•
2
0
1
9
A
N
N
U
A
L
R
E
P
O
R
T
•
Making
big health
problems a
smaller
part of life
•
T
O
O
U
R
S
H
A
R
E
H
O
L
D
E
R
S
•
“ As we evolve, our commitment
to patients with rare and serious
diseases remains unchanged.”
We are pleased to report
on a truly phenomenal year
for Insmed® as we advanced
our mission to transform the
lives of patients with serious
and rare diseases. In 2019, we
made tremendous progress
in serving patients in the
U.S. with refractory Mycobac-
terium avium complex (MAC)
lung disease; enhanced our
global operations to prepare
to serve appropriate patients
in Europe and Japan, if our
marketing applications are
approved; and advanced a
research and development
pipeline with significant
potential to address the
unmet needs patients with
rare diseases continue
to face.
We also moved into a
state-of-the-art global
headquarters in New Jersey
and grew to more than 425
employees around the world.
We are incredibly proud of
our people—they represent
the best talent in the industry
and always operate with a
patients-first mentality.
2019 was the first full year
of commercialization for
ARIKAYCE® (amikacin
liposome inhalation
suspension)—Insmed’s first
approved therapy and the
first and only medication
approved by the U.S. Food
and Drug Administration
(FDA) for the treatment of
MAC lung disease as part of
a combination antibacterial
drug regimen for adult
patients who have limited
or no alternative treatment
options.
MAC lung disease is a chronic,
debilitating condition that
can cause severe and
permanent lung damage.
For patients with refractory
disease, the availability of an
approved therapy is incredibly
meaningful. We are very
pleased with the progress we
made in bringing ARIKAYCE
to appropriate U.S. patients.
Importantly, as of the end
of 2019, more than 1,900 U.S.
physicians had prescribed
ARIKAYCE.
The success of the ARIKAYCE
launch in the U.S. is only the
beginning. We are working
to initiate a post-approval
confirmatory study of
ARIKAYCE in a front-line
setting of patients with MAC
lung disease in the second
half of 2020. We have also
filed for approval of ARIKAYCE
in both Europe and Japan
and, if approved, would
expect to launch in Germany
by the end of 2020. We are
eager to serve patients in
these areas with the same
level of dedication as we have
in the U.S.
We were thrilled to report
in early 2020 that, based on
top-line data, our global,
Phase 2 study of INS1007
in patients with non-cystic
fibrosis bronchiectasis
achieved both its primary
and key secondary end-
points. INS1007 is a novel,
oral, reversible DPP1 inhibitor
that we believe represents a
promising new approach to
modulating neutrophil
activity. As we advance
INS1007 to Phase 3 develop-
ment for bronchiectasis, we
are excited by its potential
in a range of diseases.
We are also advancing
INS1009, a dry powder,
inhaled treprostinil prodrug
formulation, into Phase 1
development for pulmonary
arterial hypertension.
2019 was the strongest year
in Insmed’s history, and we
begin 2020 with a wealth
of opportunity ahead. Impor-
tantly, we have strengthened
our leadership team with
several recent appointments
and have taken a disciplined
approach to resourcing as we
fund the activities that will
drive our growth.
As we evolve, our commitment
to patients with rare and
serious diseases remains un-
changed. We are proud to take
on some of the biggest health
challenges to make them a
smaller part of patients’ lives.
Thank you to our shareholders,
Board of Directors, employees,
and most of all the healthcare
professionals, patients, and
families we serve.
THE INSMED EXECUTIVE COMMITTEE
•
M
I
S
S
I
O
N
&
V
I
S
I
O
N
•
We’re taking on big health
challenges to make them a smaller
part of patients’ lives.
A M I S S I O N T O T R A N S F O R M At Insmed, we are on a mission to transform the lives of patients
living with serious and rare diseases. We champion those who are overlooked and underserved and
are dedicated to supporting patients along their journey.
T H E V I S I O N T O M A K E I T H A P P E N Our vision is to be a globally recognized leading biotech
company that empowers great people to deliver, with a profound sense of urgency and compassion,
life-altering therapies to small patient populations experiencing big health problems.
•
O
U
R
C
O
M
M
I
T
M
E
N
T
•
“ Our role is to have a positive impact
on the lives of patients with poorly
understood diseases. It drives every
decision we make.”
Insmed’s dedication to
we put patients first—we
patients is not just a
talk with patients, listen
company tagline. It is an
to patients, and conduct
active promise to join their
our research with input
fight—to take a stand to
from patients.
pursue unmet needs and to
work quickly and creatively
to deliver meaningful
results. In everything we do,
RECEIVED
TWO
KEY PATENTS FOR ARIKAYCE
—one in the U.S. and one in Europe—extending
patent exclusivity into 2035 in these markets
MARKED THE
First Full Year
OF LAUNCH FOR ARIKAYCE
IN THE U.S.
SUBMITTED
APPLICATIONS
FOR THE
APPROVAL
OF ARIKAYCE
IN EUROPE
AND JAPAN
ADVANCED
ARIKAYCE
LIFE-CYCLE
MANAGEMENT
PROGRAMS
AND A PROMISING
EARLIER-STAGE
PIPELINE
•
R
E
C
E
N
T
M
I
L
E
S
T
O
N
E
S
•
Opened a new, state-of-the-art
global headquarters in Bridgewater, NJ
REPORTED POSITIVE TOP-LINE RESULTS
FROM PHASE 2 WILLOW STUDY OF INS1007
IN NON-CYSTIC FIBROSIS BRONCHIECTASIS
EXPANDED
GLOBALLY WITH
THE OPENING
OF OUR
TOKYO
OFFICE
Grew to
more than
425
colleagues
worldwide
“ I care because I have a voice
that a patient may not have,
because I can educate a clinician,
and because I can make
a difference in someone’s life.”
•
B
E
T
H
•
L
I
V
I
N
G
W
I
T
H
N
T
M
L
U
N
G
D
I
S
E
A
S
E
•
“ When I was diagnosed
with NTM lung disease,
it sounded very scary.
I was alone, I was
frightened. Having a
support network means
a great deal to me.”
Beth was living her
dream, with a success-
ful career and an active
lifestyle. But she soon
developed a debilitating
cough that interrupted
both her personal and
professional life. Her
symptoms, which also
included fatigue and
weight loss, progressed
with no clear answer.
After two years, Beth
was finally diagnosed
with nontuberculous
mycobacterial (NTM)
lung disease. While the
news was frightening,
she was relieved to have
an accurate diagnosis
and a path forward.
For Beth, educating
herself about the
disease, working with
a respiratory specialist,
and finding a network
of other patients have
helped her manage life
with NTM lung disease.
“ When research progress is slow,
when there appears to be no
path forward, the reminder of
why we come to work each day
- the patient - provides the
resilience not to give up.”
•
O
U
R
V
A
L
U
E
S
•
actions align with our values.
We are each responsible for ensuring that our
we do so with respect and a willingness to listen.
We check our egos at the door and share ideas openly and candidly. When we disagree,
Collaboration
Accountability
Passion
Respect
Integrity
We e m b r a c e o u r c o l l e a g u e s ’ d i f f e re n c e s , re c o g n i z e t h e i r c o n t r i b u t i o n s ,
We are driven to expect more than others think is possible and deliver
We are committed to a c tin g in an ethical, honest,
excellence to our patients, colleagues, and stakeholders.
and create a cul ture of empowerment and trust.
and transparent manner in everything we do.
•
O
U
R
P
U
R
P
O
S
E
•
250
holiday cards sent to men
and women in the military
100
holiday gift wishes
granted to Somerset
County, NJ, residents
75pounds of candy
donated to veterans
50Thanksgiving place
settings created for
homeless individuals
100comfort kits assembled
for disaster victims
“ It’s open, it’s
informal, and
people are trusted
to make the
right decisions.”
“ People are passionate about what they do here. We have a common goal
and it’s very clear. Your ultimate goal is to serve these patients.”
At Insmed, we are powered
In 2019, our employee
Importantly, a big part of
by purpose. A purpose to
base grew significantly to
our culture is engaging with
serve patients and their
support the growing needs
our colleagues and giving
families with unwavering
of our business. While our
back to the communities
dedication. A purpose to
talents and backgrounds
in which we live and work.
find solutions where there
are varied, we all share the
Whether we’re assembling
were none before. A pur-
same sense of responsibility
disaster relief kits or running
pose to do what’s right,
to small patient populations
a 5K, these activities help
even when it isn’t easy. Our
experiencing big health
us get to know our fellow
patient-centered culture is
problems. We are proud of
employees and exercise
rooted in this shared sense
the culture we have built
creativity and passion
of purpose. We don’t always
and continue to maintain
outside the office.
have a defined play book,
even as we grow.
but we operate with passion
and creativity to come up
with the best path forward.
“ It’s a culture of
empowerment,
which organically
motivates us to do a
good job and come
to the table with a
creative mindset.”
•
F
I
N
A
N
C
I
A
L
H
I
G
H
L
I
G
H
T
S
•
2 0 1 9
N E T P R O D U C T S A L E S
B Y Q U A R T E R
( I N M I L L I O N S )
$45.7
$38.9
$30.0
$21.9
1Q19
2Q19
3Q19
4Q19
C A S H A N D
C A S H E Q U I V A L E N T S
( I N M I L L I O N S )
$495.1
$487.4
2018
2019
“ I am prou d of ou r team’s p e r form an ce i n t h e f i rst f ul l yea r of
th e ARIKAYCE U. S . lau n ch, an d we l ook for ward to s er v in g eve n
m ore pa tie n ts as we p repare for po te nt i al ap p rova ls i n Eu rop e
an d J apan . Wi th posi ti ve top -l i n e Ph as e 2 d a ta fo r INS10 07 in
n on - cyst ic f i brosi s b ron ch ie c ta si s a n d ot h e r m eanin gf ul
a d van cem e nt s in ou r pi pe l i n e , we are we l l on ou r way toward
b ui l di n g a rob u st por tfoli o t ha t a d d re ss es th e u nm e t n e e ds o f
smal l pat ie nt p opu la tion s ex p e ri e n ci n g b ig h eal th p robl em s.”
– W I L L L E W I S , C H A I R M A N & C E O
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
For the fiscal year ended December 31, 2019
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or
organization)
700 US Highway 202/206
Bridgewater, New Jersey 08807
(Address of principal executive offices)
54-1972729
(I.R.S. employer identification no.)
(908) 977-9900
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Trading symbols
INSM
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x 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 x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes x No ☐
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). Large accelerated filer x Accelerated filer ☐ Non-accelerated filer ☐ 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 financial accounting 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 x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2019, was $2.3 billion (based on
the closing price for shares 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 that all 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 be considered to be affiliates. This assumption shall not be deemed conclusive
as to affiliate status for this or any other purpose.
On February 21, 2020, there were 89,775,696 shares of the registrant's common stock, $0.01 par value, outstanding.
____________________________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission no later than April 29, 2020 and to be delivered to shareholders in connection with the 2020 Annual Meeting of Shareholders, are
herein incorporated by reference in Part III of this Annual Report on Form 10-K.
INSMED INCORPORATED
INDEX
REPORT: FORM 10-K
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
ITEM 1 BUSINESS
ITEM 1A RISK FACTORS
ITEM 1B UNRESOLVED STAFF COMMENTS
ITEM 2
PROPERTIES
ITEM 3
LEGAL PROCEEDINGS
ITEM 4 MINE SAFETY DISCLOSURES
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
ITEM 6
SELECTED FINANCIAL DATA
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A CONTROLS AND PROCEDURES
ITEM 9B OTHER INFORMATION
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
ITEM 11 EXECUTIVE COMPENSATION
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16 FORM 10-K SUMMARY
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
3
5
5
27
48
49
49
49
50
50
52
53
64
64
64
64
65
66
66
66
66
66
66
67
67
71
73
76
Unless the context otherwise indicates, references in this Annual Report on Form 10-K to “Insmed Incorporated” refers to
Insmed Incorporated, a Virginia corporation, and the “Company,” “Insmed,” “we,” “us” and “our” refer to Insmed Incorporated
together with its consolidated subsidiaries. INSMED, CONVERT and ARIKAYCE are trademarks of Insmed Incorporated.
This Annual Report on Form 10-K also contains trademarks of third parties. Each trademark of another company appearing in
this Annual Report on Form 10-K is the property of its owner.
2
•
•
•
•
•
•
•
•
•
our inability to attract and retain key personnel or to effectively manage our growth;
our inability to adapt to our highly competitive and changing environment;
our inability to adequately protect our intellectual property rights or prevent disclosure of our trade secrets and other
proprietary information and costs associated with litigation or other proceedings related to such matters;
restrictions or other obligations imposed on us by agreements related to ARIKAYCE or our product candidates,
including our license agreements with PARI and AstraZeneca AB (AstraZeneca), and failure to comply with our
obligations under such agreements;
the cost and potential reputational damage resulting from litigation to which we are or may become a party, including
product liability claims;
limited experience operating internationally;
changes in laws and regulations applicable to our business, including any pricing reform, and failure to comply with
such laws and regulations;
inability to repay our existing indebtedness and uncertainties with respect to our ability to access future capital; and
delays in the execution of plans to build out an additional FDA-approved third-party manufacturing facility and
unexpected expenses associated with those plans.
We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they
are made. Any forward-looking statement is based on information current as of the date of this Annual Report on Form 10-K
and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results,
plans, intentions or expectations anticipated in these forward-looking statements as a result of a variety of factors, many of
which are beyond our control. More information on factors that could cause actual results to differ materially from those
anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (SEC), including,
but not limited to, those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. We disclaim any obligation,
except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any
change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may
affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and
uncertainties. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are
statements that are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will,"
"should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends,"
"potential," "continues," and similar expressions (as well as other words or expressions referencing future events, conditions or
circumstances) identify forward-looking statements.
Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks,
uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain
events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated
in any forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
failure to successfully commercialize or maintain United States (US) approval for ARIKAYCE® (amikacin liposome
inhalation suspension), our only approved product;
uncertainties in the degree of market acceptance of ARIKAYCE by physicians, patients, third-party payors and others
in the healthcare community;
our inability to obtain full approval of ARIKAYCE from the US Food and Drug Administration (FDA), including the
risk that we will not timely and successfully complete the study to validate a patient reported outcome (PRO) tool and
the confirmatory post-marketing study required for full approval;
inability of us, PARI Pharma GmbH (PARI) or our third-party manufacturers to comply with regulatory requirements
related to ARIKAYCE or the Lamira Nebulizer System (Lamira);
our inability to obtain adequate reimbursement from government or third-party payors for ARIKAYCE or acceptable
prices for ARIKAYCE;
development of unexpected safety or efficacy concerns related to ARIKAYCE;
inaccuracies in our estimates of the size of the potential markets for ARIKAYCE or in data we have used to identify
physicians, expected rates of patient uptake, duration of expected treatment, or expected patient adherence or
discontinuation rates;
our inability to create an effective direct sales and marketing infrastructure or to partner with third parties that offer
such an infrastructure for distribution of ARIKAYCE;
failure to obtain regulatory approval to expand ARIKAYCE’s indication to a broader patient population;
risks that the full set of data from the WILLOW study, our six-month Phase 2 trial of INS1007 in patients with non-CF
bronchiectasis (NCFBE) will not be consistent with the top-line results of the study;
failure to successfully conduct future clinical trials for ARIKAYCE and our product candidates, including due to our
limited experience in conducting preclinical development activities and clinical trials necessary for regulatory
approval and our inability to enroll or retain sufficient patients to conduct and complete the trials or generate data
necessary for regulatory approval;
risks that our clinical studies will be delayed or that serious side effects will be identified during drug development;
failure to obtain, or delays in obtaining, regulatory approvals for ARIKAYCE outside the US or for our product
candidates in the US, Europe, Japan or other markets, including the United Kingdom as a result of the United
Kingdom's recent exit from the European Union;
•
failure of third parties on which we are dependent to manufacture sufficient quantities of ARIKAYCE or our product
candidates for commercial or clinical needs, to conduct our clinical trials, or to comply with our agreements or laws
and regulations that impact our business or agreements with us;
3
4
ITEM 1. BUSINESS
Business Overview
PART I
We are a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare
diseases. Our first commercial product, ARIKAYCE, received accelerated approval in the US in September 2018 for the
treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult
patients with limited or no alternative treatment options in a refractory setting, as defined by patients who do not achieve
negative sputum cultures after a minimum of six consecutive months of a multidrug background regimen therapy.
Nontuberculous mycobacterial (NTM) lung disease caused by MAC (which we refer to as MAC lung disease) is a rare and
often chronic infection that can cause irreversible lung damage and can be fatal. Our clinical-stage pipeline includes INS1007
and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in
bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug 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 ARIKAYCE and our product candidates
INS1007 and INS1009.
Principal Product/
Product Candidate
ARIKAYCE for MAC
lung disease
INS1007 (oral
reversible inhibitor
of DPP1) for NCFBE
and other rare diseases
INS1009 (inhaled
formulation of a
treprostinil prodrug) for
rare pulmonary
disorders
Status
Next Expected Milestones
• We continue to focus on the execution of the
successful commercialization of ARIKAYCE in the
US. The product was granted accelerated approval by
the FDA for the treatment of refractory MAC lung
disease as part of a combination antibacterial drug
regimen for adult patients who have limited or no
alternative treatment options. We began commercial
shipments of ARIKAYCE in October 2018.
• In addition to our MAA, we intend to submit
regulatory filings for ARIKAYCE in Japan in the first
quarter of 2020. If approved by the relevant
regulatory authorities, we expect ARIKAYCE would
be the first inhaled therapy specifically indicated for
the treatment of MAC lung disease in Europe and
Japan.
• In July 2019, we filed a marketing authorization
application (MAA) with the European Medicines
Agency (EMA) for ARIKAYCE for the treatment of
patients with persistent MAC lung infection. The
MAA filing was subsequently validated.
• The FDA has designated ARIKAYCE as an orphan
drug and a qualified infectious disease product
(QIDP) for nontuberculous mycobacterial (NTM)
lung disease, and the European Commission has
granted an orphan designation for ARIKAYCE for
the treatment of NTM lung disease.
• In February 2020, we announced top-line results
from our global, randomized, double-blind placebo-
controlled Phase 2 WILLOW study evaluating the
efficacy, safety, and pharmacokinetics of INS1007
administered once daily in adults with NCFBE.
• Top-line results for the WILLOW study reflect that
the study met its primary endpoint of time to first
pulmonary exacerbation over the 24-week treatment
period for both the 10 mg and 25 mg dosage groups
of INS1007 compared to placebo (p=0.027, p=0.044,
respectively). In addition, treatment with INS1007
resulted in a reduction in the frequency of pulmonary
exacerbations, a key secondary endpoint, versus
placebo.
• The results of a Phase 1 study of nebulized INS1009
were presented at the European Respiratory Society
international congress in September 2016.
• If approved by the relevant regulatory authorities,
we plan to commercialize ARIKAYCE in certain
countries in Europe, Japan and certain other countries.
• We continue to collaborate with the FDA on the
post-approval confirmatory clinical trial required for
full approval. We have initiated efforts to evaluate an
appropriate patient reported outcome (PRO) tool
through a short-term study, to enable the assessment
of therapies for the treatment of NTM lung disease. In
parallel, we plan to begin the confirmatory clinical
study of ARIKAYCE in a front-line setting of
patients with MAC lung disease in the second half of
2020. In addition, we intend to conduct a separate
study in patients with NTM lung disease caused by
M. abscessus.
• We plan to design and conduct a Phase 3 program
through which we will seek to confirm the positive
results seen in the WILLOW study. This study will
primarily investigate INS1007 in NCFBE and we
expect the primary endpoint will be frequency of
pulmonary exacerbations.
• We are also exploring the potential of INS1007 in
various neutrophil-driven inflammatory conditions.
• We believe INS1009 may offer a differentiated
product profile for rare pulmonary disorders,
including PAH. We are advancing INS1009 as an
inhaled dry powder formulation to a Phase 1 study.
Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet
medical need, including gram positive pulmonary infections in CF, NTM lung disease and refractory localized infections
involving biofilm. To complement our internal research and development, we actively evaluate in-licensing and acquisition
opportunities for a broad range of rare diseases.
Our Strategy
Our strategy focuses on the needs of patients with rare diseases. We secured accelerated approval from the FDA of
ARIKAYCE for the treatment of refractory MAC lung disease in patients with limited or no alternative treatment options, and
currently are primarily focused on the successful commercialization of ARIKAYCE. We are also seeking regulatory approval in
Europe and Japan. We are not aware of any other approved inhaled therapies specifically indicated to treat MAC lung disease in
North America, Europe or Japan. We believe that ARIKAYCE has the potential to prove beneficial in other patients with MAC,
as well as in other infections. We are also advancing earlier-stage programs in other rare pulmonary disorders.
Our current priorities are as follows:
•
•
•
•
•
•
Continue our efforts to ensure the successful commercialization of ARIKAYCE;
Develop and validate a PRO tool for NTM lung disease to be used in, among other trials, the confirmatory clinical
trial required for the full US approval of ARIKAYCE by the FDA in patients with MAC lung disease;
Continue our global expansion efforts in Europe and Japan to support pre-commercial activities in those regions
and support the potential regulatory filings for ARIKAYCE in Japan in the first quarter of 2020;
Advance our pipeline, which is intended to bring additional therapies to market for patients with serious and rare
diseases, including designing and conducting a Phase 3 program of INS1007 in patients with bronchiectasis;
Ensure our product supply chain will support the global commercialization and potential future lifecycle
management programs of ARIKAYCE;
Develop a core value dossier to support payor reimbursement for ARIKAYCE in the US, Europe and Japan;
• Maintain or obtain determinations of coverage and reimbursement in the US for ARIKAYCE from governmental
and other third-party payors;
•
•
•
Support further research and lifecycle management strategies for ARIKAYCE, including the potential use of
ARIKAYCE as part of a front-line, multi-drug regimen and as a maintenance therapy to prevent recurrence
(defined as true relapse or reinfection) of MAC lung disease;
Advance INS1009 for use as an inhaled dry powder formulation in PAH to a Phase 1 study and generate
preclinical findings from our earlier-stage programs; and
Expand our pipeline through corporate development.
ARIKAYCE for Patients with MAC Lung Disease
ARIKAYCE is our first approved product. ARIKAYCE received accelerated approval in the US in September 2018
for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients with
limited or no alternative treatment options. MAC lung disease is a rare and often chronic infection that can cause irreversible
lung damage and can be fatal. Amikacin solution for parenteral administration is an established drug that has activity against a
variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and
kidney function. Unlike amikacin solution for intravenous administration, our proprietary Pulmovance™ technology uses
charge-neutral liposomes to deliver amikacin directly to the lungs where liposomal amikacin is taken up by the lung
macrophages where the MAC infection resides. This technology also prolongs the release of amikacin in the lungs, while
minimizing systemic exposure, thereby offering the potential for decreased systemic toxicities. ARIKAYCE's ability to deliver
high levels of amikacin directly to the lung and sites of MAC infection via the use of our Pulmovance technology, distinguishes
it from intravenous amikacin. ARIKAYCE is administered once-daily, using Lamira®, an inhalation device developed and
manufactured by PARI. Lamira is a portable nebulizer that enables aerosolization of liquid medications via a vibrating,
perforated membrane, and was designed specifically for ARIKAYCE delivery.
The FDA has designated ARIKAYCE as an orphan drug and a QIDP for NTM lung disease. Orphan designated drugs
are eligible for seven years of exclusivity for the orphan indication. QIDP designation features an additional five years of
exclusivity for the designated indication. The FDA granted a total of 12 years of exclusivity in the indication for which
ARIKAYCE was approved.
5
6
Accelerated Approval
In March 2018, we submitted a new drug application (NDA) for ARIKAYCE to the FDA to request accelerated
approval. Accelerated approval allows drugs that (i) are being developed to treat a serious or life-threatening disease or
condition and (ii) provide a meaningful therapeutic benefit over existing treatments to be approved substantially based on an
intermediate endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit, rather than a clinical endpoint
such as survival or irreversible morbidity. In September 2018, the FDA granted accelerated approval for ARIKAYCE under the
Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD) for the treatment of refractory MAC lung disease
as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options via the
accelerated approval pathway. LPAD, which was enacted as part of the 21st Century Cures Act, serves to advance the
development of new antibacterial drugs to treat serious or life-threatening infections in limited populations of patients with
unmet needs. As required for drugs approved under the LPAD pathway, labeling for ARIKAYCE includes certain statements to
convey that the drug has been shown to be safe and effective only for use in a limited population.
As a condition of accelerated approval, we must conduct a post-approval confirmatory clinical trial. The required
confirmatory trial, which is currently under discussion with the FDA, will be designed to assess and describe the clinical benefit
of ARIKAYCE in patients with MAC lung disease. The trial will evaluate the effect of ARIKAYCE on a clinically meaningful
endpoint, as compared to an appropriate control, in the intended patient population of patients with MAC lung disease. We have
initiated efforts to evaluate an appropriate PRO tool through a short-term study to enable the assessment of therapies for the
treatment of NTM lung disease. In parallel, we plan to begin a confirmatory clinical study of ARIKAYCE in a front-line setting
of patients with MAC lung disease in the second half of 2020. In addition, we intend to conduct a separate study in patients
with NTM lung disease caused by M. abscessus. We continue to collaborate with the FDA on the timetable as well as the
design and validation of the PRO and the post-approval confirmatory clinical trial. The full approval of ARIKAYCE will be
contingent upon verification and description of clinical benefit in the post-approval confirmatory study.
Regulatory Pathway Outside of the US
Our regulatory filing in Europe was submitted in July 2019 and subsequently validated by the EMA. The EMA will
primarily focus on the proportion of patients who maintained durable culture conversion for three months off all therapy on
ARIKAYCE plus GBT compared to GBT only. We intend to submit regulatory filings for ARIKAYCE in Japan in the first
quarter of 2020.
Clinical Trials
Accelerated approval of ARIKAYCE was supported by preliminary data from the CONVERT study, a global Phase 3
study evaluating the safety and efficacy of ARIKAYCE in adult patients with refractory MAC lung disease, using achievement
of sputum culture conversion (defined as three consecutive negative monthly sputum cultures) by Month 6 as the primary
endpoint. Patients who achieved sputum culture conversion by Month 6 continued in the CONVERT study for an additional 12
months of treatment following the first monthly negative sputum culture in order to assess the durability of culture conversion,
as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three months. In
May 2019, we presented at the American Thoracic Society meeting that 41/65 (63.1%) of patients on ARIKAYCE plus GBT
who had achieved culture conversion by Month 6 had maintained durable culture conversion for three months off all therapy
compared to 0/10 (0%) on GBT only (p<0.0002). Safety data for these patients were consistent with safety data previously
reported for patients by Month 6 of the CONVERT study.
Patients who did not culture convert by Month 6 may have been eligible to enroll in the 312 study, an open-label
extension study for these non-converting patients who completed six months of treatment in the CONVERT study. The primary
objective of the 312 study was to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard
multi-drug regimen. The secondary objectives of the 312 study included evaluating the proportion of subjects achieving culture
conversion (defined in the same way as the CONVERT study) by Month 6 and the proportion of subjects achieving culture
conversion by Month 12, which was the end of treatment. We previously reported interim data as of December 2017 for
patients in the 312 study, with 28.4% of patients who received GBT only in the CONVERT study (19/67) and 12.3% of patients
who had received ARIKAYCE plus GBT in the CONVERT study (7/57) achieving culture conversion by Month 6 of the 312
study. The 312 study has concluded and final efficacy data regarding culture conversion were consistent with these interim data.
We have analyzed the safety and efficacy data from the 312 study, and we did not observe any new safety signals.
Further Research and Lifecycle Management
We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE beyond
treatment of refractory MAC lung disease as part of a combination antibacterial regimen for adult patients who have limited or
no treatment options. Specifically, we are evaluating study designs focusing on the MAC lung disease treatment pathway,
including front-line treatment and maintenance to prevent recurrence (defined as true relapse or reinfection) of MAC lung
disease. As noted above, we have initiated efforts to evaluate an appropriate PRO tool through a short-term study, to enable the
assessment of therapies for the treatment of NTM lung disease. In parallel, we plan to begin the confirmatory clinical study of
ARIKAYCE in a front-line setting of patients with MAC lung disease in the second half of 2020.
Subsequent lifecycle management studies could also potentially enable us to reach more patients. The use of
ARIKAYCE to treat infections caused by non-MAC NTM species is being evaluated. For instance, we plan to conduct a study
in patients with NTM lung disease caused by M. abscessus. These initiatives also include investigator-initiated studies, which
are clinical studies initiated and sponsored by physicians or research institutions with funding from us and may also include
new clinical studies sponsored by us.
Market Opportunity for ARIKAYCE in MAC Lung Disease
NTM lung disease is associated with increased rates of morbidity and mortality, and MAC is the predominant
pathogenic species in NTM lung disease in the US, Europe and Japan. The prevalence of NTM lung disease has increased over
the past two decades, and we believe it is an emerging public health concern worldwide. Using information from external
sources, including market research funded by us and third parties, and internal analyses and calculations, we currently estimate
potential patient populations in the US, the EU5 (comprised of France, Germany, Italy, Spain and the United Kingdom) and
Japan as follows:
Potential Market
United States
EU5
Japan
Estimated Number of
Patients with Diagnosed
NTM Lung Disease
Estimated Number of
Patients Treated for MAC
Lung Disease
Estimated Number of
MAC lung disease Patients
Refractory to Treatment**
95,000-115,000
14,000
125,000-145,000
48,000-55,000
4,400
60,000-70,000
12,000-17,000
1,400
15,000-18,000
** ARIKAYCE received accelerated approval for this population in the US in September 2018.
We are not aware of any other approved inhaled therapies specifically indicated for NTM lung disease in North
America, Europe or Japan. Current guideline-based approaches for NTM lung disease, including those from the American
Thoracic Society and Infectious Diseases Society of America (ATS/IDSA), involve multi-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 study that we
conducted in the US with a major medical benefits provider, we previously concluded that patients with NTM lung disease are
costly to healthcare plans, 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 age and gender-matched controls. Accordingly, we believe that a significant
market opportunity for ARIKAYCE in NTM lung disease exists in the US and internationally.
We are currently exploring the MAC lung disease market opportunity for ARIKAYCE in Europe and Japan. We
submitted our regulatory filing in Europe in July 2019. 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 Pharmaceuticals and
Medical Devices Agency (PMDA). We intend to submit regulatory filings in Japan in the first quarter of 2020. We have
established a Japanese subsidiary and, in 2018, began hiring local employees, including a general manager, to manage our
regulatory and pre-commercial activities.
Product Pipeline
INS1007
INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October
2016. We are developing INS1007 for the treatment of patients with bronchiectasis. DPP1 is an enzyme responsible for
activating NSPs in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white
blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the NSPs
(including neutrophil elastase (NE), proteinase 3, and cathepsin G) that have been implicated in a variety of inflammatory
diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and result in excessive active NSPs that
cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases such as
NCFBE by inhibiting DPP1 and its activation of NSPs.
NCFBE is a severe, chronic pulmonary disorder in which the bronchi become permanently dilated due to a cycle of
infection, inflammation, and lung tissue damage. The condition is marked by frequent pulmonary exacerbations requiring
antibiotic therapy and/or hospitalizations. Symptoms include chronic cough, excessive sputum production, shortness of breath,
and repeated respiratory infections, which can worsen the underlying condition. NCFBE affects approximately 340,000 to
7
8
520,000 patients in the US. Currently, there is no cure, and there are no approved therapies specifically targeting NCFBE in the
US, Europe, or Japan. We are also exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.
As a result of the positive results of the WILLOW study discussed below, we plan to design and conduct a Phase 3
program, which will primarily investigate INS1007 in NCFBE. Based on indications from the FDA, we expect that the primary
endpoint in the study will be frequency of pulmonary exacerbation.
The WILLOW Study
The WILLOW study was a randomized, double-blind, placebo-controlled, parallel-group, multi-center, multi-national,
Phase 2 study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24
weeks in patients with NCFBE. The WILLOW study was conducted at 116 sites and enrolled 256 adult patients diagnosed with
NCFBE who had at least two documented pulmonary exacerbations in the 12 months prior to screening. Patients were
randomized 1:1:1 to receive either 10 mg or 25 mg of INS1007 or matching placebo. The primary efficacy endpoint was the
time to first pulmonary exacerbation over the 24-week treatment period in the INS1007 arms compared to the placebo arm.
WILLOW Top-Line Efficacy Data
We announced top-line data for the WILLOW study in February 2020. The top-line data demonstrates that the
WILLOW study met its primary endpoint of time to first pulmonary exacerbation over the 24-week treatment period for both
the 10 mg and 25 mg dosage groups of INS1007 compared to placebo (p=0.027, p=0.044, respectively). In addition, treatment
with INS1007 resulted in a reduction in the frequency of pulmonary exacerbations, a key secondary endpoint, versus placebo.
Specifically, patients treated with INS1007 experienced a 36% reduction in the 10 mg arm (p=0.041) and a 25% reduction in
the 25 mg arm (p=0.167) versus placebo. Change in concentration of active NE in sputum versus placebo from baseline to the
end of the treatment period was also statistically significant (p=0.034 for 10 mg, p=0.021 for 25 mg).
WILLOW Top-Line Safety and Tolerability Data
INS1007 was generally well-tolerated in the study. Rates of adverse events (AEs) leading to discontinuation in patients
treated with placebo, INS1007 10 mg, and INS1007 25 mg were 10.6%, 7.4%, and 6.7%, respectively. The most common AEs
in patients treated with INS1007 were cough, headache, sputum increase, dyspnea, fatigue, and upper respiratory tract infection.
Rates of adverse events of special interest (AESIs) in patients treated with placebo, INS1007 10 mg, and INS1007 25 mg,
respectively, were as follows: rates of periodontal disease were 2.4%, 7.4%, and 10.1%; rates of hyperkeratosis were 0%, 3.7%,
and 1.1%; and rates of infections that were considered AESIs were 18.8%, 16.0%, and 16.9%.
Further Research
In August 2019, we received notice from the FDA that we were awarded a development grant of $1.8 million for
specific work to be performed on a PRO tool over the next two years. The grant funding is for the development of a novel PRO
tool for use in clinical trials to measure symptoms in patients with NCFBE with and without NTM lung infection.
INS1009
INS1009 is an investigational inhaled treprostinil prodrug formulation that has the potential to address certain of the
current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH
patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must
be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden
and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated
heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper
airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product
profile for rare pulmonary disorders, including PAH, and we are advancing its development to a Phase 1 study as an inhaled dry
powder formulation.
Corporate Development
We plan to continue to develop, acquire, in license or co-promote other products and product candidates, including
those that address rare diseases. We are focused broadly on rare disease therapeutics and prioritizing those areas that best align
with our core competencies.
Manufacturing
We do not have any in-house manufacturing capability other than for small-scale pre-clinical development programs,
and depend completely on a small 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-party manufacturers and suppliers for the commercial manufacture
and supply of any product candidates that we commercialize. ARIKAYCE is manufactured currently 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—
ARIKAYCE-related Agreements.
In October 2017, we entered into certain agreements with Patheon UK Limited (Patheon) related to increasing our
long-term production capacity for ARIKAYCE commercial inventory. The agreements provide for Patheon to manufacture and
supply ARIKAYCE for our long-term anticipated commercial needs. Under these agreements, we are required to deliver to
Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufacture
ARIKAYCE. The aggregate investment to increase the long-term production capacity, including under these agreements, and
related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $60
million. In addition, we have a commercialization agreement with PARI, the manufacturer of our drug delivery nebulizer for
ARIKAYCE, to address our commercial supply needs (the Commercialization Agreement).
We expect our future requirements for INS1007, beyond Phase 2, will be manufactured by a contract manufacturing
organization (CMO).
We currently produce INS1009 and plan to utilize third parties to manufacture INS1009 at a larger scale and to
manufacture the delivery device.
Intellectual Property
We own or license rights to more than 425 issued patents and pending patent applications in the US and in foreign
countries, including more than 250 issued patents and pending patent applications related to ARIKAYCE. Our success depends
in large part on our ability to maintain proprietary protection surrounding our product candidates, technology and know-how; to
operate without infringing the proprietary rights of others; and to prevent others from infringing our proprietary rights. We
actively seek patent protection by filing patent applications, including on inventions that are important to the development of
our business in the US, Europe, Japan, Canada, and selected other foreign markets that we consider key for our product
candidates. These international 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 the potential to create blocks to our products or otherwise interfere with the development of our
business. We are aware, for example, of US patents, and corresponding international counterparts, owned by third parties that
contain 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 our proposed 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 and confidentiality of our data and trade secrets by maintaining physical
security of our premises and physical and electronic security of our information technology systems.
ARIKAYCE Patents and Trade Secrets
Of the patents and applications related to ARIKAYCE, there are 10 issued US patents that cover the ARIKAYCE
composition and its use in treating NTM. These patents are listed 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)
9
10
•
•
US Patent No. 9,895,385 (expires May 15, 2035)
US Patent No. 10,251,900 (expires May 15, 2035)
In addition, we own five pending US patent applications that cover the ARIKAYCE composition and/or its use in
treating NTM, including MAC lung infections. We also own a pending US application that covers methods for making
ARIKAYCE. One or more of these patent applications, if issued as patents in their current form, may be eligible for listing in
the FDA Orange Book for ARIKAYCE. We anticipate that in the US, we will have potential patent coverage for ARIKAYCE
and its use in treating NTM lung disease, including NTM lung disease caused by MAC, through May 15, 2035.
Six patents have been granted by the European Patent Office (EPO) (European Patent Nos. 1581236, 1909759,
1962805, 2363114, 2823820 and 3142643) that relate to ARIKAYCE and its use in treating NTM, including MAC lung
infections. In addition, we have five applications pending before the EPO that relate to ARIKAYCE and its use in treating NTM
lung disease. We also have a pending European application that describes certain methods of making ARIKAYCE. European
Patent No. 2363114 was opposed by Generics (UK) Ltd, a wholly-owned subsidiary of Mylan NV, and was revoked in
November 2017. We have appealed that decision, and the patent remains enforceable during the appeal. The appeal hearing is
scheduled to take place on March 31, 2020 in Munich, Germany. European Patent No. 1909759 (the '759 patent), owned by us,
was previously opposed by Generics (UK) Ltd. A hearing was held on October 19, 2015, during which we submitted amended
claims. The European Patent Office Opposition Division (EPOOD) maintained the patent as amended and Generics (UK) Ltd
appealed the decision. The EPO Technical Board of Appeals heard arguments related to the appeal on January 8, 2019 and the
product claims of the patent were held invalid. The method of manufacture claims was remitted to the EPOOD for further
consideration, and remain enforceable. We have a divisional application pending that claims priority from the ‘759 patent where
we are pursuing product claims of varying scope. European Patent No. 1962805, which expires approximately five months after
the ‘759 patent (December 5, 2026 vs. July 19, 2026), also includes claims related to ARIKAYCE and its use in treating NTM
lung disease. European Patent No. 3142643 expires May 15, 2035 and includes claims related to ARIKAYCE and its use for
treating MAC lung infections.
More than 60 patents have also been issued in other major foreign markets, e.g., Japan, China, Korea, Australia, and
India, that relate to ARIKAYCE and/or methods of using ARIKAYCE for treating various pulmonary disorders, including
NTM lung disease. More than 30 foreign patent applications are pending that relate to the ARIKAYCE composition and/or its
use in treating various pulmonary disorders, including NTM lung disease.
Through our agreements with PARI, we have license rights to US and foreign patents and applications that cover the
Lamira Nebulizer System medical device through January 18, 2034. We have entered into a commercial supply agreement with
PARI and we also have rights to use the nebulizers in expanded access programs and clinical trials.
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, if the 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 the patent application was filed on or after June 8, 1995. All
ARIKAYCE patent applications have earliest effective filing dates falling after June 8, 1995. The basic term of 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 Patents
Through our agreement with AstraZeneca, we have licensed US Patent Nos. 9,522,894, 9,815,805 and 10,287,258,
which have claims related to INS1007 and methods for using INS1007. Each of these patents expires January 21, 2035 (not
taking into account any potential patent term extension). Counterpart patent applications are pending throughout the world and
a continuation application is pending in the US.
INS1009 Patents
We own US Patent No. 9,255,064 (expires October 24, 2034), which is the first patent to issue with claims covering
hexadecyl-treprostinil, the treprostinil component of INS1009. Other treprostinil prodrugs are also claimed and described in the
patent. We also own US Patent No. 9,469,600, which has claims directed to INS1009 and other treprostinil prodrug
formulations and expires October 24, 2034. We also own US Patent No. 10,010,518, which has claims directed to methods of
treating pulmonary hypertension, including PAH, with INS1009 and other treprostinil prodrug formulations and expires
October 24, 2034. Counterpart patent applications to these US Patents are pending in Europe, Japan and other foreign
jurisdictions.
We own pending patent applications that relate to methods for using treprostinil prodrugs and formulations comprising
the same, including INS1009 in treating patients with PAH and other diseases, as well as methods for manufacturing such
treprostinil prodrugs and formulations.
Trademarks
In addition to our patents and trade secrets, we have filed applications to register certain trademarks in the US and/or
abroad, including INSMED and ARIKAYCE. At present, we have received two registrations for the INSMED mark and one
registration for the ARIKAYCE mark from the US Patent and Trademark Office (USPTO). We have also received notices of
allowance or registrations in a number of countries abroad for the INSMED and ARIKAYCE marks, among others. The EMA
has indicated it has no objection to our use of the name ARIKAYCE, and the FDA has approved our use of the name
ARIKAYCE, as the trade name for amikacin liposome inhalation suspension. Our ability to obtain and maintain trademark
registrations will in certain geographical locations depend on making use of the mark in commerce on or in connection with our
products and approval of the trademarks for our products by regulatory authorities in each country.
License and Other Agreements
ARIKAYCE-related Agreements
We currently rely, and will continue to rely, on agreements with a number of third parties in connection with the
development and manufacture of ARIKAYCE.
PARI
We have a licensing agreement with PARI for use of the optimized Lamira Nebulizer System for delivery of
ARIKAYCE in treating patients with NTM lung infections, cystic fibrosis (CF) and bronchiectasis. Under the licensing
agreement, we have rights under several US and foreign issued patents and patent applications involving improvements to the
optimized Lamira Nebulizer System, to exploit the system with ARIKAYCE for the treatment of such indications, but we
cannot manufacture the nebulizers except as permitted under our Commercialization Agreement with PARI, which is described
in further detail below. Lamira has been approved for use in the US (in combination with ARIKAYCE) and EU. We also
currently have rights to use the nebulizers in expanded access programs and clinical trials. Lamira is labeled as investigational
for use in our clinical trials in Japan, Canada and Australia and must receive regulatory approval before we can market
ARIKAYCE outside the US and EU.
We have certain obligations under this licensing agreement in relation to specified licensed indications. With respect to
NTM and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve certain developmental
and regulatory milestones by set deadlines. Additionally, for NTM, we are obligated to use commercially reasonable efforts to
achieve certain commercial milestones in the US and Europe. With respect to CF, we are obligated to use commercially
reasonable efforts to develop, obtain regulatory and reimbursement approval, market and sell ARIKAYCE in two or more
major European countries. 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 the applicable indication. Termination of the licensing agreement or loss of exclusive rights
may occur if we fail to meet our obligations, including payment of royalties to PARI, or if we do not meet certain milestones
contained in the licensing agreement such as obtaining marketing approval in an EU country.
Under the licensing agreement, we paid PARI an upfront license fee and milestone payments. Upon FDA acceptance
of our NDA and the subsequent FDA approval of ARIKAYCE, we made additional milestone payments of €1.0 million and
€1.5 million, respectively, to PARI. In addition, PARI is entitled to receive a future milestone payment of €0.5 million in cash
based on receipt of the first marketing approval in a major EU country for ARIKAYCE and the device. In October 2017, we
exercised an option to buy-down the royalties payable to PARI. PARI is now entitled to receive royalty payments in the mid-
single digits on the annual global net sales of ARIKAYCE pursuant to the licensing agreement, subject to certain specified
annual minimum royalties.
This licensing agreement will remain in effect on a country-by-country basis until the final royalty payments have been
made with respect to the last country in which ARIKAYCE is sold, or until the agreement is otherwise terminated by either
party. We have the right to terminate this licensing agreement upon written notice for PARI's uncured material breach, if PARI
is the subject of specified bankruptcy or liquidation events, or if PARI fails to reach certain specified obligations. PARI has the
right to terminate this licensing agreement upon written notice for our uncured material breach, if we are the subject of specified
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 and obligations set forth in the agreement, or if we fail to reach certain specified milestones.
In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of Lamira
nebulizer systems and related accessories (the Device) as optimized for use with ARIKAYCE. Under the Commercialization
Agreement, PARI manufactures the Device except in the case of certain defined 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 the Commercialization
Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years that began to run in
October 2018 (the Initial Term). The term of the Commercialization Agreement may be extended by us for an additional five
years by providing written notice to PARI at least one year prior to the expiration of the Initial Term.
11
12
Therapure
In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of
ARIKAYCE, on a non-exclusive basis, at a 200 kg scale. Pursuant to the agreement, we collaborated with Therapure to
construct a production area for the manufacture of ARIKAYCE in Therapure's existing manufacturing facility in Mississauga,
Ontario, Canada. The agreement has an initial term of five years, which began in October 2018, and will renew automatically
for successive periods of two years each, unless terminated by either party by providing the required two years' prior written
notice to the other party. Notwithstanding the foregoing, the parties have rights and obligations under the agreement prior to the
commencement of the initial term. Under the agreement, we are obligated to pay a minimum of $6 million for commercial
ARIKAYCE batches produced and certain manufacturing activities each calendar year. The agreement allows for termination
by either party upon the occurrence of certain events, including (i) the material breach by the other party of any provision of the
agreement or the quality agreement expected to be entered into between the 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.
Althea
In September 2015, we entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement) with
Althea to produce, on a non-exclusive basis, ARIKAYCE in finished dosage form at a 50 kg scale. We are obligated to pay a
minimum of $2.7 million for the batches of ARIKAYCE produced by Althea each calendar year during the term of the Fill/
Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and, following an extension in 2018, will
remain in effect through December 31, 2021. The Fill/Finish Agreement may 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 its then-current term. We have
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/Finish Agreement 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 notice to Althea, and Althea may terminate the
Agreement without cause with 24 months' prior written notice to us.
Patheon and related agreements
In October 2017, we entered into certain agreements with Patheon related to the increase of our long-term production
capacity for ARIKAYCE. The agreements provide for Patheon to manufacture and supply ARIKAYCE for our anticipated
commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active
pharmaceutical ingredients, and certain fixed assets needed to manufacture ARIKAYCE. Patheon's supply obligations will
commence once certain technology transfer and construction services are completed. Our manufacturing and supply agreement
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 have given written notice of termination. The technology transfer agreement will expire when the parties agree
that the technology transfer services have been completed. The agreements may also be terminated under certain other
circumstances, including by either party due to a material uncured breach of the other party or the other party’s insolvency.
These early termination clauses may reduce the amounts due to the relevant parties. The aggregate investment to increase our
long-term production capacity, including under the Patheon agreements and related agreements or purchase orders with third
parties for raw materials and fixed assets, is estimated to be approximately $60 million.
SynteractHCR, Inc. (Synteract)
We entered into a services agreement with Synteract pursuant to which we retained Synteract to perform
implementation and management services in connection with the CONVERT 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 regulatory authority is
revoked, suspended or expires without renewal. In April 2015, we entered into a work order with Synteract to perform
implementation and management services for the 312 study. As of December 31, 2019, substantially all costs related to the
CONVERT and 312 studies had been incurred.
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 in research funding for the development of ARIKAYCE. As a result of the US approval of ARIKAYCE and in
accordance with the agreements, as amended, we owe milestone payments to CFFT of $13.4 million in the aggregate, which are
payable through 2025. In addition, if certain global sales milestones are met within five years of ARIKAYCE's
commercialization, we would owe additional payments of up to $3.9 million. We have estimated the likelihood of meeting the
global sales milestones and have accrued for these contingent obligations proportionally based on net sales of ARIKAYCE.
INS1007-related Agreements
Syneos Health (Syneos)
We entered into a services agreement with Syneos pursuant to which we retained Syneos to perform implementation
and management services in connection with the WILLOW 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 regulatory authority is revoked, suspended
or expires without renewal. We anticipate that aggregate costs relating to all work orders for the WILLOW study will be
approximately $23 million over the period of the study.
AstraZeneca
In October 2016, we entered into a license agreement with AstraZeneca (the AZ License Agreement), pursuant to
which AstraZeneca granted us exclusive global rights for the purpose of developing and commercializing AZD7986 (renamed
INS1007). In consideration of the licenses and other rights granted by AstraZeneca, we made an upfront payment of
$30.0 million in late October 2016. We are obligated to make a series of contingent milestone payments to AstraZeneca totaling
up to an additional $85.0 million upon the achievement of clinical development and regulatory filing milestones. The next
contingent milestone payment to AstraZeneca is $12.5 million and is due upon first dosing in a Phase 3 study. If we elect to
develop INS1007 for a second indication, we will be obligated to make an additional series of contingent milestone payments
totaling up to $42.5 million. We are not obligated to make any additional milestone payments for additional indications. In
addition, we have agreed to pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teens 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 for
commercialization of INS1007 in chronic obstructive pulmonary disease or asthma. If we fail to comply with our obligations
under our agreements with AstraZeneca (including, among other things, if we fail to use commercially reasonable efforts to
develop and commercialize a product based on INS1007, or we are subject to a bankruptcy or insolvency), AstraZeneca would
have the right to terminate the license.
Competition
The biotechnology and pharmaceutical industries are highly competitive. We face potential competitors from many
different areas including commercial 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 resources and may have product candidates in more
advanced stages of development and may reach the market before our product candidates. Competitors may develop products
that are more effective, safer or less expensive or that have better tolerability or convenience. We also may face generic
competitors where third-party payors will encourage use of the generic products. Although we believe that our formulation
delivery technology, respiratory and anti-infective expertise, experience and knowledge in our specific areas of focus provide us
with competitive advantages, these potential competitors could reduce our commercial opportunity. Additionally, there
currently are, and in the future there may be, already-approved products for certain of the indications for which we are
developing, or in the future may choose to develop, product candidates. For instance, PAH is a competitive indication with
established products, including other formulations of treprostinil.
In the lung disease market, our major competitors include pharmaceutical and biotechnology companies that have
approved therapies or therapies in development for the treatment of chronic lung infections. There are other companies that are
currently conducting early stage clinical trials for the treatment of lung disease. We are not aware of any approved inhaled
therapies 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 Regulation
Orphan Drug Designation
United States
Under the Orphan Drug Act (ODA), the FDA may grant orphan drug designation to drugs intended to treat a rare
disease or condition, defined as a disease or condition for which the drug is intended affects 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 drug and 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 ARIKAYCE as an orphan drug for treatment of (i) infections caused by NTM, (ii) bronchiectasis in patients
with Pseudomonas aeruginosa or other susceptible microbial pathogens and (iii) bronchopulmonary Pseudomonas aeruginosa
infections in CF patients.
13
14
Orphan drug designation qualifies the sponsor for various development incentives of the ODA, including tax credits
In the US, pharmaceutical products are subject to extensive regulation by the FDA and other government bodies. The
for qualified clinical testing, and a waiver of the PDUFA application fee (unless the application seeks approval for an indication
not included in the orphan drug designation). Orphan drug designation also affords the company a period of exclusivity for the
orphan indication upon approval of the drug. Specifically, the first NDA applicant with an FDA orphan drug designation for a
particular active moiety to receive FDA approval of the drug for an indication covered by the orphan designation is entitled 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 has several separate orphan designations may have several separate exclusivities for separate orphan indications.
During the orphan drug exclusivity period, the FDA 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 of clinical superiority to the product that has orphan
drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same 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 approval process; the sponsor must still submit evidence from clinical and non-clinical studies sufficient to demonstrate the
safety and effectiveness of the drug.
European Union
The European Commission grants orphan drug designation to promote the development of drugs or biologics (1) for
life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the EU, or (2) for life
threatening, seriously debilitating or serious and chronic condition in the EU where, without incentives, sales of the drug in the
European Economic Area (the EU plus Iceland, Lichtenstein and Norway) (EEA) are unlikely to be sufficient to justify its
development. Orphan drug designation is available either if no other satisfactory method of diagnosing, 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 significant benefit
to patients. The European Commission has granted an orphan designation for ARIKAYCE 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 such designation, the drug is entitled to orphan exclusivity. Orphan exclusivity means that the EMA or a
national medicines agency may not accept another application for authorization, or grant an authorization, for a same or similar
drug for the same therapeutic indication. Competitors may receive such a marketing authorization despite orphan exclusivity,
provided that they demonstrate that the existing orphan product is not supplied in sufficient quantities or 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
as well. The period of orphan exclusivity is 10 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 is sufficiently profitable not to justify maintenance of market
exclusivity. Each orphan designation carries the potential for one market exclusivity for all the therapeutic indications that are
covered by the designation. A product that has several separate orphan designations may have several separate market
exclusivities.
Orphan drug designation also provides opportunities for free protocol assistance and fee reductions for access to the
centralized regulatory procedure or fee exemptions for companies with a small and medium enterprises status. In addition, EU
Member States may provide national benefits to orphan drugs, such as early access to the reimbursement procedure or
exemption from any turnover tax imposed 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 European Commission decides on the maintenance of the orphan designation. The non-maintenance of the orphan
designation means that the drug loses its orphan status and thus no longer benefits from orphan exclusivity, fee reductions or
exemptions, and national benefits.
Japan
The Ministry of Health, Labour and Welfare (MHLW) may, after hearing the opinion of the Pharmaceutical Affairs
and Food Sanitation Council, grant orphan drug designation to a drug intended 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) the necessity 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 the manufacturing and marketing approval that is necessary for the drug to be sold or
marketed in Japan. ARIKAYCE did not qualify for orphan drug designation in Japan due to the estimated number of NTM
patients in Japan exceeding 50,000.
Drug Approval
United States
US Federal Food, Drug, and Cosmetic Act (FDCA) and other federal and state 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 to
comply with applicable US requirements at any time during product development, approval, or after approval may subject a
company to a variety of administrative or judicial sanctions, such as imposition of clinical holds, FDA refusal to file or approve
new drug applications, warning letters, product recalls, 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 and product candidates.
Preclinical Studies
Preclinical studies include laboratory evaluation of product chemistry, formulation and toxicity, and pharmacology, as
well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical
tests must comply with federal regulations and requirements including the FDA's good laboratory practices (GLP) regulations
and the US Department of Agriculture's regulations implementing the Animal Welfare Act. An Investigational New Drug
(IND) sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any
available clinical data 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 as animal tests of reproductive toxicity and carcinogenicity, may continue even after
the IND is submitted. An IND automatically becomes effective 30 days after 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 clinical trial 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 Trials
Clinical trials involve the administration of the investigational new drug to human subjects (healthy volunteers or
patients) under the supervision of a qualified investigator. Clinical trials must be conducted (i) in compliance with all applicable
federal regulations and guidance, including those pertaining to good clinical practice (GCP) standards that are meant to protect
the rights, safety, and welfare of human subjects and to define the roles of clinical trial sponsors, investigators, and monitors as
well as (ii) under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring
safety, and the effectiveness criteria to be evaluated. Each protocol involving testing of a new drug in the US (whether in
patients or healthy volunteers) must be included as a submission to the IND, and the FDA must be notified of subsequent
protocol amendments, including new protocols. In addition, the protocol must be reviewed and approved by an institutional
review board (IRB), and all study subjects must provide informed consent. Typically, before any clinical trial, each institution
participating in the trial will require review of the protocol before the trial commences at that institution. Progress reports
detailing the results of the clinical trials must be submitted at least annually to the FDA and there are additional, more frequent
reporting 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 a temporary or permanent clinical hold, or other sanctions, if it believes that the clinical trial either is not
being conducted in accordance with the FDA requirements or presents an unacceptable risk to the clinical trial subjects. An IRB
also may require the clinical trial at the site to be halted, either temporarily or 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 overlap or 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 be patients 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 preliminary evidence
of efficacy. Phase 3 studies typically last between several months and two years. In Phase 3, the drug is given to a large group
of subjects with the target disease or condition (typically several hundred to several thousand), often at multiple geographical
sites, to confirm its effectiveness, monitor side effects, and collect data to support drug approval. Only a small percentage of
investigational drugs complete all three phases of development and obtain marketing approval.
NDA
After completion of the required clinical testing, an NDA can be prepared and submitted to the FDA. FDA approval of
the NDA is required before marketing 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 and other testing and a compilation of data relating to the product's
pharmacology, chemistry, manufacture, and controls. The application also includes representative samples, copies of the
proposed product labeling, patent information, and a financial certification or disclosure statement. The cost of preparing and
submitting an NDA is substantial. Additionally, under federal law (as amended by the most recent reauthorization of the
15
16
Prescription Drug User Fee Act (PDUFA VI) in the FDA Reauthorization Act of 2017), most NDAs are subject to a substantial
application fee and, upon approval, the applicant will be assessed an annual prescription drug program fee, both of which are
adjusted annually. NDAs for orphan drugs are not subject to an application fee, unless the application includes an indication
other than the orphan-designated indication. FDA also has the authority to grant waivers of certain 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 threshold determination 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 be approved. 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 will typically inspect the facility or the facilities at which the drug is manufactured. FDA will not
approve the product unless compliance with current good manufacturing 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 proposed labeling. 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 FDA to 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 issue an approval letter. An approval
letter, which may specify post approval requirements, authorizes commercial marketing of the drug for the approved indication
or indications and the other conditions of use set out in the approved prescribing information. Once granted, product approvals
may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial
marketing. Under priority review status, the FDA has 180 days from either the 60 day filing date (in the case of new molecular
entity (NME) NDA submissions) or the date of receipt of the NDA (in the case of non-NME original NDA submissions) to
issue either an approval letter or a complete response letter, unless the review period is adjusted by mutual agreement between
the FDA and the 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 of 90 percent of standard (non-priority) NDAs within 10 months and priority NDAs within
six months of NDA filing or receipt.
As a condition of NDA approval, the FDA may require substantial post-approval testing, known as Phase 4 studies, to
be conducted in order to gather additional information on the drug's effect in various populations and any side effects associated
with long-term use. Beyond routine post marketing safety surveillance, the FDA may require specific additional surveillance to
monitor the drug's safety or efficacy and may impose other conditions, including labeling restrictions that can materially affect
the potential market and profitability of the drug. As a condition of approval, or after approval, the FDA also may require
submission of a risk evaluation and mitigation strategy (REMS) or a REMS with elements to assure safe use to mitigate any
identified or suspected serious risks. The REMS may include medication guides, physician communication plans, assessment
plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization
tools. Further post-approval requirements are discussed below.
Expedited Review and Approval of Eligible Drugs
Under the FDA's accelerated approval program, the FDA may approve certain drugs for serious or life-threatening
conditions on the basis of a surrogate or intermediate endpoint that is reasonably likely to predict clinical benefit, which can
substantially reduce time to approval. A surrogate endpoint used for accelerated approval is a marker—a laboratory
measurement, radiographic image, physical sign or other measure that is thought to predict clinical benefit, but is not itself a
measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than irreversible
morbidity and mortality (IMM) that is reasonably likely to predict an effect on IMM or other clinical benefit. The FDA bases its
decision on whether 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 of the product, and may impose restrictions on distribution to assure safe use. Post marketing studies
would usually be required to be studies already underway at 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 must be 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, the FDA may withdraw approval of the drug under streamlined procedures in accordance with the
agency's regulations. The agency may also withdraw approval of 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 not shown 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 or streamline the process for the development and FDA review of drugs that meet certain qualifications.
The purpose of these programs is to provide important new 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 treat a
serious condition and for which nonclinical or clinical data demonstrate the potential to address unmet medical need. It should
be requested at the time of IND 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 the request. If granted, the applicant is eligible for actions to expedite
development and review, such as frequent interaction with the review team, as well as for rolling review, meaning that the
applicant may submit sections of the application as they are available. The timing of FDA's review of these sections depends on
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 fast track 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 on a 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 of receipt 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
case of 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 evidence indicates that the drug may demonstrate substantial improvement on a clinically significant
endpoint(s) over available therapies. It can be requested with the IND 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 applicant receives intensive guidance
on efficient drug development, intensive involvement of senior managers and experienced review and regulatory health project
management staff in a proactive, collaborative, cross-disciplinary review, rolling review, and other actions to expedite review.
Designation may be rescinded if the product no longer meets the criteria for breakthrough therapy designation.
Drugs that are designated as QIDPs are eligible for priority review and fast track designation, and well as market
exclusivity. A product is eligible if it 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 drug sponsor 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 within
60 days of receiving the designation request. ARIKAYCE has been designated as a QIDP for NTM lung disease.
Additionally, the FDA may approve eligible drugs under the LPAD. A product is eligible if it is intended to treat a
serious or life-threatening infection in a limited population of patients with unmet needs, the drug otherwise meets the standards
of approval, and the FDA receives a written request from the sponsor to approve the drug under this pathway. An antibacterial
or anti-fungal drug approved through this pathway may follow a streamlined clinical development program involving smaller,
shorter, or fewer clinical trials. Approval is based on a benefit-risk assessment in the intended limited population, taking into
account the severity, rarity, or prevalence of the infection the drug is intended to treat and the availability or lack of alternative
treatment for the patient population. Such drugs may not have favorable benefit-risk profiles in a broader population. Drugs
approved under LPAD are subject to additional regulatory requirements, including labeling and advertising statements
regarding the limited population and submission of promotional materials to the FDA at least 30 days prior to dissemination.
The FDA may remove these additional requirements if the agency approves the drug for a broader population.
Exclusivities
After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension on a single
patent. The allowable patent term extension 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 time between 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 pursue approval 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 four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year.
The director of the USPTO must determine that approval of the drug covered by the patent for 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.
17
18
A variety of non-patent exclusivity periods are available under the FDCA that can delay the submission or approval of
certain applications for competing products.
effectiveness questions or to the Center with the most expertise in evaluating the most significant safety and effectiveness
questions raised by the combination product.
A five-year period of non-patent exclusivity within the US is granted to the first applicant to gain approval of an NDA
When evaluating an application for a combination product, a lead Center may consult other Centers and apply the
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 the FDA in any other application submitted under section 505(b) of the
FDCA. During the exclusivity period for a NCE, the FDA may not accept for review an abbreviated 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 NCE
drug. 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 with respect 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, when the application contains reports of new clinical investigations (other than bioavailability studies)
conducted or sponsored by the sponsor that were essential to approval of the application, for example, for new indications,
dosages, strengths or dosage forms of an existing drug. This three-year exclusivity covers only the conditions of use associated
with the new clinical investigations, which means that the FDA may approve applications for other versions of the original,
unmodified drug product. Where this form of exclusivity applies, it prevents FDA approval of an ANDA or 505(b)(2) NDA
subject to the exclusivity for 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 of exclusivity, provided that the applicant conducts or obtains a right of reference to all of the preclinical
studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
standards that would be applicable but still retain reviewing authority, or it may assign review of a specific section of the
application to another Center, delegating its review authority for that section. Depending on the type of combination product,
approval or clearance could be obtained through submission of a single marketing application or through separate applications
for the individual constituent parts (e.g., an NDA for the drug and a premarket notification for the device). The FDCA directs
the FDA to conduct a review of a combination product under a single marketing application whenever appropriate. The agency
has the discretion to require separate applications to more than one Center, and applicants may choose to submit separate
applications for constituent parts of a combination (unless the FDA determines one application is necessary). One reason to
submit multiple applications is if the applicant wishes to receive some benefit that accrues only from approval under a particular
type of application, like new drug product exclusivity. If multiple applications are submitted, each application is generally
reviewed by the Center with authority over each application type. For combination products that contain an approved
constituent part (such as a drug-device combination product in which the device has previously received clearance), the FDA
may require that the application(s) include only such information as is necessary to meet the standard for clearance or approval,
taking into account any prior finding of safety or effectiveness for the approved constituent part.
Like their constituent products—e.g., drugs and devices—combination products are highly regulated and subject to a
broad range of post marketing requirements including cGMPs, adverse event reporting, periodic reports, labeling and
advertising and promotion requirements and restrictions.
Disclosure of Clinical Trial Information
Products with QIDP designation may receive a five-year extension of other non-patent exclusivities for which the drug
Under US and certain foreign laws intended to improve clinical trial transparency, sponsors of clinical trials may be
is also eligible. The exclusivity 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 an orphan drug and a QIDP for the same
indication, like ARIKAYCE, could be eligible for a combined 12 years of exclusivity for that indication.
Medical Device Regulation
Medical devices, such as Lamira, 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 primary pathways 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 System Regulation 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 prescribed procedures and conditions. Devices intended for investigational use may be exempted from premarket
notification and premarket approval requirements when 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 the device is safe or effective for the purposes for
which it is being investigated.
Combination Products
required to register and disclose certain information about their clinical trials. This can include information related to the
investigational drug, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical
trial. This information is then made publicly available. Under a recently revised regulation in the US, sponsors are obligated to
disclose the results of these trials after completion (prior to the new rulemaking, disclosure of results was only required 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 the sponsor is seeking approval of the product or a new indication. Competitors may use this publicly-available
information to gain knowledge regarding the progress of development programs.
Other Post-approval Regulatory Requirements
Once 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, as well 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 and promotional Internet communications. FDA also establishes parameters for permissible non-
promotional communications between industry and the medical community, including industry-supported scientific and
educational activities. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion for uses
not consistent with the approved labeling, and a company that is found to have improperly promoted off-label uses or otherwise
not to have met applicable promotion rules may be subject to significant liability under both the FDCA and other statutes,
including the False Claims Act.
A combination product is a product comprising two or more regulated components (e.g., a drug and device) that are
Manufacturers are subject to requirements for adverse event reporting and submission of periodic reports following
combined into a single product, co-packaged, or sold separately but intended for co-administration, as evidenced by the labeling
for the products. Drugs that are administered using a nebulizer or another device, such as ARIKAYCE or INS1009, are
examples of combination drug/device products.
The FDA is divided into various Centers, which each have authority over a specific type of product. NDAs are
reviewed by personnel within the Center for Drug Evaluation and Research, while device applications and premarket
notifications are reviewed by the Center for Devices and Radiological Health. Combination products, such as drug/device
combinations, generally will be reviewed by the Center that regulates the product's primary mode of action (PMOA), which is
the single mode of a combination product that provides the most important therapeutic action of the combination product. If the
PMOA is unclear or in dispute, a sponsor may file a Request for Designation with FDA’s Office of Combination Products
(OCP), which will render a determination and assign a lead Center. OCP generally assigns jurisdiction based on PMOA. If there
are two independent modes of action, neither of which is subordinate to the other, the FDA makes a determination as to which
Center to assign the product based on consistency with other combination products raising similar types of safety and
FDA approval of an NDA.
All aspects of pharmaceutical manufacture must conform to cGMPs after approval. Drug manufacturers and certain of
their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA during which the FDA inspects manufacturing facilities to assess compliance
with cGMPs. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being
implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting
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 the conditions 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 NDA
supplement, in some cases before the change may be implemented. An NDA supplement for a new indication typically requires
19
20
clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA
supplements as it does in reviewing NDAs.
obligations in relation to pharmacovigilance. Once the holder has provided a comprehensive data package, the conditional
marketing authorization is replaced by a 'regular' marketing authorization.
As previously mentioned, the FDA also may require Phase 4 studies and may require a REMS, which could restrict the
Marketing authorizations under exceptional circumstances may be granted where the applicant demonstrates that, for
distribution or use of the product.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act
(PDMA), which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the
registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription
pharmaceutical product samples and impose requirements to ensure accountability in distribution.
objective and verifiable reasons, they are unable to provide comprehensive data on the efficacy and safety of the drug under
normal conditions of use. Such marketing authorizations are 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 valid for 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-benefit balance
remains positive.
European Union
MAA
To obtain approval of a drug under the EU regulatory system, an application for a marketing authorization may be
submitted under a centralized, a decentralized or a national procedure. The centralized procedure, which is compulsory for
medicines produced by certain biotechnological processes or for orphan 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 in each member state as a
national marketing authorization. As a general rule, only one marketing authorization may be granted for drugs approved
through the centralized 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 valid application within 210 days, excluding clock stops when additional information is to be provided by the
applicant in response to questions. More specifically, 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. Applicants then 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 to the applicant together with the CHMP's recommendation by day 180 of the procedure. Applicants
then have one month to respond to the CHMP (and can request a one or two-month extension). The Rapporteur and Co-
Rapporteur assess the applicant's replies, submit them for discussion to the CHMP and prepare a final assessment report. Once
its scientific evaluation is completed, the CHMP gives a favorable or unfavorable opinion as to whether to grant the marketing
authorization. After the adoption 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, the Commission 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 Circumstances
Various programs, including accelerated procedure, conditional approval and approval under exceptional
circumstances, are intended to expedite or simplify the approval of drugs that meet certain qualifications. The purpose of these
programs is to provide important new drugs to patients earlier than under 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, applicants may 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 is normally 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 CHMP may recommend, the granting of a marketing authorization, subject to
certain specific obligations; such marketing authorization may be conditional or under exceptional circumstances. The timelines
for the centralized procedure described above also apply with respect to applications for a conditional marketing authorization
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 are met: (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 trial data, (3) the product fulfills unmet medical needs, and (4) the
benefit to public health of the immediate availability on the market of the medicinal product concerned 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. The granting of conditional marketing authorization depends on the applicant's ability to fulfill
the conditions imposed within the agreed upon deadline. They are 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-risk balance is positive or to fulfill specific
Exclusivities
If an approved drug contains a new active substance, it is protected by data exclusivity for eight years from the
notification of the Commission decision granting the marketing authorization and then by marketing protection for an additional
two or three years. Overall, the drug is protected for ten or eleven 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 for regulatory purposes. During the period of marketing protection, competitors may not market their generic
drugs. The period of marketing protection is normally two years but may become three years if, during the eight-year data
exclusivity period, a new therapeutic indication is approved that is considered as bringing a significant clinical benefit over
existing therapies.
Medical Devices Regulations
In 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, may require prior review by a Notified Body. Notified Bodies are technical review bodies that are
accredited and supervised by national health authorities. They conduct conformity assessment procedures of, among others,
medical devices.
Medical devices are generally governed by Directive 93/42/EEC on Medical Devices (Directive 93/42) that
harmonizes the conditions for placing medical devices on 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. Compliance with those requirements is demonstrated by the CE mark as the manufacturer may only affix the CE
mark if it may declare conformity with the essential requirement for each medical device that is marketed. Directive 93/42
provides recourse to harmonized European standards in order to facilitate compliance with 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 medical device 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 so that, 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, a Notified Body must review the
manufacturer's procedures and/or the product. Every device is initially classified by the manufacturer. However, the Notified
Body may dispute the classification and assert that the device should be included in a class requiring stricter conformity
assessment procedures. Specific rules 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 production procedures or its products with the essential requirements of Directive 93/42. Certification takes the form
of a certificate of conformity issued by the Notified Body, 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 such measure is
justified on the basis of evidence of non-compliance. Ultimately, the manufacturer is responsible for the conformity of the
device with the essential requirements and for the affixing of the CE mark. Lamira 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 use of a medical device, which incidents may demonstrate the need for corrective action by the
manufacturer. In addition, Notified Bodies regularly reassess the conformity 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.
In May 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (MDR), which will repeal and
replace Directive 93/42 with effect from May 26, 2020. The MDR envisages, among other things, stricter controls of medical
21
22
devices, including strengthening of the conformity assessment procedures, increased expectations as regards clinical data for
devices and pre-market regulatory review of high-risk devices. Under transitional provisions, medical devices with notified
body certificates issued under Directive 93/42 prior to May 26, 2020 may continue to be placed on the market for the remaining
validity of the certificate, until May 27, 2024 at the latest. After the expiry of any applicable transitional period, only devices
that have been CE marked under the MDR may be placed on the market in the EU.
Japan
Under the Japanese regulatory system administered by the MHLW and the PMDA (which is responsible for product
review and evaluations under the supervision of the MHLW), pre-marketing approval and clinical studies are required for all
pharmaceutical products. The Law on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and
Medical Devices (Act No. 145 of 1960) requires a license for marketing authorization when importing to Japan and selling
pharmaceutical products manufactured in other countries. It also requires a foreign manufacturer to get each of its
manufacturing sites certified as a manufacturing site of pharmaceutical products to be marketed in Japan. To receive a license
for marketing authorization, the manufacturer or seller must, at the very least, employ certain manufacturing marketing, quality
and safety personnel. A license for marketing authorization may not be granted if the quality management methods and post
marketing safety management methods applied with respect to the pharmaceutical product fail to conform to the standards
stipulated in the ordinances promulgated by the MHLW. To obtain manufacturing/marketing approval for a new product, a
Company must submit an application for approval to the MHLW with results of nonclinical and clinical studies to show the
quality, efficacy and safety of the product candidate. A data compliance review, on-site inspection for good clinical practice,
audit and detailed data review for compliance with current good manufacturing practices 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 on the product, but it can take years. The product also needs approval for pricing to be applied for redemption of
health insurance. The medical products which once are approved and marketed are also subject to regular post-marketing
vigilance of safety and quality under the standards of Good Manufacturing Practice. 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 the MHLW would begin. Price would be determined within 60 to 90 days unless the applicant disagrees, which may result
in extended pricing negotiations. The government generally introduces price cut rounds every other year and also mandates
price decreases for specific products. New products judged innovative or useful, that are indicated for pediatric use, or that
target orphan or small population diseases, however, may be eligible for a pricing premium. The government has also promoted
the use of generics, where available.
Pediatric Information
United States
Under the Pediatric Research Equity Act of 2003 (PREA), certain NDAs and supplements must contain data that are
adequate to assess the safety and effectiveness of the drug for the claimed indications in relevant pediatric subpopulations and
to support dosing and administration for each pediatric subpopulation 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 of data or full or partial waivers. Unless
otherwise required by regulation, and subject to an exception for certain oncology drugs, PREA does not apply to any drug for
an indication for which orphan designation has been granted. Under the Best Pharmaceuticals for Children Act (BPCA),
pediatric research is incentivized by the possibility of six additional months of pediatric exclusivity, which if granted, is added
to existing exclusivity periods and patent-based exclusivity listed for the applicable drug in the FDA's Orange Book at the time
the sponsor satisfies the FDA's "written request" for pediatric research. Sponsors may seek to negotiate the terms of a written
request during drug development. While the sponsor of an orphan designated drug may not be required to perform pediatric
studies under PREA unless one of the above exceptions applies, they are eligible to participate in the incentives under the
BPCA if the FDA issues a written request.
European Union
In the EU, new drugs (i.e. drugs containing a new active substance) for adults, must also be tested in children. This
mandatory pediatric testing is carried out through the implementation of a pediatric investigation plan (PIP), which is proposed
by the applicant and approved by the EMA. A PIP contains 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 MAA for adults is subject to the implementation of the PIP, subject to 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 to delay 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 or more 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. Prior to obtaining the validation of a MAA for adults, the applicant has to
demonstrate compliance with the PIP at the time of submission of the application. In the case of orphan medicinal products,
completion of an approved PIP can result in an extension of the market exclusivity period from ten to twelve years.
Japan
In 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 that pharmaceutical manufacturers conduct
adequate post-marketing surveillance during the reexamination interval period and collect as much information as possible 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 pediatric drug to prepare application for manufacturing/marketing approval or after receiving the same approval, the
reexamination interval period may be extended up 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 and the US but are not yet approved in Japan, so
that they can be used as early as possible in Japan as well.
Regulation Outside the US, Europe and Japan
In addition to regulations in the US, Europe and Japan, we will be subject to a variety of regulations in other
jurisdictions governing clinical studies of our candidate products, including medical devices. Regardless of whether we obtain
FDA approval for a product candidate, we must obtain approval of the product candidate (including a medical device) by the
comparable regulatory authorities of countries outside the US before we can commence clinical studies or marketing of the
product candidate in those countries. The requirements for approval and the approval process vary from country to country, and
the time may be longer or shorter than that required for FDA approval. Under certain harmonized medical device approval/
clearance regulations outside the US, reference to US clearance permits fast-tracking of market clearance. Other regions are
harmonized with EU standards, and therefore recognize the CE mark as a declaration of conformity to applicable standards.
Furthermore, we must obtain any required pricing approvals in addition to regulatory approval prior to launching a product
candidate in the approving country. The discussion of EU government regulations also applies to the United Kingdom.
Early Access Programs
Under EU law, member states are authorized to adopt national legal regimes for the supply or use of non-authorized
drugs in case of therapeutic needs. The most common national legal regimes are compassionate use programs and named
patient sales, but other national regimes for early access may be available, depending on the member state. For drugs that must
be approved through the centralized procedure, such as orphan drugs, compassionate use programs are also regulated at the
European level. ARIKAYCE is available in certain 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 for their condition (compassionate use). As a general rule, compassionate use programs can only be put
in place for drugs or biologics that are expected to help patients with life-threatening, long-lasting or seriously disabling
illnesses who currently cannot be treated satisfactorily with authorized medicines, or who have 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 ongoing clinical trial to
obtain treatment with a potentially life-saving medicine. Compassionate use programs are coordinated and implemented by the
EU member states, which decide independently how and when to open such programs according to national rules and
legislation. Generally, doctors who wish to obtain a promising drug for their seriously ill patients will need to contact the
relevant national authority in their respective country and follow the procedure that has been set up. Typically, the national
authority keeps a register of the patients treated with the drug within the 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 are subject to compassionate use
programs due to their very nature (rare diseases are life-threatening, long-lasting or seriously disabling diseases) and the long
time 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 another country, to be used for an individual patient under their direct responsibility. This is often called
treatment on a 'named-patient basis' and is distinct from compassionate use programs. In this case, the doctor responsible for the
treatment will either contact the manufacturer directly or issue a prescription to be fulfilled by a pharmacist. While
manufacturers or pharmacists do record what they supply, there is no central register of the patients that are being treated in this
way.
Reimbursement of Pharmaceutical Products
In the US, many independent third-party payors, as well as the Medicare and state Medicaid programs, reimburse
dispensers of pharmaceutical products. Medicare is the federal program that provides healthcare benefits to senior citizens and
certain disabled and chronically ill persons. Medicaid is the need-based federal and state program administered by the states to
provide healthcare benefits to certain persons.
23
24
Similar restrictions apply in the member states of the EU and Japan, which have been set out by laws or industry
codes of conduct.
Employees
As of December 31, 2019, we had a total of 435 employees: 168 in research, clinical, regulatory, medical affairs and
quality assurance; 36 in technical operations, manufacturing and quality control; 85 in general and administrative functions; and
146 in commercial activities. We had 373 employees in the US, 47 employees in Europe and 15 employees in Japan. We
anticipate increasing our headcount in 2020.
None of our employees are represented by a labor union and we believe that our relations with our employees are
generally good. Generally, our employees are at-will employees; however, we have entered into employment agreements with
certain of our executive officers.
Available Information
We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments 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 available on 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.
Also available through our website's "Investors-Corporate Governance" page are charters for the Audit, Compensation,
Nominations and Governance and Science and Technology Committees of our board of directors, our Corporate Governance
Guidelines, and our Code of Business Conduct and Ethics. We intend to satisfy the disclosure requirements regarding any
amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by making disclosures concerning such
matters available on our website.
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 be accessed through our website, nor the contents of the SEC's website, are incorporated by reference
in this Annual Report on Form 10-K.
Financial Information
The financial information required under this Item 1 is incorporated herein by reference to Item 8 of this Annual
Report on Form 10-K.
As one of the conditions for obtaining Medicaid and, if applicable, Medicare Part B coverage for our marketed
pharmaceutical products, we will need to agree to pay a rebate to state Medicaid agencies that provide reimbursement for those
products. We will also have to agree to sell our commercial products under contracts with the Department of Veterans Affairs,
Department of Defense, Public Health Service, and numerous other federal agencies as well as certain hospitals that are
designated by federal statutes to receive drugs at prices that are significantly below the price we charge to commercial
pharmaceutical distributors. These programs and contracts are highly regulated and will impose restrictions on our business.
Failure to comply with these regulations and restrictions could result in adverse consequences such as civil money penalties,
imposition of a Corporate Integrity Agreement and/or a loss of our ability to continue receiving Medicare and Medicaid
reimbursement for our drugs.
Private healthcare payors also attempt to control costs and influence drug pricing through a variety of mechanisms,
including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms
that provide preferential access to certain drugs over others within a therapeutic class. Payors also set other criteria to govern
the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered.
The US President has indicated an interest in taking steps to lower drug prices, such as having the federal government
negotiate drug prices with pharmaceutical manufacturers and/or in indexing certain federally reimbursement payments to
international drug prices. In May 2018, the Administration issued "American Patients First," a multi-faceted blueprint to lower
drug prices. The Administration has taken administrative steps to implement the blueprint, including through proposing
sweeping demonstration projects aimed at putting downward pressure on drug prices. In addition, members of Congress have
indicated an interest in legislative measures designed to lower drug costs. Drug pricing is an active area for regulatory reform at
both the federal and state levels, and significant changes to current drug pricing and reimbursement structures in the US could
be forthcoming
Different pricing and reimbursement schemes exist in other countries. In the EU, governments influence the price of
drugs through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost
of those products to patients. Some jurisdictions operate positive and negative list systems under which drugs may only be
marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries
may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently
available therapies. Other member states allow companies to fix their own prices for drugs, but monitor and control company
profits. The downward pressure on healthcare 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-border
imports from low-priced markets exert a commercial pressure on pricing within a country. There can be no assurance that any
country that has price controls or reimbursement limitations for drugs will allow favorable reimbursement and pricing
arrangements for any of our products.
In Japan, drugs can be sold on the market if they undergo the PMDA’s review of safety, effectiveness and quality and
receive manufacturing/marketing approval. However, in order for drugs to be covered by the National Health Insurance, 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 the calculated price in the Drug Price List. After receiving manufacturing/marketing
approval, drugs are included in the Drug Price List within 60 to 90 days unless the applicant disagrees, which may result in
extended pricing negotiations. The MHLW updates the Drug Price List biennially after taking into account the survey result of
the actual sales price of drugs and hearing the opinion of the CSIMC.
Fraud and Abuse and Other Laws
Physicians and other healthcare providers and third-party payors (government or private) often play a primary role in
the recommendation and prescription of healthcare products. In the US and most other jurisdictions, numerous detailed
requirements apply to government and private healthcare programs, and a broad range of fraud and abuse laws, transparency
laws, 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 Economic and Clinical Health Act;
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.
25
26
ITEM 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 our common stock. In addition, these risks and uncertainties could
cause actual results to differ materially from those expressed or implied by forward-looking statements contained in this
Annual Report on Form 10-K (please read the Cautionary Note Regarding Forward-Looking Statements appearing at the
beginning of this Annual Report on Form 10-K).
Risks Related to the Commercialization and Continued Approval of ARIKAYCE
Our prospects are highly dependent on the success of our only approved product, ARIKAYCE, which was approved in the
United States (US) under the Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD) and accelerated
approval pathways. If we are unable to successfully commercialize or maintain approval for ARIKAYCE, our business,
financial condition, results of operations and prospects and the value of our common stock will be materially adversely
affected.
Our long-term viability and growth depend on the successful commercialization of ARIKAYCE, our only approved
product, which has been approved in the US for the treatment of patients with refractory nontuberculous mycobacterial (NTM)
lung disease caused by MAC (which we refer to as MAC lung disease) as part of a combination antibacterial drug regimen for
adult patients with limited or no alternative treatment options. We have invested and continue to invest significant efforts and
financial resources in the commercialization of ARIKAYCE, and our ability to generate revenue from ARIKAYCE will depend
heavily on successfully commercializing and obtaining full regulatory approval for ARIKAYCE by conducting an appropriate
confirmatory post-marketing study. ARIKAYCE was our first commercial launch, and its successful commercialization and our
receipt of full regulatory approval for ARIKAYCE in the US are subject to many risks.
The commercial success of ARIKAYCE will depend on the degree of market acceptance by physicians, patients, third-party
payors and others in the healthcare community.
Despite receiving US Food and Drug Administration (FDA) approval of ARIKAYCE market acceptance may vary
among physicians, patients, third-party payors or others in the healthcare community. ARIKAYCE was the first product
approved via the LPAD pathway, and there is limited information on how this approval may impact market acceptance of the
product. If ARIKAYCE does not achieve and maintain an adequate level of acceptance, it is not likely that we will continue to
generate significant revenue or become profitable. The degree of market acceptance of ARIKAYCE, which we launched in the
US early in the fourth quarter of 2018, is also dependent on a number of additional factors, including the following:
•
•
•
•
•
•
•
•
•
•
The willingness of the target patient population to use, and of physicians to prescribe, ARIKAYCE;
The efficacy and potential advantages of ARIKAYCE over alternative treatments;
The risk and safety profile of ARIKAYCE, including, among other things, physician and patient concern regarding the
boxed warning and other safety precautions resulting from its association with an increased risk of respiratory adverse
reactions, and any adverse safety information that becomes available as a result of longer-term use of ARIKAYCE;
Relative convenience and ease of administration;
The ability of the patient to tolerate ARIKAYCE;
The pricing of ARIKAYCE;
The ability and willingness of the patient to pay out of pocket costs for ARIKAYCE, for example, co-payments;
Sufficient third-party insurance coverage and reimbursement;
The strength of marketing and distribution support and timing of market introduction of competitive products and
treatments; and
Publicity concerning ARIKAYCE or any potential competitive products and treatments.
Our efforts to educate physicians, patients, third-party payors and others in the healthcare community on the benefits
of ARIKAYCE has required and will continue to require significant resources, which may be greater than those required to
commercialize more established technologies and these efforts may never be successful.
We obtained regulatory approval of ARIKAYCE in the US through an accelerated approval process, and full approval will
be contingent on successful completion of a confirmatory post-marketing study. Failure to obtain full approval or otherwise
meet our post-marketing requirements and commitments would have a material adverse effect on our business.
treat a serious or life-threatening disease or condition and (ii) provide a meaningful therapeutic benefit over existing treatments
to be approved substantially based on an intermediate endpoint or a surrogate endpoint that is reasonably likely to predict
clinical benefit, rather than a clinical endpoint such as survival or irreversible morbidity. Accelerated approval of ARIKAYCE
was supported by preliminary data from the Phase 3 CONVERT study, which evaluated the safety and efficacy of ARIKAYCE
in adult patients with refractory MAC lung disease, using achievement of sputum culture conversion (defined as three
consecutive negative monthly sputum cultures) by Month 6 as the primary endpoint.
As a condition of accelerated approval, we must conduct a post-approval confirmatory clinical trial. The required
confirmatory trial, which is currently under discussion with the FDA, is proposed to be a randomized, double-blind, placebo-
controlled clinical trial to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. The trial
will evaluate the effect of ARIKAYCE on a clinically meaningful endpoint, as compared to an appropriate control in patients
with MAC lung disease. Pursuant to the timetable agreed upon with the FDA when the approval letter of ARIKAYCE was
received, confirmatory trial results are to be reported by 2024. We have initiated efforts to evaluate an appropriate patient
reported outcome (PRO) tool through a short-term study to enable the assessment of ARIKAYCE for the treatment of MAC
lung disease. In parallel, we plan to begin a confirmatory clinical study of ARIKAYCE in a front-line setting of patients with
MAC lung disease in the second half of 2020. We continue to collaborate with the FDA on this timetable as well as the design
and validation of the PRO and the post-approval confirmatory clinical trial. There is little precedent for clinical development
and regulatory expectations for agents to treat MAC lung disease. As a result, we may encounter challenges designing this trial,
including developing and reaching agreement with the FDA on the appropriate clinical endpoints, the design of the trial itself
and the PRO, and if our PRO is not validated, we would need to develop a new clinical endpoint for the trial. We may also
encounter substantial delays in enrolling and conducting the trial, and we may not be able to enroll and conduct the trial in a
manner satisfactory to the FDA or within the time period required by the FDA. If the confirmatory trial is not successful, the
FDA could, among other things, withdraw its approval of ARIKAYCE. Separate from the confirmatory trial, additional results
from ongoing and recently completed studies may affect the FDA’s benefit-risk analysis for the product. Additionally,
ARIKAYCE is subject to post-marketing commitments consisting of implementation of a healthcare provider communication
plan, conducting a drug utilization assessment, and conducting further studies to identify an optimal quality control in vitro drug
release method. Failure to meet post-marketing commitments may raise additional regulatory challenges.
We remain subject to substantial, ongoing regulatory requirements in the US related to ARIKAYCE, and failure to comply
with these requirements could lead to enforcement action or otherwise materially harm our business.
ARIKAYCE is subject to a variety of manufacturing, packaging, storage, labeling, advertising, promotion, and record-
keeping requirements, including requirements to:
•
•
Conduct sales, marketing and promotion, scientific exchange, speaker programs, charitable donations and educational
grant programs in compliance with federal and state laws;
Disclose clinical trial information and payments to healthcare professionals and healthcare organizations on publicly
available databases;
• Monitor and report complaints, adverse events and instances of failure to meet product specifications; and
•
Comply with current good manufacturing practices (cGMP) and certain quality systems requirements for device
components.
Failure to comply with these ongoing regulatory obligations could have significant negative consequences, including:
•
•
•
•
•
•
•
Issuance of warning letters or untitled letters by FDA asserting that we are in violation of the law;
Imposition of injunctions or civil monetary penalties or pursuit by regulators of civil or criminal prosecutions and fines
against us or our responsible officers;
Suspension or withdrawal of regulatory approval;
Suspension or termination of ongoing clinical trials or refusal by regulators to approve pending marketing applications
or supplements to approved applications;
Seizure of products, required product recalls or refusal to allow us to enter into supply contracts, including government
contracts, or to import or export products;
Suspension of, or imposition of restrictions on, our operations, including costly new manufacturing requirements with
respect to ARIKAYCE; and
Negative publicity, including communications issued by regulatory authorities, which could negatively impact the
perception of us or ARIKAYCE by patients, physicians, third-party payors or the healthcare community.
The FDA approved ARIKAYCE under the LPAD and accelerated approval pathways, and full approval will be based
We provide financial assistance with out-of-pocket costs to patients enrolled in commercial health insurance plans. In
on results from a post-approval confirmatory clinical trial. Accelerated approval allows drugs that (i) are being developed to
addition, independent foundations may assist with out-of-pocket financial obligations. The ability of these organizations to
27
28
provide assistance to patients is dependent on funding from external sources, and we cannot guarantee that such funding will be
available at adequate levels, if at all. Patient assistance programs, whether provided directly by manufacturers or charitable
foundations, have come under recent government scrutiny. If we are deemed to fail to comply with relevant laws, regulations or
government guidance with respect to these programs, we could be subject to significant fines or penalties.
Any of these events could reduce market acceptance of ARIKAYCE, substantially reduce our revenue, increase the
costs of operating our business, and cause us significant reputational damage, among other consequences. If we ultimately
receive approval for ARIKAYCE in other jurisdictions, we expect to be subject to similar ongoing regulatory oversight by the
relevant foreign regulatory authorities.
If we are unable to obtain adequate reimbursement from government or third-party payors for ARIKAYCE or if we are
unable to obtain acceptable prices for ARIKAYCE, our prospects for generating revenue and achieving profitability will be
materially adversely affected.
Our prospects for generating revenue and achieving profitability depend heavily upon the availability of adequate
reimbursement for the use of ARIKAYCE from governmental and other third-party payors, both in the US and in other
markets. We expect a substantial majority of ARIKAYCE revenue will come from Medicare reimbursement. Reimbursement
by a third-party payor depends upon a number of factors, including the third-party payor’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.
setting their own reimbursement rates, and any reimbursement reduction resulting from the MMA may result in a similar
reduction in payments from private payors. Additionally, the Patient Protection and Affordable Care Act (ACA) revised the
definition of “average manufacturer price” for reporting purposes and increased the minimum percentage for Medicaid drug
rebates to states, required drug manufacturers to provide a significant discount (70% as of January 1, 2019) on prescriptions for
branded drugs filled while the beneficiary is in the Medicare Part D coverage gap (also known as the donut hole), and imposed
a significant annual fee on companies that manufacture or import branded prescription drug products. We believe it is likely
that the ACA, or any legislation enacted to amend or replace it, will continue the pressure on pharmaceutical pricing, especially
under the Medicare program, and also may increase our regulatory burdens and operating costs. Such changes may have a
significant impact on our ability to set a product price we believe is fair and may adversely affect our ability to generate revenue
and achieve or maintain profitability. For instance, we have observed an increase in the time to fill prescriptions, particularly for
patients that are insured through Medicare, in the first quarter of the year as a result of the donut hole, and, while we do not
expect this situation to extend through the entire year, this situation may recur in the first quarter of subsequent years. We
expect further federal and state proposals and healthcare reforms to continue to be proposed by legislators and/or the US
President, which could limit the prices that can be charged for the products we develop or may otherwise limit our commercial
opportunity. See Reimbursement of Pharmaceutical Products in Item 1 of Part I of this Annual Report on Form 10-K for more
information. In addition, in connection with various government programs, we are required to report certain pricing information
to the government, and the failure to do so may subject us to penalties.
In markets outside the US, including countries in the European Union (EU), Japan and Canada, pricing of
pharmaceutical products is subject to governmental control. Evaluation criteria used by many government agencies in EU
countries for the purposes of pricing and reimbursement typically focus on a product’s degree of innovation and its ability to
meet a clinical need unfulfilled by currently available therapies. The ACA created a similar entity, the Patient-Centered
Outcomes Research Institute, designed to review the effectiveness of treatments and medications in federally-funded healthcare
programs. An adverse result could lead to a treatment or product being removed from Medicare or Medicare coverage. The
decisions of such governmental agencies could affect our ability to sell our products profitably.
ARIKAYCE's potential addition to or exclusion from the guidelines of the American Thoracic Society and Infection
We have had discussions with third-party payors regarding our price for ARIKAYCE, but our pricing may meet
Diseases Society of America may also be a factor in this determination. Obtaining a determination of coverage and
reimbursement for a product from each governmental or other third-party payor is a time-consuming and costly process that
could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor.
Since commercializing ARIKAYCE, payors have evaluated ARIKAYCE for inclusion on formularies. Going forward, we may
not be able to provide data sufficient to gain positive coverage and reimbursement determinations or we might need to conduct
post-marketing studies in order to demonstrate the cost-effectiveness of ARIKAYCE to such payors’ satisfaction. Such studies
might require us to commit a significant amount of management time and financial and other resources.
Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations
that preclude payment for some uses that are approved by the FDA or non-US regulatory authorities and/or may set a
reimbursement rate that is too low to support a profitable sales price for the product. Payors have restricted and may also
continue to restrict coverage of ARIKAYCE by using a variable co-payment structure that imposes higher costs on patients for
drugs that are not preferred by the payor and by imposing requirements for prior authorization or step edits. Subsequent
approvals of competitive products could result in a detrimental change to the reimbursement of our products. The occurrence of
any of these events likely would adversely impact market acceptance and demand for ARIKAYCE, which, in turn, could affect
our ability to successfully commercialize ARIKAYCE and adversely impact our business, financial condition, results of
operations and prospects and the value of our common stock.
There is a significant focus in the US healthcare industry and elsewhere on drug prices and value, and public and
private payors are taking increasingly aggressive steps to control their expenditures for pharmaceuticals by, inter alia,
negotiating manufacturer discounts and placing restrictions on reimbursement, and patient access to, medications. These
pressures could negatively affect our business. We expect changes in the Medicare program and state Medicaid programs, as
well as managed care organizations and other third-party payors, to continue to put pressure on pharmaceutical product pricing.
For instance, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) expanded Medicare
outpatient prescription drug coverage for the elderly through Part D prescription drug plans sponsored by private entities and
authorized such plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class.
The plans generally negotiate significant price concessions as a condition of formulary placement. The MMA also introduced a
new reimbursement methodology based on average sales prices for physician-administered drugs, which is generally believed
to have resulted in lower Medicare reimbursement for physician-administered drugs. These cost reduction initiatives and other
provisions of this legislation provide additional pressure to contain and reduce drug prices and could decrease the coverage and
price that we receive for any approved products and could seriously harm our business. Although the MMA applies only to
drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations when
resistance from them and the public generally. If we are unable to obtain adequate reimbursement of ARIKAYCE, the adoption
of ARIKAYCE by physicians and patients may be limited. This, in turn, could affect our ability to successfully commercialize
ARIKAYCE and adversely impact our business, financial condition, results of operations and prospects and the value of our
common stock.
ARIKAYCE could develop unexpected safety or efficacy concerns, which would likely have a material adverse effect on us.
ARIKAYCE was granted accelerated approval from the FDA based on Month 6 data from the CONVERT study. In
the US, ARIKAYCE is now being used by larger numbers of patients, potentially for longer periods of time, and we and others
(including regulatory agencies and private payors) will collect extensive information on the efficacy and safety of ARIKAYCE
by monitoring its use in the marketplace. In addition, we will conduct a confirmatory trial to assess and describe the clinical
benefit of ARIKAYCE in patients with MAC lung disease and may conduct additional trials in connection with lifecycle
management programs for ARIKAYCE in the US. New safety or efficacy data from both market surveillance and our clinical
trials may result in negative consequences including the following:
• Modification to product labeling or promotional statements, such as additional boxed or other warnings or
contraindications, or the issuance of additional “Dear Doctor Letters” or similar communications to healthcare
professionals;
Required changes in the administration of ARIKAYCE;
Imposition of additional post-marketing surveillance, post-marketing clinical trial requirements, distribution
restrictions or other risk management measures, such as a risk evaluation and mitigation strategy (REMS) or a REMS
with elements to assure safe use;
Suspension or withdrawal of regulatory approval;
Suspension or termination of ongoing clinical trials or refusal by regulators to approve pending marketing applications
or supplements to approved applications;
Suspension of, or imposition of restrictions on, our operations, including costly new manufacturing requirements with
respect to ARIKAYCE; and
Voluntary or mandatory product recalls or withdrawals from the market and costly product liability claims.
•
•
•
•
•
•
Any of these circumstances could reduce ARIKAYCE’s market acceptance and would be likely to materially
adversely affect our business.
29
30
If estimates of the size of the potential markets for ARIKAYCE are overstated or data we have used to identify physicians is
inaccurate, our ability to earn revenue to support our business could be materially adversely affected.
The reported results of the WILLOW study are based on top-line data and may differ from complete study results once
additional data are evaluated.
We have relied on external sources, including market research funded by us and third parties, and internal analyses and
calculations to estimate the potential market opportunities for MAC lung disease in the US, where ARIKAYCE has obtained
regulatory approval, as well as other jurisdictions in which we are seeking or plan to seek approval, including the EU5
(comprised of France, Germany, Italy, Spain and the United Kingdom) and Japan. The externally sourced information 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 and assessment of numerous inputs and market conditions, including, but not limited to, the
projected increase in prevalence of MAC lung disease, Medicare patient population growth and ongoing population shifts to
geographies with increased rates of MAC lung disease. These understandings and assessments necessarily require assumptions
subject to significant judgment and may prove to be inaccurate. As a result, our estimates of the size of these potential markets
for ARIKAYCE could prove to be overstated, perhaps materially.
In addition, we are relying on third-party data to identify the physicians who treat the majority of MAC lung disease
patients in the US and to determine how to deploy our resources to market to those physicians; however, we may not be
marketing to the appropriate physicians and may therefore be limiting our market opportunity.
We may develop estimates with respect to market opportunities for product candidates in the future, and such
estimates would be subject to similar risks. In addition, a potential market opportunity could be reduced if a regulator limits the
proposed treatment population for one of our product candidates, similar to the limited population for which ARIKAYCE was
approved. In either circumstance, even if we obtain regulatory approval, we may be unable to commercialize the product on a
scale sufficient to generate significant revenue from such product candidates, which could have a material adverse effect on our
business, financial condition, results of operations and prospects and the value of our common stock.
We currently are building our global marketing and sales organization, and we have limited experience in marketing drug
products. If we are unable to successfully market and sell ARIKAYCE, our ability to generate revenue will be adversely
affected.
In order to commercialize ARIKAYCE, we must develop marketing, market access, sales and distribution capabilities
on our own or make arrangements with third parties for its marketing, sale and distribution. We have commenced
commercialization of ARIKAYCE in the US using our sales force, but we may not continue to be successful in these efforts. If
ARIKAYCE receives marketing approval in Europe, we plan to expand our sales force to support those commercialization
efforts. The establishment, development and maintenance of our own sales force is and will continue to be expensive and time-
consuming. As a result, we may seek one or more partners to handle some or all of the sales and marketing of ARIKAYCE in
certain markets outside the US following approval by the relevant regulatory authority in those markets. However, we may not
be able to enter into arrangements with third parties to sell ARIKAYCE on favorable terms or at all. In the event that either our
own marketing, market access, and sales force or third-party marketing, market access, and sales organizations are not effective,
we would not be able to successfully commercialize ARIKAYCE, which would adversely affect our ability to generate revenue
and materially harm us.
ARIKAYCE was approved for treatment in a limited population of patients with refractory MAC lung disease, and additional
clinical studies and regulatory applications will be required to expand its indication. We may not be successful in these trials
or in obtaining such regulatory approval, which may materially adversely affect our prospects and the value of our common
stock.
The FDA granted accelerated approval of ARIKAYCE for the treatment of refractory MAC lung disease as part of a
combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. Our CONVERT
study and 312 study focused on this refractory population, and we do not anticipate obtaining an indication for a broader
population of patients with MAC lung disease or any other illnesses or infections without additional clinical data. Additional
clinical trials will require additional time and expense. We expect to conduct our confirmatory clinical trial for full approval of
ARIKAYCE in the broader population of patients with MAC lung disease, but this trial, along with any other clinical trials of
ARIKAYCE may not be successful. Additional results from ongoing and recently completed studies may affect the FDA’s
benefit-risk analysis for the product. If we are unable to expand the indication for use of ARIKAYCE, our prospects and the
value of our common stock may be materially adversely affected.
The reported results of our WILLOW study, which are discussed herein, consist of only top-line data from the study.
Top-line data are based on a preliminary analysis of currently available efficacy and safety data, and therefore these reported
results are subject to change following a comprehensive review of the more extensive data we expect to receive for patients in
the study. Top-line data are based on important assumptions, estimations, calculations and information available to us, and we
have not received all analytical outputs to evaluate all of the data from the WILLOW study. As a result, the top-line data results
may differ from the complete data, or different conclusions or considerations may qualify such top-line results, once the
complete data have been fully evaluated. If these top-line data differ from the results of the full data for the WILLOW study,
our ability to continue development of, and ultimately seek regulatory approval for, INS1007 may be harmed, which could
materially adversely affect our business, financial condition, results of operations and prospects and the value of our common
stock.
Pharmaceutical research and development is very costly and highly uncertain, and we may not succeed in developing
product candidates in the future.
Product development in the pharmaceutical industry is an expensive, high-risk, lengthy, complicated, resource
intensive process. In order to develop a product successfully, we must, among other things:
•
•
•
•
•
Identify potential product candidates;
Submit for and receive regulatory approval to perform clinical trials;
Design and conduct appropriate preclinical and clinical trials, including confirmatory clinical trials, 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 clinical trials;
Obtain and correctly interpret data establishing adequate safety of our product candidates and demonstrating with
statistical significance that our product candidates are effective for their proposed indications, as indicated by
satisfaction of pre-established endpoints;
Submit for and receive regulatory approvals for marketing; and
•
• Manufacture the product candidates and device components according to cGMP and other applicable standards and
regulations.
There is a high rate of failure inherent in this process, and potential products that appear promising at early stages of
development may fail for a number of reasons. Importantly, positive results from preclinical studies of a product candidate may
not be predictive of similar results in human clinical trials, and promising results from earlier clinical trials of a product
candidate may not be replicated in later clinical trials. Many companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in late-stage clinical trials even after achieving positive results in earlier stages of
development and have abandoned development efforts or sought partnerships in order to continue development.
In addition, there are many other difficulties and uncertainties inherent in pharmaceutical research and development
that could significantly delay or otherwise materially impair our ability to develop future product candidates, including the
following:
•
•
•
•
•
•
•
Conditions imposed by regulators, ethics committees or institutional review boards for preclinical testing and clinical
trials relating to the scope or design of our clinical trials, including selection of endpoints and number of required
patients or clinical sites;
Challenges in designing our clinical trials to support potential claims of superiority over current standard of care or
future competitive therapies;
Restrictions placed upon, or other difficulties with respect to, clinical trials and clinical trial sites, including with
respect to potential clinical holds or suspension or termination of clinical trials due to, among other things, potential
safety or ethical concerns or noncompliance with regulatory requirements;
Delayed or reduced enrollment in clinical trials, or high discontinuation rates;
Failure by third-party contractors, contract research organizations (CROs), clinical investigators, clinical laboratories,
or suppliers to comply with regulatory requirements or meet their contractual obligations in a timely manner;
Greater than anticipated cost of our clinical trials; and
Insufficient product supply or inadequate product quality.
Risks Related to the Development and Regulatory Approval of Our Product Candidates Generally
Failure to successfully develop future product candidates for any of these reasons may materially adversely affect our
31
32
business, financial condition, results of operations and prospects and the value of our common stock.
We may not be able to obtain regulatory approvals for ARIKAYCE outside of the US or for our product candidates in the
US, Europe, Japan or other markets. Any such failure to obtain regulatory approvals may materially adversely affect us.
We are required to obtain various regulatory approvals prior to studying our products in humans and then again before
we market and distribute our products, and the failure to obtain such approvals will prevent us from commercializing our
products, which would materially adversely affect our business, financial condition, results of operations and prospects and the
value of our common stock. While we have obtained accelerated approval for ARIKAYCE in the US, seeking approval for
ARIKAYCE in other jurisdictions as well as approval for our product candidates in the US and foreign markets presents
significant obstacles. Approval processes in the US, Europe and Japan require the submission of extensive preclinical and
clinical data, manufacturing and quality information regarding the process and facility, scientific data characterizing our product
and other supporting data in order to establish safety and effectiveness. These processes are complex, lengthy, expensive,
resource intensive and uncertain. Regulators will also conduct a rigorous review of any trade name we intend to use for our
products. Even after they approve a trade name, these regulators may request that we adopt an alternative name for the product
if adverse event reports indicate a potential for confusion with other trade names and medication error. If we are required to
adopt an alternative name, potential commercialization of ARIKAYCE or our product candidates could be delayed or
interrupted. We have limited experience in submitting and pursuing applications necessary to obtain these regulatory approvals.
Data submitted to regulators are subject to varying interpretations that could delay, limit or prevent regulatory agency
approval. Even if we believe our clinical trial results are promising, regulators may disagree with our interpretation of data,
study design or execution and may refuse to accept our application for review or decline to grant approval. For example, in the
fourth quarter of 2014, we filed a marketing authorization application (MAA) with the European Medicines Agency (EMA) for
ARIKAYCE as a treatment for, among other things, MAC lung disease in adult patients. The filing was based in part on data
from our Phase 2 study in patients with refractory MAC lung disease. We subsequently withdrew our MAA after the
Committee for Medicinal Products for Human Use concluded that the data submitted did not provide sufficient evidence to
support an approval.
In addition, the grant of a designation by the FDA or approval by the FDA does not ensure a similar decision by the
regulatory authorities of other countries, and a decision by one foreign regulatory authority does not ensure regulatory
authorities in other foreign countries or the FDA will agree with the decision. For instance, although ARIKAYCE received
orphan drug designation in the US, ARIKAYCE did not qualify for orphan drug designation in Japan due to the estimated
number of NTM patients in Japan exceeding 50,000. Similarly, clinical studies conducted in one country may not be accepted
by regulatory authorities in other countries. Approval procedures vary among countries and can involve additional product
testing, including additional preclinical studies or clinical trials, and administrative review periods. The time required to obtain
approval in these other territories might differ from that required to obtain FDA approval. We may never obtain approval for
ARIKAYCE outside of the US or for our product candidates in the US or other jurisdictions, which would limit our market
opportunities and materially adversely affect our business. Even if ARIKAYCE is approved outside of the US or if another
product candidate is approved, regulators may limit the indications for which the product may be marketed, require extensive
warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of
approval.
We routinely assess regulatory strategies which could expedite the development and regulatory review of our product
candidates in the US and other markets, but we may be unsuccessful in pursuing such strategies. The FDA has denied our
request for orphan drug designation for INS1007 in NCFBE. 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 on studies 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.
We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which
we develop a product and the period required for review of any application for regulatory agency approval of a particular
product. Resolving such delays could force us or third parties to incur significant costs, limit our allowed activities or the
allowed activities of third parties, diminish any competitive advantages that we or our third parties may attain or 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.
For ARIKAYCE to be commercialized in a given market, in addition to regulatory approvals required for ARIKAYCE, the
Lamira Nebulizer System must satisfy certain regulatory requirements and its use as a delivery system for ARIKAYCE must
be approved or cleared by regulators.
ARIKAYCE is administered using the Lamira Nebulizer System, and the Lamira Nebulizer System must receive
regulatory approval or clearance on its own or in conjunction with ARIKAYCE as a combination product in order for us to
develop and commercialize ARIKAYCE in a given market. The FDA granted accelerated approval of the Lamira Nebulizer
System with ARIKAYCE as part of the approval of the drug/device combination product, and the Lamira Nebulizer System is
CE marked by PARI in the EU. However, outside the US and EU, the Lamira Nebulizer System is labeled as investigational for
use in our clinical trials, including in Japan, Canada and Australia, and is not approved for commercial use in Japan, Canada or
certain other markets in which we may seek to commercialize ARIKAYCE in the future.
If we seek regulatory approval in markets in which the Lamira Nebulizer System is not approved and we and PARI are
not successful in obtaining approval for the Lamira Nebulizer System, our ability to commercialize ARIKAYCE in those
markets would be materially impaired. In addition, failure to maintain regulatory approval or clearance of the Lamira Nebulizer
System could result in increased development costs, withdrawal of regulatory approval, and delays in ARIKAYCE reaching the
market. Failure to obtain or maintain regulatory approval or clearance of the Lamira Nebulizer System could result in potential
loss of regulatory approval or otherwise materially harm our business.
We have limited experience conducting and managing the preclinical development activities and clinical trials necessary to
obtain regulatory approvals, and we may not succeed in doing so in the future.
ARIKAYCE is our first approved product candidate since our merger with Transave, Inc. (Transave), and we have
limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain
regulatory approvals, including approval by the FDA, EMA, Ministry of Health, Labour and Welfare (MHLW), and
Pharmaceuticals and Medical Devices Agency (PMDA), which might prevent us from successfully designing, implementing, or
completing the clinical trials required to support regulatory approval 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 might not be able to demonstrate that our product candidates meet the relevant standards for regulatory approval or
commercialize our product candidates in the US or elsewhere, or commercialize ARIKAYCE in jurisdictions outside of the US,
or we might be significantly delayed in doing so. In such circumstances, our business, financial condition, results of operations
and prospects and the value of our common stock may be materially adversely affected.
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, we may experience delays, incur additional costs and ultimately be unable to commercialize our
product candidates in the US, Europe, Japan or other markets.
Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense,
extensive preclinical tests to demonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the
safety and efficacy of our product candidates in humans. If we experience delays in our clinical trials or other testing or the
results of these trials or tests are not positive or are only modestly positive, including with respect to safety, we may:
•
•
•
•
•
•
•
•
•
•
Experience increased product development costs;
Be delayed in obtaining, or be unable to obtain, regulatory approval for one or more of our product candidates;
Obtain approval for indications or patient populations that are not as broad as intended or entirely different than those
indications for which we sought approval or with labeling with boxed warnings or other warnings or contraindications;
Need to change the way the product is administered;
Be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing
requirements;
Have regulatory authorities withdraw, or suspend, their approval of the product or impose risk mitigation strategies
such as restrictions on distribution or other REMS;
Face a shortened patent protection period during which we may have the exclusive right to commercialize our
products;
Have competitors that are able to bring similar products to market before us;
Be sued for alleged injuries caused to patients using our products; or
Suffer reputational damage.
Such circumstances would impair our ability to commercialize our products and harm our business and results of
operations.
We may not be able to enroll enough patients to conduct and complete our clinical trials or retain a sufficient number of
patients in our clinical trials to generate the data necessary for regulatory approval of our product candidates.
33
34
The completion rate of our clinical trials is dependent on, among other factors, the patient enrollment rate. Patient
enrollment is a function of many factors, including:
as a basis for approval. A finding by the FDA that a financial relationship of an investigator raises serious questions of data
integrity could delay or otherwise adversely affect approval of our products.
•
•
•
•
•
•
•
•
•
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 trial;
Patient willingness to participate in the trial;
Discontinuation rates; and
Competition from other companies’ potential clinical trials for the same patient population.
Delays in patient enrollment for our clinical trials, including in the confirmatory clinical trial for ARIKAYCE, like
those we encountered in enrolling the CONVERT study, could increase costs and delay commercialization and sales, if any, of
our products. Once enrolled, patients may elect to discontinue participation in a clinical trial at any time. If patients elect to
discontinue participation in our clinical trials at a higher rate than expected, we may be unable to generate the data required by
regulators for approval of our product candidates.
Risks Related to Our Reliance on Third Parties
We rely on third parties including collaborators, CROs, clinical and analytical laboratories, contract manufacturing
organizations (CMOs) and other providers for many services that are critical to 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 may be materially adversely affected.
We currently rely, and expect to continue to rely, on third parties for significant research, analytical services,
preclinical development, clinical development and manufacturing of our product candidates and commercial scale
manufacturing of ARIKAYCE and the Lamira Nebulizer System. For example, we do not own facilities for clinical-scale or
commercial manufacturing of our product candidates. We currently rely on Therapure Biopharma Inc. (Therapure) and
Ajinimoto Althea, Inc. (Althea) to provide our clinical and commercial supply of ARIKAYCE, and intend to rely on Patheon in
the future. Additionally, almost all of our clinical trial work is done by CROs, such as SynteractHCR, 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:
•
•
•
•
•
•
•
The diversion of management time and cost of third-party advisers associated with the negotiation, documentation and
implementation of agreements with third parties in the pharmaceutical industry;
The inability to control whether third parties devote sufficient resources to our programs or products, including with
respect to meeting contractual deadlines;
The inability to control the regulatory and contractual compliance of third parties, including their quality systems,
processes and procedures, systems utilized to collect and analyze data, and equipment used to test drug product and/or
clinical supplies;
The inability to establish and implement collaborations or other alternative arrangements on favorable terms;
Disputes with third parties, including CROs, leading to loss of intellectual property rights, delay or termination of
research, development, or commercialization of product candidates or litigation or arbitration;
Contracts with our collaborators fail to provide sufficient protection of our intellectual property; and
Difficulty enforcing our contractual rights 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 our product candidates, and the failure of these third parties to appropriately carry out such evaluation and
selection can adversely affect the quality of the data from these studies and, potentially, the approval of our products. In
particular, as part of future drug approval submissions to the FDA, we must disclose certain financial interests of investigators
who participated in any of the clinical studies being submitted in support of approval, or must certify to the absence of such
financial interests. The FDA evaluates the information contained in such disclosures to determine whether disclosed interests
may have an impact on the reliability of a study. If the FDA determines that financial interests of any clinical investigator raise
serious questions of data integrity, the FDA can 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
These 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 ARIKAYCE, the Lamira Nebulizer System or our
product candidates to meet our required supply for commercialization or clinical studies, 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 a small number of third-party manufacturers and suppliers for the manufacture of our product
candidates on a clinical or commercial scale. For instance, we are and expect to remain dependent upon Therapure, Althea and
eventually Patheon to supply ARIKAYCE both for our clinical trials and commercial sale. Althea manufactures ARIKAYCE at
a relatively small scale; Therapure, operates at a larger scale than Althea. We may not be able to maintain adequate quantities to
meet future demand. As additional supporting data become available, we believe the current approved shelf life for product
manufactured at our CMOs will increase. If we encounter delays or difficulties in the manufacturing process that disrupt our
ability to supply our distributors with ARIKAYCE, we may experience a product stock-out, which would likely have a material
adverse effect on our business and reputation. In addition, we have entered into certain agreements with Patheon related to
increasing our long-term production capacity for ARIKAYCE commercial inventory, although Patheon’s supply obligations
will commence only after certain technology transfer and construction services are completed. Any delay in the commencement
of Patheon’s supply obligations, whether due to delays in technology transfer and construction or from adding Patheon to our
NDA as a CMO, would increase the risks associated with either Therapure or Althea being unable to provide us with an
adequate supply of ARIKAYCE.
We are also dependent upon PARI being able to provide an adequate supply of nebulizers both for commercial sale of
ARIKAYCE and any ongoing clinical trials, as PARI is the sole manufacturer of the Lamira Nebulizer System. We have no
alternative supplier for the nebulizer, and because significant effort and time were expended in the optimization of the nebulizer
for use with ARIKAYCE, we do not intend to seek an alternative or secondary supplier. In the event PARI cannot provide us
with sufficient quantities of the nebulizer, replication of the optimized device by another party would likely require
considerable time and additional regulatory approval. In the case of certain specified supply failures, we have the right under
our commercialization agreement with PARI to make the nebulizer and have it made by certain third parties, but not those
deemed under the commercialization agreement to compete 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 any reason, we may not be able to locate suppliers or enter into favorable agreements with them.
An inadequate supply of ARIKAYCE or the Lamira Nebulizer System would likely harm our commercial efforts or
delay or impair clinical trials of ARIKAYCE or our product candidates and adversely affect our business, financial condition,
results of operations and prospects and the value of our common stock.
The manufacturing facilities of our third-party manufacturers are subject to significant government regulations and
approvals, which are often costly and could 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 ARIKAYCE, the Lamira Nebulizer System and our product candidates are subject to cGMP, Quality
System Regulations and similar standards. While we have policies and procedures in place to select third-party manufacturers
for our product and product candidates that adhere, and monitor their adherence to, such standards, they may nonetheless fail to
do so. Similarly, while we have entered into a Commercialization Agreement with PARI for the manufacture of the Lamira
Nebulizer System for use with ARIKAYCE, PARI may fail to adhere to applicable standards. These manufacturers and their
facilities will be subject to periodic review and inspections by the FDA and other regulatory authorities following regulatory
approval of our products, as with ARIKAYCE. For instance, to monitor compliance with applicable regulations, the FDA
routinely conducts inspections of facilities and may identify potential deficiencies. The FDA issues what are referred to as
“Form 483s” that set forth observations and concerns identified during its inspections. Failure to satisfactorily address the
concerns or potential deficiencies identified in a Form 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 requiring prompt corrective actions. Failure to respond
adequately to a warning letter, or to otherwise fail to comply with applicable regulatory requirements could result in
enforcement, remedial and/or punitive actions by the FDA or other regulatory authorities.
35
36
If one of these manufacturers fails to maintain compliance with regulatory requirements or experiences supply
problems, including in the scale-up of commercial production, the production of ARIKAYCE, the Lamira Nebulizer System
and our product candidates could be interrupted, resulting in delays, additional costs or restrictions on the marketing or sale of
our products. An alternative manufacturer would need to be qualified, through regulatory filings, which could result in further
delay. The regulatory authorities may also require additional testing if a new manufacturer is relied upon for commercial
production. In addition, with respect to our product candidates, our manufacturers and their facilities are subject to pre-
approval cGMP inspection 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 for future product candidates.
Risks Related to the Operation of our Business
We are dependent upon retaining and attracting key personnel, the loss of whose services could materially adversely affect
our business, financial condition, 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 significantly delay or prevent the achievement of our research, development or commercialization objectives.
Our success depends, in large part, on our ability to attract and retain qualified management, clinical and commercial personnel,
and on our ability to develop and maintain important relationships with commercial partners, leading research institutions and
key distributors.
conflict with our collaborators could limit our ability to obtain future collaboration agreements and negatively influence our
relationship with existing collaborators.
If we make one or more significant acquisitions or enter into a significant collaboration in which the consideration
includes cash, we may be required to use a substantial portion of our available cash and/or need to raise additional capital,
which could adversely affect our financial condition.
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,
particularly as we now commercialize ARIKAYCE in the US. Regardless of merit or eventual outcome, liability claims may
result in:
•
Decreased demand for ARIKAYCE and any other products that we may commercialize, and a corresponding loss of
revenue
Substantial monetary awards to patients or trial participants;
Significant time and costs to defend the related litigation;
•
•
• Withdrawal or reduced enrollment of clinical trial participants; and
•
Reputational harm and significant negative media attention.
Competition for skilled personnel in our industry and market is intense because of the numerous pharmaceutical and
We currently have only limited product liability insurance for our products. We do not know if we will be able to
biotechnology companies that seek similar personnel. These companies may have greater financial and other resources, offer a
greater opportunity for career advancement and have a longer history in the industry than we do. We also experience
competition for the hiring of our clinical and commercial personnel from universities, research institutions, and other third
parties. We cannot assure that we will attract and retain such persons or maintain such relationships. Our inability to retain and
attract qualified employees would materially harm our business, financial condition, results of operations and prospects and the
value of our common stock.
maintain existing, or obtain additional, product liability insurance on acceptable terms or with adequate coverage against
potential liabilities. This type of insurance is expensive and may not be available on acceptable terms. If we are unable to obtain
or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability 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 prospects and the value of our common stock.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter
difficulties in managing our growth, which could disrupt our operations.
In connection with our commercialization of ARIKAYCE in the US and international expansion efforts, we expect to
experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug
development, regulatory affairs, quality, commercial compliance, medical affairs, and sales and marketing. For example, we
plan to hire additional personnel to support our commercialization of ARIKAYCE and preparation for potential regulatory
filings for ARIKAYCE in other markets. To manage our anticipated future growth, we must continue to implement and
improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional
qualified personnel. Due to the limited experience of our management team in managing a company with this anticipated
growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified
personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business
development resources. We may not be able to effectively manage the expansion of our operations, which could delay the
execution of our business plans or disrupt our operations.
Any acquisitions we make, or collaborative relationships we enter into, may not be clinically or commercially successful, and
may require financing or a significant amount of our available cash, which could adversely affect our business.
As part of our business strategy, we may effect acquisitions to obtain additional businesses, products, technologies,
capabilities and personnel. Acquisitions involve a number of operational risks, including:
•
•
•
•
•
•
•
Failure to achieve expected synergies;
Difficulty and expense of assimilating the operations, technology and personnel of any acquired business;
The inability to retain the management, key personnel and other employees of any acquired business;
The inability to maintain any acquired company’s relationship with key third parties, such as alliance partners;
Exposure to legal claims or other liabilities for activities of any acquired business prior to acquisition;
Diversion of our management’s attention from our core business; and
Potential impairment of intangible assets, 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. Disagreements with collaborators may develop over the rights to our intellectual property, and any
Our business and operations, including our drug development programs, could be materially disrupted in the event of system
failures, security breaches, violations of data protection laws or data loss or damage by us or our CROs or other contractors
or consultants.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our
proprietary business information and that of our suppliers, as well as personally identifiable information of clinical trial
participants and employees. Despite the implementation of security measures, our internal computer systems and those of our
CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. Such an event could have a material adverse effect on
our business operations, including a material disruption of our drug development and commercialization programs.
Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information,
whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or
unauthorized access to or through our information systems and networks, whether by our employees or third parties, could
result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable
information could also expose us to sanctions for violations of data privacy laws and regulations around the world. In addition,
the loss of clinical trial data for our product candidates could result in delays in our regulatory submission and approval efforts
and significantly increase our costs to recover or reproduce the data, if possible. To the extent that any disruption or security
breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary
information, we could incur liability and the further development of our product candidates could be delayed. For example, the
loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates
could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.
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 as to any 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 our insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our
business, financial condition, results of operations and prospects and the value of our common stock.
We have limited experience operating internationally, are subject to a number of risks associated with our international
activities and operations and may not be successful in our efforts to expand internationally.
37
38
We currently have limited operations outside of the US. As of December 31, 2019, we had 47 employees located in
There are also other amikacin products that have been approved by the FDA, MHLW and other regulatory agencies for
Europe and 15 employees located in Japan, although we have clinical trial sites and suppliers located around the world. In order
to meet our long-term goals, we expect to grow our international operations over the next several years, including in Europe and
Japan, and continue to source material used in the manufacture of our product candidates from abroad. Consequently, we are
and will continue to be subject to risks related to operating in foreign countries, including:
•
•
•
•
•
•
•
Limited experience with international regulatory requirements;
An inability to achieve optimal pricing and reimbursement for ARIKAYCE, if approved in another jurisdiction, or
subsequent changes in reimbursement, pricing and other regulatory requirements;
Any implementation of, or changes to, tariffs, trade barriers and other import-export regulations in the US or other
countries in which we, or our third-party partners, operate;
Unexpected adverse events related to ARIKAYCE or our 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, which could result in reduced revenue, increased or unpredictable operating expenses and
other obligations incident to doing business in, or with a company located in, another country;
Changes resulting from the UK's exit from the EU, including: (i) the uncertainty and instability in economic and
market conditions; (ii) the uncertainty regarding the UK’s access to the EU Single Market and the impact on the wider
trading, legal, regulatory and labor environments; and (iii) the uncertainty in the European regulatory framework,
including the relocation of the EMA from the UK to the Netherlands, and the subsequent potential disruption and delay
of EMA regulatory actions and, following the transition period, UK regulatory actions; and
Compliance with foreign or US laws, rules and regulations, including data privacy requirements, labor relations laws,
tax laws, anti-competition regulations, import, export and trade restrictions, anti-bribery/anti-corruption laws,
regulations or rules, which could lead to actions by us or our distributors, manufacturers, other third parties who act on
our behalf or with whom we do business in foreign countries or our employees 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 of operations and prospects and the value of our common stock.
We operate in a highly competitive and changing environment, and if we are unable to adapt to our environment, we may be
unable to compete successfully.
Biotechnology and related pharmaceutical technology have undergone and are likely to continue to experience rapid
and significant change. Our future success will depend in large part on our ability to maintain a competitive position with
respect to these technologies and to obtain and maintain protection for our intellectual property. Compounds, products or
processes that we develop may become obsolete before we recover any expenses incurred in connection with their
development. We face substantial competition from pharmaceutical, biotechnology and other companies, universities and
research institutions with respect to NTM lung disease, bronchiectasis, and pulmonary arterial hypertension (PAH). Relative to
us, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience
in conducting clinical studies, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products.
Many of our 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 develop products similar to ARIKAYCE and our product candidates.
We expect that competing successfully will depend, among other things, on the relative speed with which we can
develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the
product to the market, as well as product efficacy, safety, reliability, availability, timing and scope of regulatory approval and
price. We expect competition to increase as technological advances are made and commercial applications broaden. There are
potential competitive products, both approved and in development, which include oral, systemic, or inhaled antibiotic products
to treat chronic respiratory infections. For instance, certain entities have expressed interest in studying their products for lung
disease and are seeking to advance studies in lung disease, including NTM lung disease caused by mycobacterial species other
than MAC. We are not aware of any entities currently conducting clinical trials for the treatment of refractory MAC lung
disease or of any other approved inhaled therapies specifically indicated for NTM lung disease in North America, Europe or
Japan. If any of our competitors develops a product that is more effective, safe, tolerable or, convenient or less expensive than
ARIKAYCE or our product candidates, it would likely materially adversely affect our ability to generate revenue. We also may
face lower priced generic competitors if third-party payors encourage use of generic or lower-priced versions of our product or
if competing products are imported into the US or other countries where we may sell ARIKAYCE. In addition, in an effort to
put downward pressure on drug pricing, Congress and the FDA are working to facilitate generic competition, which could result
in our experiencing competition earlier than otherwise would be the case.
use in other indications, and physicians may elect to prescribe those products rather than ARIKAYCE to treat the indications
for which ARIKAYCE has received approval, which is commonly referred to as off-label use. Although regulations prohibit a
drug company from promoting off-label use of its product, the FDA and other regulatory agencies do not regulate the practice
of medicine and cannot direct physicians as to what product to prescribe to their patients. As a result, we would 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 agency approval, even if this use violates our patents or any statutory exclusivities that the FDA may grant for the
use of amikacin to treat such diseases. If we are unable to compete successfully, it will materially adversely affect our business,
financial condition, results of operations and prospects and the value of our common stock.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights adequately, the value of ARIKAYCE and our product candidates
could be materially diminished.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves
complex legal, technical, scientific and factual questions, and our success depends in large part on our ability to protect our
proprietary technology and to obtain and maintain patent protection for our products, prevent third parties from infringing our
patents, both domestically and internationally. We have sought to protect our proprietary position by filing patent applications
in the US and abroad related to our novel technologies and products that are important to our business. This process is
expensive and 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. It is 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. Our existing patents and any future patents we obtain may
not be sufficiently broad to prevent others from using our technologies or from developing competing products 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 meaningful protection or otherwise provide us with any competitive advantage. Any conclusions we may reach
regarding non-infringement, inapplicability or invalidity of a third-party’s intellectual property vis-à-vis our proprietary rights,
or those of a licensor, are based in significant part on a review of publicly available databases and other information. There may
be information not available to us or otherwise not reviewed by us that could render these conclusions inaccurate. Our
competitors may also be able to circumvent our owned or licensed patents by developing similar or alternative 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 through litigation, which could limit our ability to stop competitors from marketing similar products or reduce
the term of patent protection for amikacin liposome inhalation suspension or our product candidates. US patents and patent
applications may also be subject to interference or derivation proceedings, and US patents may be subject to re-examination
proceedings, reissue, post-grant review and/or inter partes review in the USPTO. Our foreign patents have been and may be in
the future subject to opposition or comparable proceedings in the corresponding 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 one or more of the claims of the
patent or patent application. See Intellectual Property-ARIKAYCE Patents and Trade Secrets in Item 1 of Part I of this Annual
Report on Form 10-K for more information on our European patents that have been previously opposed.
Changes in either patent laws or in interpretations of patent laws in the US and other countries may also diminish the
value of our intellectual property or narrow the scope of our patent protection, including making it easier for competitors to
challenge our patents. For example, the America Invents Act included a number of changes to established practices, including
the transition to a first-inventor-to-file system and new procedures for challenging patents and implementation of different
methods for invalidating patents.
If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of
ARIKAYCE and our product candidates could be materially 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, and other third parties and partners to protect our trade secrets and other
proprietary information. These agreements may not effectively prevent disclosure of confidential information or may not
provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, third parties may
independently develop or discover our trade secrets and proprietary information. Regulators also may disclose information we
39
40
consider to be proprietary to third parties under certain circumstances, including in response to third-party requests for such
disclosure under the Freedom of Information Act or comparable laws. Additionally, the FDA, as part of its Transparency
Initiative, continues to consider whether to make additional information publicly available 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 present time
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, which could harm our business.
The legal systems of some foreign countries, particularly developing countries, do not favor the enforcement of patents
and other intellectual property protection, especially those relating to life sciences. Many companies have encountered
significant problems in protecting and defending intellectual property rights in such foreign jurisdictions. For example, certain
foreign countries have compulsory licensing laws under which a patent owner may be required to grant licenses to third parties.
In addition, many countries limit the enforceability of patents against third parties, including government agencies or
government contractors. In these countries, patents may provide limited or no benefit. This legal environment could make it
difficult for us to stop the infringement of our patents or in-licensed patents or the misappropriation of our other intellectual
property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our
efforts and attention from other aspects of our business, and our efforts to protect our intellectual property rights in such
countries may be inadequate.
The drug research and development industry has a history of intellectual property litigation, and we could become involved
in costly intellectual property disputes, which could delay or impair our product development efforts or prevent us from, or
increase the cost of, commercializing ARIKAYCE or any other approved product candidate.
Third parties may claim that we have infringed upon or misappropriated their proprietary rights. Any existing third-
party patents, or patents that may later issue to third parties, could negatively affect our commercialization of ARIKAYCE,
INS1007, INS1009 or any other product candidate that receives regulatory approval. For instance, PAH is a competitive
indication with established products, including other formulations of treprostinil. Our supply of the active pharmaceutical
ingredient for INS1009 is dependent upon a single supplier. The supplier owns patents on its manufacturing process, and we
have filed patent applications for INS1009; however, a competitor in the PAH indication may claim that we or our supplier
have infringed upon or misappropriated its proprietary rights. Moreover, in the event that we 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 any
unexpired 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 to litigation and could also delay launch of a product candidate, if approved by regulators.
In the event of successful litigation or settlement of claims against us for infringement or misappropriation of a third-
party’s proprietary rights, as in 2007 with respect to IPLEX, we may be required to take actions including but not limited to the
following:
•
•
•
•
Paying damages, including up to treble damages, royalties, and the other party’s attorneys’ fees, which may be
substantial;
Ceasing development, manufacture, marketing and sale of products or use of processes that infringe the proprietary
rights of others;
Expending significant resources to redesign our products or our processes so that they do not infringe the proprietary
rights of others, which may not be possible, or may result in significant regulatory delays associated with conducting
additional clinical trials or other steps to obtain regulatory approval; and/or
Acquiring one or more licenses from third parties, which may not be available to us on acceptable 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 or defend the validity of any patents issued 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 a third-party’s intellectual property rights.
Any proceedings regarding our intellectual property rights are likely to be time consuming and may divert management
attention from operation of our business, and could have a material adverse effect on our business, financial condition, results of
operations and prospects and the value of our common stock.
Certain of the agreements to which we are, or may become, a party relating to ARIKAYCE and our product candidates
impose, or may in the future impose, restrictions on our business or other material obligations on us. If we fail to comply
with these obligations, our business could be adversely affected, including as a result of the loss of license rights that are
important to our business.
We are a party to various agreements related to ARIKAYCE and our product candidates, including licensing
agreements with PARI and AstraZeneca, which we view as material to our business. For additional information regarding the
terms of these agreements, see Business-License and Other Agreements in Item 1 of Part I of this Annual Report on Form 10-K.
These agreements impose a number of obligations on us and our business, including restrictions on our ability to freely develop
or commercialize our product candidates and requirements to make milestone and royalty payments to our counterparties upon
certain events. Under our license agreement with AstraZeneca, AstraZeneca retains a right of first negotiation pursuant to which
it may exclusively negotiate with us before we can negotiate with a third-party regarding any transaction to develop or
commercialize INS1007, subject to certain exceptions. While this right of first negotiation is not triggered by a change of
control, it may impede or delay our ability to consummate certain other transactions involving INS1007.
If we fail to comply with our obligations under these agreements, our counterparties may have the right to take action
against us, up to and including termination of a relevant license. For instance, under our licensing agreement with PARI, with
respect to NTM lung disease and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve
certain developmental and regulatory milestones by set deadlines. Additionally, for NTM lung disease, we are obligated to use
commercially reasonable efforts to achieve certain commercial milestones in Europe. The consequences of our failing to use
commercially reasonable efforts to achieve certain commercial 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 the applicable
indication. Similarly, under our license agreement with AstraZeneca, AstraZeneca may terminate our license to INS1007 if we
fail to use commercially reasonable efforts to develop and commercialize a product based on INS1007, or we are subject to a
bankruptcy or insolvency. Reduction or elimination of our licensed rights may result in our having to negotiate new or
reinstated licenses with less favorable terms and may materially harm our business.
Finally, if we do not proceed with the development of our ARIKAYCE program in the NTM lung disease or CF
indications, certain of our contract counterparties may elect to proceed with the development of these indications.
Risks Related to Government Regulation
Government healthcare reform could materially increase our costs, which could materially adversely affect our business,
financial condition, results of operations and prospects 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 and pricing more difficult or subject to different criteria and standards may adversely impact our
business, operations or financial results.
The Administration and the majority party in the Senate have indicated their ongoing desire to repeal the ACA and, in
December 2017, Congress repealed the ACA's individual mandate, i.e., the penalty imposed on individuals who do not obtain
healthcare coverage. It is unclear what the effect of this partial repeal will be and whether, when and how repeal of other
sections of the law may be effectuated and what the effect on the healthcare sector will be. In December 2018, a federal district
court judge in Texas found the ACA to be unconstitutional, although the ruling was stayed while the case is appealed. In
December 2019, the US Court of Appeals for the Fifth Circuit found the individual mandate to be unconstitutional and
remanded the case to the district court to determine whether the individual mandate provision is severable from the rest of the
law. The district court’s ruling remains stayed pending appeal. It is unclear what the outcome of this litigation and other
pending challenges to the ACA's constitutionality, as well as the effect of these matters on the healthcare sector, will be. The
US President has indicated an interest in taking steps to lower drug prices, such as having the federal government negotiate
drug prices with pharmaceutical manufacturers and/or in indexing certain federally reimbursement payments to international
drug prices. See Reimbursement of Pharmaceutical Products in Item 1 of Part I of this Annual Report on Form 10-K for more
information. Changes to the ACA, to the Medicare or Medicaid programs, or to the ability of the federal government to
negotiate or otherwise affect drug prices, or other federal legislation regarding healthcare access, financing or legislation in
individual states, could affect our business, financial condition, results of operations and prospects and the value of our
common stock. It remains unclear how any new legislation or regulation might affect the prices we may obtain for ARIKAYCE
or any of our product candidates for which regulatory approval is obtained.
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 in federal or state healthcare programs, which may adversely affect our business, financial
condition, results of operations and prospects and the value of our common stock.
In the US, we are subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws,
false claims laws and other laws intended to reduce fraud and abuse in federal and state healthcare programs. Although we seek
to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is
41
42
often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our
practices may be challenged under these laws. Violations of fraud and abuse laws may be punishable by criminal and/or civil
sanctions, including fines or exclusion or suspension from federal and state healthcare programs such as Medicare and
Medicaid and debarment from contracting with the US government, and our business, financial condition, results of operations
and prospects and the value of our common stock may be adversely affected. Our reputation could also suffer. In addition,
private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as
under the false claims laws of several states.
Under the ACA, we are required to report information on payments or transfers of value to US physicians and teaching
hospitals, which is posted in searchable form on a public website. Failure to submit required information may result in civil
monetary penalties.
Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or
price disclosures to the state. In addition to the federal government, some states, as well as other countries, including France,
require the disclosure of certain payments to healthcare professionals. The federal privacy regulations under HIPAA, state, and
foreign medical record privacy laws may limit access to information identifying those individuals who may be prospective
users. There are ambiguities as to what is required to comply with these requirements, and we could be subject to penalties if it
is determined that we have failed to comply with an applicable legal requirement.
We are subject to anti-corruption laws and trade control laws, as well as other laws governing our operations. If we fail to
comply with these laws, we could be subject to negative publicity, civil or criminal penalties, other remedial measures, and
legal expenses, which could adversely affect our business, financial condition, results of operations and prospects and the
value of our common 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 our intermediaries from making prohibited payments to government
officials or other persons to obtain or retain business or gain some other business advantage. We conducted the 312 study and
the WILLOW study, our global Phase 2 study of INS1007 in NCFBE, at a broad range of trial sites around the world. Certain of
these jurisdictions pose a risk of potential FCPA violations, and we have relationships with third parties whose actions could
potentially subject us to liability under the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope
or effect of future regulatory requirements to which our international operations might be subject or the manner 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 Department of 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 and transfer 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 criminal and 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 of potential
violations of the FCPA other anti-corruption laws or Trade Control laws could have an adverse impact on our reputation,
business, financial condition, results of operations and prospects and the value of our common 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, we may be precluded or delayed from commercializing the product in that indication.
Under the ODA, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition. The
company that obtains the first regulatory approval from the FDA for a designated orphan drug for a rare disease generally
receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. Similar laws exist in
the EU with a term of 10 years. See Business-Government Regulation-Orphan Drug Designation in Item 1 of Part I of this
Annual Report on Form 10-K for additional information. If a competitor obtains approval of the same drug for the same
indication or disease 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 during our orphan exclusivity period for the same
indication under certain circumstances.
Our research, development and manufacturing activities used in the production of ARIKAYCE and our product candidates
involve the use of hazardous materials, which could expose us to damages, 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 the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research
and development program and manufacturing activities for ARIKAYCE and our product candidates involve the controlled use
of hazardous materials and chemicals. We generally contract with third parties for the disposal of these materials and wastes.
Although we strive to comply with all pertinent regulations, the risk of environmental contamination, damage to facilities or
injury to personnel from the accidental or improper use or control of these materials remains. In addition to any liability we
could 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 could incur significant costs as a result of civil or criminal fines and
penalties.
In addition, we may incur substantial costs to comply with current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Risks Related to Our Financial Condition and Need for Additional Capital
We have a history of operating losses, expect to incur operating losses for the foreseeable future and 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 to Merck & Co, Inc. As of December 31, 2019, our accumulated deficit was $1.5 billion. For the years
ended December 31, 2019, 2018 and 2017, our consolidated net loss was $254.3 million, $324.3 million and $192.6 million,
respectively. Our ability to generate revenue will depend on the success of commercial sales of ARIKAYCE; however, we do
not anticipate our revenue from the sale of ARIKAYCE will be sufficient for us to become profitable without reductions in our
operating expenses. Despite our commercialization of ARIKAYCE in the US, we expect to continue to incur substantial
operating expenses, and resulting operating losses, for the foreseeable future as we:
•
•
•
•
•
•
Initiate or continue clinical studies of our product candidates;
Initiate a post-marketing clinical trial of ARIKAYCE, as required by the FDA;
Seek to discover or in-license additional product candidates
Seek regulatory approvals for ARIKAYCE in foreign markets
Scale-up manufacturing capabilities for future ARIKAYCE production, including the increase of production capacity
at Patheon and process improvements in order to manufacture at a larger commercial scale; and
Enhance operational, compliance, financial, quality and information management systems and hire more personnel,
including personnel to support our commercialization efforts and development of our product candidates.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis.
We may need to raise additional funds 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 expend substantial
financial resources to commercialize ARIKAYCE, including expenditures on product sales, marketing, manufacturing and
distribution, fund the confirmatory post-marketing study for ARIKAYCE and continue research and development of and, where
applicable, seek regulatory approval for ARIKAYCE and our product candidates. We may need to raise additional capital to
fund these activities, including due to changes in our product development plans or misjudgment of expected costs, to fund
corporate development, to maintain our intellectual property portfolio or for other purposes, including to resolve litigation. As
of December 31, 2019, we had $487.4 million of cash and cash equivalents on hand. Our operating expenses, capital
expenditures and long-term investments were significantly higher in 2019 than in 2018, reflecting our investment in the build-
out of our commercial organization to support global expansion activities for ARIKAYCE, including the launch of
ARIKAYCE in the US in the fourth quarter of 2018, the build-up of third-party manufacturing capacity and manufacture of
commercial inventory, which includes capital and long-term investments, and continued investment in research and
development as well as selling, general and administrative expenses. We do not know whether additional financing will be
43
44
available when needed, or, if available, whether the terms will be favorable. If adequate funds are not available to us when
needed, we may be forced to delay, restrict or eliminate all or a portion of our development programs or commercialization
efforts.
We have outstanding indebtedness in the form of convertible senior notes, and may incur additional indebtedness in the
future, which could adversely affect our financial position, prevent us from implementing our strategy, 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). The Convertible Notes may be convertible into common stock at an initial conversion rate of 25.5384
shares of common stock per $1,000 principal amount of Convertible Notes. We sold $450.0 million aggregate principal amount
of the Convertible Notes, including the exercise in full of the underwriters’ option to purchase additional Convertible Notes,
resulting in net proceeds of approximately $435.8 million. Holders of the Convertible Notes may convert their Convertible
Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2024
only under certain circumstances. On or after October 15, 2024 until the close of business on the second scheduled trading day
immediately preceding the maturity date, holders may convert their Convertible Notes at any time. Upon conversion of the
Convertible Notes, we may deliver cash, 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 have negative 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 changing economic 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 the Convertible Notes when they or any additional indebtedness become due; and
• We may elect to make cash payments upon conversion of the Convertible Notes, which would reduce our available
cash.
Our ability to pay principal or interest on or, if desired, to refinance our indebtedness, including the Convertible Notes,
depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are
beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy any obligations
under the Convertible Notes to make cash payments 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 to delay, restrict or eliminate all or a portion of our
development programs or commercialization efforts or refinance or obtain additional equity capital on terms that may be
onerous or highly dilutive. If we do not meet our debt obligations, it could materially adversely affect our results of operations,
financial condition and the value of our common stock.
The conversion of some or all of the Convertible Notes will dilute the ownership interests of our existing shareholders
to the extent we deliver shares upon their conversion. Any sales in the public market of the common stock issuable upon such
conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible
Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to
satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the
price of our common stock.
The accounting method for the Convertible Notes may have an adverse effect on our reported financial results.
Accounting guidance requires that we separately account for the liability and equity components of the Convertible
Notes because they may be settled entirely or partially in cash upon conversion in a manner that reflects our economic interest
cost. As a result, the equity component of the Convertible Notes is required to be included in the additional paid-in capital
section of shareholders’ equity on our consolidated balance sheet, and the value of the equity component is treated as original
issue discount for purposes of accounting for the debt component of the Convertible Notes. We may report greater net loss (or
lower net income) in our financial results because this guidance requires interest to include both the current period’s
amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future
financial results, the market price of our common stock and the trading 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 October 15, 2024 only under certain circumstances. For example, after the quarter ending March 31,
2018, holders may convert their Convertible Notes at their option during any quarter (and only during such quarter) if the last
reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of
the conversion price on each applicable trading day. If the Convertible Notes become convertible prior to October 15, 2024, we
may be required to reclassify our Convertible Notes and the related debt issuance costs as current liabilities and certain portions
of our equity outside of equity to mezzanine equity, which would have an adverse impact on our reported financial results for
such quarter, and could have an adverse impact on the market price of our common stock and the trading price of the
Convertible Notes.
Intangible assets comprised approximately 7% of our total assets as of December 31, 2019. A reduction in the value of our
intangible assets 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 in 2010, we recorded an intangible in-process research and development
(IPRD) asset of $77.9 million and goodwill of $6.3 million on our balance sheet. As a result of the clinical hold on ARIKAYCE
announced in late 2011, we recorded a charge of $26.0 million in the fourth quarter of 2011 that reduced the value of IPRD to
$58.2 million and reduced goodwill to zero. In addition, in September 2018 we recorded an additional $1.7 million in intangible
assets related to a milestone to PARI as a result of FDA approval of ARIKAYCE. As of December 31, 2019, the balance of
these intangibles, net of amortization was $52.1 million and $1.5 million, respectively. Future activities or events could result in
additional write-downs of these intangible assets, 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 carry forwards in Ireland as well. In general, our net operating losses and tax credits have been fully
offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. In particular, our ability
to fully use certain US tax loss carry forwards and general business tax credit carry 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, as amended (the
Code). Changes in the ownership of our stock, including those resulting from the issuance of shares of our common stock
offerings or upon exercise of outstanding options, may limit or eliminate our ability to use certain net operating losses and tax
credit carry forwards in the future.
Risks Related to Ownership of Our Common Stock
The market price of our stock has been and may continue to be highly volatile, which could lead to shareholder litigation
against us.
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 may continue to be highly volatile and could be subject to wide fluctuations in price in response to
various factors, including those discussed herein, many of which are beyond our control. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for
emerging biotechnology and pharmaceutical companies like us, and which have often been unrelated to their operating
performance.
Historically, when the market price of a stock has been volatile, shareholders are more likely to institute securities and
derivative class action litigation against the issuer of such stock. We previously faced a shareholder suit following a decline in
our stock price. If any of our shareholders bring a lawsuit against us in the future, it could have a material adverse effect on our
business. We have insurance policies related to some of the risks associated with our business, including directors’ and officers’
liability insurance policies; however, our insurance coverage may not be sufficient and our insurance carriers may not cover all
claims in a given litigation. If we are not successful in our defense of claims asserted in shareholder litigation, those claims are
not covered by insurance or they exceed our insurance coverage, we may have to pay damage awards, indemnify our executive
officers, directors and third parties from damage awards that may be entered against them and pay our and their costs and
expenses incurred in defense of, or in any settlement of, such claims. In addition, such shareholder suits could divert the time
and attention of management from our business.
Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements
between us and our employees could hamper a third-party’s acquisition of, or discourage a third-party from attempting to
acquire control of us.
45
46
Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements
with our employees could hamper 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 to pay for shares of our common stock. These provisions or arrangements
include:
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
•
•
•
•
•
•
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 our common stock. The issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of our common stock or could adversely affect the rights and powers, including
voting rights, of the holders of our common stock. In certain circumstances, 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 expanding the 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 of directors first calling the meeting.
The prohibition against entering into a business combination with the beneficial owner of 10% or more of our
outstanding voting stock for a period 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 a change in control, a severance plan for eligible full-time employees that provides such
employees with severance equal to six months of their then-current base salaries in connection with a termination of
employment without cause upon, or within 18 months following, a change in control.
We previously had a shareholder rights plan, or “poison pill,” which expired in May 2011. Under Virginia law, our
board of directors may implement a new shareholders’ rights plan without shareholder approval. Our board of directors intends
to regularly consider this matter, even in the absence of specific circumstances or takeover proposals, to facilitate its future
ability to quickly and effectively protect shareholder value.
47
48
ITEM 2. PROPERTIES
PART II
We currently lease 117,022 square feet of office space for our corporate headquarters in Bridgewater, New Jersey. We
have a one-time option to expand the leased premises by up to 50,000 square feet prior to the fifth anniversary of the initial
lease commencement, which occurred in the fourth quarter of 2019. The initial term of this lease will expire in 2030.
We also lease laboratory space located in Bridgewater for which the initial lease term expires in September 2021. In
October 2018, we expanded this lease to a total of 28,002 square feet. In addition, we lease office space in Ireland, the
Netherlands, Switzerland and Japan.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to various 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 adverse effect on our consolidated financial position, results of operations or cash
flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our trading symbol is "INSM." Our common stock currently trades on the Nasdaq Global Select Market.
We have never declared or paid cash dividends on our common stock. We anticipate that we will retain all earnings, if
any, to support operations and to finance the growth and development of our business for the foreseeable future. Any future
determination as to the payment of dividends will be dependent upon these and any contractual or other restrictions to which we
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 financial condition, results of operations, capital requirements and other factors our board of directors deems relevant at
that time.
49
50
COMPARISON 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
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflects our consolidated statements of operations and consolidated balance
sheets for and as of the years ended December 31, 2019, 2018, 2017, 2016 and 2015. The data below should be read in
conjunction with, and is qualified by reference to, Management's Discussion and Analysis of Financial Condition and Results
of Operations and our consolidated financial statements and notes thereto contained elsewhere in this Annual Report on
Form 10-K.
$250
$200
$150
$100
$50
$0
12/14
12/15
12/16
12/17
12/18
12/19
Insmed Incorporated
NASDAQ Pharmaceutical
NASDAQ Composite
NASDAQ Biotechnology
S&P 500
_________________________________
*
$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.
Statement of Operations Data:
Revenues
Cost of product revenues (excluding amortization of
intangible assets)
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Amortization of intangible assets
Total operating expenses
Operating loss
Investment income
Interest expense
Loss on extinguishment of debt
Other income (expense), net
Loss before income taxes
Income tax provision (benefit)
Net loss
Basic and diluted net loss per share
Weighted average basic and diluted common shares
outstanding
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total long-term liabilities
Total shareholders' equity
2019
Year Ended December 31,
2017
(in thousands, except per share data)
2018
2016
$ 136,467
$
9,835
$
— $
— $
24,212
112,255
2,423
7,412
—
—
—
—
2015
—
—
—
131,711
210,796
145,283
168,218
109,749
122,721
79,171
50,679
74,277
43,216
1,249
314,750
(307,338)
10,341
(25,472)
(2,209)
602
(324,076)
201
4,993
347,500
(235,245)
9,921
(27,705)
—
(531)
(253,560)
777
—
117,493
(117,493)
261
(2,889)
—
(33)
(120,154)
(1,971)
$ (254,337) $ (324,277) $ (192,649) $ (176,273) $ (118,183)
(2.02)
$
—
173,400
(173,400)
604
(3,498)
—
119
(176,175)
98
—
188,920
(188,920)
1,624
(5,925)
—
300
(192,921)
(272)
(2.89) $
(2.85) $
(4.22) $
(3.01) $
84,560
76,889
66,576
61,892
58,633
$ 487,429
$ 742,299
$ 395,385
$ 495,072
$ 604,556
$ 316,558
$ 381,165
$ 462,047
$ 56,332
$ 162,591
$ 237,956
$ 55,484
$ 282,876
$ 356,556
$ 22,599
$ 261,674
$ 208,266
$ 361,059
$ 154,483
$ 311,698
51
52
ITEM 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 elsewhere in 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 actual results may differ materially from
those anticipated in these forward-looking statements.
EXECUTIVE OVERVIEW
We are a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare
diseases. Our first commercial product, ARIKAYCE (amikacin liposome inhalation suspension), received accelerated approval
in the United States (US) in September 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of
a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. Nontuberculous
mycobacterial (NTM) lung disease caused by MAC (which we refer to as MAC lung disease) is a rare and often chronic
infection that can cause irreversible lung damage and can be fatal. Our clinical-stage pipeline includes INS1007 and INS1009.
INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in bronchiectasis and
other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product
profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH). We have legal entities in the US,
France, Germany, Ireland, Italy, the Netherlands, the United Kingdom (UK), Switzerland, Japan and Bermuda.
Prior to 2019, we had not generated significant revenue and through December 31, 2019, we had an accumulated
deficit of $1.5 billion. We have financed our operations primarily through the public offerings of our equity securities and debt
financings. Although it is difficult to predict our future funding requirements, based upon our current operating plan, we
anticipate that our cash and cash equivalents as of December 31, 2019 will enable us to fund our operations for at least the next
12 months.
We expect to continue to incur operating losses at our US and certain international entities, as we plan to initiate or
continue clinical studies of our product candidates; initiate a post-marketing clinical trial of ARIKAYCE, as required by the
FDA; seek to discover or in-license additional product candidates; seek regulatory approvals for ARIKAYCE in foreign
markets; scale-up manufacturing capabilities for future ARIKAYCE production, including the increase of production capacity
at Patheon and process improvements; and enhance operational, compliance, financial, quality and information management
systems and hire more personnel, including personnel to support our commercialization efforts and development of our product
candidates.
APPROVED PRODUCT - ARIKAYCE
ARIKAYCE is our first approved product. Accelerated approval of ARIKAYCE was supported by preliminary data
from the CONVERT study, a global Phase 3 study evaluating the safety and efficacy of ARIKAYCE in adult patients with
refractory MAC lung disease, using achievement of sputum culture conversion (defined as three consecutive negative monthly
sputum cultures) by Month 6 as the primary endpoint. Patients who achieved sputum culture conversion by Month 6 continued
in the CONVERT study for an additional 12 months of treatment following the first monthly negative sputum culture in order
to assess the durability of culture conversion, as defined by patients that have completed treatment and continued in the
CONVERT study off all therapy for three months. In May 2019, we presented at the American Thoracic Society meeting that
41/65 (63.1%) of patients on ARIKAYCE plus GBT who had achieved culture conversion by Month 6 had maintained durable
culture conversion for three months off all therapy compared to 0/10 (0%) on GBT only (p<0.0002). Safety data for these
patients were consistent with safety data previously reported for patients by Month 6 of the CONVERT study.
Patients who did not culture convert by Month 6 may have been eligible to enroll in the 312 study, an open-label
extension study for these non-converting patients who completed six months of treatment in the CONVERT study. The primary
objective of the 312 study was to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard
multi-drug regimen. The secondary objectives of the 312 study included evaluating the proportion of subjects achieving culture
conversion (defined in the same way as the CONVERT study) by Month 6 and the proportion of subjects achieving culture
conversion by Month 12, which was the end of treatment. We previously reported interim data as of December 2017 for
patients in the 312 study, with 28.4% of patients who received GBT only in the CONVERT study (19/67) and 12.3% of patients
who had received ARIKAYCE plus GBT in the CONVERT study (7/57) achieving culture conversion by Month 6 of the 312
study. The 312 study has concluded and final efficacy data regarding culture conversion were consistent with these interim data.
We have analyzed the safety and efficacy data from the 312 study, and we did not observe any new safety signals.
As a condition of accelerated approval, we must conduct a post-approval confirmatory clinical trial. The required
confirmatory trial, which is currently under discussion with the FDA, will be designed to assess and describe the clinical benefit
of ARIKAYCE in patients with MAC lung disease. The trial will evaluate the effect of ARIKAYCE on a clinically meaningful
endpoint, as compared to an appropriate control. We have initiated efforts to evaluate an appropriate PRO tool through a short-
term study to enable the assessment of therapies for the treatment of NTM lung disease. In parallel, we plan to begin a
confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease in the second half of 2020.
We continue to collaborate with the FDA on the timetable as well as the design and validation of the PRO and the post-approval
confirmatory clinical trial. The full approval of ARIKAYCE will be contingent upon verification and description of clinical
benefit in the post-approval confirmatory study.
Further Research and Lifecycle Management
We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE beyond
treatment of refractory MAC lung disease as part of a combination antibacterial regimen for adult patients who have limited or
no treatment options. Specifically, we are evaluating study designs focusing on the MAC lung disease treatment pathway,
including front-line treatment and maintenance to prevent recurrence (defined as true relapse or reinfection) of MAC lung
disease. As noted above, in parallel, we plan to conduct our required confirmatory trial to assess and describe the clinical
benefit of ARIKAYCE in patients with MAC lung disease beginning in the second half of 2020.
Subsequent lifecycle management studies could also potentially enable us to reach more patients. The use of
ARIKAYCE to treat infections caused by non-MAC NTM species is being evaluated. For instance, we plan to conduct a study
in patients with NTM lung disease caused by M. abscessus. These initiatives also include investigator-initiated studies, which
are clinical studies initiated and sponsored by physicians or research institutions with funding from us and may also include
new clinical studies sponsored by us.
PIPELINE PROGRESS
INS1007
INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October
2016. We are developing INS1007 for the treatment of patients with bronchiectasis. DPP1 is an enzyme responsible for
activating neutrophil serine proteases (NSPs) in neutrophils when they are formed in the bone marrow. Neutrophils are the most
common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils
contain the NSPs (including neutrophil elastase (NE), proteinase 3, and cathepsin G) that have been implicated in a variety of
inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and result in excessive
active NSPs that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory
diseases such as non-cystic fibrosis bronchiectasis (NCFBE) by inhibiting DPP1 and its activation of NSPs.
NCFBE is a severe, chronic pulmonary disorder in which the bronchi become permanently dilated due to a cycle of
infection, inflammation, and lung tissue damage. The condition is marked by frequent pulmonary exacerbations requiring
antibiotic therapy and/or hospitalizations. Symptoms include chronic cough, excessive sputum production, shortness of breath,
and repeated respiratory infections, which can worsen the underlying condition. NCFBE affects approximately 340,000 to
520,000 patients in the US. Currently, there is no cure, and there are no approved therapies specifically targeting NCFBE in the
US, Europe, or Japan. We are also exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.
As a result of the positive results of the WILLOW study discussed below, we plan to design and conduct a Phase 3
program, which will primarily investigate INS1007 in NCFBE. Based on indications from the FDA, we expect that the primary
endpoint will be frequency of pulmonary exacerbation.
The WILLOW Study
The WILLOW study was a randomized, double-blind, placebo-controlled, parallel-group, multi-center, multi-national,
Phase 2 study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24
weeks in patients with NCFBE. The WILLOW study was conducted at 116 sites and enrolled 256 adult patients diagnosed with
NCFBE who had at least two documented pulmonary exacerbations in the 12 months prior to screening. Patients were
randomized 1:1:1 to receive either 10 mg or 25 mg of INS1007 or matching placebo. The primary efficacy endpoint was the
time to first pulmonary exacerbation over the 24-week treatment period in the INS1007 arms compared to the placebo arm.
WILLOW Top-Line Efficacy Data
The top-line data demonstrates that the WILLOW study met its primary endpoint of time to first pulmonary
exacerbation over the 24-week treatment period for both the 10 mg and 25 mg dosage groups of INS1007 compared to placebo
(p=0.027, p=0.044, respectively). In addition, treatment with INS1007 resulted in a reduction in the frequency of pulmonary
exacerbations, a key secondary endpoint, versus placebo. Specifically, patients treated with INS1007 experienced a 36%
reduction in the 10 mg arm (p=0.041) and a 25% reduction in the 25 mg arm (p=0.167) versus placebo. Change in
concentration of active NE in sputum versus placebo from baseline to the end of the treatment period was also statistically
significant (p=0.034 for 10 mg, p=0.021 for 25 mg).
53
54
WILLOW Top-Line Safety and Tolerability Data
INS1007 was generally well-tolerated in the study. Rates of adverse events (AEs) leading to discontinuation in patients
treated with placebo, INS1007 10 mg, and INS1007 25 mg were 10.6%, 7.4%, and 6.7%, respectively. The most common AEs
in patients treated with INS1007 were cough, headache, sputum increase, dyspnea, fatigue, and upper respiratory tract infection.
Rates of adverse events of special interest (AESIs) in patients treated with placebo, INS1007 10 mg, and INS1007 25 mg,
respectively, were as follows: rates of periodontal disease were 2.4%, 7.4%, and 10.1%; rates of hyperkeratosis were 0%, 3.7%,
and 1.1%; and rates of infections that were considered AESIs were 18.8%, 16.0%, and 16.9%.
Further Research
In August 2019, we received notice from the FDA that we were awarded a development grant of $1.8 million for
specific work to be performed on a PRO tool over the next two years. The grant funding is for the development of a novel PRO
tool for use in clinical trials to measure symptoms in patients with NCFBE with and without NTM lung infection.
INS1009
INS1009 is an investigational inhaled treprostinil prodrug formulation that has the potential to address certain of the
current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH
patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must
be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden
and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated
heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper
airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product
profile for rare pulmonary disorders, including PAH, and we are advancing its development to a Phase 1 study as an inhaled dry
powder formulation.
Other Development Activities
Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet
medical need, including gram positive pulmonary infections in CF, NTM lung disease and refractory localized infections
involving biofilm. To complement our internal research and development, we actively evaluate in-licensing and acquisition
opportunities for a broad range of rare diseases.
KEY COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenues
Product revenues consist primarily of net sales of ARIKAYCE in the US. In October 2018, we began shipping
ARIKAYCE to our customers in the US, which include specialty pharmacies and specialty distributors. We recognize revenue
for product received by our customers net of allowances for customer credits, including prompt pay discounts, service fees,
estimated rebates, including government rebates, such as Medicaid rebates and Medicare Part D coverage gap reimbursements
in the US, chargebacks and returns. We also began recognizing revenue related to early access programs (EAPs) in Europe,
consisting of sales to the French National Agency for Medicines and Health Products Safety (ANSM), which has granted
ARIKAYCE a Temporary Authorization for Use (Autorisation Temporaire d'Utilisation or ATU) and from the named patient
program in Germany, both compassionate use programs.
Cost of product revenues (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs
related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and
allocation of overhead costs, in addition to royalty expenses and revenue-based milestones. We began capitalizing inventory
upon FDA approval of ARIKAYCE. All costs related to inventory for ARIKAYCE prior to FDA approval were expensed as
incurred and therefore not included in cost of product revenues.
Research and Development (R&D) Expenses
R&D expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for
personnel serving in our research and development functions, including medical affairs. R&D expense also includes other
internal operating expenses, the cost of manufacturing a product candidate, including the medical devices for drug delivery, for
clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition,
R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval),
such as INS1007. Our R&D expenses related to manufacturing our product candidates and medical devices for clinical study
are primarily related to activities at contract manufacturing organizations (CMOs) that manufacture INS1007 and INS1009. Our
R&D expenses related to clinical trials are primarily related to activities at contract research organizations (CROs) that conduct
and manage clinical trials on our behalf. These contracts with CROs set forth the scope of work to be completed at a fixed fee
or amount per patient enrolled. Payments under these contracts with CROs primarily depend on performance criteria such as the
successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued
based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol.
Nonrefundable advance payments for goods or services that will be used or rendered for future research and development
activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to be provided.
Selling, General and Administrative (SG&A) Expenses
SG&A 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 and compliance, commercial
and pre-commercial, corporate development, field sales, information technology, program management and human resource
functions. SG&A expenses also include professional fees for legal services, consulting services, including commercial
activities, insurance, board of director fees, tax and accounting services and certain milestones related to ARIKAYCE.
Amortization of Intangible Assets
Upon commercialization of ARIKAYCE, our intangible assets began to be amortized over their estimated useful lives.
The fair values assigned to our intangible assets are based on estimates and assumptions we believe are reasonable based on
available facts and circumstances. Unanticipated events or circumstances may occur that require us to review the assets for
impairment.
Investment Income and Interest Expense
Investment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense
consists primarily of the accretion of debt discount, contractual interest costs and the amortization of debt issuance costs related
to our accretion of debt. Debt discount is accreted, and debt issuance costs are amortized, to interest expense using the effective
interest rate method over the term of the debt. Our balance sheet reflects debt, net of the debt discount, debt issuance costs paid
to the lender, and other third-party costs. Unamortized debt issuance costs associated with extinguished debt are expensed in the
period of the extinguishment.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2019 and 2018
Overview - Operating Results
Our operating results for the year ended December 31, 2019, included the following:
•
•
•
•
•
•
Total revenues from sales of ARIKAYCE increased $126.6 million as compared to the prior year as a result of the
launch of ARIKAYCE in the fourth quarter of 2018;
Cost of product revenues (excluding amortization of intangibles) increased $21.8 million as compared to the prior year
as a result of the launch of ARIKAYCE in the fourth quarter of 2018;
R&D expenses decreased $13.6 million as compared to the prior year primarily resulting from costs relating to the
Patheon production facility being included in other assets in 2019 and external manufacturing expenses for
ARIKAYCE being included as a component of inventory in 2019;
SG&A expenses increased $42.6 million as compared to the prior year resulting from external expenses related to
ARIKAYCE and the Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT) milestone;
Amortization of intangible assets increased $3.7 million as compared to the prior year; and
Interest expense increased $2.2 million as compared to the prior year related primarily to the accretion of the debt
discount on the $450.0 million aggregate principal amount of 1.75% convertible senior notes due 2025 (the
Convertible Notes).
Net loss for the year ended December 31, 2019 was $254.3 million, or $3.01 per share—basic and diluted, compared
with a net loss of $324.3 million, or $4.22 per share—basic and diluted, for the year ended December 31, 2018.
Revenues
Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA in September 2018 and launched
in the US in October 2018. The following table summarizes the sources of revenue for the years ended December 31, 2019 and
2018 (in thousands):
55
56
Net product revenues, US
Net product revenues, EAPs
Total revenues
For the Year Ended December 31,
2019
2018
Increase (decrease)
%
$
$
$
132,094 $
9,265 $
122,829
4,373
570
3,803
136,467 $
9,835 $
126,632
1326%
667%
1288%
Revenues for the year ended December 31, 2019 increased to $136.5 million as compared to $9.8 million in 2018. The
increase was a result of having a full year of ARIKAYCE sales in 2019, after the launch of ARIKAYCE in the fourth quarter of
2018.
Cost of Product Revenues (excluding amortization of intangibles)
Cost of produce revenues increased to $24.2 million for the year ended December 31, 2019 as compared to $2.4
million in 2018. All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D
expenses. Cost of product revenues (excluding amortization of intangibles) consists primarily of direct and indirect costs related
to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packages services, freight, and
production-related overhead costs, in addition to royalty and revenue-based milestones. We expect our cost of product revenues
(excluding amortization of intangibles) as a percent of revenue to increase in 2020.
R&D Expenses
Years Ended December 31,
Increase (decrease)
Compensation and benefit related expenses
$
67,064
$
62,592
$
Stock-based compensation
Professional fees and other external expenses
Facility related and other internal expenses
18,761
97,855
27,116
16,845
70,248
18,533
2019
2018
$
4,472
1,916
27,607
8,583
Total SG&A expenses
$
210,796
$
168,218
$
42,578
%
7.1 %
11.4 %
39.3 %
46.3 %
25.3 %
SG&A expenses increased to $210.8 million during the year ended December 31, 2019 from $168.2 million in 2018.
The $42.6 million increase was primarily due to a $27.6 million increase in professional fees and other external expenses
related to ARIKAYCE, including disease awareness efforts, patient support activities, field operations, and other professional
fees. SG&A for the year ended December 31, 2019 included approximately $10.2 million for a certain milestone related to the
CFFT agreements. SG&A also increased $8.6 million due to higher facility related and other internal expenses.
Amortization of Intangible Assets
Amortization of intangible assets for the years ended December 31, 2019 and 2018 was $5.0 million and $1.2 million,
respectively. Amortization of intangible assets is comprised of amortization of acquired ARIKAYCE R&D and amortization of
the milestone paid to PARI for the FDA approval of ARIKAYCE.
R&D expenses for the years ended December 31, 2019 and 2018 were comprised of the following (in thousands):
Interest Expense
External Expenses
Clinical development and research
Manufacturing
Regulatory, quality assurance, and medical affairs
Subtotal—external expenses
Internal Expenses
Compensation and benefit related expenses
Stock-based compensation
Other internal operating expenses
Subtotal—internal expenses
Total
Years Ended December 31,
Increase (decrease)
2019
2018
$
%
$
$
$
$
$
32,421
10,416
13,343
56,180
53,535
8,210
13,786
75,531
131,711
$
$
$
$
$
30,287
43,824
12,290
86,401
$
2,134
(33,408)
1,053
$ (30,221)
38,794
9,395
10,693
58,882
145,283
$ 14,741
(1,185)
3,093
$ 16,649
$ (13,572)
7.0%
(76.2)%
8.6%
(35.0)%
38.0%
(12.6)%
28.9%
28.3%
(9.3)%
R&D expenses decreased to $131.7 million during the year ended December 31, 2019 from $145.3 million in 2018.
The $13.6 million decrease was primarily due to a decrease of $33.4 million in external manufacturing expenses, specifically
related to: pre-approval purchases of ARIKAYCE raw materials; pre-approval CMO expenses related to ARIKAYCE
commercial inventory production; and costs relating to increasing our long-term production capacity at Patheon. This was
partially offset by a $14.7 million increase in compensation and related expenses due to an increase in headcount in the year
ended December 31, 2019 as compared to the prior year.
During the year ended December 31, 2019, external R&D expenses of $56.2 million consisted of $29.0 million related
to ARIKAYCE, $22.0 million related to INS1007, and $5.2 million related to other research expenses. During the year ended
December 31, 2018, external R&D expenses of $86.4 million consisted of $69.2 million related to ARIKAYCE, $13.9 million
related to INS1007, and $3.3 million related to other research expenses.
SG&A Expenses
SG&A expenses for the years ended December 31, 2019 and 2018 were comprised of the following (in thousands):
Interest expense was $27.7 million for the year ended December 31, 2019 as compared to $25.5 million for 2018. The
$2.2 million increase in interest expense in the year ended December 31, 2019 as compared to the prior year period relates to
accretion of the debt discount on the $450.0 million aggregate principal amount of Convertible Notes. The interest expense on
the Convertible Notes is based on an effective interest rate of 7.6%.
Provision (benefit) for Income Taxes
The income tax provision was $0.8 million and $0.2 million for the years ended December 31, 2019 and 2018,
respectively. The income tax provision for the year ended December 31, 2019 and December 31, 2018 reflects the current
income tax expense recorded as a result of taxable income in certain of our subsidiaries in Europe and Japan.
Comparison of the Years Ended December 31, 2018 and 2017
Please refer to the section titled "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a comparative discussion of
our fiscal years ended December 31, 2018 and December 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Overview
There is considerable time and cost associated with developing potential pharmaceutical products to the point of
regulatory approval and commercialization. We commenced commercial shipments of ARIKAYCE in October 2018. We
expect to continue to incur operating losses at our US and certain international entities, as we plan to fund R&D for
ARIKAYCE and our other pipeline programs, continue commercialization activities for ARIKAYCE in the US, continue to
invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and other general and administrative
activities.
In the second quarter of 2019, we completed an underwritten public offering of 10,657,692 shares of common stock,
which included the underwriters' exercise in full of its over-allotment option of 1,042,307 shares from the Company at a price to
the public of $26.00, less underwriting discounts. Our net proceeds from the sale of the shares, after deducting underwriting
discounts and commissions and other offering expenses of $16.0 million, were $261.1 million. The offering also included the
sale of 400,000 shares from our Chairman and Chief Executive Officer, from which we received no proceeds.
In January 2018, we completed an underwritten public offering of $450.0 million aggregate principal amount of
Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. Our net
proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2
million, were $435.8 million.
57
58
In September 2017, we completed an underwritten public offering of 14,123,150 shares of our common stock, which
included the 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. Our net proceeds from the sale of the shares, after deducting underwriting discounts and other offering expenses
of $24.8 million, were $377.7 million.
We may need to raise additional capital to fund our operations, including continued commercialization of ARIKAYCE
and future clinical trials related to ARIKAYCE, to design and conduct a Phase 3 program for INS1007, to develop INS1009,
and to develop, acquire, in-license or co-promote other products or product candidates, including those that address orphan or
rare diseases. We believe we currently have sufficient funds to meet our financial needs for at least the next 12 months. We
expect to 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 commercialize ARIKAYCE, to conduct
further trials of ARIKAYCE, to develop our product candidates, or to pursue the license or purchase of other technologies or
products and product candidates. During 2020, we plan to support the commercialization of ARIKAYCE in the US, to continue
to fund further clinical development of ARIKAYCE and INS1007, and to fund our global expansion efforts to support pre-
commercial activities in Europe and Japan including obtaining regulatory approvals for ARIKAYCE in those regions. Our cash
requirements for the next 12 months will be impacted by a number of factors, the most significant of which we expect to be
expenses related to the commercialization efforts for ARIKAYCE, expenses related to the development activities for INS1007,
and to a lesser extent, future ARIKAYCE clinical trials.
Cash Flows
As of December 31, 2019, we had cash and cash equivalents of $487.4 million, as compared with $495.1 million as of
December 31, 2018. The $7.6 million decrease was due to cash used in operating activities and, to a lesser extent, cash used in
investing activities, mostly offset by cash received from the underwritten public offering of our common stock in the second
quarter of 2019. Our working capital was $470.0 million as of December 31, 2019 as compared with $439.2 million as of
December 31, 2018.
Net cash used in operating activities was $250.6 million and $258.0 million for the years ended December 31, 2019
and 2018, respectively. The net cash used in operating activities during the years ended December 31, 2019 and 2018 was
primarily for the commercial activities related to ARIKAYCE, as well as general and administrative expenses. In addition, net
cash used in operating activities during the year ended December 31, 2019 and 2018 included clinical trial expenses related to
INS1007.
Net cash used in investing activities was $42.3 million and $14.8 million for the years ended December 31, 2019 and
2018, respectively. The net cash used in investing activities during 2019 was primarily related to the investment in our long-
term production capacity at Patheon and our new corporate headquarters. The net cash used in investing activities during 2018
was primarily related to the investment in our long-term production capacity at Patheon. We expect our net cash used in
investing activities will decrease in 2020 as compared to 2019 as a result of the completion of our corporate headquarters and
the remaining investment required at the Patheon facility.
Net cash provided by financing activities was $285.3 million and $386.7 million for the years ended December 31,
2019 and 2018, respectively. Net cash provided by financing activities for the year ended December 31, 2019 included net cash
proceeds of $261.1 million from our underwritten public offering of 10,657,692 shares in the second quarter of 2019 and cash
proceeds from stock option exercises. Net cash provided by financing activities during 2018 included net cash proceeds of
$435.8 million from our convertible debt issuance and cash proceeds received from stock option exercises.
Contractual Obligations
In January 2018, we completed an underwritten public offering of $450.0 million aggregate principal amount of
Convertible Notes pursuant to an indenture between the Company and Wells Fargo Bank, National Association, as trustee. Our
net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2
million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15
and July 15 of each year, beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier
converted, redeemed, or repurchased. The Convertible Notes are convertible into common stock of the Company under certain
circumstances described in the indenture. For more information, see Note 8 - Debt in our notes to the consolidated financial
statements.
In September 2018, we entered into an agreement (the Lease) with Exeter 700 Route 202/206, LLC to lease 117,022
square feet of office space located in Bridgewater, New Jersey for our corporate headquarters. Subject to certain conditions, we
have the one-time option to expand the leased premises by up to 50,000 rentable square feet, exercisable prior to the fifth
anniversary of the Commencement Date, which was October 1, 2019. The initial Lease term runs 130 months from the
Commencement Date and we have the option to extend that term for up to three additional five-year periods. In addition, we are
responsible for operating expenses and taxes pursuant to the Lease. Future minimum payments under the Lease during the
initial Lease Term are approximately $32.3 million. The Lease contains customary default provisions, including those relating
to payment defaults, performance defaults and events of bankruptcy.
In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of
ARIKAYCE, on a non-exclusive basis, at a 200 kg scale. Pursuant to the agreement, we collaborated with Therapure to
construct a production area for the manufacture of ARIKAYCE in Therapure's existing manufacturing facility in Canada. The
agreement has an initial term of five years, which began in October 2018, and will renew automatically for successive periods
of two years each, unless terminated by either party by providing the required two years' prior written notice to the other party.
Under the agreement, we are obligated to pay certain minimum amounts for the batches of ARIKAYCE produced each calendar
year.
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, ARIKAYCE in finished dosage form at a 50 kg scale. Under the Fill/
Finish Agreement, we are obligated to pay a minimum of $2.7 million for the batches of ARIKAYCE produced each calendar
year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and
following an extension in 2018, the agreement remains in effect through December 31, 2021. The Fill/Finish Agreement may
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 its then-current term.
We have a licensing agreement with PARI for the use of the optimized Lamira Nebulizer System for delivery of
ARIKAYCE in treating patients with NTM lung infections, CF and bronchiectasis. Under the licensing agreement, we have
rights under several US and foreign issued patents, and patent applications involving improvements to the optimized Lamira
Nebulizer System, to exploit the system with ARIKAYCE for the treatment of such indications, but we cannot manufacture the
nebulizers except as permitted under our Commercialization Agreement with PARI, as described below. The Lamira Nebulizer
System has been approved for use in the US (in combination with ARIKAYCE) and the EU. Under the licensing agreement, we
made an upfront license fee and milestone payments to PARI. Upon FDA acceptance of our New Drug Application and the
subsequent FDA approval of ARIKAYCE, we made additional milestone payments of €1.0 million and €1.5 million,
respectively, to PARI. In addition, PARI is entitled to receive a future milestone payment of €0.5 million in cash based on
receipt of the first marketing approval in a major EU country for ARIKAYCE and the device. In October 2017, we exercised an
option to buy-down the royalties payable to PARI, which was included within selling, general and administrative expenses in
the fourth quarter of 2017. PARI is now entitled to receive royalty payments in the mid-single digits on the annual global net
sales of ARIKAYCE, pursuant to the licensing agreement, subject to certain specified annual minimum royalties.
In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of the
Lamira Nebulizer Systems and related accessories (the Device) as optimized for use with ARIKAYCE. Under the
Commercialization Agreement, PARI manufactures the 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 term of 15 years
that began in October 2018 (the Initial Term). The term of the Commercialization Agreement may be extended by us for an
additional five 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 the increase of our long-term production
capacity for ARIKAYCE. The agreements provide for Patheon to manufacture and supply ARIKAYCE for our anticipated
commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active
pharmaceutical ingredients, and certain fixed assets needed to manufacture ARIKAYCE. Patheon's supply obligations will
commence once certain technology transfer and construction services are completed. Our manufacturing and supply agreement
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 have given written notice of termination. The technology transfer agreement will expire when the parties agree
that the technology transfer services have been completed. The agreements may also be terminated under certain other
circumstances, including by either party due to a material uncured breach of the other party or the other party’s insolvency.
These early termination clauses may reduce the amounts due to the relevant parties. The aggregate investment to increase our
long-term production capacity, including under the Patheon agreements and related agreements or purchase orders with third
parties for raw materials and fixed assets, is estimated to be approximately $60 million.
In 2004 and 2009, we entered into research funding agreements with CFFT whereby we received $1.7 million and $2.2
million in research funding for the development of ARIKAYCE. As a result of the US approval of ARIKAYCE and in
accordance with the agreements, as amended, we owe milestone payments to CFFT of $13.4 million in the aggregate, which are
payable through 2025. In addition, if certain global sales milestones are met within five years of ARIKAYCE's
59
60
commercialization, we will owe additional payments of up to $3.9 million. We have estimated the likelihood of meeting such
global sales milestones and have accrued for these contingent obligations proportionally based on net sales of ARIKAYCE.
As of December 31, 2019, future payments under our long-term debt agreements, minimum future payments under
non-cancellable leases and minimum future payment obligations are as follows (in thousands):
As of December 31, 2019
Payments Due By Period
Total
Less than
1 year
1 - 3
Years
3 - 5
Years
More
than 5
Years
$ 450,000
$
— $
— $
— $ 450,000
43,334
32,250
3,521
82,017
13,400
7,875
2,939
1,926
10,767
1,000
15,750
5,276
1,595
11,850
3,900
15,750
5,252
—
9,450
5,500
3,959
18,783
—
49,950
3,000
Debt obligations
Debt maturities
Contractual interest
Capital leases
Operating leases
Purchase obligations
CFFT milestone payments
Total contractual obligations
$ 624,522
$ 24,507
$ 38,371
$ 35,952
$ 525,692
This table does not include: (a) any milestone payments, except for the CFFT milestone payments included in the table
above, which may become payable to third parties under our license and collaboration agreements as the timing and likelihood
of such payments are not known; (b) the royalty payments specified below, as the amounts of such payments, timing and/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 the aggregate in any period presented above; and (d) any payments related to the agreements mentioned below.
We entered into a services agreement with Syneos Health (Syneos) pursuant to which we retained Syneos to perform
implementation and management services in connection with the WILLOW 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 regulatory authority is revoked,
suspended or expires without renewal. We anticipate that aggregate costs relating to all work orders for the WILLOW study
will be approximately $23 million over the period of the study.
In October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive
global rights for the purpose of developing and commercializing AZD7986 (which we renamed INS1007). In consideration of
the licenses and other rights granted by AstraZeneca, we made an 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 a series of contingent milestone
payments to AstraZeneca totaling up to an additional $85.0 million upon the achievement of clinical development and
regulatory filing milestones. The next contingent milestone payment to AstraZeneca is $12.5 million and is due upon first
dosing in a Phase 3 study. If we elect to develop INS1007 for a second indication, we will be obligated to make an additional
series of contingent milestone payments totaling up to $42.5 million. We are not obligated to make any additional milestone
payments for any additional indications. In addition, we have agreed to pay AstraZeneca tiered royalties ranging from a high
single-digit to mid-teens 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 for commercialization of INS1007 in chronic obstructive pulmonary disease or asthma.
Future Funding Requirements
We may need to raise additional capital to fund our operations, including the continued commercialization of
ARIKAYCE, future clinical trials related to ARIKAYCE, development of INS1007 and INS1009, and the potential
development, acquisition, in-license or co-promotion of other products or product candidates, including those that address
orphan or rare diseases. We expect that our future capital requirements may be substantial and will depend on many factors,
including:
•
•
•
The timing and cost of our future clinical trials of ARIKAYCE for the treatment of patients with NTM lung infections;
The decisions of the EMA, MHLW and PMDA with respect to our applications for marketing approval of
ARIKAYCE in Europe and Japan;
The costs of activities related to the regulatory approval process and the timing of approvals, if received;
•
•
•
•
•
•
The cost of supporting the sales and marketing efforts necessary to support the continued commercial efforts of
ARIKAYCE;
The cost of filing, prosecuting, defending, and enforcing patent claims;
The timing and cost of our anticipated clinical trials, including our planned INS1007 Phase 3 program and the related
milestone payments due to AstraZeneca;
The costs of our manufacturing-related activities;
The costs associated with commercializing ARIKAYCE outside the US, if approved; and
The levels, timing and collection of revenue earned from sales of ARIKAYCE and other products approved in the
future, if any.
We have raised $1.1 billion in net proceeds from securities offerings since September 2017. We believe we currently
have sufficient funds to meet our financial needs for at least the next 12 months. However, our business strategy may require us
to raise additional capital at any time through equity or debt financing(s), strategic transactions or otherwise.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources. We do not have any interest in special purpose entities, structured finance entities or other variable interest entities.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in accordance with generally accepted accounting principles in the US requires us
to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the
disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our
estimates and assumptions and we regularly evaluate these estimates and assumptions. The amounts of assets and liabilities
reported in our consolidated balance sheets and the amounts reported in our consolidated statements of comprehensive loss are
affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, research
and development, stock-based compensation, inventory, finite-lived intangible assets, and accrued expenses. The accounting
policy discussed below is considered critical to an understanding of our consolidated financial statements because its
application involves the most significant judgment. Actual results could differ materially from our estimates. For additional
accounting policies, see Note 2 to our Consolidated Financial Statements—Summary of Significant Accounting Policies.
Revenue Recognition
Product revenues consist primarily of sales of ARIKAYCE in the US. In October 2018, we began shipping
ARIKAYCE to our customers in the US, which include specialty pharmacies and specialty distributors. Product revenues are
recognized for arrangements within the scope of ASC 606, once we perform the following five steps: (1) identify the contracts
with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a
performance obligation.
Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for
which reserves are established for (a) customer payments, such as invoice discounts for prompt pay and specialty pharmacies
fees, (b) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care
rebates, (c) estimated chargebacks, and (d) estimated costs of co-payment assistance. These reserves are based on the amounts
earned or to be claimed on the related sales and are classified as reductions of accounts receivable (prompt pay discounts and
chargebacks), prepaid expenses (co-payment assistance), or as a current liability (customer fees and rebates). Where
appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant
factors such as our historical experience, current contractual and statutory requirements, and forecasted customer buying and
payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which the relevant third
party is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction
price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in
the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately
received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which
would affect net product revenue and earnings in the period such variances become known.
Customer payments: Our customers are offered various forms of consideration, including fees for enhanced services
and prompt payment discounts. The payment terms for sales to specialty pharmacies for prompt payment discounts and fees for
services are based on contractual rates agreed with the respective specialty pharmacies. We anticipate that our customers will
earn these discounts and fees and, therefore, we deduct the full amount of these discounts and fees from total gross product
61
62
revenues at the time such revenues are recognized.
Rebates: We contract with government agencies and managed care organizations, or collectively, third-party payors,
so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. We estimate
the rebates we will provide to third-party payors and deduct these estimated amounts from total gross product revenues at the
time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting
in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses on the
consolidated balance sheets. We estimate the rebates that will be provided to third-party payors based upon (i) our contracts
with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range
of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) information obtained from our
specialty pharmacies.
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, currently public health service
institutions and federal government entities purchasing via the Federal Supply Schedule, purchase directly from our specialty
distributor. Contracted customers generally purchase the product at a discounted price and the specialty distributor, in turn,
charges back to us the difference between the price they initially paid and the discounted price paid by the contracted
customers. We estimate the chargebacks provided to the specialty distributor and deduct these estimated amounts from gross
product revenues at the time revenues are recognized.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive
co-payment assistance. Based upon the terms of the program and our historical experience with copay redemptions, we estimate
the average co-pay mitigation amounts and the percentage of patients that we expect to participate in the program in order to
establish our accruals for co-payment assistance. These reserves are recorded in the same period in which the related revenue is
recognized, resulting in a reduction of product revenue. We adjust our accruals for co-pay assistance based on actual
redemption activity and estimates of future redemptions related to sales in the current period.
If any, or all, of our actual experience vary from the estimates above, we may need to adjust prior period accruals,
affecting revenue in the period of adjustment.
We also began recognizing revenue related to early access programs (EAPs) in Europe, consisting of sales to the
French National Agency for Medicines and Health Products Safety, which granted ARIKAYCE a Temporary Authorization for
Use (Autorisation Temporaire d'Utilisation or ATU) and from the named patient program in Germany, both compassionate use
programs. EAPs are intended to make products available on a named patient basis before they are commercially available in
accordance with local regulations.
Recent Accounting Pronouncements—Adopted
Topic 842 was effective for fiscal years beginning after December 15, 2018 (including interim periods within those
years) and early adoption was permitted. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842,
which provided a transition option in which an entity would initially apply ASU 2016-02 at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We used the new transition
option and the package of practical expedients that allowed it to not reassess: (1) whether any expired or existing contracts are
or contain leases; (2) lease classification for any expired or existing leases; and (3) initial direct costs for any expired or existing
leases. We also used the practical expedient that allows us to treat the lease and non-lease components of our leases as a single
component. We adopted ASU 2016-02 effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the
consolidated balance sheet was $47.4 million.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments, which addressed eight specific cash flow issues with the objective of reducing the existing
diversity in practice. Among the updates, the standard requires debt extinguishment costs to be classified as cash outflows for
financing activities. This standard update became effective as of the first quarter of 2018. As a result of the adoption of the
standard, in the first quarter of 2018, we reported a $2.2 million loss on extinguishment of debt in the operating activities
section of its consolidated statement of cash flows. We had no material debt extinguishment costs prior to the first quarter of
2018. The impact of adopting this standard was not material to us.
Recent Accounting Pronouncements—Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which requires financial assets
measured at an amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected
credit losses is based on relevant information about past events, including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal
years beginning after December 15, 2019 and we will adopt the standard effective January 1, 2020. Different aspects of the
guidance require modified retrospective or prospective adoption. We have performed an assessment and determined that
adoption will not have a material impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2019, our cash and cash equivalents were in cash accounts or were invested in US treasury bills
and money market funds. Our investments in US treasury bills and money market funds are not insured by the federal
government.
As of December 31, 2019, we had $450.0 million of Convertible Notes outstanding which bear interest at a coupon
rate of 1.75%. If a 10% change in interest rates had occurred on December 31, 2019, it would not have had a material effect on
the fair value 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, British Pounds and Japanese Yen. Historically, fluctuations in foreign currency exchange rates
have not materially affected our results of operations. During the years ended December 31, 2019, 2018 and 2017, our results of
operations were not materially affected by fluctuations in foreign currency exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in our Financial Statements and Supplementary Data set forth in
Item 15 of Part IV of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019. The term "disclosure
controls and procedures," as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act) means controls and other procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit with the SEC is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Based on that evaluation our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of December 31, 2019 at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting 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 executive and principal financial and accounting officers and effected by
our board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
•
•
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 US generally accepted accounting principles, and that receipts and expenditures of our company
are being made only in accordance with authorizations of 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 a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
63
64
Integrated Framework. Based on management's assessment, management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2019.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2019 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference from the discussion responsive thereto
under the captions Election of Class II Directors, Corporate Governance and Delinquent Section 16(a) Reports in our definitive
proxy statement for our 2020 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 on Form 10-K.
Attestation Report on Internal Control over Financial Reporting
ITEM 11. EXECUTIVE COMPENSATION
Ernst & Young LLP, our independent registered public accounting firm, issued an attestation report on our internal
The information required by Item 11 of Form 10-K is incorporated by reference from the discussion responsive thereto
control over financial reporting. 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 INFORMATION
None
under the captions Compensation Discussion and Analysis, Compensation Committee Report, Compensation Committee
Interlocks and Insider Participation and Director Compensation in our definitive proxy statement for our 2020 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
on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the discussion responsive thereto
under the captions Compensation Discussion and Analysis, Security Ownership of Certain Beneficial Owners and Directors
and Management in our definitive proxy statement for our 2020 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 on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the discussion responsive thereto
under the captions Corporate Governance and Certain Relationships and Related Transactions in our definitive proxy
statement for our 2020 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 on Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the discussion responsive thereto
under the caption Corporate Governance and Ratification of the Appointment of Independent Registered Public Accounting
Firm in our definitive proxy statement for our 2020 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 on Form 10-K.
65
66
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
PART IV
1.
forth herein, beginning on page 76:
FINANCIAL STATEMENTS. The following consolidated financial statements of the Company are set
(i) Reports of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets as of December 31, 2019 and 2018
(iii) Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017
(iv) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2019, 2018 and 2017
(v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
(vi) Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES.
None required.
EXHIBITS.
The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.
2.
3.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1**
10.2**
10.2.1**
EXHIBIT INDEX
Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012
(incorporated by reference from Exhibit 3.1 to Insmed Incorporated's Annual Report on
Form 10-K filed on March 18, 2013).
Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from
Exhibit 3.1 to Insmed Incorporated's Quarterly Report on Form 10-Q filed on August 6,
2015).
Specimen stock certificate representing common stock, $0.01 par value per share, of the
Registrant (incorporated by reference from Exhibit 4.2 to Insmed Incorporated's Registration
Statement on Form S-4/A (Registration No. 333-30098) filed on March 24, 2000).
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 January 26, 2018).
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 Form 8-K filed on January 26, 2018).
Form of 1.75% Convertible Senior Note due 2025 (included in Exhibit 4.3).
Description of Securities Registered Under Section 12 of the Securities Exchange Act of
1934 (filed herewith).
Insmed Incorporated Amended and Restated 2000 Stock Incentive Plan (incorporated by
reference from Exhibit 10.3 to Insmed Incorporated's Form 10-Q filed on May 8, 2013).
Insmed Incorporated 2013 Incentive Plan (incorporated by reference from Exhibit 99.1 to
Insmed Incorporated's Registration Statement on Form S-8 filed on May 24, 2013).
Form of Award Agreement for Incentive Stock Options pursuant to the Insmed Incorporated
2013 Incentive Plan (incorporated by reference from Exhibit 10.5 to Insmed Incorporated's
Annual Report on Form 10-K filed on March 6, 2014).
Form of Award Agreement for Non-Qualified Stock Options pursuant to the Insmed
Incorporated 2013 Incentive Plan (incorporated by reference from Exhibit 10.6 to Insmed
Incorporated's Annual Report on Form 10-K filed on March 6, 2014).
Insmed Incorporated 2015 Incentive Plan (incorporated by reference from Exhibit 99.1 to
Insmed Incorporated's Registration Statement on Form S-8 filed on May 28, 2015).
Form of Award Agreement for Non-Qualified Stock Options pursuant to the Insmed
Incorporated 2015 Incentive Plan (incorporated by reference from Exhibit 10.2 to Insmed
Incorporated’s Form 10-Q filed May 3, 2017).
Insmed Incorporated 2017 Incentive Plan (incorporated by reference from Exhibit 10.3 to
Insmed Incorporated’s Form 10-Q filed August 3, 2017).
Form of Award Agreements for Restricted Stock Units pursuant to the Insmed Incorporated
2017 Incentive Plan (incorporated by reference from Exhibit 10.4 to Insmed Incorporated’s
Form 10-Q filed August 3, 2017).
Form of Award Agreement for Non-Qualified Stock Options pursuant to the Insmed
Incorporated 2017 Incentive Plan (incorporated by reference from Exhibit 10.5 to Insmed
Incorporated’s Form 10-Q filed August 3, 2017).
10.2.2**
10.3**
10.3.1**
10.4**
10.4.1**
10.4.2**
10.5**
Insmed Incorporated 2019 Incentive Plan (incorporated by reference from Exhibit 10.1 to
Insmed Incorporated’s Form 10-Q filed August 1, 2019).
10.5.1**
10.5.2**
10.5.3**
10.6**
10.7**
10.8**
10.9**
10.9.1**
10.10**
10.10.1**
Form of Award Agreement for Restricted Stock Units pursuant to the Insmed Incorporated
2019 Incentive Plan (incorporated by reference from Exhibit 10.2 to Insmed Incorporated’s
Form 10-Q filed August 1, 2019).
Form of Award Agreement for Non-Qualified Stock Options pursuant to the Insmed
Incorporated 2019 Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed
Incorporated’s Form 10-Q filed August 1, 2019).
Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the
Insmed Incorporated 2019 Incentive Plan (incorporated by reference from Exhibit 10.4 to
Insmed Incorporated’s Form 10-Q filed August 1, 2019).
Insmed Incorporated Senior Executive Bonus Plan (incorporated by reference from Exhibit
10.2 to Insmed Incorporated's Form 10-Q filed on November 5, 2013).
Form of Non-Qualified Stock Option Inducement Award Agreement (incorporated by
reference from Exhibit 10.6 to Insmed Incorporated’s Form 10-Q filed August 3, 2017).
Form of Indemnification Agreement entered into with each of the Company's directors and
officers (incorporated by reference from Exhibit 10.1 to Insmed Incorporated's Current
Report on Form 8-K filed on January 16, 2014).
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 on September 11, 2012).
Amendment to Employment Agreement, effective as of July 31, 2019, between Insmed
Incorporated and William Lewis (incorporated by reference from Exhibit 10.5 to Insmed
Incorporated’s Form 10-Q filed on August 1, 2019).
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).
Amendment to Employment Agreement, effective as of September 26, 2016, between Insmed
Incorporated and Christine Pellizzari (incorporated by reference from Exhibit 10.31 to
Insmed Incorporated’s Annual Report on Form 10-K filed February 23, 2017).
67
68
Second Amendment to Employment Agreement, effective as of July 31, 2019, between
Insmed Incorporated and Christine Pellizzari (incorporated by reference from Exhibit 10.7 to
Insmed Incorporated’s Form 10-Q filed on August 1, 2019).
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).
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 Annual Report on Form 10-K filed February 23, 2017).
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).
Amendment to Employment Agreement, effective as of July 31, 2019, between Insmed
Incorporated and Roger Adsett (incorporated by reference from Exhibit 10.6 to Insmed
Incorporated’s Form 10-Q filed August 1, 2019).
10.10.2**
10.11**
10.11.1**
10.12**
10.12.1**
10.13**
Employment Agreement, effective as of January 28, 2020, between Insmed Incorporated and
Sara Bonstein (filed herewith).
10.14**
Employment Agreement, effective as of March 17, 2014, between Insmed Incorporated and
John Goll (filed herewith).
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).
Separation Agreement and General Release, effective as of May 3, 2019, between Insmed
Incorporated and Paolo Tombesi (incorporated by reference from Exhibit 10.1 to Insmed
Incorporated’s Form 8-K filed on May 7, 2019).
License Agreement, dated April 25, 2008, between Transave, Inc. and PARI Pharma GmbH,
and Amendments No. 1-4 thereto (incorporated by reference from Exhibit 10.22 to Insmed
Incorporated's Annual Report on Form 10-K filed on March 18, 2013).
Amendment No. 5 to License Agreement between Insmed Incorporated 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 on February 25, 2016).
Amendment No. 6 to License Agreement between Insmed Incorporated 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 on February 25, 2016).
Amendment No. 7 to License Agreement between Insmed Incorporated and PARI Pharma
GmbH, effective as of July 21, 2017 (incorporated by reference from Exhibit 10.1 to Insmed
Incorporated’s Form 10-Q filed on November 2, 2017).
Amendment No. 8 to License Agreement between Insmed Incorporated and PARI Pharma
GmbH, effective as of December 19, 2018 (incorporated by reference from Exhibit 10.15.4 to
Insmed Incorporated’s Annual Report on Form 10-K filed on February 22, 2019).
Contract Manufacturing Agreement, dated February 7, 2014, between Insmed Incorporated
and Therapure Biopharma Inc. (incorporated by reference from Exhibit 10.1 to Insmed
Incorporated's Form 10-Q filed on May 8, 2014).
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).
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).
10.15*
10.15.1*
10.16*
10.16.1*
10.16.2*
10.16.3*
10.16.4*
10.17*
10.17.1*
10.18*
10.18.1*
10.19*
10.19.1*
10.19.2*
10.20*
10.20.1
10.20.2
10.21*
10.22*
10.23*
10.24
10.25
21.1
23.1
31.1
31.2
32.1
32.2
Amendment No. 1 to Commercialization Agreement between Insmed Incorporated and PARI
Pharma GmbH, effective as of July 21, 2017 (incorporated by reference from Exhibit 10.2 to
Insmed Incorporated’s Form 10-Q filed on November 2, 2017).
Master Agreement for Services, dated as of August 27, 2014, by and between Insmed
Incorporated and SynteractHCR, Inc. (incorporated by reference from Exhibit 10.29 to
Insmed Incorporated's Annual Report on Form 10-K filed on February 27, 2015).
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
Annual Report on Form 10-K filed on February 27, 2015).
Change in Scope 1 to Work Order 1, dated as of May 27, 2016, by and between Insmed
Incorporated and SynteractHCR, Inc. (incorporated by reference from Exhibit 10.2 to Insmed
Incorporated's Form 10-Q filed August 4, 2016).
Commercial Fill/Finish Services Agreement between Insmed Incorporated and Ajinomoto
Althea, Inc., dated as of September 15, 2015 (incorporated by reference from Exhibit 10.1 to
Insmed Incorporated's Form 10-Q filed November 6, 2015).
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 Annual Report on Form 10-K filed February 23,
2017).
Extension of Commercial Fill/Finish Services Agreement between Insmed Incorporated and
Ajinomoto Althea, Inc., dated as of December 18, 2018 (incorporated by reference from
Exhibit 10.29.2 to Insmed Incorporated's Annual Report on Form 10-K filed on February 22,
2019).
Manufacturing and Supply Agreement between Insmed Incorporated and Patheon UK
Limited, dated as of October 20, 2017 (incorporated by reference from Exhibit 10.39 to
Insmed Incorporated's Annual Report on Form 10-K filed February 23, 2018).
Technology Transfer Agreement between Insmed Incorporated and Patheon UK Limited,
dated as of October 20, 2017 (incorporated by reference from Exhibit 10.40 to Insmed
Incorporated's Annual Report on Form 10-K filed February 23, 2018).
License Agreement, dated October 4, 2016, between Insmed Incorporated and AstraZeneca
AB (incorporated by reference from Exhibit 10.29 to Insmed Incorporated’s Annual Report
on Form 10-K filed February 23, 2017).
Lease Agreement, effective as of July 1, 2016, by and between Insmed Incorporated and CIP
II/AR Bridgewater Holdings, LLC (incorporated by reference from Exhibit 10.1 to Insmed
Incorporated's Form 10-Q filed August 4, 2016).
Lease Agreement, dated September 11, 2018, by and between Insmed Incorporated and
Exeter 700 Route 202/206, LLC (incorporated by reference from Exhibit 10.1 to Insmed
Incorporated’s Current Report on Form 8-K filed on September 17, 2018).
Subsidiaries of Insmed Incorporated (filed herewith).
Consent of Ernst & Young LLP (filed herewith).
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal
Executive Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes Oxley Act of 2003 (filed herewith).
Certification of Sara Bonstein, Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2003 (filed herewith).
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal
Executive Officer) of Insmed Incorporated, pursuant to 18 USC Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2003 (filed herewith).
Certification of Sara Bonstein, Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer) of Insmed Incorporated, pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2003 (filed herewith).
69
70
The following materials from Insmed Incorporated’s Annual Report on Form 10-K for the
year ended December 31, 2019 formatted in iXBRL (Inline eXtensible Business Reporting
Language): (i) Consolidated Balance Sheets as of December 31, 2019 and 2018,
(ii) Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019,
2018 and 2017, (iii) Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2019, 2018 and 2017, (iv) Consolidated Statements of Cash Flows for the
years ended December 31, 2019, 2018, and 2017, and (v) Notes to the Consolidated Financial
Statements, and (vi) Cover Page.
The cover page from the Annual Report on Form 10-K for the year ended December 31,
2019, formatted in iXBRL and contained in Exhibit 101.
Certain portions of this exhibit have been redacted.
Management contract or compensatory plan or arrangement.
101
104
*
**
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant 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 signed on its behalf by the undersigned, thereunto duly authorized on February 25, 2020.
INSMED INCORPORATED
a Virginia corporation
(Registrant)
By:
/s/ WILLIAM H. LEWIS
William H. Lewis
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on February 25, 2020.
Signature
Title
/s/ WILLIAM H. LEWIS
William H. Lewis
/s/ SARA BONSTEIN
Sara Bonstein
/s/ DAVID R. BRENNAN
David R. Brennan
/s/ ALFRED F. ALTOMARI
Alfred F. Altomari
/s/ CLARISSA DESJARDINS, PH.D.
Clarissa Desjardins, Ph.D.
/s/ STEINAR J. ENGELSEN, M.D.
Steinar J. Engelsen, M.D.
/s/ DAVID W.J. MCGIRR
David W.J. McGirr
/s/ ELIZABETH MCKEE ANDERSON
Elizabeth McKee Anderson
/s/ MELVIN SHAROKY, M.D.
Melvin Sharoky, M.D.
/s/ LEO LEE
Leo Lee
Chairman and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
71
72
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Insmed Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Insmed Incorporated (the Company) as of December 31,
2019 and 2018, the related consolidated statements of comprehensive loss, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, 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's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 25, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in 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 reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to 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 included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in
2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related
amendments.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
Description of the
Matter
Variable consideration in contracts with customers
As discussed in Note 2 of the consolidated financial statements, the transaction price for product sales
is typically adjusted for variable consideration, which includes rebates paid to government agencies.
The Company estimates these reserves based upon a range of possible outcomes that are probability-
weighted for the estimated payor mix.
Auditing the Company's estimate of variable consideration for amounts to be paid to government
agencies was complex and judgmental due to uncertainty about the ultimate third-party payor at the
time of shipment to the specialty pharmacies and the amounts of rebates to be paid to those
government agencies. In addition, government pricing calculations are complex as a result of
assumptions about inputs such as the average manufacturer price, best price and the unit rebate
amount. The transaction price is sensitive to these significant assumptions and calculations.
How We Addressed the
Matter in Our Audit
We identified, evaluated and tested controls over management’s review of the calculated reductions to
gross product prices related to government agencies including management's review of the significant
assumptions and the data utilized in its calculations.
To test the revenue adjustments related to government agencies our audit procedures included, among
others, using internal specialists to assist with recalculating government pricing amounts that included
inputs such as the average manufacturer price, best price and the unit rebate amount. We also tested
the underlying data and inputs used by the Company in its determination of the estimated payor mix.
We compared the inputs used by management to historical trends, evaluated the change in the
estimated rebates amounts recorded throughout the year and assessed the historical accuracy of
management's estimates against actual results.
/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 Jersey
February 25, 2020
73
74
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Insmed Incorporated
Opinion on Internal Control over Financial Reporting
We have audited Insmed Incorporated’s internal control over financial reporting as of December 31, 2019, 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 our opinion, Insmed Incorporated (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, 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 consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated
statements of comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2019 and the related notes and our report dated February 25, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance 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 and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely 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 of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Iselin, New Jersey
February 25, 2020
INSMED INCORPORATED
Consolidated Balance Sheets
(in thousands, except par value and share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other current assets
Total current assets
Intangibles, net
Fixed assets, net
Finance lease right-of-use assets
Operating lease right-of-use assets
Other assets
Total assets
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation
Finance lease liabilities
Operating lease liabilities
Other current liabilities
Total current liabilities
Debt, long-term
Finance lease liabilities, long-term
Operating lease liabilities, long-term
Other long-term liabilities
Total liabilities
Shareholders' equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 89,682,387
and 77,307,521 issued and outstanding shares at December 31, 2019 and
December 31, 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
As of December 31,
2018
2019
$ 487,429
$ 495,072
19,232
28,313
20,220
5,515
7,032
11,327
555,194
518,946
53,682
60,180
58,675
22,636
15,256
37,673
20,314
$ 742,299
—
—
4,299
$ 604,556
$
13,184
40,375
19,140
1,221
11,040
280
85,240
335,940
19,529
29,308
10,608
480,625
$
17,741
38,254
22,208
—
—
1,529
79,732
316,558
—
—
—
396,290
897
773
1,797,286
(1,536,499)
1,489,664
(1,282,162)
(10)
(9)
261,674
208,266
$ 742,299
$ 604,556
75
76
See accompanying notes to consolidated financial statements
INSMED INCORPORATED
Consolidated Statements of Comprehensive Loss
(in thousands, except per share data)
INSMED INCORPORATED
Consolidated Statements of Shareholders' Equity
(in thousands)
Years Ended December 31,
2018
2017
2019
Revenues, net
Cost of product revenues (excluding amortization of intangible assets)
Gross profit
$ 136,467
$
9,835
$
24,212
112,255
2,423
7,412
—
—
—
Operating expenses:
Research and development
Selling, general and administrative
Amortization of intangible assets
Total operating expenses
131,711
210,796
4,993
145,283
168,218
1,249
109,749
79,171
—
347,500
314,750
188,920
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Balance at January 1, 2017
62,020
$
620
$
919,164
$
(765,236) $
(65) $ 154,483
Comprehensive loss:
Net loss
Other comprehensive income
Exercise of stock options
Net proceeds from issuance of common
stock
Issuance of common stock for vesting of
RSUs
Stock compensation expense
379
4
3,429
14,123
141
377,515
89
1
18,073
(192,649)
62
(192,649)
62
3,433
377,656
1
18,073
Operating loss
(235,245)
(307,338)
(188,920)
Balance at December 31, 2017
76,611
$
766
$ 1,318,181
$
(957,885) $
(3) $ 361,059
Investment income
Interest expense
Loss on extinguishment of debt
Other (expense) income, net
Loss before income taxes
9,921
(27,705)
—
(531)
(253,560)
10,341
(25,472)
(2,209)
602
(324,076)
1,624
(5,925)
—
300
(192,921)
Provision (benefit) for income taxes
777
201
(272)
Net loss
$ (254,337) $ (324,277) $ (192,649)
Basic and diluted net loss per share
$
(3.01) $
(4.22) $
(2.89)
Weighted average basic and diluted common shares outstanding
84,560
76,889
66,576
Net loss
$ (254,337) $ (324,277) $ (192,649)
Other comprehensive income (loss):
Foreign currency translation (losses) gains
Total comprehensive loss
(1)
(6)
62
$ (254,338) $ (324,283) $ (192,587)
See accompanying notes to audited consolidated financial statements
Comprehensive loss:
Net loss
Other comprehensive loss
Exercise of stock options and ESPP shares
645
Equity component of convertible debt
Issuance of common stock for vesting of
RSUs
52
Stock compensation expense
6
1
8,809
136,434
26,240
(324,277)
(6)
(324,277)
(6)
8,815
136,434
1
26,240
Balance at December 31, 2018
77,308
$
773
$ 1,489,664
$
(1,282,162) $
(9) $ 208,266
Comprehensive loss:
Net loss
Other comprehensive loss
Exercise of stock options and ESPP shares
1,632
Net proceeds from issuance of common
stock
Issuance of common stock for vesting of
RSUs
Stock compensation expense
10,658
84
16
107
1
19,684
260,967
26,971
(254,337)
(1)
(254,337)
(1)
19,700
261,074
1
26,971
Balance at December 31, 2019
89,682
$
897
$ 1,797,286
$
(1,536,499) $
(10) $ 261,674
See accompanying notes to audited consolidated financial statements
77
78
INSMED INCORPORATED
Consolidated Statements of Cash Flows (continued)
(in thousands)
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Amortization of intangible assets
Stock-based compensation expense
Loss on extinguishment of debt
Amortization of debt issuance costs
Accretion of debt discount and back-end fee on debt
Finance lease amortization expense
Noncash operating lease expense
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other
Accrued compensation
Net cash used in operating activities
Investing activities
Purchase of fixed assets
PARI milestone upon FDA approval
Net cash used in investing activities
Financing activities
Proceeds from issuance of 1.75% convertible senior notes due 2025
Payment on extinguishment of debt
Payment of debt
Proceeds from issuance of common stock, net
Proceeds from exercise of stock options, ESPP, and RSU vesting
Payment of debt issuance costs
Proceeds from tenant improvement allowance
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Years Ended December 31,
2017
2018
2019
$(254,337) $(324,277) $(192,649)
5,188
4,993
3,577
1,249
2,901
—
26,971
26,240
18,073
—
1,397
17,985
360
9,763
2,209
1,350
15,939
—
—
—
118
658
—
—
(13,717)
(21,281)
(8,718)
(16,008)
(4,966)
4,789
(3,068)
(250,649)
(5,515)
(7,032)
(5,514)
—
3,870
19,916
10,011
(257,977)
—
—
(2,783)
—
3,604
5,201
5,260
(159,617)
(42,268)
—
(42,268)
(13,090)
(1,724)
(14,814)
(3,001)
—
(3,001)
— 450,000
(2,835)
—
(55,000)
—
261,074
—
—
—
— 377,656
19,701
—
4,503
285,278
(4)
(7,643)
8,815
(14,237)
—
386,743
(45)
113,907
3,433
—
—
381,089
103
218,574
495,072
$ 487,429
381,165
$ 495,072
162,591
$ 381,165
$
$
7,883
339
$
$
6,289
154
$
$
5,165
166
See accompanying notes to audited consolidated financial statements
1. Description of Business and Basis of Presentation
Description of Business—Insmed is a global biopharmaceutical company on a mission to transform the lives of
patients with serious and rare diseases. The Company's first commercial product, ARIKAYCE (amikacin liposome inhalation
suspension), received accelerated approval in the United States (US) in September 2018 for the treatment of Mycobacterium
avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no
alternative treatment options. Nontuberculous mycobacterial (NTM) lung disease caused by MAC (which the Company refers
to as MAC lung disease) is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The
Company's clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl
peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis bronchiectasis and other inflammatory diseases. INS1009 is
an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders,
including pulmonary arterial hypertension (PAH).
The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive
offices are located in Bridgewater, New Jersey. The Company has legal entities in the US, France, Germany, Ireland, Italy, the
Netherlands, the United Kingdom (UK), Switzerland, Japan, and Bermuda.
The Company had $487.4 million in cash and cash equivalents as of December 31, 2019 and reported a net loss of
$254.3 million for the year ended December 31, 2019. Historically, the Company has funded its operations primarily through
public offerings of equity securities and debt financings. The Company commenced commercial shipments of ARIKAYCE in
October 2018. The Company expects to continue to incur operating losses both at its US and certain international entities while
funding research and development (R&D) activities for ARIKAYCE and its other pipeline programs, continuing
commercialization activities for ARIKAYCE in the US, continuing to invest in pre-commercial and regulatory activities for
ARIKAYCE in Europe and Japan, and funding other general and administrative activities.
The Company expects its future cash requirements to be substantial, and the Company may need to raise additional
capital to fund operations, including the commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE,
to develop INS1007 and INS1009 and to develop, acquire, in-license or co-promote other products or product candidates,
including those that address orphan or rare diseases. The source, timing and availability of any future financing or other
transaction will depend principally upon continued progress in the Company’s commercial, regulatory and development
activities. Any equity or debt financing will also be contingent upon equity and debt market conditions and interest rates at the
time. If the Company is unable to obtain sufficient additional funds when required, the Company may be forced to delay,
restrict or eliminate all or a portion of its development programs, commercialization or business development efforts. The
Company believes it currently has sufficient funds to meet its financial needs for at least the next 12 months.
Basis of Presentation—The consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiaries, Celtrix Pharmaceuticals, Inc., Insmed Holdings Limited, Insmed Ireland Limited, Insmed France SAS,
Insmed Germany GmbH, Insmed Limited, Insmed Netherlands B.V., Insmed Bermuda Limited, Insmed Godo Kaisha, Insmed
Switzerland GmbH, and Insmed Italy S.R.L.. All intercompany transactions and balances have been eliminated in
consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates—The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates and
judgments on historical experience and on various other assumptions. The amounts of assets and liabilities reported in the
Company's balance sheets and the amounts of revenues and expenses reported for each period presented are affected by
estimates and assumptions, which are used for, but not limited to, the accounting for revenue allowances, stock-based
compensation, income taxes, loss contingencies, and accounting for research and development costs. Actual results could differ
from those estimates.
Investment Income and Interest Expense—Investment income consists of interest income earned on the Company's
cash and cash equivalents. 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 less from the date of purchase.
79
80
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
2. Summary of Significant Accounting Policies (Continued)
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 the estimated useful life of the asset. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount 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 to estimated 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.
Intangible Assets, Net—Finite-lived intangible assets are measured at their respective fair values on the date they
were recorded and, with respect to the acquired ARIKAYCE R&D intangible asset, at the date of subsequent adjustments of
fair value. The fair values assigned to the Company's intangible assets are based on reasonable estimates and assumptions
given available facts and circumstances.
Impairment Assessment—The Company reviews the recoverability of its finite-lived intangible assets and long-lived
assets for indicators of impairments. Events or circumstances that may require an impairment assessment include negative
clinical trial results, a significant decrease in the market price of the asset, or a significant adverse change in legal factors or the
manner in which the asset is used. If such indicators are present, the Company assess the recoverability of affected assets by
determining if the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such
assets are found to not be recoverable, the Company measures the amount of the impairment by comparing to the carrying value
of the assets to the fair value of the assets. The Company determined that no indicators of impairment of finite-lived intangible
assets or long-lived assets existed at December 31, 2019.
Debt Issuance Costs—Debt issuance costs are amortized to interest expense using the effective interest rate method
over the term of the debt. Debt issuance costs paid to the lender and third parties are reflected as a discount to the debt in the
consolidated balance sheets. Unamortized debt issuance costs associated 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 financial statements on a recurring basis based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs
used to determine the fair value of financial assets and liabilities, are as follows:
•
•
•
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement
date.
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the
assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s
anticipated life.
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or
liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk
inherent in the inputs to the model.
Each major category of financial assets and liabilities measured at fair value on a recurring basis is categorized based
upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1
generally include US treasuries and mutual funds listed in active markets.
The Company's only financial assets and liabilities which were measured at fair value as of December 31, 2019 and
December 31, 2018 were Level 1 assets comprised of cash and cash equivalents. The Company's cash and cash equivalents
permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by
the holding financial institutions. The following table shows assets and liabilities that are measured at fair value on a recurring
basis and their carrying value (in millions):
81
Cash and cash equivalents
$
487.4
$
487.4
$
— $
—
Carrying
Value
Level 1
Level 2
Level 3
As of December 31, 2019
Fair Value
As of December 31, 2018
Fair Value
Carrying
Value
Level 1
Level 2
Level 3
Cash and cash equivalents
$
495.1
$
495.1
$
— $
—
The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter.
There were no transfers in or out of Level 1, Level 2 or Level 3 during 2019 and 2018.
As of December 31, 2019 and 2018, 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 its determination, the Company considers a number of factors, including: (1) the significance of the
decline; (2) whether the security was rated below investment grade; (3) how long the security has been in an unrealized loss
position; and (4) the Company's ability and intent to retain the investment for a sufficient period of time for it to recover.
The estimated fair value of the liability component of the 1.75% convertible senior notes due 2025 (the Convertible
Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of December 31, 2019 was $435.4 million,
determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible
Notes. The $335.9 million carrying value of the Convertible Notes as of December 31, 2019 excludes the $107.0 million of the
unamortized portion of the debt discount.
Foreign Currency—The Company has operations in the US, France, Germany, Ireland, Italy, the Netherlands,
Switzerland, the United Kingdom (UK), and Japan. The results of its non-US dollar based functional currency operations are
translated to US dollars at the average exchange rates during the period. Assets and liabilities are translated at the exchange rate
prevailing at the balance sheet date. Equity is translated at the prevailing exchange rate at the date of the equity transaction.
Translation adjustments are included in shareholders' equity, as a component of accumulated other comprehensive loss.
The Company realizes foreign currency transaction gains (losses) in the normal course of business based on
movements in the applicable exchange rates. These gains (losses) are included as a component of other income, net.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high credit-quality
financial institutions and may invest its short-term investments in US treasury securities, mutual funds and government agency
bonds. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and
liquidity.
The Company is exposed to risks associated with extending credit to customers related to the sale of products. The
Company does not require collateral to secure amounts due from its customers. The following table presents the percentage of
gross product revenue represented by the Company's three largest customers as of the year ended December 31, 2019.
Customer A
Customer B
Customer C
Percentage of Total Gross
Product Revenue
2018
2019
31%
26%
22%
27 %
37 %
15 %
82
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
2. Summary of Significant Accounting Policies (Continued)
The Company did not have product revenue prior to US FDA approval of ARIKAYCE in September 2018. The
Company relies on third-party manufacturers and suppliers for manufacturing and supply of its products. The inability of the
suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future operating results. A
change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially impact
future operating results.
Revenue Recognition—In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts
with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount
that reflects the consideration the Company expects to receive in exchange for the goods or services provided. To determine
revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify
the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity
satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each
contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance
obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, the Company
has identified one performance obligation: the sale of ARIKAYCE to its customers. The Company has not incurred or
capitalized any incremental costs associated with obtaining contracts with customers.
Product revenues consist primarily of sales of ARIKAYCE in the US. Product revenues are recognized once the
Company performs and satisfies all five steps mentioned above. In October 2018, the Company began shipping ARIKAYCE to
its customers in the US, which include specialty pharmacies and specialty distributors.
Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for
which reserves are established for (a) customer credits, such as invoice discounts for prompt pay and specialty pharmacies fees,
(b) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates,
(c) estimated chargebacks, and (d) estimated costs of co-payment assistance. These reserves are based on the amounts earned or
to be claimed on the related sales and are classified as reductions of accounts receivable (prompt pay discounts and
chargebacks), prepaid expenses (co-payment assistance), or as a current liability (rebates). Where appropriate, these estimates
take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company's
historical experience, current contractual and statutory requirements, and forecasted customer buying and payment patterns.
Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the
terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and
is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative
revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the
Company's estimates. If actual results in the future vary from estimates, the Company adjusts these estimates, which would
affect net product revenue and earnings in the period such variances become known.
Customer credits: The Company's customers are offered various forms of consideration, including fees for enhanced
services and prompt payment discounts. The payment terms for sales to specialty pharmacies for prompt payment discounts and
fees for services are based on contractual rates agreed with the respective specialty pharmacies. The Company anticipates that
its customers will earn these discounts and fees and, therefore, deduct the full amount of these discounts and fees from total
gross product revenues at the time such revenues are recognized.
Rebates: The Company contracts with government agencies and managed care organizations or collectively, third-
party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party
payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total
gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the
revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current
liability is included in accrued expenses on the consolidated balance sheets. The Company estimates the rebates that it will
provide to third-party payors based upon (i) the Company’s contracts with these third-party payors, (ii) the government
mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted
for the estimated payer mix, and (iv) information obtained from the Company’s specialty pharmacies.
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, currently public health service
institutions and federal government entities purchasing via the Federal Supply Schedule, purchase directly from the Company's
specialty distributor. Contracted customers generally purchase the product at a discounted price and the specialty distributor, in
turn, charges back to the Company the difference between the price they initially paid and the discounted price paid by the
contracted customers. The Company estimates chargebacks provided to the specialty distributor and deducts these estimated
amounts from gross product revenues, and from accounts receivable, at the time revenues are recognized.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive
co-payment assistance. Based upon the terms of the program and information regarding programs provided for similar specialty
pharmaceutical products, the Company estimates the average co-pay mitigation amounts and the percentage of patients that it
expects to participate in the program in order to establish accruals for co-payment assistance. These reserves are recorded in the
same period in which the related revenue is recognized, resulting in a reduction of product revenue. The Company adjusts its
accruals for co-pay assistance based on actual redemption activity and estimates of future redemptions related to sales in the
current period.
If any, or all, of the Company's actual experience vary from the estimates above, the Company may need to adjust
prior period accruals, affecting revenue in the period of adjustment.
The following table provides a summary roll-forward of the Company's sales allowances and related accruals for the
years ended December 31, 2019 and 2018, which have been deducted in arriving at revenues, net (in thousands).
Balance as of January 1, 2019
Allowances for current period sales
Allowances for prior period sales
Payments and credits
Balance as of December 31, 2019
Customer Credits,
Fees and Discounts
234
$
3,151
14
(2,935)
464
$
Rebates,
Chargebacks and
Co-pay Assistance
688
$
12,059
26
(7,602)
5,171
$
$
$
Balance as of January 1, 2018
Allowances for current period sales
Payments and credits
Balance as of December 31, 2018
$
$
— $
335
(101)
234
$
— $
849
(161)
688
$
Total
922
15,210
40
(10,537)
5,635
—
1,184
(262)
922
The Company also recognizes revenue related to early access programs (EAPs) in Europe, consisting of sales to the
French National Agency for Medicines and Health Products Safety, which granted ARIKAYCE a Temporary Authorization for
Use (Autorisation Temporaire d'Utilisation or ATU) and from the named patient program in Germany, both compassionate use
programs. EAPs are intended to make products available on a named patient basis before they are commercially available in
accordance with local regulations.
Inventory and Cost of Product Revenues (excluding amortization of intangible assets)—Inventory is stated at the
lower of cost and net realizable value. The Company began capitalizing inventory costs following FDA approval of
ARIKAYCE in September 2018. Inventory is sold on a first-in, first-out (FIFO) basis. The Company periodically reviews
inventory for expiry and obsolescence and, if necessary, writes down accordingly. If quality specifications are not met during
the manufacturing process, such inventory is written off to cost of product revenues (excluding amortization of intangible
assets) in the period identified.
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs
related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and
83
84
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
2. Summary of Significant Accounting Policies (Continued)
allocation of overhead costs, in addition to royalty expenses and revenue-based milestones. Cost is determined using a standard
cost method, which approximates actual cost, and assumes a first-in, first-out (FIFO) flow of goods.
Prior to FDA approval of ARIKAYCE, the Company expensed all inventory related costs in the period incurred.
Potentially dilutive securities from stock options and restricted stock units would be anti-dilutive as the Company incurred a net
loss in all periods presented. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock
options would be determined based on the treasury stock method.
Inventory used for clinical development purposes is expensed to research and development (R&D) expense when consumed.
The following table sets forth the reconciliation of the weighted average number of shares used to compute basic and
Research and Development—R&D 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, including medical
affairs. R&D expense also includes other internal operating expenses, the cost of manufacturing a product candidate, including
the medical devices for drug delivery, for clinical study, the cost of conducting clinical studies, and the cost of conducting
preclinical and research activities. In addition, R&D expenses include payments to third parties for the license rights to products
in development (prior to marketing approval), such as INS1007. The Company's expenses related to manufacturing its product
candidates and medical devices for clinical study are primarily related to activities at contract manufacturing organizations that
manufacture INS1007 and INS1009. The Company's expenses related to clinical trials are primarily related to activities at
contract research organizations that conduct and manage 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 trial milestones as well as
time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity
according to the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for
future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the
related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.
Stock-based Compensation—The Company recognizes stock-based compensation expense for awards of equity
instruments to employees and directors 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 the requisite service period, which generally equals the vesting
period of the award, and if applicable, is adjusted for expected forfeitures. The Company may also grant performance-based
stock options to employees from time-to-time. The grant-date fair value of performance-based stock options is recognized as
compensation expense 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 R&D and SG&A expenses in
the consolidated statements of comprehensive loss.
Income Taxes—The Company accounts for income taxes under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect 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 a valuation allowance, the Company takes into account various factors, including the expected level of
future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation
of a valuation allowance, the Company records a change in valuation allowance through income tax expense in the period such
determination is made.
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 sustained on examination by taxing authorities, based solely on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a
greater than 50% likelihood to be sustained upon ultimate settlement. As any adjustment to the Company’s uncertain tax
positions would not result in a cash tax liability, it has not recorded any accrued interest or penalties related to its uncertain tax
positions.
The Company's policy for interest and penalties related to income tax exposures is to recognize interest and penalties
as a component of the income tax provision (benefit) in the consolidated statements of comprehensive loss.
Net Loss Per Share—Basic net loss per share is computed by dividing net loss attributable to common shareholders
by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by
dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period.
diluted net loss per share for the years ended December 31, 2019, 2018 and 2017.
Years Ended December 31,
2018
(in thousands, except per share amounts)
2019
2017
Numerator:
Net loss
Denominator:
Weighted average common shares used in calculation of basic net loss per
share:
Effect of dilutive securities:
Common stock options
Unvested restricted stock and restricted stock units
Convertible debt securities
Weighted average common shares outstanding used in calculation of
diluted net loss per share
Net loss per share:
Basic and diluted
$
(254,337) $
(324,277) $
(192,649)
84,560
76,889
66,576
—
—
—
—
—
—
—
—
—
84,560
76,889
66,576
$
(3.01) $
(4.22) $
(2.89)
The following potentially dilutive securities have been excluded from the computations of diluted weighted average
common shares outstanding as of December 31, 2019, 2018 and 2017 as their effect would have been anti-dilutive (in
thousands).
Common stock options
Unvested restricted stock and restricted stock units
Convertible debt securities
As of December 31,
2018
2017
2019
10,493
501
11,492
9,382
228
11,492
8,609
47
—
Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases
classified as operating leases under previous generally accepted accounting principles. ASU 2016-02 requires a lessee to
recognize a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right to use the
underlying asset for the lease term on the balance sheet.
A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified
property, plant or equipment in exchange for consideration. Control of an asset is conveyed to the Company if the Company
obtains the right to obtain substantially all of the economic benefits of the asset or the right to direct the use of the asset. The
Company recognizes ROU assets and lease liabilities at the lease commencement date based on the present value of future,
fixed lease payments over the term of the arrangement. ROU assets are amortized on a straight-line basis over the term of the
lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable
lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the statement
of comprehensive loss in the same line item as expenses arising from fixed lease payments.
In accordance with Topic 842, leases are measured at present value using the rate implicit in the lease or, if the implicit
rate is not determinable, the lessee's implicit borrowing rate. As the implicit rate is not typically available, the Company uses its
85
86
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
implicit borrowing rate based on the information available at the lease commencement date to determine the present value of
future lease payments. The implicit borrowing rate approximates the rate the Company would pay to borrow on a collateralized
basis over a similar term an amount equal to the lease payments.
Financial information presented prior to January 1, 2019 has not been adjusted and is presented in accordance with
ASC 840. Refer to the Recently Adopted Accounting Pronouncements section within this note below and Note 7 - Leases for
details about the Company's lease portfolio, including Topic 842 required disclosures.
Inventory is stated at the lower of cost and net realizable value and consists of raw materials, work-in-process and
finished goods. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE in September 2018.
The Company has not recorded any significant inventory write downs since that time. The Company currently uses a limited
number of third-party contract manufacturing organizations (CMOs) to produce its inventory.
4. Accrued Expenses
Segment Information—The Company currently operates in one business segment, which is the development and
Accrued expenses consist of the following (in thousands):
commercialization of therapies for patients with rare diseases. A single management team that reports to the Chief Executive
Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to
its products or product candidates. Accordingly, the Company has one reportable segment.
Recently Adopted Accounting Pronouncements—Topic 842 was effective for fiscal years beginning after December
15, 2018 (including interim periods within those years) and early adoption was permitted. In August 2018, the FASB issued
ASU 2018-11, Targeted Improvements to ASC 842, which provided a transition option in which an entity would initially apply
ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption. The Company used the new transition option and the package of practical expedients that allowed it to
not reassess: (1) whether any expired or existing contracts are or contain leases; (2) lease classification for any expired or
existing leases; and (3) initial direct costs for any expired or existing leases. The Company also used the practical expedient that
allows it to treat the lease and non-lease components of its leases as a single component. The Company adopted ASU 2016-02
effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the consolidated balance sheet was $47.4 million.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addressed
eight specific cash flow issues with the objective of reducing the existing diversity in practice. Among the updates, the standard
requires debt extinguishment costs to be classified as cash outflows for financing activities. This standard update became
effective as of the first quarter of 2018. As a result of the adoption of the standard, in the first quarter of 2018, the Company
reported a $2.2 million loss on extinguishment of debt in the operating activities section of its consolidated statement of cash
flows. The Company had no material debt extinguishment costs prior to the first quarter of 2018. The impact of adopting this
standard was not material to the Company.
Recent Accounting Pronouncements (Not Yet Adopted)—In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses which requires financial assets measured at an amortized cost basis to be presented at the net
amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events,
including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the
reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and the Company will adopt the
standard effective January 1, 2020. Different aspects of the guidance require modified retrospective or prospective adoption.
The Company has performed an assessment and has determined that adoption will not have a material impact on its
consolidated financial statements.
3. Inventory
The Company's inventory balance consists of the following (in thousands):
Raw materials
Work-in-process
Finished goods
As of December 31,
2019
2018
16,048 $
6,420
5,845
28,313 $
2,145
4,567
320
7,032
$
$
87
Accrued clinical trial expenses
Accrued professional fees
Accrued technical operation expenses
Accrued royalty payable
Accrued interest payable
Accrued sales allowances and related costs
Accrued construction costs
Other accrued expenses
5. Intangible Assets, Net
As of December 31,
2018
2019
$
5,598
$
12,581
6,446
3,117
3,631
5,267
2,689
1,046
40,375
$
$
6,635
13,398
9,371
409
3,631
818
2,946
1,046
38,254
As of December 31, 2019, the Company's finite-lived intangible assets consisted of acquired ARIKAYCE R&D,
which resulted from the initial amount recorded at the time of the Company's merger with Transave in 2010 and subsequent
adjustments in the value, and a milestone paid to PARI of $1.7 million for the license to use PARI's Lamira® Nebulizer System
for the delivery of ARIKAYCE to patients as a result of the FDA approval of ARIKAYCE in September 2018 (the PARI
milestone). Total intangible assets, net was $53.7 million and $58.7 million as of December 31, 2019 and 2018, respectively.
The Company began amortizing its finite-lived intangible assets in October 2018, over ARIKAYCE's initial regulatory
exclusivity period of 12 years. Amortization of these assets during each of the next five years is estimated to be approximately
$5.0 million per year.
A rollforward of the Company's finite-lived intangible assets for the years ended December 31, 2019 and 2018 follows
(in thousands):
Intangible Asset
January 1,
Additions
Amortization
2019
Acquired ARIKAYCE R&D
PARI milestone
Intangible Asset
Acquired ARIKAYCE R&D
PARI milestone
$
$
$
$
56,988 $
1,687
58,675 $
— $
—
— $
2018
December 31,
52,139
(4,849) $
(144)
(4,993) $
1,543
53,682
January 1,
Additions
Amortization
December 31,
58,200 $
— $
(1,212) $
—
1,724
(37)
58,200 $
1,724 $
(1,249) $
56,988
1,687
58,675
88
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Fixed Assets, Net
Fixed assets are stated at cost and depreciated using the straight-line method, based on useful lives as follows (in
thousands):
Asset Description
Lab equipment
Furniture and fixtures
Computer hardware and software
Office equipment
Manufacturing equipment
Leasehold improvements
Construction in progress (CIP)
Less accumulated depreciation
Fixed assets, net
Estimated
Useful Life (years)
As of December 31,
2019
2018
7
7
3 - 5
7
7
lease term
—
$
9,634
$
5,908
6,806
154
1,567
33,852
21,526
79,447
(19,267)
60,180
$
$
7,935
2,320
3,796
65
1,166
7,202
14,325
36,809
(14,173)
22,636
Fixed assets, net of depreciation, increased to $60.2 million during the year ended December 31, 2019 from
$22.6 million in 2018. The $37.5 million increase was primarily due to the $26.7 million and $7.2 million increases in leasehold
improvements and construction in progress, respectively, related to the Company's new corporate headquarters and the long-
term capacity increase of the Patheon manufacturing facility.
Depreciation expense was $5.2 million, $3.6 million and $2.9 million for the years ended December 31, 2019, 2018
and 2017, respectively.
7. Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU 2016-02 requires
a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right
to use the underlying asset for the lease term on the balance sheet.
A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified
property, plant or equipment in exchange for consideration. Control of an asset is conveyed to the Company if the Company
obtains the right to obtain substantially all of the economic benefits of the asset or the right to direct the use of the asset. The
Company recognizes ROU assets and lease liabilities at the lease commencement date based on the present value of future,
fixed lease payments over the term of the arrangement. ROU assets are amortized on a straight-line basis over the term of the
lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable
lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the statement
of comprehensive loss in the same line item as expenses arising from fixed lease payments.
In accordance with Topic 842, leases are measured at present value using the rate implicit in the lease or, if the implicit
rate is not determinable, the lessee's implicit borrowing rate. As the implicit rate is not typically available, the Company uses its
implicit borrowing rate based on the information available at the lease commencement date to determine the present value of
future lease payments. The implicit borrowing rate approximates the rate the Company would pay to borrow on a collateralized
basis over a similar term an amount equal to the lease payments.
In order to determine the appropriate discount rate for each lease, the Company determined its public credit rating and
constructed debt yield curves. The debt yield curves were adjusted to reflect a collateral borrowing and differences in foreign
currencies, where applicable, as well as to match the term of each lease.
89
7. Leases (Continued)
Financial information presented prior to January 1, 2019 has not been adjusted and is presented in accordance with
ASC 840. Refer to the Recently Adopted Accounting Pronouncements section within Note 2 - Summary of Significant
Accounting Policies note.
The Company's lease portfolio consists primarily of office space, manufacturing facilities and fleet vehicles. All of the
Company's leases are classified as operating leases, except for the Company's corporate headquarters lease, which is classified
as a finance lease. The terms of the Company's lease agreements that have commenced range from less than one year to ten
years, ten months. In its assessment of the term of each such lease, the Company has not included any options to extend or
terminate the lease due to the absence of economic incentives in its lease agreements. As permitted by the practical expedient in
ASU 2016-02, leases that qualify for treatment as a short-term lease are expensed as incurred. These short-term leases are not
material to the Company's financial position. Furthermore, the Company has elected the practical expedient to not separate
lease and non-lease components for all classes of underlying assets. The Company's leases do not contain residual value
guarantees and it does not sublease any of its leased assets.
The Company outsources its manufacturing operations to CMOs. Upon review of the agreements with its CMOs, the
Company determined that these contracts contain embedded leases for dedicated manufacturing facilities. The Company obtains
substantially all of the economic benefits from the use of the manufacturing facilities, has the right to direct how and for what
purpose the facility is used throughout the period of use, and the supplier does not have the right to change the operating
instructions of the facility. The operating lease right-of-use assets and corresponding lease liabilities associated with the
manufacturing facilities is the sum of the minimum guarantees over the life of the production contracts.
In September 2018, the Company entered into the agreement to lease its new corporate headquarters in Bridgewater,
NJ, consisting of 117,022 square feet. The lease term commenced in the fourth quarter of 2019 and is accounted for as a finance
lease. The initial lease term expires in June 2030.
The table below summarizes the Company's total lease costs included in its consolidated financial statements, as well
as other required quantitative disclosures (in thousands).
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Operating lease cost
Total lease cost
Other information:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for finance leases
Operating cash flows for operating leases
Financing cash flows for finance leases
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term - finance leases
Weighted average remaining lease term - operating leases
Weighted average discount rate - finance leases
Weighted average discount rate - operating leases
As of December 31, 2019
$
360
440
$
$
$
$
$
$
$
800
12,218
13,018
—
10,060
(4,503)
20,310
47,436
10.6 years
5.0 years
8.6 %
7.4 %
The table below presents the maturity of lease liabilities on an annual basis for the remaining years of the Company's
commenced lease agreements (in thousands).
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Leases (Continued)
8. Debt (Continued)
Year Ending December 31,
Finance Lease
Operating Leases
2020
2021
2022
2023
2024
Thereafter
Total
Less: present value discount
Present value of lease liabilities
Balance Sheet Classification at December 31, 2019:
Current lease liabilities
Long-term lease liabilities
Total lease liabilities
$
$
$
$
2,938 $
2,996
2,280
2,080
3,172
18,784
32,250
11,500
20,750 $
1,221 $
19,529
20,750 $
13,415
10,306
6,000
6,000
6,000
6,000
47,721
7,373
40,348
11,040
29,308
40,348
In addition to the Company's lease agreements that have previously commenced and are reflected in the consolidated
financial statements, the Company has entered into additional lease agreements that have not yet commenced. The Company
entered into certain agreements with Patheon related to increasing its long-term production capacity for ARIKAYCE
commercial inventory. The Company has determined that these agreements with Patheon contain an embedded lease for the
manufacturing facility and the specialized equipment contained therein. Costs of $17.9 million incurred by the Company under
these additional agreements have been classified within other assets in the Company's consolidated balance sheet. Upon the
commencement date, prepaid costs and minimum guarantees specified in the agreement will be combined to establish an
operating lease right-of-use asset and operating lease liability.
8. Debt
In January 2018, the Company completed an underwritten public offering of the Convertible Notes, in which the
Company sold $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the
underwriters' option to purchase additional Convertible Notes of $50.0 million. The Company's net proceeds from the offering,
after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately
$435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year,
beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or
repurchased.
On or after October 15, 2024, until the close of business on the second scheduled trading day immediately preceding
January 15, 2025, holders may convert their Convertible Notes at any time. Upon conversion, holders may receive cash, shares
of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's
option. The initial conversion rate is 25.5384 shares of common stock per $1,000 principal amount of Convertible Notes
(equivalent to an initial conversion price of approximately $39.16 per share of common stock). The conversion rate will be
subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.
Holders may convert their Convertible Notes prior to October 15, 2024, only under the following circumstances,
subject to the conditions set forth in an indenture, dated as of January 26, 2018, between the Company and Wells Fargo Bank,
National Association (Wells Fargo), as trustee, as supplemented by the first supplemental indenture, dated January 26, 2018,
between the Company and Wells Fargo (as supplemented, the Indenture): (i) during the five business day period immediately
after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount
of convertible notes, as determined following a request by a holder of the convertible notes, for each trading day of the
measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion
rate on such trading day, (ii) the Company elects to distribute to all or substantially all holders of the common stock (a) any
rights, options or warrants (other than in connection with a stockholder rights plan for so long as the rights issued under such
plan have not detached from the associated shares of common stock) entitling them, for a period of not more than 45 days from
the declaration date for such distribution, to subscribe for or purchase shares of common stock at a price per share that is less
than the average of the last reported sale prices of the common stock for the 10 consecutive trading day period ending on, and
including, the trading day immediately preceding the declaration date for such distribution, or (b) the Company’s assets, debt
securities or rights to purchase securities of the Company, which distribution has a per share value, as reasonably determined by
the board of directors, exceeding 10% of the last reported sale price of the common stock on the trading day immediately
preceding the declaration date for such distribution, (iii) if a transaction or event that constitutes a fundamental change or a
make-whole fundamental change occurs, or if the Company is a party to (a) a consolidation, merger, combination, statutory or
binding share exchange or similar transaction, pursuant to which the common stock would be converted into, or exchanged for,
cash, securities or other property or assets, or (b) any sale, conveyance, lease or other transfer or similar transaction in one
transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its subsidiaries,
taken as a whole, all or any portion of the Convertible Notes may be surrendered by a holder for conversion at any time from or
after the date that is 30 scheduled trading days prior to the anticipated effective date of the transaction, (iv) if during any
calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar quarter), the
last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130% of the conversion price on each applicable trading day, or, (v) if the Company sends a notice of redemption, a holder may
surrender all or any portion of its Convertible Notes, to which the notice of redemption relates, for conversion at any time on or
after the date the applicable notice of redemption was sent until the close of business on (a) the second business day
immediately preceding the related redemption date or (b) if the Company fails to pay the redemption price on the redemption
date as specified in such notice of redemption, such later date on which the redemption price is paid.
The Convertible Notes can be settled in cash, common stock, or a combination of cash and common stock at the
Company's option, and thus, the Company determined the embedded conversion options in the convertible notes are not
required to be separately accounted for as a derivative. However, since the Convertible Notes are within the scope of the
accounting guidance for cash convertible instruments, the Company is required to separate the Convertible Notes into liability
and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar
liability that does not have an associated equity component. The fair value was based on data from readily available pricing
sources which utilize market observable inputs and other characteristics for similar types of instruments. The carrying amount
of the equity component representing the embedded conversion option was determined by deducting the fair value of the
liability component from the gross proceeds of the Convertible Notes. The excess of the principal amount of the liability
component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not
have an associated equity component using the effective interest method. The equity component is not remeasured as long as it
continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity.
The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million using
an effective interest rate of 7.6%, and accordingly, the residual equity component on the date of issuance was $140.9 million.
The discount is being amortized to interest expense over the term of the Convertible Notes and has a remaining period of
approximately 5.04 years.
For the twelve months ended December 31, 2019, total interest expense related to the Convertible Notes was $27.3
million, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs,
and accretion of debt discount, as described in the table below. The following table presents the carrying value of the
Company’s debt balance as of December 31, 2019 (in thousands):
1.75% convertible senior notes due 2025
Debt issuance costs, unamortized
Discount on debt
Long-term debt, net
As of December 31, 2019
450,000
$
(7,043)
(107,017)
335,940
$
As of December 31, 2019, future principal repayments of the debt for each of the fiscal years through maturity were as
follows (in thousands):
92
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Debt (Continued)
9. Shareholders' Equity (Continued)
Year Ending December 31:
2020
2021
2022
2023
2024 and thereafter
$
$
—
—
—
—
450,000
450,000
In February 2018, the Company used part of the net proceeds from the issuance of the Convertible Notes to pay off its
outstanding debt to Hercules Capital (Hercules). The payments to Hercules consisted of $55.0 million for the principal amount
and an additional $3.2 million in back-end fees, outstanding interest, and prepayment penalty fees, which resulted in a $2.2
million loss on extinguishment of debt in the quarter ended March 31, 2018.
The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is
determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are
currently in place. As of December 31, 2019 and 2018, the fair value of the Company's debt approximated the carrying amount.
Interest Expense
Interest expense related to debt and the finance lease for the years ended December 31, 2019, 2018, and 2017, which
includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, and accretion of
debt discount is as follows (in thousands):
Contractual interest expense
Amortization of debt issuance costs
Accretion of back-end fee on debt
Accretion of debt discount
Total convertible debt interest expense
Finance lease interest expense
Total interest expense
9. Shareholders' Equity
Years ended December 31,
2019
2018
2017
7,883 $
8,183
$
5,149
1,397
—
17,985
1,350
50
15,889
27,265 $
25,472
$
440
—
27,705 $
25,472
$
118
658
—
5,925
—
5,925
$
$
$
Common Stock—As of December 31, 2019, the Company had 500,000,000 shares of common stock authorized
with a par value of $0.01 and 89,682,387 shares of common stock issued and outstanding. In addition, as of December 31,
2019, the Company had reserved 10,492,946 shares of common stock for issuance upon the exercise of outstanding common
stock options and 500,822 shares of common stock for issuance upon the vesting of restricted stock units.
In the second quarter of 2019, the Company completed an underwritten public offering of 10,657,692 shares of the
Company's common stock, which included the underwriters' exercise in full of their over-allotment option of 1,042,307 shares
from the Company at a price to the public of $26.00, less underwriting discounts and commissions. The Company's net
proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of
$16.0 million, were $261.1 million. The offering also included the sale of 400,000 shares from the Company's Chairman and
Chief Executive Officer, from which the Company received no proceeds.
In January 2018, the Company completed an underwritten public offering of $450.0 million aggregate principal
amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes.
The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million, and
accordingly, the equity component (included in additional paid-in capital) on the date of issuance was calculated as
$140.9 million using the residual method, as further described in Note 8 Debt.
In September 2017, the Company completed an underwritten public offering of 14,123,150 shares of the Company’s
common stock, which included the 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 proceeds from the sale of the shares, after deducting underwriting discounts
and offering expenses of $24.8 million, were approximately $377.7 million.
Preferred Stock—As of December 31, 2019 and 2018, the Company had 200,000,000 shares of preferred stock
authorized with a par value of $0.01 and no shares of preferred stock were issued and outstanding.
10. Stock-Based Compensation
The Company’s current equity compensation plan, the 2019 Incentive Plan, was approved by shareholders at the
Company’s Annual Meeting of Shareholders in May 2019. The 2019 Incentive Plan is administered by the Compensation
Committee of the Board of Directors of the Company. Under the terms of the 2019 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 to eligible employees and non-
employee directors. Upon the approval of the 2019 Incentive Plan by shareholders, 3,500,000 shares were authorized for
issuance thereunder, plus any shares subject to then-outstanding awards under the 2017 Incentive Plan, 2015 Incentive Plan and
the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or
were settled in cash without the delivery of shares. As of December 31, 2019, 3,868,698 shares remained for future issuance
under the 2019 Incentive Plan. The 2019 Incentive Plan will terminate on May 16, 2029 unless it is extended or terminated
earlier pursuant to its terms. In addition, from time to time, the Company makes inducement grants of stock options. These
awards are made pursuant to the Nasdaq inducement grant exception as a component of new hires’ employment compensation
in connection with the Company’s equity grant program. During the twelve months ended December 31, 2019 and 2018, the
Company granted inducement stock options covering 305,180 and 295,720 shares, respectively, of the Company's common
stock to new employees.
Stock Options—The Company calculates the fair value of stock options granted using the Black-Scholes valuation
model. The following table summarizes 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, 2019, 2018 and 2017.
Volatility
Risk-free interest rate
Dividend yield
Expected option term (in years)
Weighted average fair value of stock options granted
2019
67%-70%
2018
66% - 68%
2017
71% - 79%
1.35%-2.56%
0.0%
2.25% - 2.96%
0.0%
1.73% - 2.13%
0.0%
5.09
$8.76
5.09
$16.03
6.25
$10.52
For the years ended December 31, 2019, 2018 and 2017, the volatility factor was based on the Company’s historical
volatility during the expected option term. Estimated forfeitures were based on the actual percentage of option forfeitures since
the closing of the Company’s merger with Transave, Inc. in December 2010 for the years ended 2017 and prior. Beginning with
the year ended December 31, 2018, estimated forfeitures were based on the actual 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 Company achieving certain performance criteria established at the date of grant and the individuals fulfilling a
service condition (continued employment). As a result of the FDA approval of ARIKAYCE in September 2018, the vesting of
93
94
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation (Continued)
10. Stock-Based Compensation (Continued)
performance options totaling $1.1 million was recorded as noncash compensation expense in the third quarter of 2018. The
Company had no performance options outstanding as of December 31, 2019 and 2018.
The following table summarizes stock option activity for stock options granted for the years ended December 31,
2019, 2018 and 2017 as follows:
Options outstanding at January 1, 2017
Granted
Exercised
Forfeited and expired
Options outstanding at December 31, 2017
Vested and expected to vest at December 31, 2017
Exercisable at December 31, 2017
Options outstanding at December 31, 2017
Granted
Exercised
Forfeited and expired
Options outstanding at December 31, 2018
Vested and expected to vest at December 31, 2018
Exercisable at December 31, 2018
Granted
Exercised
Forfeited and expired
Options outstanding at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019
Number of
Shares
7,116,706
2,284,710
$
$
(378,275) $
(414,220) $
8,608,921
$
8,325,255
$
4,229,478
$
8,608,921
$
$
1,755,600
(494,351) $
(488,440) $
$
9,381,730
$
8,693,635
$
5,649,698
$
3,434,270
(1,413,341) $
(909,713) $
$
$
$
10,492,946
9,767,035
5,719,818
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic
Value
(in '000)
13.30
15.92
9.08
15.50
14.08
14.03
12.71
14.08
27.63
14.46
19.79
16.30
15.90
13.45
15.02
11.87
19.02
16.24
16.15
15.38
6.82 $
6.67 $
5.37 $
86,921
81,572
51,000
The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was
$16.5 million, $5.6 million and $4.3 million, respectively.
As of December 31, 2019, there was $31.1 million of unrecognized compensation expense related to unvested stock
options, which is expected to be recognized over a weighted average period of 2.6 years. The following table summarizes the
range of exercise prices and the number of stock options outstanding and exercisable as of December 31, 2019:
Outstanding as of December 31, 2019
Weighted
Average
Remaining
Contractual Term
(in Years)
Number of
Options
Weighted
Average
Exercise Price
1,419,872
1,547,063
2,661,040
1,394,176
1,112,775
1,139,884
1,058,332
131,180
21,794
6,830
4.63 $
5.44 $
9.01 $
5.57 $
7.16 $
6.04 $
8.20 $
8.09 $
7.48 $
8.00 $
7.55
12.91
13.91
15.59
17.75
22.29
29.12
30.94
31.78
32.46
Range of
Exercise Prices
$
$
$
$
$
$
$
$
$
$
3.03
11.14
13.91
13.94
16.44
19.65
24.41
30.86
31.78
32.46
$
$
$
$
$
$
$
$
$
$
10.85
13.67
13.91
16.16
19.47
24.22
30.46
31.73
31.78
32.46
Exercisable as of
December 31, 2019
Weighted
Average
Exercise
Price
7.27
12.76
—
15.56
17.88
22.25
29.46
30.96
31.78
32.46
Number of
Options
1,311,142
1,237,855
$
$
— $
$
$
$
$
$
$
$
1,180,091
696,563
892,465
339,295
48,407
11,439
2,561
Restricted Stock and Restricted Stock Units—The Company may grant Restricted Stock (RS) and Restricted Stock
Units (RSUs) to employees and non-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 the completion of a specific period of continued service.
RS and RSU awards granted are valued at the market price of the Company's common stock on the date of grant. The
Company recognizes noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the
requisite service period of these awards.
The following table summarizes RSU awards granted during the years ended December 31, 2019, 2018 and 2017:
Outstanding at January 1, 2017
Granted
Released
Forfeited
Outstanding at December 31, 2017
Granted
Released
Forfeited
Outstanding at December 31, 2018
Granted
Released
Forfeited
Outstanding at December 31, 2019
Number of
RSUs
Weighted
Average
Grant Price
10.85
$
89,194
17.16
$
46,914
10.85
(89,194) $
—
— $
17.16
$
29.16
$
46,914
253,586
(51,992) $
(20,682) $
227,826
407,655
$
$
(92,145) $
(42,514) $
500,822
$
18.46
29.05
29.14
27.89
28.05
29.11
28.32
95
96
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation (Continued)
11. Income Taxes (Continued)
As of December 31, 2019, there was $8.3 million of unrecognized compensation expense related to unvested awards,
The Company's income tax provision (benefit) consisted of the following (in thousands):
which is expected to be recognized over a weighted average period of 2.7 years.
The following table summarizes the stock-based compensation recorded in the consolidated statements of
comprehensive loss related to stock options and RSUs during the years ended December 31, 2019, 2018 and 2017 (in millions):
Research and development expenses
Selling, general and administrative expenses
Total
2019
2018
2017
$
$
8.2
18.8
27.0
$
$
9.4
16.8
26.2
$
$
6.5
11.6
18.1
Employee Stock Purchase Plan - On May 15, 2018, the Company's shareholders approved the Company’s 2018
Employee Stock Purchase Plan (ESPP). As part of the ESPP, eligible employees may acquire an ownership interest in the
Company by purchasing common stock, at a discount, through payroll deductions. The ESPP is compensatory under GAAP and
the Company recorded stock compensation expense of $1.6 million and $0.9 million for the years ended December 31, 2019
and 2018, respectively.
11. Income Taxes
The income tax provision (benefit) was $0.8 million, $0.2 million and $(0.3) million and the effective rates were
approximately 0%, 0% and 0% for the years ended December 31, 2019, 2018 and 2017, respectively. The income tax (benefit)
for the year ended December 31, 2017 reflects the reversal of the valuation allowance related to alternative minimum tax
(AMT) that the Company paid in 2009. As a result of the Tax Cuts and Jobs Act (the Tax Act), the Company recorded a
noncurrent receivable to reflect the refund due to the Company in future periods relating to the previously paid AMT. In
addition, the income tax provision (benefit) for the years ended December 31, 2019, 2018 and 2017 reflected current income tax
expense recorded as a result of the taxable income in certain of the Company's non-US subsidiaries.
For the years ended December 31, 2019 and 2018, the Company was also subject to foreign income taxes as a result of
legal entities established for activities in Europe and Japan. The Company's loss before income taxes in the US and globally
was as follows (in thousands):
US
Foreign
Total
Years Ended December 31,
2018
(286,211) $
(37,865)
(324,076) $
2019
(201,161) $
(52,399)
(253,560) $
2017
(136,682)
(56,239)
(192,921)
$
$
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
Years Ended December 31,
2018
2017
2019
$
— $
— $
10
767
777
—
—
—
—
4
197
201
—
—
—
—
$
777
$
201
$
—
3
142
145
(417)
—
—
(417)
(272)
The reconciliation between the federal statutory tax rates and the Company's effective tax rate is as follows:
Statutory federal tax rate
Permanent items
State income taxes, net of federal benefit
R&D and other tax credits
Foreign income taxes
Impact of Tax Act
Change in valuation allowance
Change in Irish trading status
Effective tax rate
Years Ended December 31,
2018
2017
2019
21 %
(1)%
6 %
2 %
1 %
— %
(32)%
3 %
— %
21 %
— %
5 %
2 %
(1)%
— %
(27)%
— %
— %
34 %
(3)%
4 %
8 %
(6)%
(49)%
12 %
— %
— %
The trading income tax rate for an Irish company is 12.5% and the non-trading income tax rate is 25%. During 2019,
the Company determined that it qualifies as a non-trading company. As such, the Company’s Irish NOLs were revalued to the
97
98
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes (Continued)
11. Income Taxes (Continued)
higher rate. Further, not all expenses incurred will result in a non-trading company loss carryforward. These changes had no
impact to income tax expense as a result of the valuation allowance.
continues to track all of its NOLs and tax credit carryforwards but has provided a full valuation allowance to offset those
amounts.
Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases
using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred
tax assets and liabilities consist of the following:
On December 22, 2017, the US government enacted the Tax Act. The Tax Act significantly revises US tax law by,
among other provisions, lowering the US federal statutory income tax rate from 35% to 21%, imposing a mandatory one-time
transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
Deferred tax assets:
Net operating loss carryforwards
General business credits
Product license
Inventory
Stock based compensation
Other
Deferred tax assets
Deferred tax liabilities:
Intangibles
Convertible debt
Deferred tax liabilities
Net deferred tax assets
Valuation allowance
Net deferred tax assets
As of December 31,
2018
2019
$
300,292
$
114,887
6,456
3,129
20,587
10,012
455,363
$
(14,316) $
(27,570)
(41,886) $
$
413,477
(413,477)
— $
$
$
$
$
$
231,918
109,502
6,902
7,651
17,960
6,895
380,828
(15,424)
(32,799)
(48,223)
332,605
(332,605)
—
The net deferred tax assets (prior to applying the valuation allowance) of $413.5 million and $332.6 million at
December 31, 2019 and 2018, respectively, primarily consist of net operating loss carryforwards for income tax purposes. Due
to the Company's history of operating losses, the Company recorded a valuation allowance on its net deferred tax assets by
increasing the valuation allowance by $80.9 million and $71.3 million in 2019 and 2018, respectively, as it was more likely
than not that such tax benefits will not be realized.
At December 31, 2019, the Company had federal net operating loss carryforwards for income tax purposes of
approximately $1.1 billion. Due to the limitation on NOLs as more fully discussed below, $889.0 million of the NOLs are
available to offset future taxable income, if any. The NOL carryovers and general business tax credits expire in various years
beginning in 2018. For state tax purposes, the Company has approximately $517.4 million of New Jersey NOLs available to
offset against future taxable income. The Company also has California and Virginia NOLs that are entirely limited due to
Section 382 (as discussed below). The Company has $152.4 million of non-trading loss carryforwards for Irish tax purposes.
From 2014 through 2017, the Company completed an Internal Revenue Code Section 382 (Section 382) analysis in
order to determine the amount of losses that are currently available for potential offset against future taxable income, if any. It
was determined that the utilization of the Company's NOL and general business tax credit carryforwards generated in tax
periods up to and including December 2010 were subject to substantial limitations under Section 382 due to ownership changes
that occurred at various points from the Company's original organization through December 2010. In general, an ownership
change, as defined by Section 382, results from transactions increasing the ownership of shareholders that own, directly or
indirectly, 5% or more of a corporation's stock, in the stock of a corporation by more than 50 percentage points over a testing
period (usually 3 years). Since the Company's formation in 1999, it has raised capital through the issuance of common stock on
several occasions which, combined with the purchasing shareholders' subsequent disposition of those shares, have resulted in
multiple changes in ownership, as defined by Section 382. These ownership changes resulted in substantial limitations on the
use of the Company's NOLs and general business tax credit carryforwards up to and including December 2010. The Company
The Tax Act
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 to the complexity and significance of the Tax Act’s provisions, the SEC staff issued SAB
118, which allowed companies to record 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 a limited measurement period as more information becomes
available.
The Tax Act did not have a material impact on the Company's financial statements because its deferred temporary
differences are fully offset by a valuation allowance and the Company does not have any significant offshore earnings from
which to record the mandatory transition tax. The Company completed its analysis during the fourth quarter of 2018 and no
additional tax effects of the Act were required to be recorded for the year ended December 31, 2018.
The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely
than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured
and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. If such
unrecognized tax benefits were realized and not subject to valuation allowances, the Company would recognize a tax benefit of
$4.8 million. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands):
Balance as of January 1,
Additions related to prior period tax positions
Reductions related to prior period tax positions
Additions related to current period tax positions
Balance as of December 31,
2019
2018
$
$
4,087
—
(60)
809
4,836
$
$
—
3,345
—
742
4,087
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 the years ended 2016 and later, and is generally open for certain states for the years 2015 and later. The
Company has incurred net operating losses since inception, 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 has recorded no such expense. As of December 31, 2019 and 2018, the Company has recorded reserves
for unrecognized income tax benefits of $4.8 million and $4.1 million, respectively. As any adjustment to the Company’s
uncertain tax positions would not result in a cash tax liability, it has not recorded any accrued interest or penalties related to its
uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions
over the next 12 months.
12. License and Other Agreements
In-License Agreements
PARI Pharma GmbH—In April 2008, the Company entered into a licensing agreement with PARI Pharma GmbH
(PARI) for use of the optimized Lamira Nebulizer System for delivery of ARIKAYCE in treating patients with NTM lung
infections, CF and bronchiectasis. Under the licensing agreement, the Company has rights under several US and foreign issued
99
100
INSMED INCORPORATED
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. License and Other Agreements (Continued)
12. License and Other Agreements (Continued)
patents and patent applications involving improvements to the optimized Lamira Nebulizer System, to exploit the system with
ARIKAYCE for the treatment of such indications, but the Company cannot manufacture the nebulizers except as permitted
under the a commercialization agreement with PARI, which is described in further detail below. The Lamira Nebulizer System
has been approved for use in the US (in combination with ARIKAYCE) and EU. Under the licensing agreement, the Company
paid PARI an upfront license fee and certain milestone payments. Upon FDA acceptance of the Company's New Drug
Application and the subsequent FDA approval of ARIKAYCE, the Company paid PARI additional milestone payments of €1.0
million and €1.5 million, respectively. In addition, PARI is entitled to receive a future milestone payment of €0.5 million in
cash based first receipt of the first marketing approval in a major EU country for ARIKAYCE and the device. In October 2017,
the Company exercised an option to buy-down the royalties that will be paid to PARI on ARIKAYCE net sales. As a result,
PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ARIKAYCE, pursuant to
the licensing agreement, subject to certain specified annual minimum royalties. The buy-down payment to PARI was included
as a component of SG&A expenses in the fourth quarter of 2017. See below for information related to the commercialization
agreement with PARI.
Other Agreements
Cystic Fibrosis Foundation Therapeutics, Inc.—In 2004 and 2009, the Company entered into research funding
agreements with Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT) whereby it received $1.7 million and $2.2 million in
research funding for the development of ARIKAYCE. As a result of the US approval of ARIKAYCE and in accordance with
the agreements, as amended, the Company owes payments to CFFT of $13.4 million in the aggregate, which are payable
through 2025. Furthermore, if certain global sales milestones are met within five years of the ARIKAYCE's commercialization,
the Company would owe up to an additional $3.9 million. The Company has determined the likelihood of meeting such global
sales milestones and have accrued for these contingent obligations proportionally based on net sales of ARIKAYCE.
Therapure Biopharma Inc.—In February 2014, the Company entered into a contract manufacturing agreement with
Therapure Biopharma Inc. (Therapure) for the manufacture of ARIKAYCE, on a non-exclusive basis, at a 200 kg scale.
Pursuant to the agreement, the Company and Therapure collaborated to construct a production area for the manufacture of
ARIKAYCE in Therapure's existing manufacturing facility in Canada. The agreement has an initial term of five years, which
began in October 2018, and will renew automatically for successive periods of two years each, unless terminated by either party
by providing the required two years prior written notice to the other party. Notwithstanding the foregoing, the parties have
rights and obligations under the agreement prior to the commencement of the initial term. Under the agreement, the Company is
obligated to pay a minimum of $6 million for commercial ARIKAYCE batches produced and certain manufacturing activities
each calendar year.
PARI Pharma GmbH—In July 2014, the Company entered into a commercialization agreement with PARI (the
Commercialization Agreement) for the manufacture and supply of Lamira Nebulizer Systems and related accessories (the
Device) as optimized for use with ARIKAYCE. Under the Commercialization Agreement, PARI manufactures the 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 term of fifteen years from the first commercial sale of ARIKAYCE in October
2018 (the Initial Term). The term of the agreement may be extended by the 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 the foregoing, the parties
have certain rights and obligations under the agreement prior to the commencement of the Initial Term.
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, ARIKAYCE 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 ARIKAYCE produced by Althea each calendar year during the
term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and following an
extension in 2018, is expected to remain in effect through December 31, 2021. The Fill/Finish Agreement may 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 its then-current term. The Company has expensed at least the required minimum in each year of the contract.
AstraZeneca AB—In October 2016, the Company entered into a license agreement (AZ License Agreement) with
AstraZeneca AB, a Swedish corporation (AstraZeneca). Pursuant to the terms of the AZ License Agreement, AstraZeneca
granted the Company exclusive global rights for the purpose of developing and commercializing AZD7986 (renamed INS
1007). In consideration of the licenses and other rights granted by AstraZeneca, the Company made an upfront payment of
$30.0 million, which was included as research and development expense in the fourth quarter of 2016. The Company is also
obligated to make a series of contingent milestone payments totaling up to an additional $85.0 million upon the achievement of
clinical development and regulatory filing milestones. If the Company elects to develop INS1007 for a second indication, the
Company will be obligated to make an additional series of contingent milestone payments to AstraZeneca totaling up to $42.5
million. The Company is not obligated to make any additional milestone payments for additional indications. In addition, the
Company will pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teens on net sales of any approved
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 AZ License Agreement provides AstraZeneca with the option to negotiate a future agreement with the Company for
commercialization of INS1007 in chronic obstructive pulmonary disease or asthma.
Patheon UK Limited—In October 2017, the Company entered into certain agreements with Patheon UK Limited
(Patheon) related to the increase of its long-term production capacity for ARIKAYCE commercial inventory. The agreements
provide for Patheon to manufacture and supply ARIKAYCE for its anticipated commercial needs. Under these agreements, the
Company is required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain
fixed assets needed to manufacture ARIKAYCE. Patheon's supply obligations will commence once certain technology transfer
and construction services are completed. The Company's manufacturing and supply agreement with Patheon will remain in
effect for a fixed initial term, after which it will continue for successive renewal terms unless either party has given written
notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services
have been completed. The agreements may also be terminated under certain other circumstances, including by either party due
to a material uncured breach of the other party or the other party’s insolvency. These early termination clauses may reduce the
amounts due to the relevant parties. The investment to increase our long-term production capacity, including under the Patheon
agreements and related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be
approximately $60 million.
13. Commitments and Contingencies
Commitments
In September 2018, the Company entered into a lease for its new corporate headquarters in Bridgewater, New Jersey.
The initial lease term commenced in October 2019 and expires in September 2030. In July 2016, the Company signed an
operating lease for laboratory space, also located in Bridgewater, for which the initial lease term expires in September 2021. In
October 2018, the Company expanded its lease for laboratory space located in Bridgewater, which commenced in January
2019. Future minimum rental payments under the Bridgewater leases are $34.5 million.
Rent expense charged to operations was $3.2 million, $2.1 million, and $1.5 million for the years ended December 31,
2019, 2018 and 2017, respectively. Rent expense is recorded on a straight-line basis over the term of the applicable leases.
In addition to rent, the Company has several firm purchase commitments, primarily related to the manufacturing of
ARIKAYCE and annual minimum royalties on global net sales of ARIKAYCE. Future firm purchase commitments under these
agreements, the last of which ends in 2034, total $82.0 million. These amounts do not represent the Company's entire
anticipated purchases in the future, but instead represent only purchases that are the subject of contractually obligated minimum
purchases. The minimum commitments disclosed are determined based on non-cancelable minimum spend amounts or
termination amounts. Additionally, the Company purchases products and services as needed with no firm commitment.
Legal Proceedings
From time to time, the Company is a party to various 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 adverse effect on the Company’s consolidated financial position, results of
operations or cash flows.
14. Retirement Plan
The Company has a 401(k) defined contribution plan for the benefit for all US employees and permits voluntary
contributions by employees subject to IRS-imposed limitations. Effective January 1, 2018, the Company matched 100% of
eligible employee contributions on the first 4% of employee salary (up to the IRS maximum). Employer contributions for the
101
102
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Retirement Plan (Continued)
year ended December 31, 2019, 2018 and 2017 were $2.8 million, $2.2 million and $0.8 million, respectively. In 2017, the
Company matched 100% of eligible employee contributions on the first 3% of employee salary (up to the IRS maximum).
15. Quarterly Financial Data (Unaudited)
The following table summarizes unaudited quarterly financial data for the years ended December 31, 2019 and 2018
(in thousands, except per share data).
Revenues
Gross profit*
Operating loss
Net loss
Basic and diluted net loss per share
Revenues
Gross profit*
Operating loss
Net loss
Basic and diluted net loss per share
________________
$
$
$
$
$
$
$
$
$
$
First
Quarter
Second
Quarter
2019
Third
Quarter
Fourth
Quarter
Total
21,902
17,752
$
$
29,972
25,053
$
$
38,885
32,448
$
$
45,708
37,002
$
$
136,467
112,255
(69,509) $
(62,166) $
(56,488) $
(47,082) $ (235,245)
(74,153) $
(66,514) $
(60,682) $
(52,988) $ (254,337)
(0.96) $
(0.81) $
(0.68) $
(0.59) $
(3.01)
First
Quarter
Second
Quarter
— $
— $
(62,751) $
(68,524) $
(0.89) $
— $
— $
(72,882) $
(76,437) $
(1.00) $
2018
Third
Quarter
Total
Fourth
Quarter**
9,835
7,412
— $
— $
(83,983) $
(87,743) $
(1.14) $
$
9,835
$
7,412
(87,722) $ (307,338)
(91,573) $ (324,277)
(4.22)
(1.19) $
* Excludes amortization of intangible assets.
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.
103
•
S
H
A
R
E
H
O
L
D
E
R
I
N
F
O
R
M
A
T
I
O
N
•
Paving stones outside Insmed’s global headquarters in
New Jersey showcase employees’ personal motivations for serving
the rare disease community.
EXECUTIVE COMMITTEE
BOARD OF DIRECTORS
William H. Lewis, J.D., M.B.A.
Chairman and
Chief Executive Officer
William H. Lewis, J.D., M.B.A.
Chairman and Chief Executive
Officer, Insmed Incorporated
Roger Adsett, M.B.A.
Chief Operating Officer
Sara M. Bonstein, M.B.A.
Chief Financial Officer
Martina Flammer, M.D., M.B.A.
Chief Medical Officer
Christine Pellizzari, J.D.
Chief Legal Officer
S. Nicole Schaeffer, M.B.A.
Chief People Strategy Officer
John D. Soriano, J.D.
Chief Compliance Officer
Eugene J. Sullivan, M.D.
Chief Product Strategy Officer
David R. Brennan3
Lead Independent Director,
Insmed Incorporated
Former Chief Executive Officer,
AstraZeneca PLC
Elizabeth McKee Anderson2
Former Worldwide Vice
President, Global Strategic
Marketing and Market Access,
Infectious Diseases and
Vaccines, Janssen
Pharmaceuticals, Inc.
Alfred F. Altomari1,3
Chairman and Chief Executive
Officer, Agile Therapeutics, Inc.
(Nasdaq: AGRX)
Clarissa Desjardins, Ph.D.4
Former President and Chief
Executive Officer, Clementia
Pharmaceuticals, Inc. (now
Ipsen S.A.)
Steinar J. Engelsen, M.D.1, 4
Former Acting
Chief Executive Officer,
Centaur Pharmaceuticals, Inc.
Leo Lee3,4
Chief Executive Officer and
Executive Director, Regeneus
(ASX: RGS)
David W.J. McGirr1
Former Chief Financial Officer,
Cubist Pharmaceuticals, Inc.
(now Merck & Co., Inc.)
Melvin Sharoky, M.D.2, 4
Former President and
Chief Executive Officer,
Somerset Pharmaceuticals, Inc.
Committee Legend (bold indicates
chairperson) 1: Audit; 2: Nomination &
Governance; 3: Compensation;
4: Science & Technology
Shareholders may receive without
charge a copy of our Annual Report
on Form 10-K for the year ended
December 31, 2019 by going to
investor.insmed.com or by
sending a written request to
Ms. Christine Pellizzari, Corporate
Secretary, Insmed Incorporated,
700 US Highway 202/206,
Bridgewater, New Jersey, 08807,
(908) 977-9900. In connection with
any such request, we will provide a
list of exhibits to the Annual Report
on Form 10-K for the year ended
December 31, 2019, and will provide
copies of any such exhibit upon the
payment of a reasonable fee.
GLOBAL HEADQUARTERS
700 US Highway 202/206, Bridgewater, NJ 08807-1704
Tel: (908) 977-9900
TRADING SYMBOL
The common stock of Insmed Incorporated is listed on the
Nasdaq Global Select Market under the symbol INSM.
TRANSFER AGENT & REGISTRAR
Broadridge Corporate Issuer Solutions
P.O. Box 1342, Brentwood, NY 11717
Email: shareholder@broadridge.com
Tel: (866) 321-8022
INDEPENDENT AUDITORS
Ernst & Young LLP
99 Wood Avenue South, Iselin, NJ 08830-9961
INVESTOR RELATIONS
Argot Partners
Laura Perry, Heather Savelle
Email: investor.relations@insmed.com
Tel: (212) 600-1902
ANNUAL SHAREHOLDER MEETING
To be held on Tuesday, May 12, 2020, 9:00 a.m.
www.insmed.com
Insmed Incorporated © 2020
ARIKAYCE and Insmed are registered trademarks
of Insmed Incorporated. All rights reserved.
Various statements in this annual report are “forward-looking statements,” as
that term is defined in the Private Securities Litigation Reform Act of 1995.
Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,”
“continues,” and similar expressions (as well as other words or expressions
referencing future events, conditions or circumstances) identify forward-looking
statements. Forward-looking statements are based on our current expectations
and beliefs, and involve known and unknown risks, uncertainties and other factors,
which may cause our actual results, performance and achievements and the
timing of certain events to differ materially from the results, performance,
achievements or timing discussed, projected, anticipated or indicated in any
forward-looking statements. For additional information, see Item 1A – Risk Factors
of the Form 10-K included in this Annual Report. We undertake no obligation to
update or revise publicly any forward-looking statements.