INSMED INCORPORATED — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparisons are with the three and nine months ended September 30, 2013, and balance-sheet figures are compared with December 31, 2013. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Insmed is a development-stage biopharmaceutical company focused on inhaled therapies for serious lung diseases. Its lead candidate, ARIKAYCE (liposomal amikacin for inhalation), is being developed primarily for nontuberculous mycobacteria (NTM) lung infections and Pseudomonas infections in cystic fibrosis (CF) patients. The company reported no product revenue and expected continued operating losses while it pursued development, regulatory filings, manufacturing scale-up, and potential commercialization.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | None | None | None | $11.5 million one-time royalty-rights payment |
| Research and development expense | $15.2 million | $12.1 million | $41.5 million | $34.7 million |
| General and administrative expense | $8.2 million | $4.7 million | $22.8 million | $16.3 million |
| Net loss | $24.0 million | $17.3 million | $61.5 million | $39.9 million |
| Net loss per share, basic and diluted | $0.54 | $0.46 | $1.50 | $1.19 |
| Operating cash used | Not separately stated | Not separately stated | $51.5 million | $32.6 million |
- At September 30, 2014, cash and cash equivalents were $167.3 million, versus $113.9 million at December 31, 2013; working capital was $149.6 million. Current assets were $170.8 million and current liabilities were $21.3 million.
- Nine-month investing cash outflow was $3.8 million, including $3.3 million for the Bridgewater headquarters build-out. Financing provided $108.7 million, principally from the August 2014 public offering.
- The August offering raised $108.0 million net from 10.235 million shares sold at $11.25 per share. Shares outstanding were 49.6 million at September 30, 2014; 49.665 million were reported as outstanding at October 31.
- Total liabilities were $36.2 million. Hercules debt had $20.0 million principal outstanding, bears 9.25% interest, and matures January 1, 2016. Principal payments were deferred through December 31, 2014; repayment was scheduled to begin January 1, 2015. The debt is secured by company assets other than intellectual property.
- No meaningful operating margin comparison is available because the company had no product revenue. Interest expense was $0.6 million in Q3 and $1.8 million for the nine-month period in 2014. The nine-month income-tax benefit of $4.4 million reflected cash proceeds from selling New Jersey tax attributes.
Material changes versus prior periods
- Q3 net loss increased $6.7 million year over year, mainly from higher R&D and G&A spending. R&D rose with personnel costs and manufacturing scale-up at Therapure; G&A increased with headcount and pre-commercial activity. Lower external clinical costs partly offset these increases as the CF phase 3 trial had been completed in 2013.
- Nine-month net loss increased $21.6 million. The comparison was affected by the $11.5 million one-time payment recognized in 2013. Higher 2014 personnel, manufacturing, regulatory, and pre-commercial costs also contributed; completion of the CF phase 3 trial reduced clinical-development expense.
- Operating cash use increased from $32.6 million to $51.5 million. Excluding the 2013 one-time payment and tax-attribute sale proceeds in both periods, management reported operating cash use of $55.9 million in 2014 versus $45.3 million in 2013.
- Cash increased substantially following the 2014 equity offering, while the share count also rose. Fixed assets increased to $6.0 million from $1.8 million, largely reflecting the new headquarters and laboratory build-out.
Outlook, clinical and regulatory developments
- NTM: The phase 2 trial missed its prespecified primary endpoint for statistical significance (reported p=0.148), but the key secondary culture-conversion endpoint favored ARIKAYCE: 11 of 44 treated patients versus 3 of 45 placebo patients were culture-negative at day 84 (p=0.01). In the open-label extension, 21 patients were culture-negative at day 168 among the 68 with available data. These results do not establish regulatory approval.
- Management planned a global phase 3 confirmatory NTM study focused on non-CF patients with MAC infections who had failed prior standard treatment: approximately 300 patients, with initiation expected in early 2015, enrollment within one year, and preliminary results anticipated in mid-2016. The company said positive results could support a Subpart H filing and potential accelerated approval.
- CF/Pseudomonas: The European/Canadian phase 3 trial met its primary non-inferiority endpoint versus twice-daily Tobi; management described overall secondary results as comparable and safety as comparable. A two-year open-label safety study was ongoing, with completion expected in mid-2015.
- Management intended to submit European marketing applications for ARIKAYCE in NTM and CF/Pseudomonas by the end of 2014, and Canadian applications in the first half of 2015. These were plans, not approvals. The FDA had granted ARIKAYCE Breakthrough Therapy, Fast Track, QIDP, and orphan-drug designations for NTM.
- The company expected fourth-quarter 2014 operating cash requirements of $22–$26 million, including about $4 million for third-party manufacturing capacity; it also expected about $2 million in capital expenditures and to pay about $1 million of current headquarters-build-out liabilities. Management said it might raise additional capital within the next 12 months and did not expect material revenue for at least the next few years.
- Manufacturing capacity remained a key execution issue. The Althea manufacturing agreement was extended only through December 31, 2014 while an extension was being negotiated. Therapure was building production capacity; Insmed expected to pay about $12 million for the build-out and related manufacturing costs, of which about $6 million had been paid by September 30. A PARI agreement addressed commercial supply of the nebulizer system.
Risks, contingencies and unusual items
- ARIKAYCE development, regulatory approval, manufacturing readiness, and eventual commercialization are uncertain. The company warned that clinical results may not be replicated and that delays or additional expenses could require further financing; it could not assure capital would be available on favorable terms or at all.
- Prior long-term rat inhalation studies found lung tumors in 2 of 120 rats at the highest dose. The relevance to human use was unknown. The company reported no evidence of neoplasia in its completed dog inhalation toxicity study.
- The company had $398.7 million of federal net operating loss carryforwards at December 31, 2013, but said prior-year tax attributes may be substantially limited under Section 382; its analysis was ongoing. It maintained a full valuation allowance on net deferred tax assets.
- Potential contingent payments include up to $13.4 million to the Cystic Fibrosis Foundation if ARIKAYCE is approved and commercialized for CF in the U.S., plus up to $3.9 million tied to sales milestones. These amounts were not accrued due to development risk. PARI milestones and sales royalties may also be payable; timing and likelihood were uncertain.
- The Transave appraisal litigation was settled in May 2014, with the company fully indemnified for the settlement and related defense costs. Management did not expect other ordinary-course legal matters to have a material adverse effect.
- Management stated that disclosure controls were effective at a reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the NTM phase 3 trial was initiated as planned, and whether it confirmed the secondary culture-conversion result despite the phase 2 primary-endpoint miss.
- Whether European and Canadian applications were filed on the stated timetable, and subsequent regulatory feedback or decisions for both NTM and CF/Pseudomonas.
- Manufacturing capacity, permits, quality readiness, and continuity of supply, including the status of the Althea extension and Therapure build-out.
- Cash use relative to the stated fourth-quarter requirements, remaining cash runway, and any subsequent financing or dilution.
- Debt repayment beginning in 2015, the 9.25% borrowing cost, and the effect of other contractual or contingent obligations.
- Potential safety implications of the rat tumor findings and any resulting regulatory requirements.