INSMED Inc annual report, FY2017

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Insmed Incorporated — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; quarterly figures include fourth quarter 2017. The filing was signed February 23, 2018. Insmed is a clinical-stage biopharmaceutical company focused on rare diseases; it had no material product revenue.

Financial results and liquidity

  • Revenue: $0 in 2017, 2016 and 2015. The filing notes immaterial revenue from a French access program recorded in other income, not the revenue line.
  • Loss and expenses: 2017 net loss was $192.6 million ($2.89 per share), versus $176.3 million ($2.85 per share) in 2016. Operating loss was $188.9 million versus $173.4 million. With no reported revenue, operating margins were not meaningful.
  • Costs: R&D was $109.7 million, down 10.6% from $122.7 million, largely because 2016 included a $30.0 million INS1007 license payment. G&A rose 56.2% to $79.2 million, including higher pre-commercial costs and a one-time PARI royalty buy-down payment. Interest expense increased to $5.9 million from $3.5 million.
  • Fourth quarter: Revenue was $0; operating loss was $65.4 million, net loss $65.4 million and basic and diluted loss per share $0.85. The quarter included the one-time PARI royalty buy-down payment. In Q4 2016, operating loss was $67.1 million, net loss $68.4 million and loss per share $1.10; that quarter included the $30.0 million AstraZeneca license payment.
  • Cash flow: Operating cash use was $159.6 million, compared with $146.7 million in 2016. Investing cash use was $3.0 million; financing provided $381.1 million, principally from a September 2017 stock offering.
  • Liquidity and debt: Cash and cash equivalents were $381.2 million at year-end, up from $162.6 million; working capital was $344.8 million. Long-term debt was $55.6 million, with $55.0 million principal outstanding. In January 2018, Insmed raised $450.0 million of 1.75% convertible notes due 2025, receiving approximately $435.8 million net. In February it notified Hercules it would repay the loan on February 28 for approximately $58.0 million, including interest, fees and penalty.
  • Capital position: Total assets were $462.0 million and shareholders’ equity $361.1 million at December 31. Accumulated deficit was $957.9 million. Management said available funds were sufficient for at least 12 months; it expected 2018 operating expenses, capital expenditures and long-term investments to rise significantly.

Business developments and changes

  • ALIS: The lead candidate for treatment-refractory MAC lung disease. In the Phase 3 CONVERT study, six-month culture conversion was 29% with ALIS plus guideline-based therapy versus 9% with guideline-based therapy alone (p<0.0001). The study’s primary endpoint was met in top-line results; data were preliminary.
  • Interim durability results through December 2017 showed durable conversion three months after treatment in 28 of 46 evaluable ALIS-arm converters (60.9%), versus 0 of 7 evaluable control-arm converters. The 312 extension study reported interim conversion rates of 28.4% for patients crossing over from control to ALIS and 12.3% for those continuing ALIS; these data were descriptive and not statistically analyzed.
  • ALIS plus background therapy was associated with treatment-emergent adverse events in approximately 98% of patients versus 91% in the control arm; serious events occurred in approximately 20% and 18%, respectively. Most events were mild or moderate. The ALIS arm had a higher dropout rate; overall CONVERT dropout was 18% by December 2017. The filing reported no treatment-arm distinction in hearing loss or renal impairment.
  • Pipeline: Enrollment in the Phase 2 WILLOW study of INS1007 for non-CF bronchiectasis began in December 2017. INS1009 completed Phase 1; the company was assessing development options, including a dry-powder formulation.
  • Spending mix: Compared with 2016, lower R&D from the prior-year license payment was more than offset at the total-expense level by higher G&A and interest expense. The company expanded pre-commercial preparation and manufacturing capacity for a potential ALIS launch.

Outlook, risks and unusual items

  • Management planned to submit an ALIS NDA to the FDA by the end of March 2018, seeking accelerated approval based on six-month CONVERT results, and expected a six-month priority review. Approval, review timing and commercial launch were not assured. The FDA could require additional data, including on durability, device performance or human factors; accelerated approval would require confirmatory studies and could be withdrawn if benefit is not verified.
  • Management anticipated a potential U.S. launch in late 2018 if approved, and planned to pursue approvals in Japan and other markets when sufficient data were available. Reimbursement, pricing, market uptake and the ability to establish commercial operations remain material uncertainties.
  • Manufacturing depends on external suppliers, including PARI as the sole eFlow nebulizer supplier. A Patheon capacity build-out was expected to require approximately $60 million over three to four years; supply obligations depend on completion of technology transfer and construction.
  • Insmed remains loss-making with no material product revenue and expects continued losses. Further capital may be needed. The 2018 convertible notes could add interest, repayment and potential dilution exposure; Hercules debt was secured by company assets other than intellectual property and subject to restrictive covenants until repayment.
  • Other risks include incomplete or changing clinical data, adverse effects, regulatory and combination-product review, patient enrollment and retention, third-party execution, intellectual-property challenges, competition, reimbursement pressure and dependence on key personnel. One ALIS-related European patent was revoked in November 2017; Insmed intended to appeal, and another patent remained under appeal.
  • A securities class action complaint was dismissed without prejudice on February 15, 2018; the plaintiff could file an amended complaint by March 19, 2018. Management stated ordinary-course legal matters were not expected to materially affect financial position, results or cash flows.

Most important facts for investors to verify

  • Full CONVERT results, durability analyses, final 312 data, and whether the FDA accepts the proposed surrogate endpoint and NDA submission.
  • FDA review outcome and timing, including any requirements tied to the eFlow device, manufacturing, human-factors testing or confirmatory trials.
  • Actual cash use and 2018 runway after the convertible-note proceeds, Hercules repayment and planned commercialization and manufacturing investments.
  • Terms and potential dilution of the convertible notes, completion of Hercules repayment, and the extent of future financing needs.
  • Commercial supply readiness, including PARI dependence and progress on the Patheon capacity build-out; reimbursement and market adoption if ALIS is approved.
  • Any amended securities complaint, patent appeal outcomes, and material changes in clinical safety or dropout data.

Audit: Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2017.