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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number 000-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia54-1972729
(State or other jurisdiction of incorporation or organization)(I.R.S. employer identification no.)
700 US Highway 202/206,
 
Bridgewater, New Jersey
08807
(Address of principal executive offices)(Zip Code)
(908) 977-9900
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section12(b) of the Act:
Title of each classTrading symbolsName of each exchange on which registered
Common stock, par value $0.01 per shareINSMNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company 
Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
As of October 24, 2022, there were 135,476,809 shares of the registrant’s common stock outstanding.



INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
 
INDEX
 
 
 
 
 
 
Unless the context otherwise indicates, references in this Form 10-Q to “Insmed Incorporated” refers to Insmed Incorporated, a Virginia corporation, and “Company,” “Insmed,” “we,” “us” and “our” refer to Insmed Incorporated together with its consolidated subsidiaries. INSMED, PULMOVANCE, ARIKARES and ARIKAYCE are trademarks of Insmed Incorporated. This Form 10-Q also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-Q is the property of its owner.

2

PART I.  FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INSMED INCORPORATED
Consolidated Balance Sheets
(in thousands, except par value and share data)
As ofAs of
September 30, 2022December 31, 2021
 (unaudited) 
Assets  
Current assets:  
Cash and cash equivalents$414,633 $716,782 
Marketable securities98,662  
Accounts receivable27,401 24,351 
Inventory66,276 67,009 
Prepaid expenses and other current assets25,193 28,898 
Total current assets632,165 837,040 
Marketable securities, non-current 50,043 
Fixed assets, net53,684 52,955 
Finance lease right-of-use assets16,697 9,256 
Operating lease right-of-use assets22,430 33,305 
Intangibles, net70,020 73,809 
Goodwill136,110 136,110 
Other assets63,711 50,990 
Total assets$994,817 $1,243,508 
Liabilities and shareholders’ equity  
Current liabilities:  
Accounts payable and accrued liabilities$131,861 $125,030 
Finance lease liabilities337 609 
Operating lease liabilities5,456 9,527 
Total current liabilities137,654 135,166 
Debt, long-term784,799 566,588 
Contingent consideration51,800 75,668 
Finance lease liabilities, long-term22,679 14,103 
Operating lease liabilities, long-term16,504 21,441 
Other long-term liabilities11,340 20,074 
Total liabilities1,024,776 833,040 
Shareholders’ equity:  
Common stock, $0.01 par value; 500,000,000 authorized shares, 121,726,199 and 118,738,266 issued and outstanding shares at September 30, 2022 and December 31, 2021, respectively
1,217 1,187 
Additional paid-in capital2,506,665 2,673,556 
Accumulated deficit(2,536,455)(2,265,243)
Accumulated other comprehensive (loss) income(1,386)968 
Total shareholders’ (deficit) equity(29,959)410,468 
Total liabilities and shareholders’ equity$994,817 $1,243,508 
See accompanying notes to consolidated financial statements
3

INSMED INCORPORATED
Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands, except per share data)
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Product revenues, net$67,730 $46,757 $186,058 $132,337 
Operating expenses:    
Cost of product revenues (excluding amortization of intangible assets)13,471 10,183 42,057 30,864 
Research and development99,872 70,347 272,755 196,392 
Selling, general and administrative75,583 60,280 192,305 169,007 
Amortization of intangible assets1,263 1,264 3,789 3,790 
Change in fair value of deferred and contingent consideration liabilities5,238 8,300 (19,002)8,300 
Total operating expenses195,427 150,374 491,904 408,353 
Operating loss(127,697)(103,617)(305,846)(276,016)
Investment income1,791 46 2,763 113 
Interest expense(3,353)(11,245)(10,001)(29,123)
Loss on extinguishment of debt   (17,689)
Other expense, net(1,514)(476)(7,069)(678)
Loss before income taxes(130,773)(115,292)(320,153)(323,393)
Provision (benefit) for income taxes372 (2,578)1,258 (1,717)
Net loss$(131,145)$(112,714)$(321,411)$(321,676)
Basic and diluted net loss per share$(1.09)$(0.96)$(2.68)$(2.93)
Weighted average basic and diluted common shares outstanding
120,789 117,092 119,780 109,955 
Net loss$(131,145)$(112,714)$(321,411)$(321,676)
Other comprehensive income (loss):    
Foreign currency translation loss(553)(324)(1,255)(93)
Unrealized gain (loss) on marketable securities96  (1,099) 
Total comprehensive loss$(131,602)$(113,038)$(323,765)$(321,769)
    
See accompanying notes to consolidated financial statements

4

INSMED INCORPORATED
Consolidated Statements of Shareholders' Equity (unaudited)
(in thousands)

 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at June 30, 2021115,239 $1,152 $2,569,028 $(2,039,551)$424 $531,053 
Comprehensive loss:
Net loss(112,714)(112,714)
Other comprehensive income (loss)(324)(324)
Exercise of stock options and ESPP shares issuance226 3 2,491 2,494 
Equity component of convertible debt issuance311 311 
Issuance of common stock for vesting of RSUs1   
Issuance of common stock for Business Acquisition2,889 29 71,762 71,791 
Stock-based compensation expense12,231 12,231 
Balance at September 30, 2021118,355 $1,184 $2,655,823 $(2,152,265)$100 $504,842 
Balance at June 30, 2022119,865 $1,199 $2,449,281 $(2,405,310)$(929)$44,241 
Comprehensive loss:
Net loss(131,145)(131,145)
Other comprehensive income (loss)(457)(457)
Exercise of stock options and ESPP shares issuance395 3 4,066 4,069 
Net proceeds from issuance of common stock1,290 13 33,370 33,383 
Issuance of common stock for vesting of RSUs5   
Deferred payments for Business Acquisition171 2 4,294 4,296 
Stock-based compensation expense15,654 15,654 
Balance at September 30, 2022121,726 $1,217 $2,506,665 $(2,536,455)$(1,386)$(29,959)
See accompanying notes to consolidated financial statements

5

INSMED INCORPORATED
Consolidated Statements of Shareholders' Equity (unaudited)
(in thousands)
 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at December 31, 2020102,763 $1,028 $2,105,252 $(1,830,589)$193 $275,884 
Comprehensive loss:
Net loss(321,676)(321,676)
Other comprehensive income (loss)(93)(93)
Exercise of stock options and ESPP shares issuance986 10 16,009 16,019 
Net proceeds from issuance of common stock11,500 115 269,771 269,886 
Equity component of convertible debt issuance196,374 196,374 
Equity component of convertible debt redemption(37,846)(37,846)
Issuance of common stock for vesting of RSUs217 2 2 
Issuance of common stock for Business Acquisition2,889 2971,762 71,791 
Stock-based compensation expense34,501 34,501 
Balance at September 30, 2021118,355 $1,184 $2,655,823 $(2,152,265)$100 $504,842 
Balance at December 31, 2021118,738 $1,187 $2,673,556 $(2,265,243)$968 $410,468 
Cumulative impact of ASU 2020-06 adoption(264,609)50,199 (214,410)
Comprehensive loss:
Net loss(321,411)(321,411)
Other comprehensive income (loss)(2,354)(2,354)
Exercise of stock options and ESPP shares issuance1,190 11 17,318 17,329 
Net proceeds from issuance of common stock1,290 13 33,370 33,383 
Issuance of common stock for vesting of RSUs337 4 4 
Deferred payment for Business Acquisition171 2 4,294 4,296 
Stock-based compensation expense42,736 42,736 
Balance at September 30, 2022121,726 $1,217 $2,506,665 $(2,536,455)$(1,386)$(29,959)
See accompanying notes to consolidated financial statements
6

INSMED INCORPORATED
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months Ended September 30,
 20222021
Operating activities  
Net loss$(321,411)$(321,676)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation3,095 7,011 
Amortization of intangible assets3,789 3,790 
Stock-based compensation expense42,736 34,501 
Loss on extinguishment of debt 17,689 
Amortization of debt issuance costs and accretion of debt discount2,465 22,055 
Finance lease amortization expense1,846 809 
Noncash operating lease expense11,440 11,218 
Change in fair value of deferred and contingent consideration liabilities(19,002)8,300 
Changes in operating assets and liabilities:  
Accounts receivable(5,440)(2,875)
Inventory624 (18,588)
Prepaid expenses and other current assets1,806 (2,097)
Other assets(13,023)(20,994)
Accounts payable and accrued liabilities15,137 (4,057)
Other liabilities(21,352)(14,256)
Net cash used in operating activities(297,290)(279,170)
Investing activities  
Purchase of fixed assets(5,187)(6,147)
Purchase of marketable securities(99,706) 
Cash used for Business Acquisition, net (6,920)
Maturities of marketable securities50,000  
Net cash used in investing activities(54,893)(13,067)
Financing activities  
Proceeds from exercise of stock options, ESPP, and RSU vestings17,333 16,021 
Proceeds from issuance of common stock, net33,383 269,886 
Payment on extinguishment of 1.75% convertible senior notes due 2025
 (12,578)
Payment of principal on 1.75% convertible senior notes due 2025
 (225,000)
Proceeds from issuance of 0.75% convertible senior notes due 2028
 575,000 
Payment of debt issuance costs (15,702)
Payments of finance lease principal(830)(791)
Net cash provided by financing activities49,886 606,836 
Effect of exchange rates on cash and cash equivalents148 (799)
Net (decrease) increase in cash and cash equivalents(302,149)313,800 
Cash and cash equivalents at beginning of period716,782 532,756 
Cash and cash equivalents at end of period$414,633 $846,556 
Supplemental disclosures of cash flow information:  
Cash paid for interest$7,442 $8,202 
Cash paid for income taxes$1,626 $1,451 
See accompanying notes to consolidated financial statements
7

INSMED INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.                                    The Company and Basis of Presentation
Insmed is a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare diseases. The Company's first commercial product, ARIKAYCE, is approved in the United States (US) as ARIKAYCE® (amikacin liposome inhalation suspension), in Europe as ARIKAYCE Liposomal 590 mg Nebuliser Dispersion and in Japan as ARIKAYCE inhalation 590mg (amikacin sulfate inhalation drug product). ARIKAYCE received accelerated approval in the US in September 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options in a refractory setting. In October 2020, the European Commission (EC) approved ARIKAYCE for the treatment of nontuberculous mycobacterial (NTM) lung infections caused by MAC in adults with limited treatment options who do not have cystic fibrosis (CF). In March 2021, Japan's Ministry of Health, Labour and Welfare (MHLW) approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. NTM lung disease caused by MAC (which the Company refers to as MAC lung disease) is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The Company's clinical-stage pipeline includes brensocatib and treprostinil palmitil inhalation powder (TPIP). Brensocatib is a small molecule, oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1), which the Company is developing for the treatment of patients with bronchiectasis, CF and other neutrophil-mediated diseases, including chronic rhinosinusitis without nasal polyps (CRSsNP) and hidradenitis suppurativa (HS). TPIP is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for pulmonary hypertension associated with interstitial lung disease (PH-ILD) and pulmonary arterial hypertension (PAH).
The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located in Bridgewater, New Jersey. The Company has legal entities in the US, France, Germany, Ireland, Italy, the Netherlands, Switzerland, the United Kingdom (UK), and Japan.
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
     The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated in consolidation and certain prior year amounts have been reclassified to conform to the current year presentation.
     The Company had $414.6 million in cash and cash equivalents and marketable securities totaling $98.7 million as of September 30, 2022 and reported a net loss of $321.4 million for the nine months ended September 30, 2022. The Company has funded its operations through public offerings of equity securities, debt financings and revenue interest financings. The Company expects to continue to incur consolidated operating losses, including losses in its US and certain international entities, while funding research and development (R&D) activities for ARIKAYCE, brensocatib, TPIP and its other pipeline programs, continuing commercialization and regulatory activities for ARIKAYCE and pre-commercial, regulatory and, if approved, commercialization activities for brensocatib, and funding other general and administrative activities.
The Company expects its future cash requirements to be substantial. While the Company currently has sufficient funds to meet its financial needs for at least the next 12 months, the Company may raise additional capital in the future to fund its operations, its ongoing commercialization and clinical trial activities, and its future product candidates, and to develop, acquire, in-license or co-promote other products or product candidates, including those that address orphan or rare diseases. The source, timing and availability of any future financing or other transaction will depend principally upon continued progress in the Company’s commercial, regulatory and development activities. Any equity or debt financing will also be contingent upon equity and debt market conditions and interest rates at the time. If the Company is unable to obtain sufficient additional funds when required, the Company may be forced to delay, restrict or eliminate all or a portion of its development programs or commercialization efforts.
Risks and Uncertainties - There are many uncertainties regarding the novel coronavirus (COVID-19) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect the Company's financial results and business operations for the nine months ended September 30, 2022, the Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future
8

periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.
2.                                      Summary of Significant Accounting Policies
The following are the required interim disclosure updates to the Company's significant accounting policies described in Note 2 of the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2021:
     Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Each major category of financial assets and liabilities measured at fair value on a recurring basis is categorized based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1 generally include US treasuries and mutual funds listed in active markets. The Company's cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions.
The following table shows assets and liabilities that are measured at fair value on a recurring basis and their carrying value (in millions):
September 30, 2022
Fair Value
Carrying ValueLevel 1Level 2Level 3
Cash and cash equivalents$414.6 $414.6 $ $ 
Marketable securities$98.7 $98.7 $ $ 
Deferred consideration$8.0 $ $8.0 $ 
Contingent consideration liabilities$59.3 $ $ $59.3 
December 31, 2021
Fair Value
Carrying ValueLevel 1Level 2Level 3
Cash and cash equivalents$716.8 $716.8 $ $ 
Marketable securities$50.0 $50.0 $ $ 
Deferred consideration$14.9 $ $14.9 $ 
Contingent consideration liabilities$75.7 $ $ $75.7 
The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the nine months ended September 30, 2022, the Company purchased $99.7 million of additional marketable securities consisting of US Treasury Notes. There were no other transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2022.
As of September 30, 2022, the Company held $98.7 million of current available-for-sale securities, net of an unrealized loss of $1.3 million recorded in accumulated other comprehensive income. Marketable securities maturing in one year or less are classified as current assets and marketable securities maturing in more than one year are classified as non-current assets. As of December 31, 2021, the Company held no securities that were in an unrealized gain or loss position.
9

The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making its determination, the Company considers a number of factors, including: (1) the significance of the decline; (2) whether the security was rated below investment grade; (3) how long the security has been in an unrealized loss position; and (4) the Company's ability and intent to retain the investment for a sufficient period of time for it to recover. The Company has determined that there were no other-than-temporary impairments during the quarter ended September 30, 2022.
Deferred Consideration
The deferred consideration arose from the acquisitions of Motus Biosciences, Inc. (Motus) and AlgaeneX, Inc. (AlgaeneX) (the Business Acquisition) in August 2021 (Note 13). The Company is obligated to issue to Motus equityholders an aggregate of 184,433 shares of the Company’s common stock on each of the first, second and third anniversaries of the closing date, subject to certain reductions. During August 2022, the Company fulfilled the payment due on the first anniversary of the closing date by issuing 171,427 shares of the Company's common stock. A valuation of the deferred consideration is performed quarterly with gains and losses included within change in fair value of deferred and contingent consideration liabilities in the consolidated statements of comprehensive loss. As the deferred consideration is settled in shares, there is no discount rate applied in the fair value calculation.
The deferred consideration has been classified as a Level 2 recurring liability as its valuation utilizes an input, the Insmed share price on the valuation date, which is a directly observable input at the measurement date and for the duration of the liabilities' anticipated lives. Deferred consideration expected to be settled within twelve months or less is classified as a current liability and are included in accrued liabilities. As of September 30, 2022, the fair value of deferred consideration included in accrued liabilities was $4.0 million. Deferred consideration expected to be settled in more than twelve months is classified as a non-current liability and is included in other long-term liabilities. As of September 30, 2022, the fair value of deferred consideration included in other long-term liabilities was $4.0 million.
The following observable input was used in the valuation of the deferred consideration as of September 30, 2022:
Fair Value as of September 30, 2022 (in millions)
Observable InputInput Value
Deferred consideration$8.0
Insmed share price as of September 30, 2022
$21.54
Contingent Consideration
The contingent consideration liabilities arose from the Business Acquisition in August 2021 (Note 13). The contingent consideration liabilities consist of developmental and regulatory milestones, a priority review voucher milestone and net sales milestones. Upon the achievement of certain development and regulatory milestone events, the Company is obligated to issue to Motus equityholders up to 5,348,572 shares in the aggregate and AlgaeneX equityholders up to 368,867 shares in the aggregate. The fair value of the development and regulatory milestones are estimated utilizing a probability-adjusted approach. At September 30, 2022, the weighted average probability of success was 42%. The development and regulatory milestones will be settled in shares of the Company's common stock. As such, there is no discount rate applied in the fair value calculation.
If the Company were to receive a priority review voucher, the Company is obligated to pay to the Motus equityholders a portion of the value of the priority review voucher, subject to certain reductions. The potential payout will be either 50% of the after tax net proceeds received by the Company from a sale of the priority review voucher or 50% of the average of the sales prices for the last three publicly disclosed priority review voucher sales, less certain adjustments. The fair value of the priority review voucher milestone is estimated utilizing a probability-adjusted discounted cash flow approach. This obligation will be settled in cash.
The contingent consideration liabilities for net sales milestones were valued using an option pricing model with Monte Carlo simulation. As of September 30, 2022, the fair value of these net sales milestones were deemed immaterial to the overall fair value of the contingent consideration.
The contingent consideration liabilities have been classified as a Level 3 recurring liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. If different assumptions were used for the inputs to the valuation approach, the estimated fair value could be significantly different than the fair value the Company determined. Contingent consideration liabilities expected to be settled in more than twelve months are classified as a non-current liability. A valuation of the contingent consideration liabilities is performed quarterly with gains and losses included within change in fair value of contingent consideration liabilities in the consolidated statements of comprehensive loss.
The following significant unobservable inputs were used in the valuation of the contingent consideration liabilities as of September 30, 2022 (in millions):
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Contingent Consideration Liabilities
Fair Value as of September 30, 2022
Valuation TechniqueUnobservable InputsValues
Development and regulatory milestones$51.8Probability-adjustedProbabilities of success
14% - 95%
Priority review voucher milestone$5.5Probability-adjusted discounted cash flowProbability of success
16.4%
Discount rate
14.3%
The following table is a summary of the changes in the fair value of the Company's valuations for the deferred and contingent consideration liabilities for the nine months ended September 30, 2022 and 2021 (in thousands):
2022
December 31, 2021AdditionsChange in Fair ValuePayments/AdjustmentsSeptember 30, 2022
Deferred consideration$14,931  (2,635)(4,296)$8,000 
Contingent consideration$75,668  (16,368) $59,300 
2021
December 31, 2020AdditionsChange in Fair ValuePayments/AdjustmentsSeptember 30, 2021
Deferred consideration$ 13,700 1,516  $15,216 
Contingent consideration$ 69,706 6,784  $76,490 
Convertible Notes
The estimated fair value of the liability component of the Company's 0.75% convertible senior notes due 2028 (the 2028 Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of September 30, 2022 was $525.4 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the 2028 Convertible Notes. The $562.1 million carrying value of the 2028 Convertible Notes as of September 30, 2022 excludes the $12.9 million of the unamortized portion of the debt issuance costs.
The estimated fair value of the liability component of the Company's 1.75% convertible senior notes due 2025 (the 2025 Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of September 30, 2022 was $217.8 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the 2025 Convertible Notes. The $222.7 million carrying value of the 2025 Convertible Notes as of September 30, 2022 excludes the $2.3 million of the unamortized portion of the debt issuance costs.
Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, restricted stock, restricted stock units (RSUs), performance stock units (PSUs) and convertible debt securities would be anti-dilutive as the Company incurred a net loss. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock options and from the assumed conversion of the Company's convertible notes are determined based on the treasury stock method.
11

The following table sets forth the reconciliation of the weighted average number of common shares used to compute basic and diluted net loss per share for the three and nine months ended September 30, 2022 and 2021:
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
 (in thousands, except per share amounts)
Numerator:    
Net loss$(131,145)$(112,714)$(321,411)$(321,676)
Denominator:    
Weighted average common shares used in calculation of basic net loss per share:120,789 117,092 119,780 109,955 
Effect of dilutive securities:    
Common stock options    
Restricted stock and RSUs    
PSUs    
Convertible debt securities    
Weighted average common shares outstanding used in calculation of diluted net loss per share120,789 117,092 119,780 109,955 
Net loss per share:    
Basic and diluted$(1.09)$(0.96)$(2.68)$(2.93)
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of September 30, 2022 and 2021, respectively, as their effect would have been anti-dilutive (in thousands):
 
September 30,
 20222021
Common stock options17,459 14,518 
Unvested restricted stock and RSUs1,582 1,069 
PSUs672  
Convertible debt securities23,438 23,438 
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high credit-quality financial institutions and may invest its short-term investments in US treasury securities, mutual funds and government agency bonds. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.
The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The Company uses an expected loss methodology to calculate allowances for trade receivables. The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company does not currently have a material allowance for collectible trade receivables. The following table presents the percentage of gross product revenue represented by the Company's three largest customers as of the nine months ended September 30, 2022 and 2021.
September 30,
20222021
Customer A35%25%
Customer B33%24%
Customer C19%3%
The Company relies on third-party manufacturers and suppliers for manufacturing and supply of its products. The inability of the suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future
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operating results. A change in the relationship with the suppliers or manufacturers, or an adverse change in their business, could materially impact future operating results.
Revenue Recognition - In accordance with Accounting Standards Codification (ASC) 606 , Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each contract to determine which are performance obligations and to assess whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, the Company has identified one performance obligation: the sale of ARIKAYCE to its customers. The Company has not incurred or capitalized any incremental costs associated with obtaining contracts with customers.
Product revenues, net consist of net sales of ARIKAYCE. The Company's customers in the US include specialty pharmacies and specialty distributors. In December 2020, the Company began recognizing product revenue from commercial sales of ARIKAYCE in Europe. In July 2021, the Company began recognizing product revenue from commercial sales of ARIKAYCE in Japan. Globally, product revenues are recognized once the Company performs and satisfies all five steps of the revenue recognition criteria mentioned above.
The following table presents a summary of the Company's product revenues, net, by geographic location for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
US$49,539 $38,511 $137,511 $117,519 
Japan14,483 4,984 41,008 4,984 
Europe and rest of world3,708 3,262 7,539 9,834 
  Total product revenues, net$67,730 $46,757 $186,058 $132,337 
Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for (a) customer credits, such as invoice discounts for prompt pay, (b) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates, (c) estimated chargebacks, and (d) estimated costs of co-payment assistance. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (prompt pay discounts and chargebacks), prepaid expenses (co-payment assistance), or as a current liability (rebates). Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company's historical experience, current contractual and statutory requirements, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Customer credits: The Company's customers are offered various forms of consideration, including prompt payment discounts. The payment terms for sales to specialty pharmacies for prompt payment discounts are based on contractual rates agreed with the respective specialty pharmacies. The Company anticipates that its customers will earn these discounts and, therefore, deducts the full amount of these discounts from total gross product revenues at the time such revenues are recognized.
Rebates: The Company contracts with government agencies and managed care organizations, or collectively, third-party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current liability is included in accrued liabilities on the consolidated balance sheets. The Company estimates the rebates that it will provide to third-party payors based upon (i) the Company's contracts with these third-party payors, (ii) the government
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mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) information obtained from the Company's specialty pharmacies.
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, currently public health service institutions and federal government entities purchasing via the Federal Supply Schedule, purchase directly from the Company's specialty distributor. Contracted customers generally purchase the product at a discounted price and the specialty distributor, in turn, charges back to the Company the difference between the price the specialty distributor initially paid and the discounted price paid by the contracted customers. The Company estimates chargebacks provided to the specialty distributor and deducts these estimated amounts from gross product revenues, and from accounts receivable, at the time revenues are recognized.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Based upon the terms of the program and information regarding programs provided for similar specialty pharmaceutical products, the Company estimates the average co-pay mitigation amounts and the percentage of patients that it expects to participate in the program in order to establish accruals for co-payment assistance. These reserves are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue. The Company adjusts its accruals for co-pay assistance based on actual redemption activity and estimates of future redemptions related to sales in the current period.
If any, or all, of the Company's actual experience varies from its estimates, the Company may need to adjust prior period accruals, affecting revenue in the period of adjustment.
The Company also recognizes revenue related to various early access programs (EAPs) in Europe, predominantly in France. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.
Inventory and Cost of Product Revenues (excluding amortization of intangible assets) - Inventory is stated at the lower of cost and net realizable value. The Company began capitalizing inventory costs following US Food and Drug Administration (FDA) approval of ARIKAYCE in September 2018. Inventory is sold on a first-in, first-out (FIFO) basis. The Company periodically reviews inventory for expiry and obsolescence and, if necessary, writes down accordingly. If quality specifications are not met during the manufacturing process, such inventory is written off to cost of product revenues (excluding amortization of intangible assets) in the period identified.
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses and revenue-based milestone payments. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods.
Prior to FDA approval of ARIKAYCE, the Company expensed all inventory-related costs in the period incurred. Inventory used for clinical development purposes is expensed to R&D expense when consumed.
Business combinations and asset acquisitions - The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, and non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, Business Combinations, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
The consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events. The obligations for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, are recognized as a gain or loss and recorded within change in the fair value of deferred and contingent consideration liabilities in the consolidated statements of comprehensive loss.
If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on the cost to the acquiring
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entity on a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s books. Consideration transferred that is non-cash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets acquired and liabilities assumed, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values.
Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets.
Indefinite-lived intangible assets - Indefinite-lived intangible assets consist of In Process Research & Development (IPR&D). IPR&D acquired directly in a transaction other than a business combination is capitalized if the projects will be further developed or have an alternative future use; otherwise they are expensed. The fair values of IPR&D project assets acquired in business combinations are capitalized. The Company generally utilizes the Multi-Period Excess Earning Method to determine the estimated fair value of the IPR&D assets acquired in a business combination. The projections used in this valuation approach are based on many factors, such as relevant market size, patent protection, and expected pricing and industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company considers many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to, expected growth rates, the cost of equity and debt capital, general economic conditions, the Company’s outlook and market performance of the Company’s industry and recent and forecasted financial performance. The Company performs a qualitative test for its indefinite-lived intangible assets annually as of October 1.
Finite-lived Intangible Assets - Finite-lived intangible assets are measured at their respective fair values on the date they were recorded and, with respect to the acquired ARIKAYCE R&D intangible asset, at the date of subsequent adjustments of fair value. The fair values assigned to the Company's intangible assets are based on reasonable estimates and assumptions given available facts and circumstances.
Impairment Assessment - The Company reviews the recoverability of its finite-lived intangible assets and long-lived assets for indicators of impairments. Events or circumstances that may require an impairment assessment include negative clinical trial results, a significant decrease in the market price of the asset, or a significant adverse change in legal factors or the manner in which the asset is used. If such indicators are present, the Company assesses the recoverability of affected assets by determining if the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such assets are found to not be recoverable, the Company measures the amount of the impairment by comparing to the carrying value of the assets to the fair value of the assets. The Company determined that no indicators of impairment of finite-lived intangible assets or long-lived assets existed at September 30, 2022.
Goodwill - Goodwill represents the amount of consideration paid in excess of the fair value of net assets acquired as a result of the Company’s business acquisitions accounted for using the acquisition method of accounting. Goodwill is not amortized and is subject to impairment testing at a reporting unit level on an annual basis or when a triggering event occurs that may indicate the carrying value of the goodwill is impaired. The Company reassesses its reporting units as part of its annual segment review. An entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company will perform its next annual impairment testing for goodwill on October 1, 2022.
Leases - A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified property, plant or equipment in exchange for consideration. Control of an asset is conveyed to the Company if the Company obtains the right to obtain substantially all of the economic benefits of the asset or the right to direct the use of the asset. The Company recognizes right-of-use (ROU) assets and lease liabilities at the lease commencement date based on the present value of future, fixed lease payments over the term of the arrangement. ROU assets are amortized on a straight-line basis over the term of the lease or are amortized based on consumption, if this approach is more representative of the pattern in
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which benefit is expected to be derived from the underlying asset. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the consolidated statements of comprehensive loss in the same line item as expenses arising from fixed lease payments.
Leases are measured at present value using the rate implicit in the lease or, if the implicit rate is not determinable, the lessee's implicit borrowing rate. As the implicit rate is not typically available, the Company uses its implicit borrowing rate based on the information available at the lease commencement date to determine the present value of future lease payments. The implicit borrowing rate approximates the rate the Company would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Refer to Note 7 - Leases for details about the Company's lease portfolio, including required disclosures.
Recently Adopted Accounting Pronouncements - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also promote consistent application of and simplify US generally accepted accounting principles (GAAP) for other areas of Topic 740 by clarifying and amending the existing guidance. For public business entities, the guidance was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The Company adopted this guidance January 1, 2021. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements and accompanying notes.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, to reduce the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the number of accounting models for convertible debt instruments is reduced, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Only convertible instruments that meet the definition of a derivative or are issued with substantial premiums will continue to be subject to the separation models. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a share of convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021. The Company transitioned using the modified retrospective method. The impact of adopting ASU 2020-06 on January 1, 2022 resulted in an opening balance sheet adjustment increasing debt by $221.9 million, increasing issuance costs classified to debt by $6.1 million, decreasing the deferred tax liability by $1.4 million, and causing an increase to retained earnings of $50.2 million, with an offsetting reduction to additional paid-in-capital of $264.6 million, net of tax.
3.            Inventory
As of September 30, 2022 and December 31, 2021, the Company's inventory balance consists of the following (in thousands):
September 30, 2022December 31, 2021
Raw materials$29,557 $29,541 
Work-in-process18,763 18,528 
Finished goods17,956 18,940 
$66,276 $67,009 
Inventory is stated at the lower of cost and net realizable value and consists of raw materials, work-in-process and finished goods. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE in September 2018. The Company has not recorded any significant inventory write-downs since that time. The Company currently uses a limited number of third-party contract manufacturing organizations (CMOs) to produce its inventory.
4.                                      Intangibles, Net and Goodwill
 Intangibles, Net
Finite-lived Intangible Assets
As of September 30, 2022, the Company's finite-lived intangible assets consisted of acquired ARIKAYCE R&D and the milestones paid to PARI Pharma GmbH (PARI) for the license to use PARI's Lamira® Nebulizer System (Lamira) for the delivery of ARIKAYCE to patients as a result of the FDA and EC approvals of ARIKAYCE in September 2018 and October 2020, respectively. The Company began amortizing its acquired ARIKAYCE R&D and PARI milestones intangible assets in
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October 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. Amortization of these assets during each of the next five years is estimated to be approximately $5.1 million per year.
Indefinite-lived Intangible Assets
As of September 30, 2022, the Company's indefinite-lived intangible assets consisted of acquired in process research and development (IPR&D) from the Business Acquisition (Note 13). Indefinite-lived intangible assets are not amortized.
A rollforward of the Company's intangible assets for the nine months ended September 30, 2022 and September 30, 2021 is as follows (in thousands):
Intangible AssetDecember 31, 2021AdditionsAmortization
September 30, 2022
Acquired ARIKAYCE R&D$42,439 $ $(3,638)$38,801 
Acquired IPR&D29,600   29,600 
PARI milestones1,770  (151)1,619 
$73,809 $ $(3,789)$70,020 
Intangible AssetDecember 31, 2020AdditionsAmortization
September 30, 2021
Acquired ARIKAYCE R&D$47,289 $ $(3,638)$43,651 
Acquired IPR&D 29,600  29,600 
PARI milestones1,972  (152)1,820 
$49,261 $29,600 $(3,790)$75,071 
Goodwill
The Company's goodwill balance of $136.1 million as of September 30, 2022 and December 31, 2021, resulted from the Business Acquisition (Note 13). 
5.    Fixed Assets, Net
Fixed assets are stated at cost and depreciated using the straight-line method, based on useful lives as follows (in thousands):
Asset DescriptionEstimated
Useful Life (years)
September 30, 2022December 31, 2021
Lab equipment7$14,378 $11,862 
Furniture and fixtures76,183 5,799 
Computer hardware and software
3-5
4,892 7,264 
Office equipment788 89 
Manufacturing equipment