of any of Patheon’s Intellectual Property used in accordance with the terms of this Agreement or the use by Patheon of any ThirdParty Intellectual Property); or (ii) any product liability claim made by any Person with respect to any Products which upon deliveryconformed to and were Manufactured in accordance with the terms of Section 2.1(c); or(b) any Loss incurred by any of them in connection with: (i) the negligence or willful misconduct of the Client On SiteRepresentatives at the Facility; or (ii) any damage to Patheon’s property or any claims of personal injury to any Patheon employees orThird Party Subcontractors caused as a result of Patheon’s use of the Client Manufacturing Equipment in the performance of theManufacturing Services provided that Patheon and its employees and Third Party Subcontractors have complied with all applicableEquipment Standard Operating Procedures or the manufacturer’s terms of operation and recommended procedures for the ClientManufacturing Equipment, Specifications, and have not otherwise acted in a negligent manner or committed an act of willfulmisconduct in connection with the use and Maintenance of the Client Manufacturing Equipment;except, in each case for (a) and (b), for those Losses for which Patheon has an obligation to indemnify the Client Indemnified Partiespursuant to Section 9.2, as to which Losses each Party shall indemnify the other to the extent of their respective liability for suchLosses; and provided, however, that50*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Client will not be required to indemnify the Patheon Indemnified Parties with respect to any such Loss hereunder to the extent the sameis caused by any breach of contract, negligent act or omission, or intentional misconduct by any Patheon Indemnified Parties. Clientacknowledges that Patheon has not and will not conduct any freedom to operate searches in relation to the Product or the ClientManufacturing Process nor reviewed any Third Party patents in relation thereto and that Patheon’s failure or omission to do so will notbe considered negligence for the purposes of excluding or limiting a claim under this indemnity.9.2 Patheon Indemnification Obligations. Patheon shall indemnify Client, its Affiliates, and their respective directors,officers, employees, and agents (the “Client Indemnified Parties”), and defend and save each of them harmless, from and against:(a) any Third Party Losses incurred by any of them resulting from, or relating to, any claim of personal injury orproperty damage to the extent that the injury or damage is in connection with, arising from, or occurring as a result of: (i) any failure byPatheon to Manufacture and supply Products in accordance with the terms of in this Agreement; (ii) any gross negligence or willfulmisconduct by Patheon or any of its Affiliates; or (iii) any product liability claim made by any Person with respect to any ProductManufactured by Patheon to the extent any such liability is based on or caused by a Patheon Nonconformance; or(b) any Third Party Losses incurred by any of them in connection with, arising from, or occurring as a result of a claimthat any Existing Patheon Intellectual Property, Patheon Independent Manufacturing Improvement or Patheon Improvement used byPatheon in the Manufacture or supply of the Product infringes or misappropriates the Intellectual Property rights of such Person;except in each case for (a) and (b) for which Client has an obligation to indemnify the Patheon Indemnified Parties pursuant to Section9.1, as to which Losses each Party shall indemnify the other to the extent of their respective liability for such Losses; and provided,however, that Patheon will not be required to indemnify the Client Indemnified Parties with respect to any such Loss hereunder to theextent the same is caused by any breach of contract, negligent act or omission, or intentional misconduct by Client Indemnified Parties.9.3 Indemnification Procedure.(a) Indemnification Procedure. The indemnified Party (the “Indemnified Party”) shall give the indemnifying Party (the“Indemnifying Party”) prompt written notice of any Loss, action, or discovery of facts upon which such Indemnified Party intends tobase a request for indemnification under Section 9.1 or 9.2 (a “Claim”), but in no event shall the Indemnifying Party be liable for anyLosses that result from any delay in providing such notice. The Indemnified Party will: (i) use Commercially Reasonable Efforts tomitigate the effects of the Claim; (ii) reasonably cooperate with the Indemnifying Party in the defense of the Claim; and (iii) permit theIndemnifying Party to control the defense and settlement of the Claim, all at the Indemnifying Party’s cost and expense.51*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b) Settlement. With respect to any Losses (i) relating solely to the payment of money damages in connection with aClaim, (ii) that will not result in the Indemnified Party becoming subject to injunctive or other relief or otherwise adversely affect thebusiness or reputation of the Indemnified Party in any manner, and (iii) as to which the Indemnifying Party has acknowledged inwriting the obligation to indemnify the Indemnified Party hereunder, the Indemnifying Party shall have the sole right to consent to theentry of any judgment, enter into any settlement, or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its solediscretion, shall deem appropriate. With respect to all other Losses in connection with Claims, where the Indemnifying Party hasassumed the defense of the Claim in accordance with Section 9.3(a), the Indemnifying Party shall have authority to consent to the entryof any judgment, enter into any settlement, or otherwise dispose of such Loss; provided that it obtains the prior written consent of theIndemnified Party, which consent shall not be unreasonably withheld or delayed. The Indemnifying Party shall not, without the priorwritten consent of the Indemnified Party, agree to any settlement or acquiesce to any judgment with respect to a Claim that obligatesthe Indemnified Party to pay any amount subject to indemnification by the Indemnifying Party or causes the Indemnified Party to admitto any civil or criminal liability.9.4 Insurance. During the Term and for [***] thereafter, each Party shall procure and maintain at its own expense from aqualified and licensed insurer liability insurance or indemnity policies, in an amount not less than [***] in the aggregate, subject tosuch deductible or self-retention limits as either Party in its business discretion may elect. Such policies shall insure against liability onthe part of each Party and any of its Affiliates, as their interests may appear, due to injury, disability, or death of any person orpersons, or injury to property, arising from the distribution of the Products. Upon the execution of this Agreement and thereafter onJanuary 1 of each year during the Term, each Party shall provide to the other a certificate of insurance (i) summarizing the insurancecoverage and (ii) identifying any exclusions. Each Party shall promptly notify the other of any material adverse alterations to the termsof this policy or decreases in the amounts for which insurance is provided.9.5 Limitation on Damages(a) Maximum Liability. Except with respect to (i) [***], or (ii) a breach by [***] of its obligations under [***],Patheon’s maximum liability to Client under this Agreement for any reason whatsoever, including, without limitation, any liabilityarising under Sections 2.2(o), 2.9, 3.12, 3.14 or 9.2 hereof or resulting from any and all breaches of its representations, warranties, orany other obligations under this Agreement in each calendar year will not exceed [***] of the total [***] received by or payable toPatheon pursuant to this Agreement in the [***] period prior to the month in which the underlying event occurred that gave rise to theliability (e.g., the date of the incident or manufacture). For the first [***] period after the first commercial batch, as Patheon will nothave received [***] for a full [***] period, the amount of the [***] for the purpose of the limitation of liability shall be calculated basedon the volume of Product set out in the first [***] of the Forecast applicable on the date of Manufacture of the first commercial batch.(b) Section 9.5(a) shall not apply to any reimbursement of the Product Fee, Shipment Costs or [***] pursuant toSection 2.8(d)(ii).52*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(c) Subject to Section 9.5(d), neither Party will be liable to the other in contract, tort, negligence, breach of statutoryduty, equity, or otherwise for: (i) any direct or indirect loss of profits, of production, of anticipated savings, of business, or goodwill; (ii)any reliance damages, including but not limited to costs or expenditures incurred to evaluate the viability of entering into thisAgreement or to prepare for performance under this Agreement; or (iii) for any other indirect or consequential loss, liability, damage,costs, penalty or expense. For the avoidance of doubt this Section 9.5(c) shall not apply to the costs of a [***] resulting from a PatheonNonconformance.(d) Nothing in this Agreement shall exclude or limit either Party’s liability for (i) personal injury or death caused by thenegligence of that Party, or (ii) for fraud or fraudulent misrepresentation.(e) Sole & Exclusive Remedies. Notwithstanding anything in this Article IX to the contrary Patheon’s sole liabilityand Client’s sole and exclusive remedy whether in contract, tort, equity or otherwise for:(i) Non-Conforming Product based on or caused by a Patheon Nonconformance shall be the rights andremedies set forth in Section 2.2(o), 2.8, 2.9, 3.12, 3.14, 8.2 and 9.2 of this Agreement;(ii) late or incomplete deliveries of Product specified in a Purchase Order by the Agreed Delivery Date asdescribed in Section 2.3(h) (provided that the late or incomplete delivery is not the result of a breach by Patheon of anyother term of this Agreement) shall be the rights and remedies set forth in Section 2.7 and Schedule D of thisAgreement. 9.6 Product Liability Claims. As soon as it becomes aware, each Party will give the other prompt written notice of any defector alleged defect in a Product, any injury alleged to have occurred as a result of the use or application of the Product, and anycircumstances that may give rise to litigation or recall of a Product or regulatory action that may affect the sale or Manufacture of aProduct, specifying, to the extent the Party has such information, the time, place, and circumstances thereof and the names andaddresses of the persons involved. Each Party will also furnish promptly to the other copies of all papers received in respect of anyclaim, action, or suit arising out of such alleged defect, injury, or regulatory action.9.7 Allocation of Risk. This Agreement (including, without limitation, this Article IX) is reasonable and creates a reasonableallocation of risk for the relative profits the Parties each expect to derive from the Products.53*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.ARTICLE X. MISCELLANEOUS10.1 Notices. Notwithstanding that advance notification of any notices or other communications may be given by electronicmail transmission, all notices or other communications that shall or may be given pursuant to this Agreement shall be in writing(including by confirmed receipt electronic mail) and shall be deemed to be effective (a) when delivered if sent by registered orcertified mail, return receipt requested, or (b) on the next business day, if sent by overnight courier, (c) when sent if sent by electronicmail provided that receipt is confirmed, in each case to the Parties at the following addresses (or at such other addresses as shall bespecified by like notice) with postage or delivery charges prepaid:If to Client:Insmed Incorporated10 Finderne Avenue, Building 10Bridgewater, New Jersey 08807, USAAttn: General CounselEmail: [***]If to Patheon:Patheon UK LimitedExecutive Director & General ManagerKingfisher Drive, CovinghamSwindon, Wiltshire SN3 5BZEnglandEmail: [***]with copy toLegal Director.10.2 Force Majeure. Neither Party shall be liable for delay in delivery, performance or nonperformance, in whole or in part,nor shall the other Party have the right to terminate this Agreement except as otherwise specifically provided in this Section 10.2where such delay in delivery, performance or nonperformance results from acts beyond the reasonable control and without the faultor negligence of such Party including, but not limited to, the following conditions: fires, floods, storms, embargoes, shortages,epidemics, quarantines, war, acts of war (whether war be declared or not), terrorism, insurrections, riots, civil commotion, or acts,omissions, or delays in acting by any governmental authority; provided that the Party affected by such a condition shall, on or before[***] of its occurrence, give notice to the other Party stating the nature of the condition, its anticipated duration, and any action beingtaken to avoid or minimize its effect. The suspension of performance shall be of no greater scope and no longer duration than isreasonably required, and the nonperforming Party shall use its Commercially Reasonable Efforts to remedy its inability to perform;provided, however, that in the event the suspension of performance continues for [***] days after the date of the occurrence, andsuch failure to perform would constitute a material breach54*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.of this Agreement in the absence of such force majeure event, the non-affected Party may terminate this Agreement immediately bywritten notice to the affected Party.10.3 Independent Contractor. The Parties to this Agreement are independent contractors. Nothing contained in thisAgreement shall be construed to place the Parties in the relationship of employer and employee, partners, principal, and agent or ajoint venture. Neither Party shall have the power to bind or obligate the other Party nor shall either Party hold itself out as having suchauthority.10.4 Waiver. Save where expressly stated to the contrary in this Agreement, including Sections 2.8, 2.9, 3.12, 3.14, 8.2, 8.4and 9.5, no waiver by either Party of any provision or breach of this Agreement shall constitute a waiver by such Party of any otherprovision or breach, and no such waiver shall be effective unless made in writing and signed by an authorized representative of theParty against whom waiver is sought. No course of conduct or dealing between the Parties will act as a modification or waiver of anyprovision of this Agreement. Either Party’s consent to or approval of any act of the other Party shall not be deemed to renderunnecessary the obtaining of that Party’s consent to or approval of any subsequent act by the other Party.10.5 Entire Agreement. This Agreement (together with all Schedules hereto, which are hereby incorporated by reference),the Quality Agreement, the Confidentiality Agreement, and the Technology Transfer Agreement constitute the final, complete, andexclusive agreement between the Parties relating to the subject matter hereof and supersede all prior conversations, understandings,promises, and agreements relating to the subject matter hereof. Neither Party has relied upon any communications, representations,terms or promises, verbal or written, not set forth herein. No terms, provisions or conditions of any Purchase Order or other businessform or written authorization used by Client or Patheon will have any effect on the rights, duties, or obligations of the Parties under orotherwise modify this Agreement, regardless of any failure of Client or Patheon to object to the terms, provisions, or conditions unlessthe document specifically refers to this Agreement and is signed by both Parties.10.6 Assignment; Change of Control. This Agreement may not be assigned by Patheon without the prior written consent ofClient. Notwithstanding the foregoing, either Party may assign this Agreement to an Affiliate, or to an acquirer or successor in interestin connection with a Change of Control of such Party, without the prior written consent of the other Party, provided that such Partyprovides the other Party with written notice of any such assignment. This Agreement shall be binding upon and inure to the benefit ofClient and Patheon and their respective successors, heirs, executors, administrators, and permitted assigns. “Change of Control”means the earlier of a public announcement of an agreement in principle or the closing of (a) a merger, consolidation or similartransaction providing for the acquisition of the direct or indirect ownership of more than fifty percent (50%) of a Party’s shares orsimilar equity interests or voting power of the outstanding voting securities or that represents the power to direct the management andpolicies of a Party or (b) the sale of all or substantially all of a Party’s assets related to the subject matter of the Agreement.55*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.10.7 Amendment; Modification. This Agreement may not be amended, modified, altered, or supplemented except by awriting signed by both Parties. No modification of any nature to this Agreement and no representation, agreement, arrangement, orother communication shall be binding on the Parties unless such is expressly contained in writing and executed by the Parties as anamendment to this Agreement. This Agreement may not be amended in any respect by any Purchase Order, invoice,acknowledgment, or other similar printed document issued by either Party.10.8 Governing Law.(a) This Agreement and any matter, claim or dispute arising out of or in connection with it, whether contractual ornon-contractual, shall be construed under and governed by the laws of England without regard to the application of principles ofconflicts of law. Both Parties hereby submit to the exclusive jurisdiction of the courts of England.(b) The Parties expressly exclude the application of the United Nations Convention on Contracts for the InternationalSale of Goods, if applicable.(c) The Parties agree that nothing in this Agreement shall (i) grant Client any property ownership rights in theManufacturing Suite or the Facility or (ii) constitute a lease to the Manufacturing Suite or the Facility and no relationship of landlordand tenant is created between Patheon and Client pursuant to this Agreement. Patheon retains control, possession and management ofthe Facility and Manufacturing Suite and Client has no right to exclude Patheon from the Facility or Manufacturing Suite.10.9 Compliance with Applicable Laws. Each Party and its Affiliates, and their respective representatives, shall comply withall Applicable Laws in the performance of their obligations under this Agreement. Without limiting the foregoing, each Party and itsAffiliates, and their respective representatives, shall comply with export control laws and regulations of the country of Manufactureand of the United States. Neither Party nor its Affiliates (or representatives) shall, directly or indirectly, without prior U.S.government authorization, export, re-export, or transfer the Product to any country subject to a U.S. trade embargo, to any resident ornational of any country subject to a U.S. trade embargo, or to any person or entity listed on the “Entity List” or “Denied Persons List”maintained by the U.S. Department of Commerce or the list of “Specifically Designated Nationals and Blocked Persons” maintainedby the U.S. Department of Treasury. In so far as the same applies to a Party or its Affiliates, each Party and its Affiliates andrespective representatives shall comply with the requirements of the Foreign Corrupt Practices Act of 1977 (15 U.S.C. § 78dd-1, etseq.).10.10 Dispute Resolution.(a) The Parties recognize that disputes may arise from time to time during the Term of this Agreement. It is theobjective of the Parties to establish procedures to facilitate the resolution of such disputes arising under this Agreement in an expedientmanner by mutual cooperation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Section 10.10 ifand when a dispute arises under this Agreement.56*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b) Unless otherwise specifically recited in the Agreement, disputes between the Parties under this Agreement will befirst referred to the Project Manager of each Party as soon as reasonably possible after such dispute has arisen. If the Project Managersare unable to resolve such a dispute within [***] days of being requested by a Party to resolve such dispute, each Party shall have theright, pursuant to written notice, to refer such dispute to the Senior Management of each Party for attempted resolution by negotiationswithin [***] days after such written notice is received. If the Senior Management are unable to resolve such dispute within [***] daysof being requested by a Party to resolve such dispute, each Party shall have the right to pursue any remedies available to it at law or inequity.10.11 Press Releases; Use of Trademarks. The Parties agree not to disclose in any press release or other public statement anyterms or conditions of this Agreement to any Third Party without the prior consent of the other Party, save as permitted pursuant tothe Confidentiality Agreement. Neither Party shall (a) issue a press release or make any other public statement that references thisAgreement or (b) use the other Party’s or the other Party’s Affiliates’ names or trademarks for publicity or advertising purposes,except with the prior written consent of the other Party, save as permitted pursuant to the Confidentiality Agreement or Securities andExchange Commission filings which are required by Applicable Law, in which instance both Parties shall work together in goodfaith to agree the disclosure to be made having due and proper regard to their legal obligations. Each Party agrees that it shallcooperate fully and in a timely manner with the other with respect to all disclosures to the Securities and Exchange Commission orany other governmental or regulatory agencies, including requests for confidential treatment of Confidential Information of eitherParty included in any such disclosure.10.12 Severability. If any provision of this Agreement is found by a proper authority to be unenforceable, that provision tothe extent it is found to be unenforceable or invalid shall be severed and the remainder of the provision and this Agreement willcontinue in full force and effect. The Parties shall use their best efforts to agree upon a valid and enforceable provision as a substitutefor any invalid or unenforceable provision, taking in to account the Parties’ original intent of this Agreement.10.13 Construction. Unless the context of this Agreement otherwise requires: (a) words of any gender include each othergender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms “hereof,”“herein,” “hereby,” and derivative or similar words refer to this entire Agreement; (d) the terms “Article,” “Section,” “Schedule,”refer to the specified Article, Section or Schedule of this Agreement; (e) “or” is disjunctive but not necessarily exclusive; and (f) theterm “including” or “includes” means “including without limitation” or “includes without limitation.” Whenever this Agreementrefers to a number of days, such number shall refer to calendar days unless business days are specified. The captions and headings ofthis Agreement are for convenience of reference only and in no way define, describe, extend, or limit the scope or intent of thisAgreement or the intent of any provision contained in this Agreement. The language of this Agreement shall be deemed to be thelanguage mutually chosen by the Parties, and no rule of strict construction shall be applied against either Party hereto.57*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.10.14 Third Party Beneficiaries. This Agreement is not intended to confer upon any non-party rights or remedies hereunder,except as may be received or created as part of a valid assignment.Without prejudice to the previous sentence, any Affiliate of Client may submit Purchase Orders under this Agreement ifthe quantities of Product ordered are included in the Forecasts given by Client such that Patheon shall receive a single consolidatedForecast pursuant to Section 2.3(a). Patheon shall submit invoices to the Affiliate of Client directly for all applicable fees and charges,which shall be payable by the Affiliate of Client directly in accordance with ARTICLE IV. The Parties agree that Client may delegate(in part) the benefits it receives under this Agreement, and its obligations, to any Affiliate in order that it may benefit from the terms ofthis Agreement in connection with Purchase Orders, provided that Client shall remain ultimately liable for any act or omission underthis Agreement of such Affiliate. This shall not give an Affiliate any right to enforce any term of this Agreement against Patheon.10.15 The rights of Patheon and Client to terminate, rescind or agree any variation, modification, amendment, waiver orsettlement under this Agreement are not subject to the consent of any other person and expressly do not require the consent of anyAffiliate.Further Assurances. Each of the Parties agrees to duly execute and deliver, or cause to be duly executed and delivered, suchfurther instruments and do and cause to be done such further acts and things, including the filing of such additional assignments,agreements, documents, and instruments, that may be necessary or as the other Party hereto may at any time and from time to timereasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to betterassure and confirm unto such other Party its rights and remedies under, this Agreement.10.16 Counterparts. This Agreement may be signed in counterparts, each and every one of which shall be deemed anoriginal. Electronic signatures shall be treated as original signatures.[The remainder of this page is left blank intentionally.]58*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.PATHEON UK LIMITED:INSMED INCORPORATED: By:/s/ Luca Andretta By:/s/ William H. Lewis Name:Luca Andretta Name:William H. Lewis Title: Director Title:President and CEO Date:10/20/2018 Date:10/20/2018 [Signature Page of Manufacturing and Supply Agreement]Schedule AProductProductVial SizeFill WeightPackaging ConfigurationAmikacin LiposomeInhalation Suspension inVials[***][***][***]A-1*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Schedule BFeesI.Base Fee[***]Commencement DateEnd DateFee (per calendar [***])[***][***][***][***][***][***][***][***][***][***][***][***][***][***][***]For the avoidance of doubt, the Base Fees will accrue under this Agreement alone. The fees for the Transfer Services are specified inthe Technology Transfer Agreement.Consequences for the failure to achieve milestones for the Transfer Services or effects of early completion of the Transfer Services arespecified in Exhibit H of the Technology Transfer Agreement.II.Product Fees[***]Tier pricing: [***][***][***][***][***][***][***][***]Product ConversionPrice[***][***][***][***][***][***][***][***]Notes:The tier pricing will apply if [***].In tier pricing, for any given year the first [***]-[***] vials cost £[***], the [***] to [***] vials cost £[***], the [***] to [***] vialscost £[***]. etc.Tier pricing [***]:The tier pricing below will apply if [***] [***][***][***][***][***][***][***][***]Product ConversionPrice[***][***][***][***][***][***][***][***]B-1*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Base Fees and Product Fees include:[***]Base Fee and Product Fees DO NOT Include:[***]Materials:Cost allocation for the procurement of Materials is set forth in Section 2.2 of this Agreement. A provisional bill of Materials is listed inSchedule C.Bill Back Items:During the Transfer Services, Patheon and Client will work together to develop a non-exhaustive list of typical Bill Back Items. Termsfor the procurement of Bill Back Items are described in Section 2.2(r). Additional Services:The following non-exhaustive list shall be considered Additional Services and will be invoiced to Client at the price agreed accordingto Section 2.2(s).[***]B-2*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Schedule CMaterialsPart A: Client-Supplied MaterialsMaterialSpecification Cost ($/kg)[***][***][***][***][***][***][***][***][***][***][***][***]Part B: Patheon-Supplied MaterialsMaterialLong leadtime[***] The column for items with a long lead time will be completed in the final version of the bill of materials to be established during theTransfer Services.The above list will form the initial basis of the bill of materials for the Product (“BOM”).The BOM will be further developed duringthe Transfer Services to reflect the possibility of local suppliers and any changes to the equipment /materials needed at the Facility.[***]This BOM will be updated and agreed by the Parties prior to commercial launch of the Product.C-1*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Schedule DOn Time In Full Delivery PerformanceI. Calculation of OTIF delivery[***]II. [***] Delivery Target[***]III. Shortfall[***]IV. Bonus[***]Example calculation: Actual OTIF [***]Amount of Credit [***]Bonus Credit due to Patheon[***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***]Annual Delivery Target (example)[***]Shortfall Credit due to Client[***][***][***][***][***][***][***][***][***][***][***][***][***][***][***]D-1*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Schedule EClient On Site RepresentativesThe following terms shall apply to any use of on-site office space or other accommodations that is provided by Patheon for the ClientOn Site Representatives:(a)Patheon permits only the Client On Site Representatives to use the relevant office space, which use shall be in common withPatheon and all others authorised by Patheon;(b)the purpose of use of the office space shall be within Use Class B1 of the Town and Country Planning (Use Classes) Order1987 and only in connection with the exercise of the rights of Client under Section 3.5(a);(c)the Client On Site Representatives shall use the office space as a licensee and that no relationship of landlord and tenant shallbe created between Patheon and Client;(d)Patheon retains control, possession and management of the office space and Client has no right to exclude Patheon from theoffice space;(e)the right to use the office space is personal to Client and is not assignable;(f)the Client On Site Representatives shall not be entitled to the exclusive use or occupation of the office space;(g)Patheon shall be entitled at any time on giving not less than [***] notice to require the Client On Site Representatives totransfer to alternative, comparable space elsewhere within the Facility and the Client On Site Representatives shall comply withsuch requirement.In relation to use of on-site office space or other accommodations that is provided by Patheon for the Client On Site Representatives,Client agrees:(a)not to make any alteration or addition to the office space;(b)not to display any advertisement, signboards, nameplate, inscription, flag, banner, placard, poster, signs or notices in the officespace or elsewhere in the Facility without the prior written consent of Patheon;(c)not to do or permit to be done in the office space anything that is illegal or that may be or become a nuisance, annoyance,inconvenience or disturbance to Patheon or to occupiers of the Facility or any owner or occupier of a neighbouring property;(d)not to cause or permit to be caused any damage to the office space, any property of Patheon, the Facility or any neighbouringproperty; or(e)not to obstruct the common parts of the Facility;(f)not to apply for any planning permission in respect of the office space or the Facility;(g)not to do anything that will or might constitute a breach of any planning permissions or similar consents affecting the officespace or the Facility or that will or might invalidate in whole or in part any insurance effected by Patheon in respect of theoffice space or the Facility from time to time;(h)to comply with all laws and with any recommendations of the relevant suppliers relating to the supply and removal ofelectricity, gas, water, sewage, telecommunications and data and other services and utilities to or from the office space; and(i)to observe any reasonable rules and regulations Patheon makes and notifies to Client from time to time governing Client’s useof the office space and the common parts.E-1*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Schedule FClient [***] Volume Forecast Product[***] Volume Forecast (Vials)[***][***]Amikacin Liposome InhalationSuspension in Vials[***][***]The Client [***] Volume Forecast for [***] shall be a minimum of [***] unless agreed otherwise (only for the purpose of determiningthe Product Fee). Any commercial Product manufactured for stock building purposes prior to commercial launch shall count towardsthe volume of Product purchased.E-2*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Schedule GExample Exchange Rate Fluctuation Mechanism Option 1 - GBP to USD Contract Pricing Re-pricing of the following Contract elements: [***]E-3*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Confidential EXHIBIT 10.40CONFIDENTIAL TREATMENT HAS BEEN REQUESTED AS TO CERTAIN PORTIONS OF THIS DOCUMENT.EACH SUCH PORTION, WHICH HAS BEEN OMITTED HEREIN AND REPLACED WITH ASTERISKS (***), HASBEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.TECHNOLOGY TRANSFER AGREEMENT1TECHNOLOGY TRANSFER AGREEMENTThis TECHNOLOGY TRANSFER AGREEMENT (this “Agreement”), dated as of 20 October 2017 (the “EffectiveDate”), is made by and between Insmed Incorporated, a Virginia corporation having its principal place of business at 10 FinderneAvenue, Building 10, Bridgewater, New Jersey 08807, USA (“Client”), and Patheon UK Limited, a company incorporated inEngland and Wales having its principal place of business at Kingfisher Drive, Covingham, Swindon, SN35BZ, United Kingdom(“Patheon”). Client and Patheon are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”RECITALSWHEREAS, Client has a commercial interest in the manufacture and commercialization of Amikacin Liposome InhalationSuspension (ARIKAYCE®), a sterile, aqueous liposomal suspension designed for inhalation via nebulization which is manufacturedusing the Client Manufacturing Process (the “Product”);WHEREAS, concurrently herewith, the Parties are executing a manufacturing and supply agreement pursuant to whichPatheon would be a manufacturer and supplier of the Product; andWHEREAS, in anticipation of the manufacturing and supply agreement and the goods and services that Patheon will supplythereunder, the Parties desire to enter into a binding agreement pursuant to which Patheon would undertake certain technology transferand construction services in order to validate Client’s technology package and prepare Patheon’s facilities for the manufacture of theProduct;NOW, THEREFORE, in consideration of the foregoing, the mutual promises and covenants of the Parties contained herein,and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intendingto be legally bound, do hereby agree as follows:ARTICLE 1 DEFINITIONSThe following terms will have the meanings set forth below. Unless the context indicates otherwise, the singular will includethe plural and the plural will include the singular. Any term not defined hereunder shall have the meaning ascribed to such term in theManufacturing and Supply Agreement.“Agreement” has the meaning set forth in the preamble hereto.“Capital Expenditures” has the meaning set forth in Section 2.4(a).2*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.“Client” has the meaning set forth in the Preamble.“Client Indemnified Parties” has the meaning set forth in Section 7.2.“Completion of the Tech Transfer” has the meaning set forth in Section 8.2.“Effective Date” has the meaning set forth in the Preamble.“Key Technical Assumptions” means the assumptions set forth in Exhibit D.“Manufacturing and Supply Agreement” means the Manufacturing and Supply Agreement executed by the Parties on the datehereof as described in more detail in the Preamble.“Manufacturing Suite” means the manufacturing suite at the Facility, whose footprint and engineering approach shall be insubstantially the form attached as Exhibit A.“Milestones” means the milestones in respect of the Transfer Services set forth in Exhibit H.“Party” or “Parties” has the meaning set forth in the Preamble.“Patheon” has the meaning set forth in the Preamble.“Patheon Indemnified Parties” has the meaning set forth in Section 7.1.“Steering Committee” has the meaning set forth in Section 2.10(d).“Technology Transfer Fees” means the monthly fees paid by Client in consideration for the Transfer Services, as morespecifically set forth in Part 1 of Exhibit B. Technology Transfer Fees do not include Capital Expenditures, Product Fees,Material Costs, Maintenance Costs, Disposal Costs or charges for Bill Back Items or Additional Services.“Term” has the meaning set forth in Section 8.1.“Timeline” has the meaning set forth in Section 2.3.“Transfer Services” means the services rendered under this Agreement, as described in Section 2.1 and in the Exhibits attachedto this Agreement, based on the Key Technical Assumptions stated therein.“Transfer Services Termination Costs” has the meaning set forth in Section 8.12(f).ARTICLE 2 TRANSFER SERVICES2.1 Description of Transfer Services. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Patheon will:(a) provide engineering and construction services, directly or using approved (as described in Section 2.11) Third Parties, toconstruct the Manufacturing Suite in accordance with the engineering approach and the footprints set forth in Exhibit A of thisAgreement, as it may be amended;(b) procure and/or validate the Equipment necessary to Manufacture the Product in accordance with Section 2.9 and performthe Transfer Services set forth in Exhibit C in order to validate and implement the Client Manufacturing Process for the Product incompliance with the Quality Agreement, GMP, all other Applicable Law and the Specifications; and(c) register the Facility to Manufacture the Product,(collectively, the “Transfer Services”).2.2 Patheon will perform the Transfer Services and facilitate Client obtaining Regulatory Approval of the Manufacturing Suiteas the manufacturing, testing, and packaging site for the Product. The Transfer Services will be performed with the aim of ensuring thatthe Product is Manufactured and tested using the Client Manufacturing Process according to the Specifications and test methods.2.3 Payments for Transfer Services. The Parties acknowledge and agree that Patheon’s consideration for the Transfer Servicesperformed hereunder is the payment of the Technology Transfer Fees. Patheon will use its Commercially Reasonable Efforts tocomplete the Transfer Services in a timely fashion in accordance with the schedule set forth in Exhibit E (the “Timeline”). In the eventof any delays in completion of the Transfer Services, Client’s sole remedy whether in contract, tort, equity or otherwise, shall beadjustment of the Technology Transfer Fees (and, where relevant, any Base Fee payable pursuant to the Manufacturing and SupplyAgreement) as set out in Exhibit H, together with the remedies expressly set forth in Section 7.5 and ARTICLE 8). The dates onwhich the Technology Transfer Fees become payable as set out in Exhibit B shall be reviewed and (if necessary, and subject toagreement) updated by the Steering Committee within [***] of the Effective Date.2.1 Additional Payments. In addition to the Technology Transfer Fees, Client shall also pay:(a) the capital requirements and the payments associated with the Equipment, Manufacturing Suite construction and relatedprocess and support and validation services set forth in Part 2 of Exhibit B (the “Capital Expenditures”); *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b) the Material Costs of Patheon-Supplied Materials in accordance with Section 2.2(b) of the Manufacturing and SupplyAgreement, except that the handling fee will be [***], save in respect of any Material Costs of Patheon-Supplied Materials for use inthe Manufacture of commercial Product (i.e. after the completion of Manufacture of process validation batches), which shall have ahandling fee of [***]; and(c) any Maintenance Costs, Disposal Costs and any charges for Bill Back Items or any Additional Services.2.1 All fees and costs in this Agreement are shown in British Pounds (GBP) but which shall be adjusted as described inSection 2.6(c) of the Manufacturing and Supply Agreement so that all invoices from Patheon and payments from Client to Patheonhereunder shall be in United States Dollars (USD) and will be due and payable in accordance with ARTICLE IV of theManufacturing and Supply Agreement (which is incorporated herein). All invoices from Patheon to Client for Capital Expendituresshall include all (if any) applicable invoices from vendors for the supply, transportation, installation, and commissioning of theEquipment that pertain to the Transfer Services invoiced by Patheon. Client acknowledges that the amounts of Capital Expenditures setforth in Part 2 of Exhibit B are estimates and are subject to review by the Steering Committee and agreement by the Parties in writingonce manufacturing details and process specification requirements have been confirmed, any necessary machine trials performed andupon receipt of formal quotations from the equipment suppliers to the extent not already obtained as at the Effective Date.2.2 Modifications. The Parties may modify and agree upon the definitive engineering approach, footprint of theManufacturing Suite, or the Timeline, taking into account parameters such as the exact design of the space, space classifications, coderequirements, Equipment, materials, personnel, waste stream process flows, equipment sizing and utility requirements. For example,feasibility work and/or engineering runs may be executed prior to completion of operational qualification, if mutually agreed upon byboth parties. Any such modifications shall be discussed by the Steering Committee but shall not take effect until agreed in writing(including as to any consequential fees and costs or savings relating thereto) and duly executed by the Parties, provided that theselection and use of stability material (including the selection of materials to be used for generation of the stability data to be used in thepost approval inspection) shall be agreed by the Parties. By way of example an alternate non-contractual timeline that Client maychoose to pursue is set out in Exhibit E and if so the Parties shall work together to achieve this Timeline provided that it is compliantwith GMP). The alternate timeline in Exhibit E shall not form part of this Agreement unless the Parties agree to incorporate it by awritten amendment that is executed by the Parties (such agreement not to be unreasonably withheld). *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.2.1 Client’s Responsibilities.(a) To assist Patheon in its performance of the Transfer Services under this Agreement, Client shall at its expense:(i)deliver to Patheon DDP Incoterms 2010 the Facility the Client Manufacturing Equipment;(ii)provide Patheon with relevant information, documentation, and data relating to (1) the ClientManufacturing Process, (2) the Equipment necessary to Manufacture the Product in accordance with theClient Manufacturing Process, and (3) Product safety and information, documentation, and data,including any applicable NDA numbers, NDC codes, “CMC” sections of NDAs, validation protocols,validation reports, method validation protocols, method validation reports, and other documentsnecessary or reasonably requested by Patheon for Patheon to Manufacture the Product, provide theTransfer Services or otherwise necessary or appropriate for Patheon’s performance hereunder; and(iii)provide to Patheon Client-Supplied Materials pursuant to Section 2.13,in each case consistent with the dates set out in the Timeline or within such period as agreed by the Parties.(b) If Client is to review or approve any information, documentation, data, or samples prepared or supplied by or on behalf ofPatheon, it will do so on the dates set out in the Timeline or within such period as agreed by the Parties.(c) It is understood and acknowledged by the Parties that Client will retain ownership of the Regulatory Approval for theProduct including any application therefor, and any supplements thereto. Subject to Section 2.7(d) Client is responsible for allsubmission of documents and correspondence with the FDA and other competent Regulatory Authorities relating to the RegulatoryApproval for the Product . Client shall have the sole responsibility for the filing of the documents with the applicable RegulatoryAuthorities, and to take any other actions that may be required for the receipt of Regulatory Approval as described in Section 3.17 ofthe Manufacturing and Supply Agreement, provided, however, that Patheon shall have the right to review and comment on Client’sdraft submissions to any Regulatory Authorities to the extent they relate to the Facility prior to Client’s issuance of the submission inaccordance with Section 2.7(f). *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(d) Client will use Commercially Reasonable Efforts to pursue Regulatory Approval for the Product. Patheon will useCommercially Reasonable Efforts to support Client in relation to the same, to the extent required in order for Patheon to Manufacturethe Product at the Facility. For the avoidance of doubt Patheon shall be responsible at its cost for all Regulatory Filings, and obtainingand maintaining all licences, necessary for or required in connection with the manufacture of pharmaceutical products in general at theFacility including GMP inspections by Regulatory Authorities, including a manufacturing authorisation issued to Patheon by theMedicines and Healthcare products Regulatory Agency in the United Kingdom.(e) Client shall provide Patheon with a copy of any Regulatory Approval relevant to this Agreement on request including anyRegulatory Approval required for the storage, receipt or distribution of the Product by Client or its designee, to the extent reasonablyrequired by Patheon for Regulatory Filings or in order to satisfy its obligations under Applicable Laws.(f) Where documents or data generated by Patheon in relation to the Transfer Services are to be filed by Client with anyRegulatory Authority and such filing includes data or information pertaining to a Patheon Regulatory Obligation (as such term isdefined in the Manufacturing and Supply Agreement), prior to filing any such documents and data with the Regulatory Authority,Client shall provide Patheon with a copy of the documents incorporating such data so as to give Patheon the opportunity to review theaccuracy of such documents as it relates to the Patheon Regulatory Obligation in accordance with the review and comment proceduresset forth in Section 3.17 of the Manufacturing and Supply Agreement (including the process for resolution of inaccuracies set forth inSection 3.17(f) thereto). Notwithstanding anything in Section 3.17 of the Manufacturing and Supply Agreement to the contrary:(i)at least [***] prior to Client’s planned filing date with the Regulatory Authority of any documentationwhich is or is equivalent to the Quality document portion (Drug Product section) of the U.S.Investigational New Drug application, the EU Clinical Trial application and Investigational MedicinalProduct Dossier, the Common Technical Document module 3 (Drug Product section) of the US NewDrug Application, U.S. Biological License Application, or the EU Marketing AuthorizationApplication, as the case may be, Client shall provide Patheon with a copy of the Initial Draft (defined inthe Manufacturing and Supply Agreement) of such portion so as to permit Patheon to verify that theInitial Draft accurately describes the development and validation work Patheon has performed and themanufacturing and control processes that Patheon will perform pursuant to this Agreement; *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(ii)Patheon shall provide comments regarding such Initial Draft no later than [***] prior to the requiredfiling date with the applicable Regulatory Authority (including notifying Client of any identifiedinaccuracies);(iii)at least [***] prior to Client’s planned filing date with the Regulatory Authority of the abovedocumentation Client shall provide Patheon with a revised copy of the Initial Draft and Patheon shallprovide any further comments regarding such Initial Draft no later than [***] prior to the required filingdate with the applicable Regulatory Authority; and(iv)Client shall deliver a copy of the Final Filing to Patheon at least [***] prior to the date it is planned to besubmitted to the relevant Regulatory Authority.2.2 Patheon’s Responsibilities.(a) Patheon will provide to Client all data and documentation necessary to support Client’s submissions to the FDA, or anyresponses to questions raised by the FDA with respect to those Transfer Services, that are necessary for Regulatory Approval of theFacility as the manufacturing, testing, and bulk-packaging site for the Product.(b) Patheon shall at its own cost ensure that any and all necessary licenses, registrations, and Regulatory Authority approvalshave been obtained in connection with the Facility and Equipment used in connection with the Manufacture of the Product by Patheon.Any changes to the Transfer Services shall be subject to the change control procedure set out in Section 2.10(b) of the Manufacturingand Supply Agreement.(c) Patheon will promptly notify Client in writing and by telephone if an authorized agent of a Regulatory Authority visits theManufacturing Suite, or any other location in the Facility where the Product is being manufactured, bulk-packaged, stored or qualitytested, and the procedures set forth in Section 3.6 of the Manufacturing and Supply Agreement shall apply.(d) Patheon shall install and validate the Equipment in compliance with the capital requirements set forth in Exhibit B and thetechnical transfer process set forth in Exhibit C.2.3 Equipment.(a) Client shall be responsible for the design of all Client Manufacturing Equipment and for the cost of procurement,installation, commissioning and validation of all Client Manufacturing Equipment and any Patheon Manufacturing Equipment as setout in the Capital Expenditures. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Patheon shall be responsible for the design of all Patheon Manufacturing Equipment in collaboration with Client.(b) The Client Manufacturing Equipment must be supplied with appropriate cleaning certificates and must comply with therequirements set out in Section 2.10(a)(xiii) of the Manufacturing and Supply Agreement which is incorporated herein.(c) Maintenance, replacement, insurance ownership and use of the Client Manufacturing Equipment and PatheonManufacturing Equipment shall be governed by Section 2.10(a) of the Manufacturing and Supply Agreement which is incorporatedherein.(d) With respect to all Equipment, Patheon shall provide engineering project management and process validation, qualificationsupport, installation and commissioning services, in consideration for the payments set forth in Exhibit B. After such Equipment isdelivered to the Facility, Patheon shall manage the installation, commissioning and validation activities of such Equipment.(e) The Parties shall provide their Commercially Reasonable Efforts to minimize the Capital Expenditures and the costs ofprocurement, transportation, installation and commissioning of the Equipment. Patheon shall provide Client with quotes and copies ofall applicable invoices from vendors, for the costs of procurement, transportation, installation, and commissioning of the Equipment. Inorder to obtain, and prior to obtaining, any payment for the Capital Expenditures hereunder, Patheon must obtain prior written approvalfrom Client and provide Client with quotes and invoices, including copies of all applicable invoices from vendor(s), for the supply,transportation, installation, and commissioning of the Equipment.2.4 Client On Site Representatives; Reporting of Results; Project Managers; Steering Committee.(a) Client shall have the right at all times throughout the Term to have [***] Client On Site Representatives present in thatportion of the Facility that is being constructed or used to Manufacture the Product or store Materials, to observe the procedures andprocesses used to Manufacture the Product or to perform the activities associated with the transfer of Client Manufacturing Processhereunder as further described in Section 3.5 of the Manufacturing and Supply Agreement and provided that Client complies with theterms set out in Schedule E of the Manufacturing and Supply Agreement which are incorporated herein.(b) Patheon will respond to Client’s inquiries regarding the status of the Transfer Services on an ongoing basis, and Patheonwill endeavor to keep Client informed of interim results of the Transfer Services. Patheon will provide copies of all analytical, cleaning,and process validation protocols, data summaries, reports and all batch records, test methods, and specifications for Client’s review,comment, and approval prior to implementation and execution. Once such protocols, data *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.summaries, reports, records, methods, and specifications have been approved and executed, Patheon will provide copies to Client.Patheon will provide Client with information relating to the Equipment to be used in connection with the Manufacture of the Product,which Equipment will be subject to Client’s review and approval (not to be unreasonably withheld or delayed). On or before [***]after Client’s request, Patheon will provide to Client documentation that summarizes the implementation efforts of the TransferServices at the Facility.(c) Patheon and Client will each appoint a Project Manager, who will meet as needed to resolve any issues or problemsassociated with the Transfer Services. Client’s Project Manager may be one of the Client On Site Representatives.(d) Within [***] of the Effective Date the Parties shall establish a steering committee (the “Steering Committee”) as describedin Exhibit G. The Steering Committee shall have the responsibilities and authority allocated to it in Exhibit G. 2.5 Subcontractors. Patheon may arrange for Third Party subcontractors (“Third Party Subcontractors”) to perform specificTransfer Services (such as testing or analysis) under this Agreement with Client’s consent or at Client’s request as further described inSection 3.16 of the Manufacturing and Supply Agreement which is incorporated herein.2.6 Intellectual Property. The Parties’ Intellectual Property rights relating to the subject matter of this Agreement shall begoverned by ARTICLE V of the Manufacturing and Supply Agreement.2.7 Materials. Client-Supplied Materials will be purchased by Client and shipped to Patheon in accordance with this Section2.13. Client shall purchase all Client-Supplied Materials for the Transfer Services and ship such Client-Supplied Materials to Patheonin accordance with this Section 2.13. All shipments from Client to Patheon will be made DDP (Incoterms 2010) the Facility unlessotherwise agreed. All shipments of Client-Supplied Materials will be accompanied by Certificate(s) of Analysis from the Materialmanufacturer, confirming its compliance with the Material’s specifications and the required documentation as specified in the QualityAgreement. Client or Client’s designee will be the “Importer of Record”. Client-Supplied Materials will be held by Patheon on behalfof Client as set forth in this Agreement. Title to Client-Supplied Materials will at all times remain the property of Client or a ClientAffiliate. Any Client-Supplied Materials received by Patheon will only be used by Patheon to perform the Manufacturing Services orthe Transfer Services or associated activities necessary to perform the Manufacturing Services or the Transfer Services.2.8 Compliance Audits. With the exception of “for cause” audits (e.g., audits arising from regulatory issues or materialProduct conformity issues), Client and its designated representatives shall have the right to audit once per year all applicable non-financial records pertaining to the *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Product or Patheon’s obligations hereunder and non-financial records of Patheon for the purpose of determining Patheon’s compliancewith the obligations set forth in this Agreement. The terms of such audit shall be as set out in Section 3.10 of the Manufacturing andSupply Agreement (which is incorporated herein) and an audit may be performed once per year under this Agreement or theManufacturing and Supply Agreement but not both.2.9 Patheon shall store, handle, and protect the Materials with a reasonable level of care, which shall include taking allreasonable precautions to ensure that the Materials are not subject to contamination, deterioration, destruction, or theft. Patheon shallkeep adequate records of its usage of the Materials during the Term.2.10 Bill Back Items. Bill Back Items will be charged to Client at Patheon’s cost plus a [***] handling fee. Patheon shallinvoice Client [***] for any Bill Back Items used in connection with the Transfer Services during the preceding [***] in accordancewith ARTICLE IV of the Manufacturing and Supply Agreement (which is incorporated herein). Patheon may only invoice Bill BackItems that have been quoted to and approved in writing by an authorized person of Client in advance. The cost of any Bill Back Itemswhere use is shared between Client and other clients of Patheon will be apportioned in good faith in proportion to their use.2.11 Additional Services. If Client is interested in having Patheon perform Additional Services, Client will provide Patheonwith a written request containing sufficient detail to enable Patheon to provide Client with a quote and proposal to provide suchAdditional Services. Patheon may only invoice for Additional Services that have been quoted to and approved in writing by anauthorized person of Client in advance. Patheon shall invoice Client monthly for any Additional Services performed by Patheon duringthe preceding month in accordance with ARTICLE IV of the Manufacturing and Supply Agreement (which is incorporated herein).2.12 Storage. Patheon will provide [***] sufficient storage capacity to support storage of the required quantity of Materialsnecessary for the Transfer Services.2.13 Shipping. Except to the extent set forth otherwise in this Agreement or the Manufacturing and Supply Agreement, anyshipment from Patheon to Client, whether of Product, Materials or otherwise, shall be made EXW (Incoterms 2010) the Facility unlessotherwise mutually agreed. Title and risk of loss shall pass to Client (or a designated Client Affiliate) at the time when Patheon loadsthe Product onto the carrier’s vehicle for shipment at the shipping point at the Facility. Client shall collect shipments promptly from theFacility following notification of availability for delivery from Patheon. Any shipment from Client to Patheon will be made DDP(Incoterms 2010) the Facility. Storage of Product will be provided in accordance with Section 2.2(q) of the Manufacturing and SupplyAgreement. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.2.14 Payment of Technology Transfer Fees. Patheon will invoice Client monthly in advance for the Technology TransferFees. All fees will be due and payable in accordance with ARTICLE IV of the Manufacturing and Supply Agreement (which isincorporated herein). The Technology Transfer Fees stated herein are calculated as at the Effective Date and shall be fixed until [***].Thereafter, starting on [***] the Technology Transfer Fees shall be adjusted annually to reflect any change in the UK Consumer PriceIndex: All Items Index published by the Office for National Statistics (as published at www.ons.gov.uk) during the preceding twelve(12) months (based on the average of the monthly changes over the 12-month period), provided that if the increase in the indexexceeds [***] it will be implemented but the Parties shall meet and negotiate in good faith measures to mitigate the effect of the feeincrease.2.15 Exchange Rate Fluctuations. The fees and charges under this Agreement will be adjusted in accordance with Section2.6(c) of the Manufacturing and Supply Agreement.2.16 Amendment of Product Specifications, Manufacturing Process, Equipment, and Formulation; Changes in Applicable Law.Any changes to the Specifications, Quality Agreement, the Client Manufacturing Process, the Equipment, the Transfer Services to beprovided pursuant hereto, the formulation of the Product or changes (required as a result of changes in Applicable Law or otherwise)shall be governed by Section 2.10(b) of the Manufacturing and Supply Agreement which is incorporated herein.2.17 Commercial supply of Products. The Parties acknowledge that any technical batches, stability batches or validationbatches manufactured under this Agreement are intended for validation purposes and are governed by the terms and conditions of thisAgreement, and that any supplies of Products that are intended for commercial use shall be subject to, and governed by, theManufacturing and Supply Agreement. Any commercial Product (i.e. after the completion of Manufacture of process validationbatches) that Client wishes to use for a clinical trial shall be governed by the Manufacturing and Supply Agreement. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.ARTICLE 3 CONFIDENTIALITYARTICLE VII of the Manufacturing and Supply Agreement shall apply to this Agreement and is incorporated herein.ARTICLE 4 CLIENT’S REPRESENTATIONS, WARRANTIES, AND COVENANTS4.1 Commercially Reasonable Efforts. Except where specifically stated to the contrary in this Agreement otherwise, Clientwill use its Commercially Reasonable Efforts to perform Client’s obligations hereunder.4.2 Additional Representations, Warranties, and Covenants of Client. Client warrants, represents, and covenants that:(a) to its knowledge, as at the Effective Date (1) it or its Affiliates Control all right, title, and interest in all IntellectualProperty in the Client Manufacturing Process, the Client Manufacturing Equipment, the Product and the Specifications necessaryfor performance of the Transfer Services; and (2) it has the right to authorize Patheon to perform the Transfer Services, in eachcase in accordance with the terms and conditions hereof;(b) to its knowledge, as at the Effective Date, the performance of the Transfer Services hereunder, in accordance withthe terms and conditions hereof and using the Client Manufacturing Process, or the manufacture, use, supply or other dispositionof the Product by Patheon as may be required to perform its obligations under this Agreement or by Client, does not and will notresult, in the infringement or misappropriation of any Third Party’s Intellectual Property rights; and(c) Client or its Affiliates Control and have the right to lawfully disclose the Specifications to Patheon and to authorizePatheon to use the Specification to perform the Transfer Services. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.ARTICLE 5 PATHEON’S REPRESENTATIONS, WARRANTIES, AND COVENANTSPatheon represents, warrants, and covenants to Client as follows:5.1 Commercially Reasonable Efforts. Except where specifically stated to the contrary in this Agreement otherwise, Patheonwill use its Commercially Reasonable Efforts to perform its obligations hereunder. If Patheon is not able to meet the Timeline, Patheonwill provide written notice to Client of such inability as soon as practical, but in any event on or before [***] of discovering suchinability.5.1 Transfer Services. Patheon warrants that there is no claim, suit, proceeding, or other investigation issued on Patheon, or tothe actual knowledge of Patheon, pending or threatened against Patheon, which is likely to prevent or materially adversely affect therights and interests of Client hereunder or keep Patheon from performing its obligations hereunder.5.1 Additional Representations, Warranties, and Covenants of Patheon. Section 6.2 of the Manufacturing and SupplyAgreement shall apply to this Agreement and the performance of the Transfer Services and is incorporated herein.5.1 Disclaimer. THE FOREGOING EXPRESS WARRANTIES AND THOSE IN ARTICLE 4 and ARTICLE 6 ARE INLIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OFMERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT, AND ALL OTHERWARRANTIES ARE HEREBY DISCLAIMED AND EXCLUDED BY EACH PARTY.ARTICLE 6 GENERAL REPRESENTATION AND WARRANTIESSections 6.1(a) and 6.1(c) of the Manufacturing and Supply Agreement shall apply to this Agreement and are incorporatedherein.ARTICLE 7 INDEMNIFICATION7.1 Indemnification by Client. Client will indemnify Patheon, its Affiliates, and their respective directors, officers, employees,and agents (the “Patheon Indemnified Parties”), and defend and save each of them harmless from and against:(a) any Third Party Loss incurred by any of them in connection with, arising from, or occurring as a result of: (i) any claim ofpersonal injury or property damage to the extent that the *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.injury or damage arises other than from a breach of this Agreement by Patheon; (ii) a claim that the Transfer Services performed byPatheon hereunder, in accordance with the terms and conditions of this Agreement, infringes or misappropriates a patent or any otherIntellectual Property rights, if it is a claim related to the use of Existing Client Intellectual Property, the Client ManufacturingEquipment or the Client Manufacturing Process or the Product; or (iii) a claim that the use of any device, composition, or processprovided by Client to Patheon and used in connection with the Transfer Services in accordance with the terms and conditions of thisAgreement constitutes infringement or misappropriation of a Third Party’s Intellectual Property rights; or(b) any Loss incurred by any of them in connection with: (i) the negligence or willful misconduct of the Client On SiteRepresentatives at the Facility; or (ii) any damage to Patheon’s property or any claims of personal injury to any Patheon employees orThird Party Subcontractors caused as a result of Patheon’s use of the Client Manufacturing Equipment in the performance of theTransfer Services provided that Patheon and its employees and Third Party Subcontractors have complied with all applicableEquipment Standard Operating Procedures or the manufacturer’s terms of operation and recommended procedures for the ClientManufacturing Equipment, Specifications, and have not otherwise acted in a negligent manner or committed an act of willfulmisconduct in connection with the use and Maintenance of the Client Manufacturing Equipment;except, in each case for (a) and (b), for those Losses for which Patheon has an obligation to indemnify the Client Indemnified Partiespursuant to Section 7.2 below, as to which Losses each Party shall indemnify the other to the extent of their respective liability for suchLosses; and provided, however, that Client will not be required to indemnify the Patheon Indemnified Parties with respect to any suchLoss hereunder to the extent the same is caused by any breach of contract, negligent act or omission, or willful misconduct by Patheonor any or its Affiliates. Client acknowledges that Patheon has not and will not conduct any freedom to operate searches in relation tothe Product or the Client Manufacturing Process nor reviewed any Third Party patents in relation thereto and that Patheon’s failure oromission to do so will not be considered negligence for the purposes of excluding or limiting a claim under this indemnity.7.1 Indemnification by Patheon. Patheon will indemnify Client, its Affiliates, and their respective directors, officers,employees, and agents (the “Client Indemnified Parties”), and defend and save each of them harmless from and against any Third PartyLoss incurred by any of them in connection with, arising from, or occurring as a result of:(a) any claim of personal injury or property damage to the extent that the injury or damage is the result of a failure by Patheonto perform the Transfer Services in accordance with the terms of this Agreement; or(b) a claim that any Existing Patheon Intellectual Property employed in providing the Transfer Services infringes ormisappropriates a United States patent or any other Intellectual *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Property rights except to the extent such claim is based on the use of Existing Client Intellectual Property in accordance with the termsand conditions of this Agreement;except, in each case for (a) and (b), for those Losses for which Client has an obligation to indemnify the Patheon Indemnified Partiespursuant to Section 7.1 above, as to which Losses each Party shall indemnify the other to the extent of their respective liability for suchLosses; and provided, however, that Patheon will not be required to indemnify the Client Indemnified Parties with respect to any suchLoss hereunder to the extent the same is caused by any breach of contract, negligent act or omission, or willful misconduct by Client orany or its Affiliates.7.1 Indemnification Procedures. Section 9.3 of the Manufacturing and Supply Agreement shall apply to Sections 7.1 and 7.2of this Agreement and is incorporated herein.7.2 Limitation of Liability.(a) Subject to Section 7.4(b), neither Party will be liable to the other in contract, tort, negligence, breach of statutoryduty, equity, or otherwise for: (i) any direct or indirect loss of profits, of production, of anticipated savings, of business, orgoodwill; (ii) any reliance damages, including but not limited to costs or expenditures incurred to evaluate the viability of enteringinto this Agreement or to prepare for performance under this Agreement; or (iii) for any other indirect or consequential loss,liability, damage, costs, penalty, or expense.(b) Nothing in this Agreement is intended to limit either Party’s liability for: (i) death or personal injury caused by itsnegligence; or (ii) fraud or fraudulent misrepresentation.7.3 Re-performance. If any part of the Transfer Services provided or procured by Patheon is not performed in accordancewith the terms of this Agreement, then as Client’s sole remedy (whether in contract, tort, equity or otherwise, and subject to theremedies expressly set forth in Section 2.3 and ARTICLE 8) Client may request Patheon to repeat that part of the Transfer Service atPatheon’s cost, provided that:(a) where the Transfer Services to be repeated require Client-Supplied Materials, Client will provide such Client-SuppliedMaterials;(b) where the Transfer Services to be repeated require the supply of additional Patheon-Supplied Materials, Patheon willprovide any Patheon-Supplied Materials at its cost and at no additional cost to Client;(c) in the event that any loss of Client-Supplied Materials has arisen from the [***] of Patheon in its performance of thisAgreement prior to the Manufacture of process validation batches (having regard to the nature of this Agreement and that at this stageof the Transfer Services, the process for commercial Manufacture will not have been established and errors of judgement and *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.mistakes may be made in good faith in establishing the same), in each calendar year (or part thereof) Patheon will reimburse Client forlosses of Client-Supplied Materials at cost, up to a maximum amount of either (i) [***] in the case of [***], or (ii) [***] in the case of[***], of the total [***] received by or payable to Patheon pursuant to this Agreement in that calendar year or part thereof (for theavoidance of doubt sub-Sections (i) and (ii) shall not be additive); and(d) in the event that any loss of Client-Supplied Materials has arisen from the [***] of Patheon in its performance of thisAgreement during the Manufacture of process validation or subsequent batches, in each calendar year (or part thereof) Patheon willreimburse Client for losses of Client-Supplied Materials at cost, up to a maximum amount of [***] of the total [***] received by orpayable to Patheon pursuant to this Agreement in that calendar year (or part thereof).(e) For the first [***]period after the Effective Date, as Patheon will not have received [***] for a full [***] period, theamount of the [***] for the purpose of the limitation of liability in this Section shall be calculated based on the expected [***] for thefirst [***] of Transfer Services based on the Timeline in place at the Effective Date.For the purpose of this Section 7.5, “[***]” means any failure to comply with GMP or any breach (being an act or omission) ofobligations provided under this Agreement or any other negligent act or omission of Patheon in connection with this Agreement thateither:[***].ARTICLE 8 TERM AND TERMINATION8.1 Term. This Agreement will remain in full force and effect unless and until it expires or is terminated in accordance withthe provisions of this ARTICLE 8 (the “Term”).8.2 Expiration. This Agreement will expire when the Parties agree that the Transfer Services have been completed (byClient’s acceptance in writing of a written notification from Patheon) (the “Completion of the Tech Transfer”).8.1 Termination by Client. Client may terminate this Agreement in its entirety:(a) by giving Patheon [***] prior written notice if: (i) Client’s application for Marketing Authorization in the United States isrejected, or (ii), or (iii) any Regulatory Authority causes the clinical hold or permanent withdrawal of the Product in the United States;(b) for convenience, at any time prior to the FDA Approval Date, with [***] written notice to Patheon and subject to paymentof the compensation set out in Section 8.13; or *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(c) by giving Patheon [***] written notice if Patheon (due solely to its acts or omissions) fails to deliver:(i)Milestones 1 and 2 as described in Exhibit H on or before [***] after the date stated in the Timeline;(ii)Milestone 3 as described in Exhibit H on or before [***] after the date stated in the Timeline; or(iii)Milestone 4 [***] on or before [***] after the date stated in the Timeline.8.2 Termination by Mutual Agreement. This Agreement may be terminated at any time upon mutual written agreementbetween the Parties.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.8.3 Termination for Default. Each Party will have the right to terminate this Agreement at any time upon written notice to theother Party, if such other Party (a) breaches any of the representations, warranties, covenants, or agreements set forth in this Agreementor (b) otherwise defaults in the performance of any of its duties or obligations under this Agreement, which in either case has a materialeffect on the other Party, and which breach or default is not cured on or before [***] after written notice is given to the breaching Partyspecifying the breach or default, or such longer period as the Parties acting reasonably may agree (“Remediation Period”), providedthat the Parties shall use Commercially Reasonable Efforts to agree a plan to remedy the breach or default within [***] after writtennotice is given to the breaching Party. The aggrieved Party’s right to terminate this Agreement for a particular breach under this Section8.5 may only be exercised for a period of [***] following the expiry of the Remediation Period (where the breach has not beenremedied) and, if the termination right is not exercised during this period, then the aggrieved Party will be deemed to have waived itsright to terminate this Agreement for such breach. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.8.4 Bankruptcy; Insolvency. To the extent permitted by law, each Party will have the right to terminate this Agreementimmediately upon notice to the other Party, if the other Party shall file in any court or agency, pursuant to any statute or regulation ofany state or country, a petition in bankruptcy or insolvency or for reorganization or for arrangement or for the appointment of a receiveror trustee of the other Party or of its assets, or if the other Party proposes a written agreement of composition or extension of its debts,or if the other Party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shallnot be dismissed on or before [***] after the filing thereof, or if the other Party shall propose or be a party to any dissolution orliquidation, or if the other Party shall make an assignment for the benefit of its creditors.8.5 Cross Termination. Should either Client or Patheon exercise its right to terminate this Agreement in its entirety prior to theFDA Approval Date (but not in the event of an expiration of this Agreement as set forth in Section 8.2), then the Manufacturing andSupply Agreement and the Quality Agreement will concurrently and automatically terminate.8.6 No Release. Neither the termination nor expiration of this Agreement will release or operate to discharge either Party fromany liability or obligation that may have accrued prior to such termination or expiration, including any obligation to pay to the otherParty any amounts accrued under this Agreement with respect to the period prior to the effective date of such expiration or termination.Except as otherwise expressly provided herein, termination of this Agreement in accordance with the provisions hereof will not limitremedies that may otherwise be available in law or equity.8.7 Obligations. Notwithstanding the giving of any notice of termination pursuant to this ARTICLE 8, each Party willcontinue to fulfill its obligations under this Agreement at all times until the effective date of any such termination or expiration.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.8.1 Survival. The expiration or termination of this Agreement shall be without prejudice to any rights or obligations of theParties that may have accrued prior to such termination, and the provisions of Sections 2.3 (as it may relate to any unpaid amounts dueand owing), 2.9 (as it may relate to the use to which Patheon may put the Client Manufacturing Equipment), 2.12 and ARTICLE 1,ARTICLE 3, ARTICLE 7, ARTICLE 8, and ARTICLE 9 shall survive the expiration or termination of this Agreement. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.8.2 Rights and Duties Upon Expiration. Upon expiration of this Agreement pursuant to Section 8.2, the terms of theManufacturing Supply Agreement shall apply to any relevant finished Products, semi-finished Products and Materials held by Patheonas at the Completion of the Tech Transfer. In addition, any outstanding Technology Transfer Fees shall remain payable in accordancewith the payment schedule set out in Part 1 of Exhibit B.8.3 Rights and Duties Upon Termination. Upon termination of this Agreement for any reason:(a) Patheon will, as promptly as practicable, (i) cease work on the Transfer Services, and (ii) subject to Section 8.12(d), makeavailable for collection by Client at its option, EXW (Incoterms 2010) the Facility, all Products, semi-finished Products, and Materials,that are then in Patheon’s possession, and any results and information resulting from the Transfer Services (whether in written orelectronic form) that are the property of Client in accordance with Section 2.12 of this Agreement;(b) each Party shall return to the other all Confidential Information and any licences of Intellectual Property granted pursuantto Section 2.12 shall terminate;(c) Patheon will dismantle the Client Manufacturing Equipment and prepare and make it available for collection from theFacility according to a procedure agreed by the Parties (acting reasonably), following which Client shall remove all ClientManufacturing Equipment, Product and Materials from the Facility on or before the day [***] days after the completion of saidprocedure, failing which Client will pay a fee equivalent to the aggregate monthly Base Fee for the Manufacturing Suite for eachmonth or part month the Client Manufacturing Equipment, Product or Materials remain at the Facility after [***] post termination.(d) Client will, as promptly as practicable, (i) pay all earned but unpaid fees and charges for the Transfer Services, includingTechnology Transfer Fees, Material Costs, Maintenance Costs, Disposal Costs and Capital Expenditures, to reflect Transfer Servicesperformed as of the date of such termination by Patheon; and (ii) pay all due and outstanding invoices in accordance with ARTICLEIV of the Manufacturing and Supply Agreement (which is incorporated herein);(e) unless this Agreement has been terminated by [***] pursuant to [***] Client will, as promptly as practicable, pay toPatheon all and any (i) dismantling costs, (ii) removal costs and (iii) Make Good Costs, associated with the cessation of theManufacturing Services or the removal of the Client Manufacturing Equipment and Materials from the Facility; and*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(f) unless this Agreement has been terminated by [***] pursuant to [***] Client will, as promptly as practicable, pay toPatheon the following costs (“Transfer Services Termination Costs”): (i) all actual costs incurred by Patheon to complete reasonableactivities associated with the completion, expiry or termination including, without limitation, disposal fees that may be payable for anyMaterials and supplies owned by Client to be disposed of by Patheon; (ii) all and any direct costs and expenses, or wasted costs andexpenses, or termination or cancellation fees payable by Patheon as a consequence of or arising from the termination of thisAgreement, to include but not limited to, all and any redundancy costs of employees employed by Patheon to work solely or mainly inproviding the Transfer Services and/or Manufacturing the Product, all and any termination costs in relation to subcontractors andagency staff working solely or mainly in providing the Transfer Services and/or Manufacturing the Product, any termination orcancellation fees payable to Third Party suppliers; and (iii) any additional costs incurred by Patheon in connection with the TransferServices that are required to fulfill outstanding applicable regulatory and contractual requirements,in each case subject to Patheon using Commercially Reasonable Efforts to minimise such costs and Patheon providing Client withdocumentation to substantiate the costs have been properly and reasonably incurred.8.4 Consequences of termination for convenience. Upon termination of this Agreement by Client pursuant to Section 8.3(b),in addition to any other obligations of Client under Section 8.12. Client shall pay Patheon a compensation payment calculated inaccordance with the table below. The Parties confirm that this sum represents a genuine pre-estimate of Patheon’s loss in suchcircumstances and shall be in full and final settlement of all liabilities of Client arising out of any termination of this Agreementpursuant to Section 8.3(b) but shall be without prejudice to any obligation of Client under Sections 7.1, 8.12 or any obligations whichsurvive termination of this Agreement. For the avoidance of doubt no such compensation shall be payable in circumstances where theProducts are sold to a Third Party and this Agreement is assigned or novated to such Third Party, unless the Third Party terminates thisAgreement pursuant to Section 8.3(b) in which case, this Section 8.13 shall apply as between Patheon and the Third Party. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Date of termination (number of months after the EffectiveDate)Amount of compensationOn or before [***][***]After [***] and on or before [***][***]After [***] and on or before [***][***]After [***] and on or before [***][***]After [***] and on or before [***][***]After [***] and on or before [***][***]After [***][***] ARTICLE 9 MISCELLANEOUSARTICLE X of the Manufacturing and Supply Agreement shall apply to this Agreement and the performance of the TransferServices and is incorporated herein (mutatis mutandis).[The remainder of this page is left blank intentionally.] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.IN WITNESS WHEREOF, this Technology Transfer Agreement has been executed by the Parties hereto as of the day andyear first written above.PATHEON UK LIMITED:INSMED INCORPORATED: By:/s/ Luca Andretta By:/s/ William H. Lewis Name:Luca Andretta Name:William H. Lewis Title:Director Title:President and CEO *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Signature Page of Technology Transfer Agreement *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions. Exhibit AEngineering Approach and FootprintEngineering ApproachThe engineering approach for the Product and project is still to be finalised but would be based on the assumptions built into the BasicEngineering Design.Manufacturing Suite[***]Exhibit BPart 1: Technology Transfer FeesRefTechnology Transfer FeePayment structureFirst payment dueEnd date1[***][***] [***][***]2[***][***][***][***]3[***][***][***][***]Consequences for the failure to achieve Milestones or effects of early completion of the Transfer Services are specified in Exhibit H.Part 2: Capital Expenditures as at the Effective DateThe Capital Expenditures for the Product are still to be finalised but will be based on the following estimate and the assumptions builtinto the Basic Engineering Design.[***]*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Exhibit CTransfer ServicesConstruction and Validation phase[***]Development and Transfer Services phase[***]*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Exhibit DKey Technical AssumptionsManufacturing ParametersThe full manufacturing process for the Product is still to be finalised and but would be based on the assumptions built into the BasicEngineering Design.[***]1.1.1 *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Exhibit E[***]Exhibit FEquipmentClient Manufacturing EquipmentDetails of the Client Manufacturing Equipment are the subject of the Basic Engineering Design and will be finalized between theParties during the Transfer Services.Patheon Manufacturing EquipmentDetails of the Patheon Manufacturing Equipment are the subject of the Basic Engineering Design and will be finalized between theParties during the Transfer Services.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Exhibit GSteering Committee1. Generally. The purpose of the Steering Committee shall be to oversee this Agreement and to facilitate communications betweenthe Parties with respect thereto. The Steering Committee shall have the responsibilities and authority allocated to it in this Exhibit G.The Steering Committee shall have the obligation to exercise its authority consistent with the respective purpose for the SteeringCommittee as stated herein and any such decisions shall be made in good faith.2 Formation and Purpose. Promptly following the Effective Date, the Parties shall confer and then create a Steering Committee. TheSteering Committee shall have authority, subject to Paragraph 5, to oversee the priorities and budgets for the Transfer Services (with allexpenditure to be reviewed on not less than a quarterly basis), to oversee manufacturing and controls for the Products, to review andapprove all associated regulatory filings and correspondence under this Agreement (including reviewing and approving itemizedbudgets with respect to the foregoing), to approve the projects and plans of any subcommittee it establishes consistent with thisauthority and to review any concerns either Party may have concerning key employees employed by the Parties to provide the TransferServices under this Agreement. The Steering Committee shall also review any potential restrictions on the availability of additionalspace within the Facility, which shall be notified by Patheon sufficiently far in advance of any proposed agreement with a Third Partyin order for Client to be able assess its likely future requirements and for the Parties to have the opportunity to negotiate in good faithany reservation of the same.3 General Steering Committee Membership and Procedure.(a)Membership. Each Party shall designate an equal number of representatives (not to exceed three (3) for each Party) tothe Steering Committee with appropriate expertise to serve as members of the Steering Committee. The SteeringCommittee representatives must all be employees of such Party or an Affiliate of such Party, with the caveat that eachParty may designate for the Steering Committee up to one (1) representative who is not an employee if : (i) such non-employee representative agrees in writing to be bound to the terms of this Agreement for the treatment and ownershipof confidential information of the Parties, and (ii) the other Party consents to the designation of such non-employeerepresentative, which consent shall not be unreasonably withheld. Each Party may replace its Steering Committeerepresentatives at any time upon written notice to the other Party. The Steering Committee shall have a chairpersonwhich shall be appointed by Client. The chairperson of the Steering Committee shall be responsible for callingmeetings, preparing and circulating an agenda in advance of each meeting of the Steering Committee, and preparingand issuing minutes of each meeting within fifteen (15) days thereafter.32*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(b)Meetings. The Steering Committee shall be constituted and the first meeting of the Steering Committee shall be heldwithin [***] following the Effective Date, with the Steering Committee considering finalization and approval ofworkplans prepared by the Parties for inclusion and commencement under this Agreement. Otherwise, the SteeringCommittee shall hold meetings at such times as it elects to do so, but in no event shall such meetings be held lessfrequently than once every three (3) months. Meetings of the Steering Committee may be held in person or by means oftelecommunication (telephone, video, or web conferences). To the extent that the Steering Committee holds anymeetings in person, the Parties will alternate in designating the location for such in-person meetings, with Clientselecting the first meeting location for the Steering Committee. A reasonable number of additional representatives of aParty may attend meetings of the Steering Committee in a non-voting capacity. Each Party shall be responsible for all ofits own expenses of participating in the Steering Committee.(c)Meeting Agendas. Each Party will disclose to the other proposed agenda items along with appropriate information atleast three (3) business days in advance of each meeting of the Steering Committee; provided, that a Party may provideits agenda items to the other Party within a lesser period of time in advance of the meeting, or may propose that therenot be a specific agenda for a particular meeting, so long as such other Party consents to such later addition of suchagenda items or the absence of a specific agenda for the Steering Committee meeting.(d)Limitations of Steering Committee Powers. The Steering Committee shall have only such powers as are specificallydelegated to it hereunder or from time to time as agreed to in writing by the mutual consent of the Parties and shall notbe a substitute for the rights of the Parties. Without limiting the generality of the foregoing, the Steering Committee shallnot have any power to amend this Agreement. Additionally, no member of the Steering Committee shall be able to votein the Steering Committee and thereby bind its respective Party on any material matter except as otherwise properlyauthorized, approved, or delegated by such Party in accord with Paragraph 5.33*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.(e)Quorum and voting. The quorum for meetings of the Steering Committee shall be one (1) representative of each Party,provided that the chairperson, or, if the chairperson is not available then an alternate chairperson agreed by the Parties,must be present at all meetings of the Steering Committee. At any meeting, the Steering Committee members presentappointed by Client shall have one (1) vote in aggregate and the Steering Committee members present appointed byPatheon shall have one (1) vote in aggregate, irrespective of the number of representatives actually in attendance at ameeting. In the event of deadlock the matter will be first referred to the Project Manager of each Party as soon asreasonably possible. If the Project Managers are unable to resolve the deadlock within seven (7) days of the referral, thematter shall be referred to the Senior Management of each Party for resolution. If the Senior Management are unable toresolve the matter within seven (7) days each Party shall have the right to pursue any remedies available to it at law orin equity. Each Party may invite additional employees or consultants to attend meetings of the Steering Committee butany such additional attendees shall not have any right to vote.4 Restrictions. Neither Party shall exercise its right to finally resolve a dispute at the Steering Committee in accordance with thisParagraph 4 in a manner that (i) excuses such Party from any of its obligations specifically enumerated under this Agreement; (ii)expands the obligations of the other Party under this Agreement; (iii) negates any consent rights or other rights specifically allocated tothe other Party under this Agreement; (iv) purports to resolve any dispute involving the breach or alleged breach of this Agreement; (v)resolves a matter if the provisions of this Agreement specify that mutual agreement is required for such matter; or (vi) would require theother Party to perform any act that is inconsistent with applicable law.5 Authorization of Steering Committee Representatives. Each representative serving on the Steering Committee shall be responsiblefor ensuring that he or she acts only as duly authorized by its respective Party and obtains any advance approvals, delegations, or otherauthorizations from his or her respective Party in advance of making any Steering Committee votes.34*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.Exhibit HMilestones and consequences of delay MilestoneTargetcompletiondateConsequence of on time orearly completionConsequence of completion being delayed solelyas result of any Patheon breach, act or omissionConsequence ofcompletion beingdelayed for any otherreason1.[***][***][***][***][***]2.[***][***][***][***]3.[***][***][***][***]4.[***][***][***][***][***]*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has beenrequested with respect to the omitted portions.EXHIBIT 21.1 LIST OF SUBSIDIARIES NameJurisdiction ofIncorporationCeltrix Pharmaceuticals, Inc.DelawareInsmed LimitedEngland and WalesInsmed Holdings LimitedIrelandInsmed Ireland LimitedIrelandInsmed Germany GmbHGermanyInsmed France SASFranceInsmed Netherlands B.V.NetherlandsInsmed Godo KaishaJapanEXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements:(1) Registration Statement on Form S-3 No. 333-218118 of Insmed Incorporated, and(2) Registration Statements on Form S-8 Nos. 333-39200, 333-87878, 333-129479, 333-175532, 333-188852, 333-204503, and 33-218668 of Insmed Incorporated;of our reports dated February 23, 2018, with respect to the consolidated financial statements of Insmed Incorporated and the effectiveness of internal control over financial reportingof Insmed Incorporated included in this Annual Report (Form 10-K) of Insmed Incorporated for the year ended December 31, 2017. /s/ Ernst & Young LLPIselin, New JerseyFebruary 23, 2018EXHIBIT 31.1 Section 302 Certification I, William H. Lewis, Chief Executive Officer of Insmed Incorporated, certify that:(1) I have reviewed this annual report on Form 10-K of Insmed Incorporated;(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 23, 2018By:/s/ William H. Lewis William H. Lewis Chief Executive Officer (Principal Executive Officer) and DirectorEXHIBIT 31.2 CERTIFICATION PURSUANT TO 18 USC. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with this Annual Report on Form 10-K of Insmed Incorporated (the "Company") for the period ended December 31, 2017 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), I, William H. Lewis, Chief Executive Officer of the Company, certify, pursuant to 18 USC. § 1350, as adopted pursuant to § 906 ofthe Sarbanes-Oxley Act of 2003, that:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.By:/s/ William H. Lewis William H. Lewis Chief Executive Officer (Principal Executive Officer) and DirectorFebruary 23, 2018This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference intoany filing of Insmed Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of theForm 10-K), irrespective of any general incorporation language contained in such filing.EXHIBIT 32.1 Section 302 Certification I, Paolo Tombesi, Chief Financial Officer of Insmed Incorporated, certify that:(1) I have reviewed this annual report on Form 10-K of Insmed Incorporated;(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respect to the period covered by this report;(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presented in this report;(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in whichthis report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (theregistrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control overfinancial reporting; and(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and theaudit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financialreporting.Date: February 23, 2018/s/ Paolo TombesiPaolo TombesiChief Financial Officer(Principal Financial and Accounting Officer)EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 USC. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with this Annual Report on Form 10-K of Insmed Incorporated (the "Company") for the period ended December 31, 2017 as filed with the Securities and ExchangeCommission on the date hereof (the "Report"), I, Paolo Tombesi, Chief Financial Officer of the Company, certify, pursuant to 18 USC. § 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2003, that:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Paolo TombesiPaolo TombesiChief Financial Officer(Principal Financial and Accounting Officer)February 23, 2018This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference intoany filing of Insmed Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of theForm 10-K), irrespective of any general incorporation language contained in such filing.

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