INSMED Inc quarterly report, Q3 FY2013

Insmed Incorporated — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2013; financial results compare the three and nine months ended September 30, 2013 with the corresponding 2012 periods. Insmed is a clinical-stage biopharmaceutical company developing ARIKACE, an inhaled antibiotic. It reported no revenue from ARIKACE; 2013 revenue was a one-time license-related payment.

Financial results and position

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Other revenue	$0	$0	$11.5 million	$0
Research and development expense	$12.1 million	$5.7 million	$34.7 million	$18.2 million
General and administrative expense	$4.7 million	$3.6 million	$16.3 million	$8.4 million
Net loss	$17.3 million	$9.4 million	$39.9 million	$25.9 million
Basic and diluted loss per share	$0.46	$0.38	$1.19	$1.04
Net cash used in operating activities	Not provided for quarter	Not provided for quarter	$32.6 million	$22.1 million

• Revenue for the nine-month period was the $11.5 million payment received from Premacure (now Shire) for Insmed’s future royalty rights; Insmed relinquished those future royalties. Excluding this one-time receipt, operating cash use was $44.1 million.
• At September 30, cash and cash equivalents were $128.0 million, versus $90.8 million at year-end 2012; working capital was $109.9 million. Management said cash should fund operations through 2014.
• Cash increased by $37.2 million during the first nine months, principally reflecting $67.0 million net proceeds from a July common-stock offering and the Premacure payment, partly offset by operating cash use. Financing cash provided was $68.4 million.
• Total liabilities were $32.8 million. Debt had $20.0 million principal outstanding at 9.25%; balance-sheet carrying value was $19.6 million before classification between current and long-term portions. Principal repayments were deferred until January 2014; maturity is January 2016. The lender has a first-priority lien on company assets, excluding intellectual property.
• There was no meaningful product gross margin or operating margin to report because the company had no product sales. The filing does not provide a clear margin measure applicable to this development-stage business.

Material changes and business developments

• Q3 net loss increased $7.9 million year over year, primarily due to higher R&D spending on CF safety and NTM studies, ARIKACE manufacturing-process work, increased staffing, and higher G&A expenses.
• Nine-month net loss rose $14.0 million. R&D increased $16.5 million and G&A increased $7.9 million; the $11.5 million Premacure payment partly offset these increases. Stock-based compensation expense was $6.4 million for the nine months, including expense related to remeasurement of excess awards.
• On July 22, Insmed issued 6.9 million shares at $10.40 per share, generating $67.0 million net proceeds. Shares outstanding increased from 31.5 million at December 31, 2012 to 39.1 million at September 30, 2013.
• The lender’s 329,932-share warrant was exercised through net issuance in May; Insmed issued 223,431 shares and the warrant was no longer outstanding.

Outlook, risks, contingencies and unusual items

• ARIKACE—CF: The completed Phase 3 trial in Europe and Canada met its primary non-inferiority endpoint versus twice-daily TOBI for change in FEV₁; reported secondary results and safety were described as comparable. Insmed expected EMA and Health Canada filings in the first half of 2014 and expected to complete the open-label safety study in mid-2015.
• ARIKACE—NTM: Enrollment in the Phase 2 study reached 90 patients in October 2013. Insmed expected top-line results and related FDA-pathway dialogue by the end of Q1 2014. The product had FDA Fast Track, QIDP and U.S. orphan designations; these designations do not assure approval.
• Management expected continued losses and no significant product revenue for at least the next few years. It may seek additional capital; availability and terms are uncertain. Clinical, regulatory, manufacturing, commercialization and financing outcomes could require additional funding or program changes.
• Insmed relies on a sole manufacturer for ARIKACE and single suppliers for raw materials. Supply interruptions or quality problems could delay trials or harm operations. The filing also cites clinical-trial execution, regulatory approval, competition, intellectual-property and commercialization risks.
• Management concluded disclosure controls were ineffective because of a material weakness in administration, accounting and oversight of the 2000 Stock Incentive Plan. Remediation steps were underway; the filing does not state that the weakness had been fully remediated.
• Two legal matters remained: an appeal in the Cacchillo case, with a decision anticipated in the first half of 2014, and the Pilkiewicz appraisal action concerning approximately 7.77 million former Transave shares, with trial expected in Q1 2014. The company could not estimate a possible loss range for the appraisal action.
• Other potential obligations include up to $13.4 million to the Cystic Fibrosis Foundation after U.S. CF approval, plus up to $3.9 million if sales milestones are met; these were not accrued because development risk remained significant. Operating-lease commitments totaled $2.4 million.
• After quarter-end, the board adopted a senior executive bonus plan and terminated the employee stock purchase plan; a director resigned and a new director was appointed as audit committee chair.

Most important facts for investors to verify

• ARIKACE Phase 3 data, regulatory filing timing and the NTM Phase 2 results and FDA pathway.
• Cash burn, the assumptions behind management’s stated runway through 2014, and potential financing needs and dilution.
• Debt repayment schedule, 9.25% interest cost, secured collateral and any covenant or default developments.
• Progress in remediating the material weakness and the status of the Pilkiewicz appraisal action and Cacchillo appeal.
• Clinical supply capacity and reliance on sole-source manufacturing and raw-material suppliers.