Insmed Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Insmed is a development-stage biopharmaceutical company with no revenue from ARIKACE, its lead inhaled antibiotic candidate.
Business context and pipeline
Insmed’s principal focus is developing ARIKACE for Pseudomonas lung infections in cystic fibrosis (CF) and non-tuberculous mycobacterial (NTM) lung infections. At quarter-end, its CF Phase 3 trial and NTM Phase 2 trial were ongoing. The CF trial’s last patient visit occurred May 6, 2013, after quarter-end. The company also reported a completed Phase 2 study in non-CF bronchiectasis but was prioritizing the CF and NTM programs.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $10.3 million | $4.7 million; up $5.6 million |
| General and administrative expense | $4.0 million | $2.5 million; up $1.5 million |
| Operating loss | $14.3 million | $7.3 million |
| Net loss | $13.7 million; $0.43 per share | $6.8 million; $0.28 per share |
| Cash used in operating activities | $11.2 million | $5.6 million |
At March 31, cash and cash equivalents were $79.4 million and the certificate of deposit was $2.2 million, for $81.6 million in total cash and certificate of deposit. Working capital was $60.6 million excluding the certificate of deposit. Management said these funds were expected to support operations into 2014, while cautioning that additional capital may be needed.
Total debt was $20.0 million principal, bearing 9.25% interest; reported balance-sheet debt was $19.4 million after discounts and other adjustments. Current liabilities were $20.3 million and total liabilities were $35.4 million. Total assets were $143.0 million. No revenue-based margins are meaningful because revenue was zero.
Changes versus prior period
- Net loss increased by $6.8 million, primarily as R&D spending rose with the CF Phase 3, its extension study, and the NTM Phase 2 trial.
- G&A increased mainly from professional fees related to reviewing and accounting for equity awards that exceeded plan sub-limits, and higher compensation expense.
- Interest expense rose to $0.6 million from nominal expense in Q1 2012 following the company’s $20 million borrowing in 2012. Investment income fell to $0.1 million from $0.4 million.
- Cash and cash equivalents declined by $11.3 million from year-end 2012, principally reflecting operating cash use.
Outlook, risks, contingencies, and unusual items
- Clinical outlook: Management expected CF Phase 3 top-line results in mid-2013 and NTM Phase 2 results in Q4 2013. It planned a limited NTM compassionate-use program in the second half of 2013. These are expectations, not reported outcomes.
- Subsequent events: On April 29, 2013, Premacure exercised an option for an $11.5 million buyout payment, due by May 9, in exchange for a fully paid IGF-1 license; Insmed gave up future royalties and transferred related royalty obligations. On April 30, the lender exercised its warrant through net issuance; 223,431 shares were issued May 1.
- Funding and execution risks: The company expected continued losses and no material revenue for at least the next few years. Clinical delays, regulatory outcomes, manufacturing capacity and additional financing availability could affect development plans and liquidity. Insmed disclosed sole-source suppliers for raw materials and a sole manufacturer for its lead candidate.
- Debt and obligations: Loan principal repayments were scheduled to start August 2013, potentially extendable to January 2014 upon specified development milestones. The debt is secured by a first lien on company assets other than intellectual property. Contractual obligations totaled $26.3 million, including debt, interest, leases and capital leases; possible milestones and royalties were excluded.
- Legal matters: A court dismissed the remaining claims in Cacchillo v. Insmed in January 2013; the plaintiff appealed in March. A separate Transave appraisal action remained ongoing, with trial scheduled for September 2013; the company said potential loss could not be estimated.
- Controls and unusual compensation issue: Management reported disclosure controls were ineffective and internal control over financial reporting was ineffective due to a material weakness in administration, accounting and oversight of the 2000 Stock Incentive Plan. Awards representing about 1.4 million shares exceeded annual per-person sub-limits. The company recorded a $1.8 million liability and described remediation efforts as underway.
- Tax item: A $1.2 million income tax benefit reflected a cash sale of $27.0 million of New Jersey tax losses; remaining net deferred tax assets were fully offset by a valuation allowance.
Most important facts for investors to verify
- Whether the CF Phase 3 and NTM Phase 2 results were reported as expected, and what they showed on efficacy and safety.
- Actual receipt and use of the $11.5 million Premacure payment, and the effect of ending future royalty income.
- Cash runway after clinical spending, debt service, commercial preparation costs, and any subsequent financing.
- Progress in remediating the stock-plan control weakness and whether controls were later assessed as effective.
- Developments and potential financial impact in the Transave appraisal action and the Cacchillo appeal.