INSMED Inc annual report, FY2014

Insmed Incorporated — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; comparative results are for FY2013. The filing also reports unaudited fourth-quarter results. Insmed is a clinical-stage biopharmaceutical company focused primarily on ARIKAYCE, an inhaled amikacin candidate for NTM lung infections and Pseudomonas infections in cystic fibrosis (CF), and on INS1009 for pulmonary arterial hypertension. It had no product revenue in 2014.

Financial results and liquidity

Metric	FY2014	FY2013
Revenue	$0	$11.5 million, one-time IPLEX royalty-rights buyout
Research and development expense	$56.3 million	$44.3 million
General and administrative expense	$31.1 million	$22.2 million
Operating loss	$87.4 million	$55.0 million
Net loss	$79.2 million	$56.1 million
Basic and diluted loss per share	$1.84	$1.60
Cash used in operating activities	$64.4 million	$46.7 million

• FY2014 net loss includes a $10.4 million income-tax benefit from selling New Jersey tax attributes; this is not operating revenue. Operating cash use, excluding the $9.4 million cash proceeds from those sales, was $73.8 million.
• Cash and cash equivalents were $159.2 million at year-end, up from $113.9 million; working capital was $145.1 million. The cash increase principally reflected $109.0 million of net stock-issuance proceeds and $5.0 million of additional debt, partly offset by operating and investing cash use.
• Debt was $25.0 million principal, carried at $24.9 million net of discounts and fees, bearing fixed interest at 9.25%. The interest-only period was extended through December 31, 2015; principal was scheduled to mature in 2016, subject to an option to extend to 2018 if specified financing proceeds are obtained and the company pays a fee. Debt is secured by company assets other than intellectual property.
• Operating margins are not meaningful because the company recorded no revenue in 2014. No profit or positive cash-flow guidance was provided.

Material changes and operating developments

• Net loss widened by $23.1 million year over year. Expense growth reflected higher manufacturing and clinical-supply spending, process improvements, staffing, and pre-commercial and administrative activity. R&D rose 27.1% and G&A rose 39.7%.
• R&D manufacturing expense increased $8.4 million, while clinical development and research expense fell $7.4 million, mainly because the pivotal CF study was completed in 2013. G&A pre-commercial expense rose to $8.0 million from $3.6 million.
• Insmed raised $108.0 million net in an August 2014 public stock offering and issued about $1.0 million of shares to lender Hercules in December. Shares outstanding increased to 49.8 million at year-end from 39.1 million.
• Fourth-quarter 2014 revenue was $0; operating loss was $23.1 million and net loss was $17.6 million, or $0.36 per share. The smaller quarterly net loss versus operating loss primarily reflects the timing of tax benefits.

Outlook, commentary, and risks

• Management said available funds were sufficient for 2015, while noting it might raise capital opportunistically and that future funding availability and terms were uncertain. The company expected no material revenue for at least two years and continued operating losses for the foreseeable future.
• Management expected 2015 R&D expense to increase, principally due to the global ARIKAYCE phase 3 NTM study and INS1009 preclinical work. G&A was also expected to rise with commercial-readiness spending, including in Europe.
• ARIKAYCE’s 2014 phase 2 NTM trial missed its prespecified primary endpoint for statistical significance (positive trend, p=0.148), but achieved statistical significance on the secondary culture-conversion endpoint: 11 of 44 treated patients versus 3 of 45 placebo patients at day 84 (p=0.01). The open-label follow-up reported 21 culture-negative patients at day 168 among 68 assessed; these results do not establish regulatory approval.
• For CF-associated Pseudomonas, the completed phase 3 study met its primary non-inferiority endpoint versus twice-daily tobramycin, with broadly comparable secondary results and safety. The EMA marketing application, filed in Q4 2014 for NTM and CF indications, was validated in February 2015. Validation begins formal review; it is not approval.
• The global phase 3 NTM confirmatory study began in early 2015, targeting about 300 patients. Management expected enrollment completion within roughly a year and preliminary top-line results in mid-2016. If successful, the company believed the culture-conversion endpoint could support an accelerated-approval application, with post-approval confirmation obligations.
• For INS1009, management targeted an IND filing and phase 1 start in the second half of 2015, subject to preclinical and toxicology results. FDA discussions indicated possible eligibility for the 505(b)(2) pathway, not a guarantee of eligibility or approval.
• Key risks include clinical failure or delay, uncertain regulatory and surrogate-endpoint acceptance, and safety concerns. A two-year rat inhalation study found lung tumors in 2 of 120 rats at the highest dose, within two-fold of clinical-study doses on specified normalized bases; relevance to humans is unknown. FDA clinical holds imposed in 2011 were lifted in 2012.
• Manufacturing and delivery depend on third parties: Althea remained the current ARIKAYCE manufacturer without a long-term supply agreement, Therapure capacity was being built out, and PARI was the sole nebulizer supplier. Scale-up, quality, permits, and supply interruptions could delay trials or commercialization.
• Other risks include continued cash burn and possible dilution or restrictive financing, debt covenants and collateral, reimbursement and pricing uncertainty, competition, intellectual-property challenges, and the possibility of impairment to the $58.2 million in-process R&D asset. Management reported no impairment indicator at year-end. Ordinary-course legal matters were not expected to have a material adverse effect.

Most important facts for investors to verify

• Progress, enrollment, endpoint results, and timing for the ARIKAYCE phase 3 NTM study, and the FDA’s position on any accelerated-approval strategy.
• EMA review outcome and timing for the ARIKAYCE application, plus any subsequent U.S. or Canadian filing and approval milestones.
• Cash burn versus the stated 2015 funding outlook, and whether additional financing is needed, including its dilution and terms.
• Successful qualification and commercial-scale supply from Therapure, continued Althea supply, and PARI device availability and regulatory status.
• Any new safety findings, particularly regarding the animal tumor observations, and any material change in the valuation or impairment assessment of the IPR&D asset.