Company Quick10K Filing
Quick10K
Insmed
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$28.60 78 $2,220
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-25 Other Events, Exhibits
8-K 2019-05-24 Regulation FD, Exhibits
8-K 2019-05-21 Other Events, Exhibits
8-K 2019-05-16 Officers, Shareholder Vote
8-K 2019-05-01 Earnings, Officers, Exhibits
8-K 2019-04-08 Earnings, Exhibits
8-K 2019-02-22 Earnings, Exhibits
8-K 2019-01-09 Officers
8-K 2019-01-04 Earnings, Regulation FD, Exhibits
8-K 2018-11-06 Officers, Other Events, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-09-28 Regulation FD, Exhibits
8-K 2018-09-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-05-16 Regulation FD, Exhibits
8-K 2018-05-15 Officers, Shareholder Vote
8-K 2018-03-29 Regulation FD, Exhibits
8-K 2018-02-14 Regulation FD, Exhibits
8-K 2018-01-26 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-01-03 Regulation FD, Exhibits
GSK GlaxoSmithKline 98,910
ANAB Anaptysbio 1,930
EBIX Ebix 1,560
KEN Kenon Holdings 1,050
DBD Diebold Nixdorf 831
LFAC LF Capital Acquisition 196
BOCH Bank of Commerce Holdings 191
SGOL ETFS Gold Trust 0
PKPL Park Place Energy 0
GOV Government Properties Income Trust 0
INSM 2019-03-31
Part I. Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 insm-20190331xex101.htm
EX-10.2 insm-20190331xex102.htm
EX-10.3 insm20190331-ex103.htm
EX-31.1 insm-20190331xex311.htm
EX-31.2 insm-20190331xex312.htm
EX-32.1 insm-20190331xex321.htm
EX-32.2 insm-20190331xex322.htm

Insmed Earnings 2019-03-31

INSM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
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)
Virginia
 
54-1972729
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
 
 
 
10 Finderne Avenue, Building 10
 
 
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)
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 o
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 o
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 o
Emerging growth company o
 
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Securities registered pursuant to Section12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange on which registered
Common stock, par value $0.01 per share
INSM
Nasdaq Global Select Market
As of May 2, 2019, there were 77,666,309 shares of the registrant’s common stock outstanding.
 


Table of Contents

INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
 
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, ARIKAYCE, and CONVERT 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

Table of Contents

PART I.  FINANCIAL INFORMATION
 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
INSMED INCORPORATED
Consolidated Balance Sheets
(in thousands, except par value and share data)
 
 
As of
 
As of
 
March 31, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
420,231

 
$
495,072

Accounts receivable
9,347

 
5,515

Inventory
12,682

 
7,032

Prepaid expenses and other current assets
12,372

 
11,327

Total current assets
454,632

 
518,946

 
 
 
 
Intangibles, net
57,427

 
58,675

Fixed assets, net
27,933

 
22,636

Right-of-use assets
44,609

 

Other assets
11,314

 
4,299

Total assets
$
595,915

 
$
604,556

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
30,223

 
$
17,741

Accrued expenses
38,317

 
38,254

Accrued compensation
16,271

 
22,208

Lease liabilities
9,359

 

Other current liabilities
82

 
1,529

Total current liabilities
94,252

 
79,732

 
 
 
 
Debt, long-term
321,313

 
316,558

Long-term lease liabilities
35,709

 

Other long-term liabilities
504

 

Total liabilities
451,778

 
396,290

 
 
 
 
Shareholders’ equity:
 

 
 

Common stock, $0.01 par value; 500,000,000 authorized shares, 77,596,384 and 77,307,521 issued and outstanding shares at March 31, 2019 and December 31, 2018, respectively
776

 
773

Additional paid-in capital
1,499,646

 
1,489,664

Accumulated deficit
(1,356,315
)
 
(1,282,162
)
Accumulated other comprehensive income (loss)
30

 
(9
)
Total shareholders’ equity
144,137

 
208,266

Total liabilities and shareholders’ equity
$
595,915

 
$
604,556

 
See accompanying notes to consolidated financial statements

3

Table of Contents

INSMED INCORPORATED
Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands, except per share data)
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Revenues, net
$
21,902

 
$

 
 
 
 
Costs and expenses:
 

 
 

Cost of product revenues (excluding amortization of intangible assets)
4,150

 

Research and development
31,203

 
30,098

Selling, general and administrative
54,810

 
32,653

Amortization of intangible assets
1,248

 

Total costs and expenses
91,411

 
62,751

 
 
 
 
Operating loss
(69,509
)
 
(62,751
)
 
 
 
 
Investment income
2,416

 
2,040

Interest expense
(6,726
)
 
(5,642
)
Loss on extinguishment of debt

 
(2,209
)
Other (expense) income, net
(119
)
 
86

Loss before income taxes
(73,938
)
 
(68,476
)
 
 
 
 
Provision for income taxes
215

 
48

 
 
 
 
Net loss
$
(74,153
)
 
$
(68,524
)
 
 
 
 
Basic and diluted net loss per share
$
(0.96
)
 
$
(0.89
)
 
 
 
 
Weighted average basic and diluted common shares outstanding
77,541

 
76,619

 
 
 
 
Net loss
$
(74,153
)
 
$
(68,524
)
Other comprehensive income:
 

 
 

Foreign currency translation gains
39

 
42

Total comprehensive loss
$
(74,114
)
 
$
(68,482
)
 
See accompanying notes to consolidated financial statements


4

Table of Contents

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

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shares
 
Amount
 
Balance at January 1, 2018
76,611

 
$
766

 
$
1,318,181

 
$
(957,885
)
 
$
(3
)
 
$
361,059

Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Net loss
 
 
 
 
 
 
(68,524
)
 
 
 
(68,524
)
Other comprehensive income
 
 
 
 
 
 
 
 
42

 
42

Exercise of stock options
12

 


 
142

 
 
 
 
 
142

Equity component of convertible debt issuance
 
 
 
 
136,463

 
 
 
 
 
136,463

Stock compensation expense
 
 
 
 
5,674

 
 
 
 
 
5,674

Balance at March 31, 2018
76,623

 
$
766

 
$
1,460,460

 
$
(1,026,409
)
 
$
39

 
$
434,856

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
77,308

 
$
773

 
$
1,489,664

 
$
(1,282,162
)
 
$
(9
)
 
$
208,266

Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Net loss
 
 
 
 
 
 
(74,153
)
 
 
 
(74,153
)
Other comprehensive income
 
 
 
 
 
 
 
 
39

 
39

Exercise of stock options and ESPP shares
253

 
3

 
3,046

 
 
 
 
 
3,049

Issuance of common stock for vesting of RSUs
35

 
 
 
 
 
 
 
 
 

Stock compensation expense
 
 
 
 
6,936

 
 
 
 
 
6,936

Balance at March 31, 2019
77,596

 
$
776

 
$
1,499,646

 
$
(1,356,315
)
 
$
30

 
$
144,137




See accompanying notes to consolidated financial statements


5

Table of Contents

INSMED INCORPORATED
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Operating activities
 

 
 

Net loss
$
(74,153
)
 
$
(68,524
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation
1,069

 
769

Amortization of intangible assets
1,248

 

Stock-based compensation expense
6,936

 
5,674

Loss on extinguishment of debt

 
2,209

Amortization of debt issuance costs
349

 
299

Accretion of debt discount
4,406

 
3,021

Accretion of back-end fee on debt

 
50

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(3,832
)
 

Inventory
(5,650
)
 

Prepaid expenses and other current assets
(1,061
)
 
(2,217
)
Other assets
(7,044
)
 

Accounts payable
9,499

 
(828
)
Accrued expenses and other
323

 
(165
)
Accrued compensation
(5,937
)
 
(7,701
)
Net cash used in operating activities
(73,847
)
 
(67,413
)
Investing activities
 

 
 

Purchase of fixed assets
(4,028
)
 
(5,365
)
Net cash used in investing activities
(4,028
)
 
(5,365
)
Financing activities
 

 
 

Proceeds from exercise of stock options and ESPP
3,049

 
142

Payment on extinguishment of debt

 
(2,835
)
Payment of debt

 
(55,000
)
Proceeds from issuance of 1.75% convertible senior notes due 2025

 
450,000

Payment of debt issuance costs

 
(14,141
)
Net cash provided by financing activities
3,049

 
378,166

Effect of exchange rates on cash and cash equivalents
(15
)
 
28

Net increase in cash and cash equivalents
(74,841
)
 
305,416

Cash and cash equivalents at beginning of period
495,072

 
381,165

Cash and cash equivalents at end of period
$
420,231

 
$
686,581

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
3,939

 
$
1,275

Cash paid for income taxes
$
178

 
$
54

 
See accompanying notes to consolidated financial statements


6

Table of Contents

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 (amikacin liposome inhalation suspension), received accelerated approval in the United States (US) on September 28, 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. 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 INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis (non-CF) bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are in Bridgewater, New Jersey. The Company has legal entities in the US, Ireland, Germany, France, the United Kingdom (UK), the Netherlands, Bermuda 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, 2018.
 
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.
 
The Company had $420.2 million in cash and cash equivalents as of March 31, 2019 and reported a net loss of $74.2 million for the three months ended March 31, 2019. Historically, the Company has funded its operations through public offerings of equity securities and debt financings. The Company commenced commercial shipments of ARIKAYCE in October 2018. The Company expects to continue to incur operating losses both in our US and certain international entities while funding research and development (R&D) activities for ARIKAYCE and our other pipeline programs, continuing commercial launch activities for ARIKAYCE in the US, continuing to invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and funding other general and administrative activities. The Company expects its future cash requirements to be substantial, and the Company may need to raise additional capital to fund operations, including the commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE, to develop INS1007 and INS1009 and to develop, acquire, in-license or co-promote other products or product candidates 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.

All intercompany transactions and balances have been eliminated in consolidation and certain prior year amounts have been restated to conform to the current year presentation. 

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, 2018:
 
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

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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 only financial assets and liabilities which were measured at fair value as of March 31, 2019 and December 31, 2018 were Level 1 assets comprised of cash and cash equivalents. 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):

 
As of March 31, 2019
 
 
 
Fair Value
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
420.2

 
$
420.2

 
$

 
$



The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers in or out of Level 1, Level 2 or Level 3 during the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019 and December 31, 2018, the Company held no securities that were in an unrealized gain or loss position.

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 securities were rated below investment grade; (3) how long the securities have 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 estimated fair value of the liability component of the 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of March 31, 2019 was $438 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $321.3 million carrying value of the Convertibles Notes as of March 31, 2019 excludes the $120.6 million of the unamortized portion of the debt discount.
 
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 units (RSUs) 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 Convertible Notes are determined based on the treasury stock method.
 
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 months ended March 31, 2019 and 2018:

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Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except per share amounts)
Numerator:
 

 
 

Net loss
$
(74,153
)
 
$
(68,524
)
Denominator:
 

 
 

Weighted average common shares used in calculation of basic net loss per share:
77,541

 
76,619

Effect of dilutive securities:
 

 
 

Common stock options

 

RSUs

 

Convertible debt securities

 

Weighted average common shares outstanding used in calculation of diluted net loss per share
77,541

 
76,619

Net loss per share:
 

 
 

Basic and diluted
$
(0.96
)
 
$
(0.89
)

 
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of March 31, 2019 and 2018 as their effect would have been anti-dilutive (in thousands):
 
 
As of March 31,
 
2019
 
2018
Stock options to purchase common stock
11,903

 
9,866

Unvested RSUs
170

 
234

Convertible debt securities
11,492

 
11,492


 
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 following table presents the percentage of gross product revenue represented by the Company's three largest customers as of the quarter ended March 31, 2019.
 
Percentage of Total Gross Product Revenue
Customer A
33%
Customer B
31%
Customer C
16%

The Company did not have product revenue prior to US FDA approval of ARIKAYCE in September 2018. 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 operating results. A change in the relationship with the suppliers or manufacturer, 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

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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 and determines those that are performance obligations and assesses 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 consist primarily of sales of ARIKAYCE in the US. Product revenues are recognized once the Company performs and satisfies all five steps mentioned above. In October 2018, the Company began shipping ARIKAYCE to its customers in the US, which include specialty pharmacies and specialty distributors. The Company recognizes revenues for product received by its customers, net of allowances for customer credits, including prompt pay discounts, service fees, estimated rebates, including government rebates such as Medicaid rebates and Medicare Part D coverage gap reimbursements in the US, chargebacks and returns.
 
Customer credits: The Company’s customers are offered various forms of consideration, including service fees and prompt payment discounts. The Company anticipates that its customers will earn prompt payment discounts and, therefore, deducts the full amount of these discounts from total gross product revenues when revenues are recognized. Service fees are also deducted from total gross product revenues as they are earned.
 
Rebates: The Company contracts with Medicaid, other government agencies and various private 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.
 
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 initially paid by the specialty distributor and the discounted price paid by the contracted customers. The Company estimates the chargebacks it provides to the specialty distributor and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by a third-party administrator.
If any, or all, of the Company’s actual experience vary from the estimates above, the Company may need to adjust prior period accruals, affecting revenue in the period of adjustment.
The Company has initiated early access programs (EAPs) in Europe and other countries, some of which may be fully reimbursed. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.
Cost of product revenues (excluding amortization of intangible assets) - 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 research and development (R&D) expense when consumed.

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, allocation of overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI Pharma GmbH (PARI).

Recently Adopted Accounting Pronouncements - In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. Among the updates, the standard requires debt extinguishment costs to be classified as cash outflows for

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financing activities. This standard update became effective as of the first quarter of 2018. As a result of the adoption of the standard, in the first quarter of 2018, the Company reported a $2.2 million loss on extinguishment of debt in the operating activities section of its consolidated statement of cash flows. The Company had no material debt extinguishment costs prior to the first quarter of 2018. The impact of adopting this standard was not material to the Company.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles. ASU 2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) and early adoption was permitted. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provided a transition option in which an entity would initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company used the new transition option and the package of practical expedients that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases; (2) lease classification for any expired or existing leases; and (3) initial direct costs for any expired or existing leases. The Company also used the practical expedient that allows it to treat the lease and non-lease components of its leases as a single component. The Company adopted ASU 2016-02 effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the consolidated balance sheet was $47.4 million. Refer to Note 6 - Leases for additional details about the Company's lease portfolio, including Topic 842 required disclosures.
 
New Accounting Pronouncements (Not Yet Adopted)—In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which requires financial assets measured at an amortized cost basis to be presented at the net amount expected to be collected. The 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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. Different aspects of the guidance require modified retrospective or prospective adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
 
3.        Inventory
As of March 31, 2019 and December 31, 2018, the Company's inventory balance consists of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Raw materials
$
4,454

 
$
2,145

Work-in-process
7,059

 
4,567

Finished goods
1,169

 
320

 
$
12,682

 
$
7,032


Inventory is stated at the lower of cost and net realizable value and consists of raw materials, work-in-process and finished goods. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE on September 28, 2018. The Company has not recorded any inventory write downs since that time. The Company currently uses a limited number of third-party contract manufacturing organizations (CMOs) to produce its inventory.


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4.                                      Accrued Expenses
 
As of March 31, 2019 and December 31, 2018, the Company's accrued expenses balance consist of the following (in thousands): 
 
March 31, 2019
 
December 31, 2018
Accrued clinical trial expenses
$
7,632

 
$
6,635

Accrued professional fees
11,380

 
13,398

Accrued technical operation expenses
9,536

 
9,371

Accrued royalty payable
1,000

 
409

Accrued interest payable
1,663

 
3,631

Accrued sales allowances and related costs
2,642

 
818

Accrued construction costs
2,475

 
2,946

Other accrued expenses
1,989

 
1,046

 
$
38,317

 
$
38,254


 
5.                                      Intangible, net
 
As of March 31, 2019, the Company's identifiable intangible assets consisted of acquired ARIKAYCE R&D and a $1.7 million milestone paid to PARI for the license to use PARI's Lamira® Nebulizer System for the delivery of ARIKAYCE to patients as a result of the FDA approval of ARIKAYCE on September 28, 2018. Total intangible assets, net was $57.4 million as of March 31, 2019 and $58.7 million as of December 31, 2018.

Intangible assets are measured at their respective fair values on the date they were recorded and, with respect to the acquired ARIKAYCE milestone, at the date of subsequent adjustments of fair value. The Company began amortizing its intangible assets October 1, 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. A rollforward of the Company's intangible assets for the three months ended March 31, 2019 follows (in thousands):
 
2019
Intangible Asset
January 1,
 
Additions
 
Amortization
 
March 31,
Acquired ARIKAYCE R&D
$
56,988

 
$

 
$
(1,212
)
 
$
55,776

PARI milestone upon FDA approval
1,687

 

 
(36
)
 
1,651

     Intangible assets
$
58,675

 
$

 
$
(1,248
)
 
$
57,427


    
Amortization of intangible assets during each of the next five years is estimated to be approximately $5.0 million per year. The Company performs its annual impairment test as of October 1.
 

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6.                                    Leases

The Company's lease portfolio consists primarily of office space, manufacturing facilities and fleet vehicles. Currently, all of the Company's leases that have commenced are classified as operating leases. The terms of its lease agreements that have commenced range from less than one year to seven years. In its assessment of the term of each such lease, the Company has not included any options to extend or terminate the lease due to the absence of economic incentives in its lease agreements. As permitted by the practical expedient in ASU 2016-02, leases that qualify for treatment as a short-term lease are expensed as incurred. These short-term leases are not material to the Company's financial position. Furthermore, the Company has elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets. The Company's leases do not contain residual value guarantees and it does not sublease any of its leased assets.

The Company outsources its manufacturing operations to CMOs. Upon review of the agreements with its CMOs, the Company determined that these contracts contain embedded leases for dedicated manufacturing facilities. The Company obtains substantially all of the economic benefits from the use of the manufacturing facilities, has the right to direct how and for what purpose the facility is used throughout the period of use, and the supplier does not have the right to change the operating instructions of the facility. The right-of-use asset and corresponding lease liability associated with the manufacturing facilities is the sum of the minimum guarantees over the life of the production contracts.

In order to determine the appropriate discount rate for each lease, the Company determined its public credit rating and constructed debt yield curves. The debt yield curves were adjusted to reflect a collateral borrowing and differences in foreign currencies, where applicable, as well as to match the term of each lease.

The table below summarizes the Company's total lease costs included in its consolidated financial statements, as well as other required quantitative disclosures (in thousands).
 
Three Months Ended
 
March 31, 2019
Lease cost
 
 Operating lease cost
$
3,078

Total lease cost
$
3,078

 
 
Other information:
 
Cash paid for amounts included in the measurement of lease liabilities:
 
  Operating cash flows for operating leases
$
3,134

Right-of-use assets obtained in exchange for new operating lease liabilities
$
47,396

Weighted average remaining lease term - operating leases (years)
5.5

Weighted average discount rate - operating leases
7.3
%


The table below presents the maturity of lease liabilities on an annual basis for the remaining years of the Company's commenced lease agreements (in thousands).

Year ending December 31,
 
   2019 (remaining)
$
9,344

2020
11,000

2021
10,287

2022
6,000

2023
6,000

Thereafter
12,000

Total
$
54,631

Less: present value discount
9,563

Present value of lease liabilities
$
45,068




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In addition to the Company's lease agreements that have previously commenced and are reflected in the consolidated financial statements, the Company has entered into additional lease agreements that have not yet commenced. In September 2018, the Company entered into an agreement to lease its new corporate headquarters in Bridgewater, NJ for which the initial lease term expires in June 2030. Upon commencement of the lease, which is anticipated to occur in the second half of 2019, the lease will be accounted for as a finance lease.

Additionally, in October 2017, the Company entered into certain agreements with Patheon UK Limited (Patheon) related to increasing its long-term production capacity for ARIKAYCE commercial inventory. Similar to the CMO arrangements previously described, the Company has determined that this agreement with Patheon contains an embedded lease for the manufacturing facility and the specialized equipment contained therein. Costs incurred by the Company related to the agreement of $7.1 million, subsequent to the adoption of ASU 2016-02, have been classified within other assets in the Company's consolidated balance sheet. Upon the commencement date, the prepaid costs and minimum guarantees specified in the agreement will be combined to establish a right-of-use asset and related lease liability.


7.                                    Debt
 
In January 2018, the Company completed an underwritten public offering of the Convertible Notes, in which the Company sold $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriters' option to purchase additional Convertible Notes of $50.0 million. The Company's net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased.
    
On or after October 15, 2024, until the close of business on the second scheduled trading day immediately preceding January 15, 2025, holders may convert their Convertible Notes at any time. Upon conversion, holders may receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's option. The initial conversion rate is 25.5384 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $39.16 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Holders may convert their Convertible Notes prior to October 15, 2024, only under the following circumstances, subject to the conditions set forth in an indenture, dated as of January 26, 2018, between the Company and Wells Fargo Bank, National Association (Wells Fargo), as trustee, as supplemented by the first supplemental indenture, dated January 26, 2018, between the Company and Wells Fargo (as supplemented, the Indenture): (i) during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of convertible notes, as determined following a request by a holder of the convertible notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on such trading day, (ii) the Company elects to distribute to all or substantially all holders of the common stock (a) any rights, options or warrants (other than in connection with a stockholder rights plan for so long as the rights issued under such plan have not detached from the associated shares of common stock) entitling them, for a period of not more than 45 days from the declaration date for such distribution, to subscribe for or purchase shares of common stock at a price per share that is less than the average of the last reported sale prices of the common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the declaration date for such distribution, or (b) the Company’s assets, debt securities or rights to purchase securities of the Company, which distribution has a per share value, as reasonably determined by the board of directors, exceeding 10% of the last reported sale price of the common stock on the trading day immediately preceding the declaration date for such distribution, (iii) if a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs, or if the Company is a party to (a) a consolidation, merger, combination, statutory or binding share exchange or similar transaction, pursuant to which the common stock would be converted into, or exchanged for, cash, securities or other property or assets, or (b) any sale, conveyance, lease or other transfer or similar transaction in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole, all or any portion of the Convertible Notes may be surrendered by a holder for conversion at any time from or after the date that is 30 scheduled trading days prior to the anticipated effective date of the transaction, (iv) if during any calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar quarter), the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, or, (v) if the Company sends a notice of redemption, a holder may surrender all or any portion of its Convertible Notes, to which the notice of redemption relates, for conversion at any time on or

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after the date the applicable notice of redemption was sent until the close of business on (a) the second business day immediately preceding the related redemption date or (b) if the Company fails to pay the redemption price on the redemption date as specified in such notice of redemption, such later date on which the redemption price is paid.
 
The Convertible Notes can be settled in cash, common stock, or a combination of cash and common stock at the Company's option, and thus, the Company determined the embedded conversion options in the convertible notes are not required to be separately accounted for as a derivative. However, since the Convertible Notes are within the scope of the accounting guidance for cash convertible instruments, the Company is required to separate the Convertible Notes into liability and equity components. The carrying amount of the liability component as of the date of issuance was calculated by measuring the fair value of a similar liability that did not have an associated equity component. The fair value was based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the gross proceeds of the Convertible Notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity. The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million using an effective interest rate of 7.6%, and accordingly, the residual equity component on the date of issuance was $140.9 million. The discount is being amortized to interest expense over the term of the Convertible Notes and has a remaining period of approximately 5.79 years. The following table presents the carrying value of the Company’s debt balance (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 1.75% convertible senior notes due 2025
$
450,000

 
$
450,000

 Debt issuance costs, unamortized
(8,091
)
 
(8,440
)
 Discount on debt
(120,596
)
 
(125,002
)
Long-term debt, net
$
321,313

 
$
316,558


 
As of March 31, 2019, future principal repayments of the debt for each of the fiscal years through maturity were as follows (in thousands):
 
Year Ending December 31:
 

2019
$

2020

2021

2022

2023

2024 and thereafter
450,000

 
$
450,000


 
In February 2018, the Company used part of the net proceeds from the issuance of the Convertible Notes to pay off its outstanding debt to Hercules Capital (Hercules). The payments to Hercules consisted of $55.0 million for the principal amount and an additional $3.2 million in back-end fees, outstanding interest, and prepayment penalty fees, which resulted in a $2.2 million loss on extinguishment of debt in the quarter ended March 31, 2018.    

Interest Expense

For the three months ended March 31, 2019 and March 31, 2018, interest expense related to the Convertible Notes was $6.7 million and $5.6 million, respectively, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, and accretion of debt discount, as described in the table below (in thousands):

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Three Months Ended March 31,
 
2019
 
2018
Contractual interest expense
$
1,971

 
$
2,272

Amortization of debt issuance costs
349

 
299

Accretion of back-end fee on debt

 
50

Accretion of debt discount
4,406

 
3,021

     Total interest expense
$
6,726

 
$
5,642



 
8.                                      Shareholders’ Equity
 
Common Stock — As of March 31, 2019, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 per share and 77,596,384 shares of common stock issued and outstanding. In addition, as of March 31, 2019, the Company had reserved 11,892,800 shares of common stock for issuance upon the exercise of outstanding stock options and 169,343 shares of common stock for issuance upon the vesting of RSUs. The Company has also reserved 11,492,280 shares of common stock for issuance upon conversion of the Convertible Notes, subject to adjustment in accordance with the Indenture.    

In January 2018, the Company completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million, and accordingly, the equity component (included in additional paid-in capital) on the date of issuance was calculated as $140.9 million using the residual method, as further described in Note 7 Debt.

Preferred Stock — As of March 31, 2019, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01 per share and no shares of preferred stock were issued and outstanding.

9.                                      Stock-Based Compensation
 
The Company’s current equity compensation plan, the 2017 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 18, 2017. As of March 31, 2019, 909,303 shares remained for future issuance under the 2017 Incentive Plan. The 2017 Incentive Plan will terminate on April 3, 2027 unless it is extended or terminated earlier pursuant to its terms. The Company has submitted a proposal to its shareholders to approve a new equity compensation plan, the 2019 Incentive Plan, at the 2019 Annual Meeting of Shareholders. The 2019 Incentive Plan, if approved, will provide for the issuance of 3,500,000 shares, plus any shares that were subject to outstanding awards under the 2017 Incentive Plan, the 2015 Incentive Plan and the 2013 Incentive Plan, as of the effective date of the 2019 Incentive Plan, that are canceled, terminate unearned, expire, are forfeited, lapse for any reason or are settled in cash without the delivery of shares. If the 2019 Incentive Plan is approved, no additional awards will be granted under the 2017 Incentive Plan. In addition, from time to time, the Company makes inducement grants of stock options to new hires, which awards are made pursuant to the NASDAQ inducement grant exception. During the three months ended March 31, 2019, the Company granted inducement stock options covering 51,870 shares of the Company's common stock to new employees.
 
On May 15, 2018, the 2018 Employee Stock Purchase Plan (2018 ESPP) was approved by shareholders at the Company’s Annual Meeting of Shareholders. The Company has reserved the following for issuance under the 2018 ESPP: (i) 1,000,000 shares of common stock, plus (ii) commencing on January 1, 2019 and ending on December 31, 2023, an additional number of shares to be added on the first day of each calendar year equal to the lesser of (A) 1,200,000 shares of common stock, (B) 2% of the number of outstanding shares of common stock on such date and (C) an amount determined by the administrator.

Stock Options - As of March 31, 2019, there was $43.0 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 3.0 years. During the quarter ended September 30, 2018, performance-condition options totaling $1.1 million, or 133,334 shares, met their recognition criteria as a result of the FDA approval of ARIKAYCE and vested in full. As of March 31, 2019, there were no performance-condition options outstanding.
  
Restricted Stock Units — As of March 31, 2019, there was $2.8 million of unrecognized compensation expense related to unvested RSU awards which is expected to be recognized over a weighted average period of 2.1 years.

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The following table summarizes the aggregate stock-based compensation expense recorded in the consolidated statements of comprehensive loss related to stock options and RSUs during the three months ended March 31, 2019 and 2018, respectively (in millions): 
 
Three Months Ended March 31,
 
2019
 
2018
Research and development expenses
$
2.2

 
$
1.9

Selling, general and administrative expenses
4.7

 
3.8

Total
$
6.9

 
$
5.7


 
10.                                      Income Taxes
 
The Company’s provision for income taxes was $0.2 million and $0.0 million for the three months ended March 31, 2019 and March 31, 2018, respectively. The provision for income taxes in both periods was a result of certain of the Company’s international subsidiaries, which had taxable income during the three months ended March 31, 2019 and 2018. In jurisdictions where the Company has net losses, there was a full valuation allowance recorded against the Company’s deferred tax assets and therefore no tax benefit was recorded.

The Company is subject to US federal and state income taxes and the statute of limitations for tax audit is open for the Company's federal tax returns for the years ended 2014 and later, and is generally open for certain states for the years 2013 and later. The Company has incurred net operating losses since inception, except for the year ended December 31, 2009. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin. As of March 31, 2019 and December 31, 2018, the Company had recorded reserves for unrecognized income tax benefits against certain deferred tax assets in the United States.  However, given the Company’s valuation allowance position these reserves do not have an impact on the balance sheet as of March 31, 2019 and December 31, 2018 or the income statement for the three months ended March 31, 2019 and March 31, 2018.  Due to the noncash impact of the reserve for unrecognized income tax benefits the Company has not recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next 12 months.
 
11.                                      Commitments and Contingencies
 
Rent expense charged to operations was $0.8 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively.
 
Legal Proceedings
 
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Note Regarding Forward Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are statements that are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," "continues," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements.
              Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated in any forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:

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failure to successfully commercialize or maintain United States (US) approval for ARIKAYCE® (amikacin liposome inhalation suspension), our only approved product;
uncertainties in the degree of market acceptance of ARIKAYCE by physicians, patients, third-party payers and others in the health-care community;
our inability to obtain full approval of ARIKAYCE from the US Food and Drug Administration (FDA), including the risk that we will not successfully complete the confirmatory post-marketing study required for full approval;
inability of us, PARI Pharma GmbH (PARI) or our other third-party manufacturers to comply with regulatory requirements related to ARIKAYCE or the Lamira Nebulizer System (Lamira);
our inability to obtain adequate reimbursement from government or third-party payers for ARIKAYCE or acceptable prices for ARIKAYCE;
development of unexpected safety or efficacy concerns related to ARIKAYCE;
inaccuracies in our estimates of the size of the potential markets for ARIKAYCE or in data we have used to identify physicians, expected rates of patient uptake, duration of expected treatment, or expected patient adherence or discontinuation rates;
our inability to create an effective direct sales and marketing infrastructure or to partner with third parties that offer such an infrastructure for distribution of ARIKAYCE;
failure to obtain regulatory approval to expand ARIKAYCE’s indication to a broader patient population;
failure to successfully conduct future clinical trials for ARIKAYCE and our product candidates, including due to our limited experience in conducting preclinical development activities and clinical trials necessary for regulatory approval and our inability to enroll or retain sufficient patients to complete the trials or generate data necessary for regulatory approval;
risks that our clinical studies will be delayed or that serious side effects will be identified during drug development;
failure to obtain regulatory approvals for ARIKAYCE outside the US or for our product candidates in the US, Europe, Japan or other markets;
failure of third parties on which we are dependent to manufacture sufficient quantities of ARIKAYCE or our product candidates for commercial or clinical needs, to conduct our clinical trials, or to comply with laws and regulations that impact our business or agreements with us;
our inability to attract and retain key personnel or to effectively manage our growth;
our inability to adapt to our highly competitive and changing environment;
our inability to adequately protect our intellectual property rights or prevent disclosure of our trade secrets and other proprietary information and costs associated with litigation or other proceedings related to such matters;
restrictions or other obligations imposed on us by agreements related to ARIKAYCE or our drug candidates, including our license agreements with PARI and AstraZeneca AB (AstraZeneca), and failure to comply with our obligations under such agreements;
the cost and potential reputational damage resulting from litigation to which we are or may become a party, including product liability claims;
limited experience operating internationally;
changes in laws and regulations applicable to our business and failure to comply with such laws and regulations;
inability to repay our existing indebtedness and uncertainties with respect to our ability to access future capital; and
delays in the execution of plans to build out and move into the leased space at our new headquarters and to build out an additional third-party manufacturing facility and unexpected expenses associated with those plans.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Any forward-looking statement is based on information current as of the date of this Quarterly Report on Form 10-Q and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results, plans, intentions or expectations anticipated in these forward-looking statements as a result of a variety of factors, many of which are beyond our control. More information on factors that could cause actual results to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (SEC), including, but not limited to, those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. We disclaim any obligation, except as specifically required by law, and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events,

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conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018.
 
OVERVIEW
     We are a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare diseases. Our first commercial product, ARIKAYCE (amikacin liposome inhalation suspension), received accelerated approval in the US on September 28, 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, as defined by patients who do not achieve negative sputum cultures after a minimum of 6 consecutive months of a multidrug background regimen therapy. MAC lung disease is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Our clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis (non-CF) bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).
The table below summarizes the current status and anticipated milestones for ARIKAYCE and our product candidates INS1007 and INS1009.

Principal Product/Product Candidate
 
Status
 
Next Expected Milestones
ARIKAYCE for MAC lung disease
 
• We continue to focus on having a successful commercial launch of ARIKAYCE in the US for appropriate patients. We began commercial shipments of ARIKAYCE in October 2018.

• In September 2018, the FDA granted accelerated approval of ARIKAYCE for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients who have limited or no alternative treatment options.

• The FDA has designated ARIKAYCE as an orphan drug and a qua
lified infectious disease product (QIDP) for nontuberculous mycobacterial (NTM) lung disease, and the European Commission has granted an orphan designation for ARIKAYCE for the treatment of NTM lung disease.

 
• We intend to submit regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020. If approved, we expect ARIKAYCE would be the first inhaled therapy specifically indicated for the treatment of MAC lung disease in Europe and Japan.

• If approved, we plan to commercialize ARIKAYCE in certain countries in Europe, Japan and certain other countries.

• We intend to collaborate with the FDA on, and invest in, the post-approval confirmatory clinical trial required by the FDA to support full approval and intend to complete the design and protocol of the confirmatory study during the first half of 2019. We also intend to collaborate with the FDA on lifecycle management programs.

INS1007 (oral reversible inhibitor of DPP1) for non-CF bronchiectasis and other rare diseases

 
• We are enrolling patients in the WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel-group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis.
 
• We expect to complete enrollment in the WILLOW clinical study of INS1007 in mid-2019.

• We are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions, including treating granulomatosis with polyangiitis.
INS1009 (inhaled formulation of a treprostinil prodrug) for rare pulmonary disorders

 
• The results of our phase 1 study of INS1009 were presented at the European Respiratory Society international congress in September 2016.

 
• We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development including exploring its use as an inhaled dry powder formulation.
 

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Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, including gram positive pulmonary infections in CF, NTM lung disease and refractory localized infections involving biofilm. To complement our internal research and development, we actively evaluate in-licensing and acquisition opportunities for a broad range of rare diseases.


Our Strategy

Our strategy focuses on the needs of patients with rare diseases. We secured US regulatory approval of ARIKAYCE for the treatment of refractory MAC lung disease in patients with limited or no alternative treatment options. We are currently primarily focused on the US commercial launch of ARIKAYCE. We are not aware of any other approved inhaled therapies specifically indicated to treat MAC lung disease in North America, Europe or Japan. We believe that ARIKAYCE has the potential to prove beneficial in other patients with MAC, as well as in other infections. We are also advancing earlier-stage programs in other rare pulmonary disorders.
 
Our current priorities are as follows:
 
Continue our efforts to ensure a successful US launch of ARIKAYCE;
Complete the design and protocol of the confirmatory clinical trial required for the full US approval of ARIKAYCE by the FDA in patients with MAC during the first half of 2019;
Accelerate our global expansion efforts to support potential regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020;
Advance our pipeline, which is intended to bring additional therapies to market for patients with serious and rare diseases, including completing enrollment in the WILLOW study, our six-month Phase 2 trial of INS1007 in patients with non-cystic fibrosis bronchiectasis, in mid-2019;
Ensure our product supply chain will support the global commercialization and potential future lifecycle management programs of ARIKAYCE;
Develop the core value dossier to support the reimbursement for ARIKAYCE in the US, Europe and Japan;
Obtain determinations of coverage and reimbursement in the US for ARIKAYCE from governmental and other third-party payors;
Support further research and lifecycle management strategies for ARIKAYCE in the US, including exploring the potential use of ARIKAYCE as part of a front-line, multi-drug regimen and as a maintenance therapy to prevent recurrence (defined as true relapse or reinfection) of MAC lung disease;
Explore INS1009 for use as an inhaled dry powder formulation and generate preclinical findings from our earlier-stage programs; and
Expand our rare disease pipeline through corporate development.
 
ARIKAYCE for Patients with MAC Lung Disease
 
ARIKAYCE is our first approved product. ARIKAYCE received accelerated approval in the US on September 28, 2018 for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. MAC lung disease is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenous administration, our proprietary Pulmovance™ technology uses charge-neutral liposomes to deliver amikacin directly to the lungs where liposomal amikacin is taken up by the lung macrophages where the MAC infection resides. This technology also prolongs the release of amikacin in the lungs, while minimizing systemic exposure, thereby offering the potential for decreased systemic toxicities. ARIKAYCE's ability to deliver high levels of amikacin directly to the lung and sites of MAC infection via the use of our Pulmovance technology, distinguishes it from intravenous amikacin. ARIKAYCE is administered once-daily, using Lamira®, an inhalation device developed and manufactured by PARI. Lamira is a portable nebulizer that enables aerosolization of liquid medications via a vibrating, perforated membrane, and was designed specifically for ARIKAYCE delivery.
 

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The FDA has designated ARIKAYCE as an orphan drug and a QIDP for NTM lung disease. Orphan designated drugs are eligible for seven years of exclusivity for the orphan indication. QIDP designation features an additional five years of exclusivity for the designated indication. The FDA granted a total of 12 years of exclusivity in the indication for which ARIKAYCE was approved.

Accelerated Approval

In March 2018, we submitted a new drug application (NDA) for ARIKAYCE to the FDA pursuant to Section 506(c) of the Federal Food Drug and Cosmetic Act and 21 C.F.R. Part 314 Subpart H (Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses) (Subpart H). Accelerated approval allows drugs that (i) are being developed to treat a serious or life-threatening disease or condition and (ii) provide a meaningful therapeutic benefit over existing treatments to be approved substantially based on an intermediate endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit, rather than a clinical endpoint such as survival or irreversible morbidity. On September 28, 2018, the FDA granted approval for ARIKAYCE under the Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD) for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options via the accelerated approval pathway. LPAD, which was enacted as part of the 21st Century Cures Act, serves to advance the development of new antibacterial drugs to treat serious or life-threatening infections in limited populations of patients with unmet needs. As required for drugs approved under the LPAD pathway, labeling for ARIKAYCE includes certain statements to convey that the drug has been shown to be safe and effective only for use in a limited population.

As a condition of accelerated approval, we must conduct a post-approval confirmatory clinical trial. The required confirmatory trial, which is currently under discussion with FDA, is proposed to be a randomized, double-blind, placebo-controlled clinical trial to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. The trial will evaluate the effect of ARIKAYCE on a clinically meaningful endpoint, as compared to an appropriate control, in the intended patient population of patients with MAC lung disease. Pursuant to the timetable agreed upon with the FDA, the study protocol is expected to be finalized during the first half of 2019, with trial results to be reported by 2024. Continued approval of ARIKAYCE will be contingent upon verification and description of clinical benefit in this study.

Clinical Trials

Accelerated approval of ARIKAYCE was supported by preliminary data from our CONVERT study, a global Phase 3 study evaluating the safety and efficacy of ARIKAYCE in adult patients with refractory MAC lung disease, using achievement of sputum culture conversion (defined as three consecutive negative monthly sputum cultures) by Month 6 as the primary endpoint. Patients who achieved sputum culture conversion by Month 6 continued in the CONVERT study for an additional 12 months of treatment following the first monthly negative sputum culture in order to assess the durability of culture conversion, as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three months. We previously reported interim durability data as of December 2017, in which 60.9% of patients (28/46) who had achieved the primary endpoint at Month 6 on ARIKAYCE plus guidelines-based therapy (GBT) remained culture negative three months off all therapy, compared to 0.0% of patients (0/7) who had achieved the primary endpoint at Month 6 on GBT only. Final durability data for patients three months off all therapy were consistent with these interim data, and safety data for these patients were consistent with safety data previously reported for patients by Month 6 of the CONVERT study. The CONVERT study is ongoing.
  
Patients who did not culture convert by Month 6 may have been eligible to enroll in our 312 study, an open-label extension study for these non-converting patients who completed six months of treatment in the CONVERT study. The primary objective of the 312 study was to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard multi-drug regimen. The secondary objectives of the 312 study included evaluating the proportion of subjects achieving culture conversion (defined in the same way as the CONVERT study) by Month 6 and the proportion of subjects achieving culture conversion by Month 12, which was the end of treatment. We previously reported interim data as of December 2017 for patients in the 312 study, with 28.4% of patients who received GBT only in the CONVERT study (19/67) and 12.3% of patients who had received ARIKAYCE plus GBT in the CONVERT study (7/57) achieving culture conversion by Month 6 of the 312 study. The 312 study has concluded. Final efficacy data regarding culture conversion were consistent with these interim data. We are continuing to analyze the safety and efficacy data from the 312 study, but we have not identified any new safety signals.

Further Research and Lifecycle Management
 
We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE in the US beyond treatment of refractory MAC lung disease as part of a combination antibacterial regimen for adult patients who have

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limited or no treatment options. Specifically, we are evaluating future study designs focusing on the MAC lung disease treatment pathway, including front-line treatment and maintenance to prevent recurrence (defined as true relapse or reinfection) of MAC lung disease. As noted above, we plan to conduct our required confirmatory trial to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. We intend to submit regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020.

Subsequent lifecycle management studies could also potentially enable us to reach more patients. For instance, the use of ARIKAYCE to treat infections caused by non-MAC NTM species, such as M. abscessus, is being evaluated. These initiatives include investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding from us, and may also include new clinical studies sponsored by us.
 
Product Pipeline

INS1007
 
INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October 2016. DPP1 is an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the neutrophil serine proteases (including neutrophil elastase, proteinase 3, and cathepsin G) that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases. Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis. We are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions, including treating granulomatosis with polyangiitis.
 
The WILLOW Study
 
The WILLOW study is a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. We commenced enrollment in the WILLOW study in December 2017, which we expect to complete in mid-2019. In addition, we are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.
 
INS1009
 
INS1009 is an investigational inhaled treprostinil prodrug formulation that has the potential to address certain of the current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaled dry powder formulation.  

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenues
Product revenues consist primarily of net sales of ARIKAYCE in the US. In October 2018, we began shipping ARIKAYCE to our customers in the US, which include specialty pharmacies and specialty distributors. We recognize revenue for product received by our customers net of allowances for customer credits, including prompt pay discounts, service fees, estimated rebates, including government rebates, such as Medicaid rebates and Medicare Part D coverage gap reimbursements in the US, chargebacks and returns. We also began recognizing revenue related to early access programs (EAPs) in Europe, consisting of sales to the French National Agency for Medicines and Health Products Safety (ANSM), which has granted ARIKAYCE a Temporary Authorization for Use (Autorisation Temporaire d'Utilisation or ATU) and from the named patient program in Germany, both compassionate use programs.

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Cost of Product Revenues (excluding amortization of intangible assets)
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, allocation of overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI. We began capitalizing inventory upon FDA approval of ARIKAYCE.
Research and Development (R&D) Expenses

R&D expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs. Expenses also include other internal operating expenses, the cost of manufacturing our drug candidate(s) for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, our R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as for INS1007. Our expenses related to manufacturing our drug candidate(s) for clinical study are primarily related to activities at contract manufacturing organizations (CMOs) that manufacture our product candidates for our use, including purchases of active pharmaceutical ingredients. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our non-employee directors and personnel serving in our executive, finance and accounting, legal and compliance, commercial and pre-commercial, corporate development, field sales, information technology, program management and human resource functions. SG&A expenses also include professional fees for legal services, consulting services, including pre-commercial planning activities such as disease awareness, insurance, board of director fees, tax and accounting services.

Amortization of Intangible Assets
    
Upon commercialization of ARIKAYCE, our intangible assets began to be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on estimates and assumptions we believe are reasonable based on available facts and circumstances. Unanticipated events or circumstances may occur that require us to review the assets for impairment.
Investment Income and Interest Expense
Investment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense consists primarily of the accretion of debt discount, contractual interest costs and the amortization of debt issuance costs related to our accretion of debt. Debt discount is accreted, and debt issuance costs are amortized, to interest expense using the effective interest rate method over the term of the debt. Our balance sheet reflects debt, net of the debt discount, debt issuance costs paid to the lender, and other third-party costs. Unamortized debt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.
 
RESULTS OF OPERATIONS
 
Comparison of the Three Months Ended March 31, 2019 and 2018
 
Overview - Operating Results
Our operating results for the quarter ended March 31, 2019, included the following:
Total revenues from sales of ARIKAYCE of $21.9 million during the quarter ended March 31, 2019;
Cost of product revenues (excluding amortization of intangibles) of $4.2 million during the quarter ended March 31, 2019 related to sales of ARIKAYCE;
Increased R&D expenses of $1.1 million as compared to the same period in the prior year primarily resulting from an increase in compensation and related expenses due to an increase in headcount;
Increased SG&A expenses of $22.2 million as compared to the same period in the prior year resulting from higher compensation and related expenses due to an increase in headcount, and an increase in commercial activities related to ARIKAYCE;
Amortization of intangible assets of $1.2 million during the quarter ended March 31, 2019; and

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Increased interest expense of $1.1 million as compared to the same period in the prior year related to interest on the $450.0 million aggregate principal amount of 1.75% convertible senior notes due 2025 (the Convertible Notes).
Revenues
Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA on September 28, 2018 and launched in the US in October 2018. The following table summarizes the sources of revenue for the three months ended March 31, 2019 (in thousands):
 
For the Three Months Ended March 31, 2019
Net product revenues, US
$
20,983

Net product revenues, EAPs
919

    Total revenues
$
21,902


Cost of Product Revenues (excluding amortization of intangibles)
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, production-related overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI. We began capitalizing inventory upon FDA approval of ARIKAYCE. Cost of product revenues (excluding amortization of intangible assets) was $4.2 million during the quarter ended March 31, 2019.
All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. As mentioned above, our cost of product revenues includes certain expenses which are fixed, other expenses that were incurred after FDA approval and royalties based on net sales. We expect our cost of product revenues (excluding amortization of intangible assets) to continue to be positively impacted during 2019, as we sell through certain inventory that was expensed prior to FDA approval of ARIKAYCE in September 2018.
R&D Expenses
 
R&D expenses for the quarters ended March 31, 2019 and March 31, 2018 were comprised of the following (in thousands):
 
 
Quarters Ended March 31,
 
Increase (decrease)
 
2019
 
2018
 
$
 
%
External Expenses
 

 
 

 
 

 
 

Clinical development & research
$
10,529

 
$
7,818

 
$
2,711

 
34.7
 %
Manufacturing
556

 
7,934

 
(7,378
)
 
(93.0
)%
Regulatory, quality assurance, and medical affairs
1,792

 
1,630

 
162

 
9.9
 %
Subtotal—external expenses
$
12,877

 
$
17,382

 
$
(4,505
)
 
(25.9
)%
Internal Expenses
 

 
 

 
 

 
 

Compensation and benefit related expenses
$
12,757

 
$
7,953

 
$
4,804

 
60.4
 %
Stock-based compensation
2,191

 
1,930

 
261

 
13.5
 %
Other internal operating expenses
3,378

 
2,833

 
545

 
19.2
 %
Subtotal—internal expenses
$
18,326

 
$
12,716

 
$
5,610

 
44.1
 %
Total
$
31,203

 
$
30,098

 
$
1,105

 
3.7
 %
 
R&D expenses increased to $31.2 million during the quarter ended March 31, 2019 from $30.1 million in the same period in 2018. The $1.1 million increase was primarily due to a $4.8 million increase in compensation and related expenses due to an increase in headcount and an increase of $2.7 million primarily due to increases in expenses related to the phase 2 WILLOW trial for INS1007. These increases were offset by a decrease of $7.4 million in external manufacturing expenses, (i) as raw materials purchased and CMO costs during the quarter ended March 31, 2019 were recorded as inventory, and (ii)

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construction costs relating to the build-out of the Patheon UK Limited (Patheon) production facility during the quarter ended March 31, 2019 were classified as other assets.

During the quarter ended March 31, 2019, external R&D expenses of $12.9 million consisted of $4.9 million related to ARIKAYCE, $5.9 million related to INS1007, and $2.1 million related to other research expenses. During the quarter ended March 31, 2018, external R&D expenses of $17.4 million consisted of $14.6 million related to ARIKAYCE, $2.3 million related to INS1007, and $0.5 million related to other research expenses.

     SG&A Expenses 

SG&A expenses for the quarters ended March 31, 2019 and March 31, 2018 were comprised of the following (in thousands):
 
 
 
Quarters Ended March 31,
 
Increase (decrease)
 
2019
 
2018
 
$
 
%
Compensation and benefit related expenses
 
$
19,536

 
$
11,708

 
$
7,828

 
66.9
%
Stock-based compensation
 
4,745

 
3,744

 
1,001

 
26.7
%
Professional fees and other external expenses
 
21,591

 
12,929

 
8,662

 
67.0
%
Facility related and other internal expenses
 
8,938

 
4,272

 
4,666

 
109.2
%
Total SG&A expenses
 
$
54,810

 
$
32,653

 
$
22,157

 
67.9
%

SG&A expenses increased to $54.8 million during the quarter ended March 31, 2019 from $32.7 million in the same period in 2018. The $22.2 million increase was primarily due to $7.8 million in higher compensation and related expenses due to an increase in headcount, including the hiring of our field force, and $8.7 million in commercial expenses related to ARIKAYCE, including disease awareness, patient support activities, field operations and other professional fees.
Amortization of Intangible Assets
Amortization of intangible assets for the quarter ended March 31, 2019 was $1.2 million and is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestone paid to PARI for the FDA approval of ARIKAYCE. 
Interest Expense
 
Interest expense was $6.7 million for the quarter ended March 31, 2019 as compared to $5.6 million in the same period in 2018. The $1.1 million increase in interest expense in the quarter ended March 31, 2019 as compared to the prior year period relates to interest on the $450.0 million aggregate principal amount of the Convertible Notes issued in late January 2018. The interest expense on the Convertible Notes is based on an effective interest rate of 7.6%.

LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
There is considerable time and cost associated with developing a potential pharmaceutical product to the point of regulatory approval and commercialization. In recent years, we have funded our operations through public offerings of equity securities and debt financings. We commenced commercial shipments of ARIKAYCE beginning in October 2018. We expect to continue to incur operating losses both in our US and certain international entities, as we plan to fund R&D for ARIKAYCE and our other pipeline programs, continue commercial launch activities for ARIKAYCE in the US, continue to invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and other general and administrative activities.
    
In January 2018, we completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were $435.8 million.
    
We may need to raise additional capital to fund our operations, including continued commercialization of ARIKAYCE and future clinical trials related to ARIKAYCE, to develop INS1007 and INS1009, and to develop, acquire, in-license or co-

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promote other products that address orphan or rare diseases. We believe we currently have sufficient funds to meet our financial needs for at least the next 12 months. We expect to opportunistically raise additional capital and may do so through equity or debt financing(s), strategic transactions or otherwise. We expect such additional funding, if any, would be used to continue to commercialize ARIKAYCE, to conduct further trials of ARIKAYCE, to develop our product candidates, or to pursue the license or purchase of other technologies or products and product candidates. During 2019, we plan to support the ongoing commercial launch of ARIKAYCE in the US, to continue to fund further clinical development of ARIKAYCE and INS1007, and support efforts to obtain regulatory approvals for ARIKAYCE outside the US. Our cash requirements for 2019 will be impacted by a number of factors, the most significant of which are expenses related to the commercialization efforts for ARIKAYCE, expenses related to the WILLOW trial for INS1007, and to a lesser extent, future ARIKAYCE clinical trials.

Cash Flows
 
As of March 31, 2019, we had cash and cash equivalents of $420.2 million, as compared with $495.1 million as of December 31, 2018. The $74.8 million decrease was due to cash used in operating activities and, to a lesser extent, cash used in investing activities. Our working capital was $360.4 million as of March 31, 2019 as compared with $439.2 million as of December 31, 2018.
 
Net cash used in operating activities was $73.8 million and $67.4 million for the three months ended March 31, 2019 and 2018, respectively. The net cash used in operating activities during the three months ended March 31, 2019 and 2018 was primarily for the commercial, pre-commercial (in 2018), clinical and manufacturing activities related to ARIKAYCE, as well as SG&A expenses. In addition, net cash used in operating activities during the three months ended March 31, 2019 included clinical trial expenses related to INS1007.
 
Net cash used in investing activities was $4.0 million and $5.4 million for the three months ended March 31, 2019 and 2018, respectively. The net cash used in investing activities during the three months ended March 31, 2019 and 2018 was primarily related to the purchase of fixed assets for our long-term production capacity build-out at Patheon. We expect our cash used in investing activities to increase for the year ended December 31, 2019 due primarily to our investments in the build-out of our new corporate headquarters and our long-term production capacity build-out at Patheon.
 
Net cash provided by financing activities was $3.0 million and $378.2 million for the three months ended March 31, 2019 and 2018, respectively. Net cash provided by financing activities for the three months ended March 31, 2019 was primarily due to cash proceeds from stock option exercises and participation in our employee stock purchase program. Net cash provided by financing activities for the three months ended March 31, 2018 included net cash proceeds of $435.8 million from our issuance of Convertible Notes in January 2018, partially offset by the February 2018 pay-off of our outstanding debt to Hercules Capital in the amount of $55.0 million.

Contractual Obligations
 
There were no material changes outside of the ordinary course of business in our contractual obligations during the three months ended March 31, 2019 from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2018.    

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have any interest in special purpose entities, structured finance entities or other variable interest entities.

CRITICAL ACCOUNTING POLICIES
 
There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. For the required interim disclosure updates related to our accounting policies, see Note 2 to our consolidated financial statements — Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q.


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ITEM 3.                                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As of March 31, 2019, our cash and cash equivalents were in cash accounts and money market funds. Our investments in money market funds are not insured by the federal government.
 
As of March 31, 2019, we had $450.0 million of Convertible Notes outstanding which bear interest at a coupon rate of 1.75%. If a 10% change in interest rates had occurred on March 31, 2019, it would not have had a material effect on the fair value of our debt as of that date, nor would it have had a material effect on our future earnings or cash flows.
 
The majority of our business is conducted in US dollars. However, we do conduct certain transactions in other currencies, including Euros, British Pounds, and Japanese Yen. Historically, fluctuations in foreign currency exchange rates have not materially affected our results of operations and during the three months ended March 31, 2019 and 2018, our results of operations were not materially affected by fluctuations in foreign currency exchange rates.
 
ITEM 4.                                                CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in Internal Control Over Financial Reporting
 
During the three months ended March 31, 2019, we implemented processes and internal controls related to the January 1, 2019 adoption of ASU 2016-02. The implementation of these processes resulted in material changes to our internal control over financial reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reporting for the fiscal year ended December 31, 2019.

 
PART II. OTHER INFORMATION
 
ITEM 1.                                                LEGAL PROCEEDINGS
 
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

ITEM 1A.                                       RISK FACTORS

There have been no material changes during the quarter ended March 31, 2019 to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
There were no unregistered sales of the Company’s equity securities by the Company during the quarter ended March 31, 2019.
 

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ITEM 6.                                                EXHIBITS
 
Exhibit Index
 
Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012 (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Annual Report on Form 10-K filed on March 18, 2013).
 
 
 
 
Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Quarterly Report on Form 10-Q filed on August 6, 2015).
 
 
 
 
Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2017 Incentive Plan.
 
 
 
 
First Amendment to Lease, dated October 1, 2016, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
 
 
 
 
Second Amendment to Lease, dated October 17, 2018, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
 
 
 
 
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
 
101
 
The following materials from Insmed Incorporated’s quarterly report on Form 10-Q for the quarter ended March 31, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, (ii) Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, and (iv) Notes to the Unaudited Consolidated Financial Statements.


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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
INSMED INCORPORATED
 
 
 
 
 
 
Date: May 7, 2019
By
/s/ Paolo Tombesi
 
 
Paolo Tombesi
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)


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