Company Quick10K Filing
Quick10K
Insmed
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$16.32 78 $1,268
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
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 2019-10-30 Earnings, Officers, Exhibits
8-K 2019-08-01 Earnings, Exhibits
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 2019-03-27 Officers, Regulation FD, 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
REGN Regeneron Pharmaceuticals 32,886
ZGNX Zogenix 1,860
BDSI Biodelivery Sciences International 374
XERS Xeris 311
DVAX Dynavax Technologies 275
FTSV Forty Seven 231
GLMD Galmed Pharmaceuticals 113
AQST Aquestive Therapeutics 100
SELB Selecta Biosciences 74
CFRX Contrafect 27
INSM 2019-09-30
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-31.1 insm20190930ex311.htm
EX-31.2 insm20190930ex312.htm
EX-32.1 insm20190930ex321.htm
EX-32.2 insm20190930ex322.htm

Insmed Earnings 2019-09-30

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)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number 000-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia54-1972729
(State or other jurisdiction of incorporation or organization)(I.R.S. employer identification no.)
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)
Securities registered pursuant to Section12(b) of the Act:
Title of each classTrading symbolsName of each exchange on which registered
Common stock, par value $0.01 per shareINSMNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company 

Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
As of October 28, 2019, there were 89,343,718 shares of the registrant’s common stock outstanding.



Table of Contents
INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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 ofAs of
September 30, 2019December 31, 2018
 (unaudited) 
Assets  
Current assets:  
Cash and cash equivalents$535,632  $495,072  
Accounts receivable15,346  5,515  
Inventory23,313  7,032  
Prepaid expenses and other current assets21,313  11,327  
Total current assets595,604  518,946  
Intangibles, net54,930  58,675  
Fixed assets, net52,991  22,636  
Operating lease right-of-use assets39,949  —  
Other assets19,643  4,299  
Total assets$763,117  $604,556  
Liabilities and shareholders’ equity  
Current liabilities:  
Accounts payable$20,415  $17,741  
Accrued expenses38,908  38,254  
Accrued compensation13,954  22,208  
Lease liabilities11,985  —  
Other current liabilities130  1,529  
Total current liabilities85,392  79,732  
Debt, long-term331,003  316,558  
Long-term lease liabilities31,417  —  
Other long-term liabilities11,264    
Total liabilities459,076  396,290  
Shareholders’ equity:  
Common stock, $0.01 par value; 500,000,000 authorized shares, 89,310,684 and 77,307,521 issued and outstanding shares at September 30, 2019 and December 31, 2018, respectively
893  773  
Additional paid-in capital1,786,667  1,489,664  
Accumulated deficit(1,483,511) (1,282,162) 
Accumulated other comprehensive loss(8) (9) 
Total shareholders’ equity304,041  208,266  
Total liabilities and shareholders’ equity$763,117  $604,556  
See accompanying notes to consolidated financial statements
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Table of Contents
INSMED INCORPORATED
Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands, except per share data)
 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
Revenues, net$38,885  $  $90,759  $  
Costs and expenses:    
Cost of product revenues (excluding amortization of intangible assets)6,437    15,506    
Research and development34,340  39,538  99,081  105,358  
Selling, general and administrative53,347  44,445  160,590  114,258  
Amortization of intangible assets1,249    3,745    
Total costs and expenses95,373  83,983  278,922  219,616  
Operating loss(56,488) (83,983) (188,163) (219,616) 
Investment income2,885  2,741  7,879  7,510  
Interest expense(6,846) (6,675) (20,357) (18,805) 
Loss on extinguishment of debt      (2,209) 
Other (expense) income, net(85) 220  (255) 550  
Loss before income taxes(60,534) (87,697) (200,896) (232,570) 
Provision for income taxes148  46  453  134  
Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
Basic and diluted net loss per share$(0.68) $(1.14) $(2.43) $(3.03) 
Weighted average basic and diluted common shares outstanding
89,245  77,066  82,907  76,819  
Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
Other comprehensive income:    
Foreign currency translation (losses) gains(1) 2  1  23  
Total comprehensive loss$(60,683) $(87,741) $(201,348) $(232,681) 
 
See accompanying notes to consolidated financial statements

4

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

 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at July 1, 201877,039  $770  $1,472,699  $(1,102,846) $18  $370,641  
Comprehensive loss:      
Net loss(87,743) (87,743) 
Other comprehensive income2  2  
Exercise of stock options47  1  603  604  
Issuance of common stock for vesting of RSUs  
Stock compensation expense7,903  7,903  
Balance at September 30, 201877,086  $771  $1,481,205  $(1,190,589) $20  $291,407  
Balance at July 1, 201989,207  $892  $1,778,517  $(1,422,829) $(7) $356,573  
Comprehensive loss:      
Net loss(60,682) (60,682) 
Other comprehensive income(1) (1) 
Exercise of stock options and ESPP shares103  1  1,460  1,461  
Net proceeds from issuance of common stock(104) (104) 
Issuance of common stock for vesting of RSUs1      
Stock compensation expense6,794  6,794  
Balance at September 30, 201989,311  $893  $1,786,667  $(1,483,511) $(8) $304,041  

See accompanying notes to consolidated financial statements


5

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


 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at January 1, 201876,611  $766  $1,318,181  $(957,885) $(3) $361,059  
Comprehensive loss:      
Net loss(232,704) (232,704) 
Other comprehensive income23  23  
Exercise of stock options428  4  6,385  6,389  
Equity component of convertible debt issuance136,434  136,434  
Issuance of common stock for vesting of RSUs47  1  1  
Stock compensation expense20,205  20,205  
Balance at September 30, 201877,086  $771  $1,481,205  $(1,190,589) $20  $291,407  
Balance at January 1, 201977,308  $773  $1,489,664  $(1,282,162) $(9) $208,266  
Comprehensive loss:      
Net loss(201,349) (201,349) 
Other comprehensive income1  1  
Exercise of stock options and ESPP shares1,266  12  14,953  14,965  
Net proceeds from issuance of common stock10,658  107  260,967  261,074  
Issuance of common stock for vesting of RSUs79  1  1  
Stock compensation expense21,083  21,083  
Balance at September 30, 201989,311  $893  $1,786,667  $(1,483,511) $(8) $304,041  

See accompanying notes to consolidated financial statements
6

Table of Contents
INSMED INCORPORATED
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months Ended September 30,
 20192018
Operating activities  
Net loss$(201,349) $(232,704) 
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation3,249  2,652  
Amortization of intangible assets3,745    
Stock-based compensation expense21,083  20,205  
Loss on extinguishment of debt  2,209  
Amortization of debt issuance costs1,047  1,000  
Accretion of debt discount and back-end fee13,398  11,591  
Changes in operating assets and liabilities:  
Accounts receivable(9,831)   
Inventory(16,281)   
Prepaid expenses and other current assets(10,156) (4,315) 
Other assets(15,305)   
Accounts payable1,410  2,536  
Accrued expenses and other10,999  9,823  
Accrued compensation(8,254) (810) 
Net cash used in operating activities(206,245) (187,813) 
Investing activities  
Purchase of fixed assets(29,230) (10,063) 
Net cash used in investing activities(29,230) (10,063) 
Financing activities  
Proceeds from exercise of stock options, ESPP, and RSU vesting14,966  6,390  
Proceeds from issuance of common stock, net261,074    
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  (14,235) 
Net cash provided by financing activities276,040  384,320  
Effect of exchange rates on cash and cash equivalents(5) (35) 
Net increase in cash and cash equivalents40,560  186,409  
Cash and cash equivalents at beginning of period495,072  381,165  
Cash and cash equivalents at end of period$535,632  $567,574  
Supplemental disclosures of cash flow information:  
Cash paid for interest$7,880  $4,975  
Cash paid for income taxes$320  $127  
 See accompanying notes to consolidated financial statements

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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) in September 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. 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, France, Germany, Ireland, Italy, the Netherlands, the United Kingdom (UK), Switzerland, Japan and Bermuda.
 
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. All intercompany transactions and balances have been eliminated in consolidation and certain prior year amounts have been reclassified to conform to the current year presentation.
 
The Company had $535.6 million in cash and cash equivalents as of September 30, 2019 and reported a net loss of $201.3 million for the nine months ended September 30, 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 at its US and certain international entities while funding research and development (R&D) activities for ARIKAYCE and its 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, including those that address orphan or rare diseases. The source, timing and availability of any future financing or other transaction will depend principally upon continued progress in the Company’s commercial, regulatory and development activities. Any equity or debt financing will also be contingent upon equity and debt market conditions and interest rates at the time. If the Company is unable to obtain sufficient additional funds when required, the Company may be forced to delay, restrict or eliminate all or a portion of its development programs, commercialization or business development efforts.

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 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:
 
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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 September 30, 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 September 30, 2019
Fair Value
Carrying ValueLevel 1Level 2Level 3
Cash and cash equivalents$535.6  $535.6  $  $  

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 nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 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 Company's 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of September 30, 2019 was $375.3 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $331.0 million carrying value of the Convertibles Notes as of September 30, 2019 excludes the $111.6 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 and nine months ended September 30, 2019 and 2018:
 
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 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
 (in thousands, except per share amounts)
Numerator:    
Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
Denominator:    
Weighted average common shares used in calculation of basic net loss per share:89,245  77,066  82,907  76,819  
Effect of dilutive securities:    
Common stock options        
RSUs        
Convertible debt securities        
Weighted average common shares outstanding used in calculation of diluted net loss per share89,245  77,066  82,907  76,819  
Net loss per share:    
Basic and diluted$(0.68) $(1.14) $(2.43) $(3.03) 
 
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of September 30, 2019 and 2018 as their effect would have been anti-dilutive (in thousands):
 
As of September 30,
 20192018
Stock options to purchase common stock10,773  9,608  
Unvested RSUs460  245  
Convertible debt securities11,492  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 nine months ended September 30, 2019.
Percentage of Total Gross Product Revenue
Customer A31 
Customer B28 
Customer C21 
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 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)
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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 varies 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) - Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses and milestone payments. 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.

Leases - 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 (ROU) asset representing its right to use the underlying asset for the lease term on the balance sheet.

A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified property, plant or equipment in exchange for consideration. Control of an asset is conveyed to the Company if the Company obtains the right to obtain substantially all of the economic benefits of the asset or the right to direct the use of the asset. The
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Company recognizes ROU assets and lease liabilities at the lease commencement date based on the present value of future, fixed lease payments over the term of the arrangement. ROU assets are amortized on a straight-line basis over the term of the lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the statement of comprehensive income in the same line item as expenses arising from fixed lease payments.

In accordance with Topic 842, leases are measured at present value using the rate implicit in the lease or, if the implicit rate is not determinable, the lessee's implicit borrowing rate. As the implicit rate is not typically available, the Company uses its implicit borrowing rate based on the information available at the lease commencement date to determine the present value of future lease payments. The implicit borrowing rate approximates the rate the Company would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.

Financial information presented prior to January 1, 2019 has not been adjusted and is presented in accordance with ASC 840. Refer to the Recently Adopted Accounting Pronouncements section within this note below and Note 7 - Leases for details about the Company's lease portfolio, including Topic 842 required disclosures.

Recently Adopted Accounting Pronouncements - Topic 842 was effective for fiscal years beginning after December 15, 2018 (including interim periods within those years) 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.
 
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 and the Company will adopt the standard effective January 1, 2020. Different aspects of the guidance require modified retrospective or prospective adoption. The Company has performed a preliminary assessment and anticipates adoption will not have a material impact on its consolidated financial statements.
 
3.        Inventory

As of September 30, 2019 and December 31, 2018, the Company's inventory balance consists of the following (in thousands):
September 30, 2019December 31, 2018
Raw materials$10,556  $2,145  
Work-in-process6,199  4,567  
Finished goods6,558  320  
$23,313  $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 in September 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.

4.                                      Intangibles, net
 
As of September 30, 2019, the Company's identifiable intangible assets consisted of acquired ARIKAYCE R&D and a milestone paid to PARI for the license to use PARI's Lamira® Nebulizer System for the delivery of ARIKAYCE to patients as
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a result of the FDA approval of ARIKAYCE in September 2018. Total intangible assets, net was $54.9 million as of September 30, 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 in October 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. A rollforward of the Company's intangible assets for the nine months ended September 30, 2019 follows (in thousands):
2019
Intangible AssetJanuary 1,AdditionsAmortizationSeptember 30,
Acquired ARIKAYCE R&D$56,988  $  $(3,637) $53,351  
PARI milestone upon FDA approval1,687    (108) 1,579  
     Intangible assets$58,675  $  $(3,745) $54,930  

Amortization of intangible assets during each of the next five years is estimated to be approximately $5.0 million per year. The Company reviews the recoverability of these finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. During the quarter ended September 30, 2019, no indicators of impairment were identified.
 
5. Fixed Assets, net

Fixed assets are stated at cost and depreciated using the straight-line method, based on useful lives as follows (in thousands):

Asset DescriptionEstimated
Useful Life (years)
As of September 30, 2019As of December 31, 2018
Lab equipment7$8,646  $7,935  
Furniture and fixtures72,559  2,320  
Computer hardware and software
3-5
4,839  3,796  
Office equipment765  65  
Manufacturing equipment71,535  1,166  
Leasehold improvementslease term8,861  7,202  
Construction in Progress (CIP)—  44,003  14,325  
70,508  36,809  
Less: accumulated depreciation(17,517) (14,173) 
Fixed assets, net$52,991  $22,636  

Fixed assets, net of depreciation increased to $53.0 million as of September 30, 2019 from $22.6 million as of December 31, 2018. The increase was primarily due to $29.7 million in CIP for the manufacturing equipment related to the long-term capacity build-out at the Patheon UK Limited (Patheon) facility and the Company's new corporate headquarters.

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6.                                      Accrued Expenses
 
As of September 30, 2019 and December 31, 2018, the Company's accrued expenses balance consists of the following (in thousands): 
September 30, 2019December 31, 2018
Accrued clinical trial expenses$4,988  $6,635  
Accrued professional fees9,421  13,398  
Accrued technical operation expenses10,176  9,371  
Accrued royalty payable1,830  409  
Accrued interest payable1,663  3,631  
Accrued sales allowances and related costs4,640  818  
Accrued construction costs4,693  2,946  
Other accrued expenses1,497  1,046  
 $38,908  $38,254  
 
7.                                    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 the Company's 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 operating lease right-of-use assets and corresponding lease liabilities 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).
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Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
Lease cost
 Operating lease cost$3,072  $9,225  
Total lease cost$3,072  $9,225  
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
  Operating cash flows for operating leases$3,140  $9,415  
Right-of-use assets obtained in exchange for new operating lease liabilities$  $47,389  
Weighted average remaining lease term - operating leases (years)5.2 years5.2 years
Weighted average discount rate - operating leases7.4 %7.4 %

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)$6,435  
202010,984  
202110,287  
20226,000  
20236,000  
Thereafter
12,000  
Total51,706  
Less: present value discount
8,304  
Present value of lease liabilities$43,402  
Balance sheet classification at September 30, 2019:
  Current lease liabilities$11,985  
  Long-term lease liabilities31,417  
Total lease liabilities$43,402  


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 fourth quarter of 2019, the lease will be accounted for as a finance lease and the Company estimates the impact on its consolidated balance sheet will be approximately $20 million to $25 million.

Additionally, in October 2017, the Company entered into certain agreements with 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. Certain costs incurred by the Company under the agreement of $15.5 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 lease will be accounted for as an operating lease and prepaid costs and minimum guarantees specified in the agreement will be combined to establish an operating lease right-of-use asset and related lease liability.

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8.                                    Debt