Business context and reporting period
Insmed Incorporated is a development-stage biopharmaceutical company focused on ARIKACE, an inhaled liposomal amikacin. This Form 10-Q covers the quarter and six months ended June 30, 2013. Insmed had no product sales; its lead programs target Pseudomonas aeruginosa lung infections in cystic fibrosis (CF) patients and non-tuberculous mycobacterial (NTM) lung infections.
Financial performance and position
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Other revenue | 11.50 | 0 | 11.50 | 0 |
| Research and development expense | 12.23 | 7.75 | 22.56 | 12.48 |
| General and administrative expense | 7.54 | 2.24 | 11.52 | 4.76 |
| Operating loss | (8.27) | (9.98) | (22.58) | (17.25) |
| Net loss | (8.85) | (9.70) | (22.53) | (16.54) |
| Basic and diluted loss per share | $(0.28) | $(0.39) | $(0.71) | $(0.67) |
The $11.5 million revenue was a one-time payment from Premacure, now Shire, for Insmed’s future royalty rights; Insmed surrendered those rights and has no further royalties under that agreement. Gross margin is not meaningful because the company had no product sales.
For the six months, operating cash use was $16.3 million, versus $12.9 million a year earlier. Excluding the $11.5 million Premacure receipt, management said operating cash use would have been $27.8 million. Investing activities used $0.5 million; financing provided $0.6 million, primarily from option exercises. Cash and cash equivalents were $74.6 million at June 30; including a $2.2 million certificate of deposit, cash and equivalents totaled $76.8 million, down from $92.9 million at year-end 2012. Working capital was $58.3 million, excluding the certificate of deposit.
Total liabilities were $33.5 million and shareholders’ equity was $105.2 million at June 30. Debt comprised $20.0 million in notes bearing 9.25% interest, secured by company assets except intellectual property; the reported balance, net of discounts and other adjustments, was $19.5 million. The company extended the interest-only period through December 2013, with principal payments to begin January 1, 2014; maturity remains January 1, 2016. Interest expense for the first half was $1.3 million.
Material changes versus prior comparable periods
- Q2 net loss narrowed by $0.8 million, largely because of the one-time $11.5 million royalty-rights payment, which was mostly offset by higher operating expenses.
- First-half net loss increased by $6.0 million: R&D expense rose $10.1 million and G&A rose $6.7 million, partly offset by the $11.5 million payment.
- First-half R&D growth reflected CF and NTM clinical work and the CF safety study. G&A growth included higher compensation and professional fees, including costs related to reviewing excess equity awards.
- Stock-based compensation was $5.0 million for the first half, versus $1.0 million a year earlier. The 2013 amount included remeasurement expense related to awards that had exceeded plan sub-limits; shareholders approved the awards in May and the related liability was reclassified to equity.
Outlook, management commentary, risks and unusual items
- After quarter-end, Insmed completed a public offering of 6.9 million shares at $10.40 per share, with expected net proceeds of approximately $67 million. Management said June 30 cash and the offering proceeds were expected to fund operations through 2014, while noting that additional capital may be needed and is not assured.
- In July 2013, Insmed reported top-line Phase 3 CF results: once-daily ARIKACE met the primary non-inferiority endpoint versus twice-daily TOBI for change in FEV1. The company planned to report additional results in the second half of 2013 and expected EMA and Health Canada filings in the first half of 2014. The two-year open-label safety study was expected to finish in mid-2015.
- The NTM Phase 2 trial had enrolled 81 of a target 100 patients at June 30. Insmed expected top-line results and regulatory-pathway discussions with the FDA by the end of the first quarter of 2014, and planned a compassionate-use study in the second half of 2013. ARIKACE received FDA QIDP and Fast Track designations for NTM in June 2013.
- Insmed cautioned that regulatory approval, clinical outcomes, trial timing and costs, manufacturing capacity, commercialization, and future financing are uncertain. It sources each raw material from a single supplier and uses a sole manufacturer for its lead product candidate.
- Management stated disclosure controls were not effective because of a material weakness in administration, accounting and oversight of the 2000 Stock Incentive Plan. Remediation measures were underway; the company had inadvertently exceeded individual award sub-limits for approximately 1.4 million shares. The 2012 internal-control assessment had also concluded controls were ineffective.
- In the Pilkiewicz appraisal action, former Transave shareholders dispute consideration for approximately 7.77 million Transave shares; trial was scheduled for December 2013 and the potential loss could not be estimated. The Cacchillo case had been dismissed on summary judgment, but an appeal remained pending.
- Other exposures include potential limits on use of tax-loss carryforwards under Section 382, and contingent payments to the Cystic Fibrosis Foundation of up to $13.4 million after U.S. approval and commercialization, plus $3.9 million tied to sales milestones. These were not accrued because of development risk.
Most important facts for investors to verify
- Full Phase 3 CF data, the safety-study results, and whether regulators accept the evidence and approve ARIKACE.
- NTM Phase 2 outcomes and the FDA’s required regulatory pathway, including timing and any additional-trial requirements.
- Actual cash use and financing runway relative to management’s through-2014 estimate, including the completed offering proceeds and rising clinical and commercialization costs.
- Progress in remediating the material weakness in equity-plan controls and any further financial-reporting or compensation consequences.
- Developments in the Transave appraisal litigation, supply/manufacturing concentration, and potential contingent obligations.