Insmed Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing was signed August 6, 2014. Insmed is a clinical-stage biopharmaceutical company focused on inhaled therapies; ARIKAYCE is its lead product candidate. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $11.5 million | $0 | $11.5 million |
| Research and development expense | $14.9 million | $12.2 million | $26.3 million | $22.6 million |
| General and administrative expense | $7.9 million | $7.5 million | $14.6 million | $11.5 million |
| Operating loss | $22.8 million | $8.3 million | $40.9 million | $22.6 million |
| Net loss | $23.2 million | $8.9 million | $37.5 million | $22.5 million |
| Basic and diluted loss per share | $0.59 | $0.28 | $0.96 | $0.71 |
- The 2013 comparison included a one-time $11.5 million payment from Premacure (acquired by Shire) in exchange for Insmed’s future royalty rights. Insmed reported no product revenue in either 2014 period and said it did not expect material revenue for at least several years absent product approval and commercialization.
- For the six months, R&D expense rose 16.6%, mainly reflecting higher personnel and manufacturing costs, partly offset by lower clinical-development spending after completion of the CF Phase 3 study. G&A rose 26.8%, principally from pre-commercial activity and increased headcount.
- The six-month 2014 net loss included a $4.4 million income-tax benefit from selling New Jersey tax attributes; the comparable 2013 benefit was $1.2 million. These benefits are not an indication of operating profitability.
- Cash and cash equivalents were $82.7 million at June 30, down from $113.9 million at year-end 2013. Working capital was $64.9 million. Six-month operating cash use was $30.6 million versus $16.3 million; excluding the 2013 royalty-rights payment and tax-sale proceeds in both periods, management reported adjusted operating cash use of $35.0 million in 2014 versus $29.0 million in 2013.
- Six-month investing cash use was $0.9 million; financing provided $0.3 million. No meaningful product margin was reported because there were no product sales.
- Total assets were $150.1 million, total liabilities $38.6 million, and shareholders’ equity $111.5 million at June 30. Debt consisted of $20.0 million principal under secured notes bearing 9.25% interest; balance-sheet debt, net of discounts and charges, was $19.8 million. Insmed extended the interest-only period through December 31, 2014; principal payments were scheduled to begin January 1, 2015, with maturity January 1, 2016.
Material developments and outlook
- ARIKAYCE in NTM: In the Phase 2 trial, the primary endpoint did not reach prespecified statistical significance (p=0.148). The key secondary culture-conversion endpoint was statistically significant: 11 of 44 ARIKAYCE patients versus 3 of 45 placebo patients were culture-negative at Day 84 (p=0.01). Open-label follow-up reported 21 culture-negative patients at Day 168 among 68 patients with available data.
- The FDA granted Breakthrough Therapy Designation for treatment-refractory NTM in June 2014. Subsequent to quarter-end, Insmed said it planned two Phase 3 NTM trials: a confirmatory study focused on treatment-refractory MAC patients, with results expected in the first half of 2016, and a broader NTM study, with results expected in 2017. These are management expectations, not guaranteed outcomes.
- ARIKAYCE in CF: The completed European/Canadian Phase 3 study met its primary non-inferiority endpoint versus twice-daily tobramycin inhalation solution; the filing described overall secondary outcomes and safety as comparable. The company planned to submit European marketing applications by year-end 2014 and Canadian applications in the first half of 2015, subject to regulatory review.
- Insmed entered a February 2014 manufacturing agreement with Therapure and a July 2014 commercialization agreement with PARI for nebulizer supply. The company expected to pay Therapure about $12 million for facility build-out and related manufacturing costs; about $5 million had been paid by June 30.
- Management estimated second-half 2014 operating cash requirements of $42–$47 million, including $6–$8 million for third-party manufacturing capacity, plus $2.5–$3.5 million of capital expenditures and about $2.5 million of current liabilities related to the Bridgewater facilities. It stated that capital would need to be raised within the next 12 months and warned that financing might not be available on acceptable terms or at all.
- Management stated that it expected continued losses and could not predict when, if ever, the company would generate positive cash flow. A May 2014 shelf registration permitted future common-stock offerings.
Risks, contingencies, and unusual items
- Development and regulatory success is highly dependent on ARIKAYCE. Clinical results may not be replicated; the NTM Phase 2 primary endpoint failure underscores this risk. The company also disclosed that two of 120 rats at the highest dose in a two-year inhalation study developed lung tumors; relevance to humans is unknown. Prior FDA clinical holds were lifted after additional work, but this remains a disclosed safety concern.
- Insmed’s debt is secured by a first-priority lien on company assets other than intellectual property. Default provisions allow acceleration and additional default interest. Contractual obligations included $20.0 million debt principal, $2.6 million contractual interest, and $5.2 million operating lease payments as of June 30.
- Potential future payments to PARI and Cystic Fibrosis Foundation Therapeutics depend on milestones, approvals, or sales. Up to $13.4 million plus $3.9 million in sales-milestone payments could be owed to CFFT if specified U.S. CF approval and sales conditions are met; these amounts were not accrued given development risk.
- A Delaware appraisal action relating to the Transave merger settled in May 2014; Insmed stated it was indemnified in full for the settlement and defense costs. Management did not expect other ordinary-course legal matters to materially adversely affect the company.
- After quarter-end, the Chief Commercial Officer notified the company of his resignation on August 1, 2014. Commercial responsibilities were to be shared by management while the company searched for a replacement.
Most important facts for investors to verify
- Cash burn against the $82.7 million June 30 cash balance, the stated need to raise capital within 12 months, and the terms or timing of any financing.
- Progress, enrollment, endpoints, safety findings, and result timing for both planned NTM Phase 3 trials, especially given the Phase 2 primary endpoint result.
- Regulatory-submission and review progress for NTM and CF indications, including whether the stated filing timelines were achieved.
- Therapure manufacturing scale-up, permits, costs, and supply readiness, as well as PARI device availability and any milestone or royalty obligations.
- Whether the rat tumor finding or other safety signals affect clinical development or regulatory decisions, and the company’s ability to manage its secured debt and upcoming principal repayments.