Insmed Incorporated — Q3 2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. Following its December 2010 combination with Transave, Insmed’s focus is developing inhaled liposomal medicines, principally ARIKACE for cystic fibrosis (CF) and non-tuberculous mycobacterial (NTM) lung infections. The company has no marketed ARIKACE product; reported revenue mainly reflects cost recovery from the IPLEX expanded access program.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $0.4m | $1.8m | $3.0m | $5.6m |
| Research and development | $6.9m | $0.8m | $21.4m | $2.3m |
| General and administrative | $2.5m | $1.6m | $8.5m | $5.1m |
| Impairment loss | $26.0m | — | $26.0m | — |
| Operating loss | $35.0m | $0.6m | $52.8m | $1.8m |
| Net loss | $34.6m | $0.3m | $51.5m | $0.6m |
| Net loss attributable to common stockholders | $34.6m | $0.3m | $60.7m | $0.6m |
| Loss per common share | $1.39 | $0.03 | $2.66 | $0.05 |
Margins and cash flow. The company remained loss-making, and operating margins are not meaningful given minimal revenue and substantial development costs. Nine-month operating cash use was $24.1m, versus $1.2m provided in the prior-year period. Investing activities provided $23.9m, mainly from sales of short-term investments; financing activities used $0.03m. Cash and cash equivalents decreased by $0.3m to $10.4m.
Liquidity and debt. At September 30, 2011, cash, cash equivalents, short-term investments and a certificate of deposit totaled $85.3m, down from $110.2m at December 31, 2010. Working capital was $80.3m. Total liabilities were $3.7m, including approximately $0.1m of current and long-term capital lease obligations; the filing reports no material conventional debt balance. Total assets were $146.1m, including $58.2m of in-process research and development. Accumulated deficit was $286.0m.
Material changes and unusual items
- Revenue fell $1.4m in Q3 and $2.6m for the first nine months, primarily because IPLEX expanded-access cost recovery declined. Insmed expected those revenues to cease in Q4 2011 as existing IPLEX inventory was depleted.
- R&D rose sharply as the company prepared for ARIKACE trials and manufactured clinical supply; R&D headcount increased from about 8 to 28 year over year. G&A growth reflected higher staffing and, for the nine-month comparison, transaction-related legal, finance and consulting costs.
- The $26.0m non-cash impairment comprised $19.7m against in-process research and development and $6.3m against goodwill, following the FDA clinical hold and the resulting reduction in expected ARIKACE value.
- The nine-month loss attributable to common stockholders includes a $9.2m non-cash beneficial conversion charge related to conversion of Series B preferred stock. The company also completed a one-for-ten reverse stock split in March 2011; comparative share and per-share data reflect the split.
- Short-term investments declined to $72.8m from $97.3m at year-end. The portfolio had a $0.9m net unrealized gain at September 30.
Outlook, risks and contingencies
- ARIKACE regulatory risk: The FDA placed U.S. Phase 3 programs for CF and NTM on clinical hold after reviewing interim findings from a long-term rat inhalation carcinogenicity study. In October 2011, the FDA continued both holds, stating it lacked sufficient information to assess patient risks. No patients had been dosed in those Phase 3 trials.
- For CF, the FDA requested a nine-month dog inhalation toxicity study and a proposed patient population/disease state with a potentially more favorable risk-benefit profile. For NTM, the FDA requires a Phase 2 trial in adults to provide proof-of-concept efficacy and safety data before the previously approved Phase 3 trial may proceed. Management was seeking clarification and evaluating options and timelines; it noted European Phase 3 trials were not on hold.
- Management said available funds were sufficient for the remainder of 2011, but future development may require additional capital through licensing, debt or equity. It cautioned that financing may not be available on acceptable terms and that a shortfall could force research delays, restrictions, asset sales or cessation of operations. It expects no material revenues for at least the next several years and provided no quantified forward financial guidance.
- The company’s results depend heavily on ARIKACE’s development and regulatory outcome. Other disclosed risks include clinical and preclinical setbacks, additional costs and delays, manufacturing and supply constraints, regulatory approval of the e-Flow nebulizer device, and the possibility that development or commercialization never succeeds.
- Insmed entered a three-year lease for a larger 27,035-square-foot facility beginning January 2012, with obligations of approximately $1.7m through December 2014. A separate IPLEX-related lawsuit retained three claims in discovery; the company said potential loss could not be estimated. A merger-related Delaware action was settled and court-approved in October 2011, with legal fees and expenses payable by Insmed.
Most important facts for investors to verify
- FDA follow-up, data requirements and timing for lifting or continuing the ARIKACE CF and NTM clinical holds, including the dog study and required NTM Phase 2 trial.
- Cash and investment balances, operating cash burn, and the company’s ability to fund development as IPLEX cost-recovery revenue ends.
- Any changes in ARIKACE development plans, European trial status, anticipated timelines, or collaboration and financing strategy.
- Whether further clinical findings or regulatory developments trigger additional impairment charges or alter the carrying value of ARIKACE-related assets.
- Resolution and potential financial exposure from the remaining IPLEX litigation claims.