insm-20210331

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 March 31, 2021

☐ 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.)

700 US Highway 202/206,
Bridgewater, New Jersey						08807
(Address of principal executive offices)						(Zip Code)

(908) 977-9900

(Registrant’s telephone number including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section12(b) of the Act:


Title of each class	Trading symbols	Name of each exchange on which registered
Common stock, par value $0.01 per share	INSM	Nasdaq 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 May 3, 2021, there were 103,492,007 shares of the registrant’s common stock outstanding.

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INSMED INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

INDEX


PART I. FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements

	Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	3

	Consolidated Statements of Comprehensive Loss (unaudited) for the three months ended March 3 1 , 202 1 and 20 20	4

	Consolidated Statements of Shareholders' Equity (unaudited) for the three months ended March 31, 2021 and 2020	5

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and 2020	6

	Notes to Consolidated Financial Statements (unaudited)	7

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	32
ITEM 4	Controls and Procedures	33

PART II. OTHER INFORMATION

ITEM 1	Legal Proceedings	33
ITEM 1A	Risk Factors	33
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
ITEM 6	Exhibits	34

SIGNATURE		35

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

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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, 2021		December 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	409,751	$	532,756
Accounts receivable	17,628		16,562
Inventory	52,060		49,592
Prepaid expenses and other current assets	21,565		23,982
Total current assets	501,004		622,892

Intangibles, net	47,998		49,261
Fixed assets, net	52,684		53,953
Finance lease right-of-use assets	10,064		10,334
Operating lease right-of-use assets	34,279		32,946
Other assets	46,362		26,769
Total assets	$	692,391	$	796,155

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	22,422	$	42,853
Accrued expenses	41,289		37,807
Accrued compensation	10,149		25,591
Finance lease liabilities	1,119		1,081
Operating lease liabilities	6,418		11,475

Total current liabilities	81,397		118,807

Debt, long-term	361,575		356,318
Finance lease liabilities, long-term	14,417		14,713
Operating lease liabilities, long-term	24,068		21,255
Other long-term liabilities	9,298		9,178
Total liabilities	490,755		520,271

Shareholders’ equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 103,278,670 and 102,763,060 issued and outstanding shares at March 31, 2021 and December 31, 2020, respectively	1,033		1,028
Additional paid-in capital	2,122,743		2,105,252
Accumulated deficit	(1,922,230)		(1,830,589)
Accumulated other comprehensive income	90		193
Total shareholders’ equity	201,636		275,884
Total liabilities and shareholders’ equity	$	692,391	$	796,155

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands, except per share data)


	Three Months Ended March 31,
		2021		2020

Product revenues, net		$	40,214	$	36,860

Operating expenses:
Cost of product revenues (excluding amortization of intangible assets)		9,844		8,438
Research and development		61,390		36,184
Selling, general and administrative		51,550		51,346
Amortization of intangible assets		1,263		1,249
Total operating expenses		124,047		97,217

Operating loss		(83,833)		(60,357)

Investment income		33		1,404
Interest expense		(7,559)		(7,411)

Other (expense) income, net		(43)		36
Loss before income taxes		(91,402)		(66,328)

Provision for income taxes		239		36

Net loss		$	(91,641)	$	(66,364)

Basic and diluted net loss per share		$	(0.89)	$	(0.74)

Weighted average basic and diluted common shares outstanding		103,040		89,779

Net loss		$	(91,641)	$	(66,364)
Other comprehensive income (loss):
Foreign currency translation losses		(103)		(37)
Total comprehensive loss		$	(91,744)	$	(66,401)

See accompanying notes to consolidated financial statements

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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, 2020	89,682	$	897	$	1,797,286	$	(1,536,499)	$	(10)	$	261,674
Comprehensive loss:
Net loss						(66,364)				(66,364)
Other comprehensive loss								(37)		(37)
Exercise of stock options and ESPP shares issuance	151	2		2,424						2,426

Issuance of common stock for vesting of RSUs	27	—								—
Stock compensation expense				9,002						9,002
Balance at March 31, 2020	89,860	$	899	$	1,808,712	$	(1,602,863)	$	(47)	$	206,701

Balance at January 1, 2021	102,763	$	1,028	$	2,105,252	$	(1,830,589)	$	193	$	275,884
Comprehensive loss:
Net loss						(91,641)				(91,641)
Other comprehensive loss								(103)		(103)
Exercise of stock options and ESPP shares issuance	416	4		6,956						6,960

Issuance of common stock for vesting of RSUs	100	1								1
Stock compensation expense				10,535						10,535
Balance at March 31, 2021	103,279	$	1,033	$	2,122,743	$	(1,922,230)	$	90	$	201,636

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Three Months Ended March 31,
	2021		2020
Operating activities
Net loss	$	(91,641)	$	(66,364)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	2,388		2,266
Amortization of intangible assets	1,263		1,249
Stock-based compensation expense	10,535		9,002

Amortization of debt issuance costs	350		349
Accretion of debt discount	4,907		4,650
Finance lease amortization expense	270		360
Noncash operating lease expense	5,208		1,536
Changes in operating assets and liabilities:
Accounts receivable	(1,066)		2,078
Inventory	(2,754)		(2,332)
Prepaid expenses and other current assets	2,056		4,341
Other assets	(19,731)		(1,568)
Accounts payable	(20,273)		4,169
Accrued expenses and other	(4,686)		(7,480)
Accrued compensation	(15,107)		(10,191)
Net cash used in operating activities	(128,281)		(57,935)
Investing activities
Purchase of fixed assets	(1,181)		(2,679)

Net cash used in investing activities	(1,181)		(2,679)
Financing activities
Proceeds from exercise of stock options, ESPP, and RSU vesting	6,961		2,426





Payments of finance lease principal	(258)		(292)

Net cash provided by financing activities	6,703		2,134
Effect of exchange rates on cash and cash equivalents	(246)		(7)
Net decrease in cash and cash equivalents	(123,005)		(58,487)
Cash and cash equivalents at beginning of period	532,756		487,429
Cash and cash equivalents at end of period	$	409,751	$	428,942
Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,271	$	4,381
Cash paid for income taxes	$	672	$	414

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, is approved in the United States as ARIKAYCE (amikacin liposome inhalation suspension), in Europe as ARIKAYCE® Liposomal 590 mg Nebuliser Dispersion and in Japan as ARIKAYCE inhalation 590mg (amikacin sulfate inhalation drug product). ARIKAYCE received accelerated approval in the 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 in a refractory setting. In October 2020, the European Commission (EC) approved ARIKAYCE for the treatment of nontuberculous mycobacterial (NTM) lung infections caused by MAC in adults with limited treatment options who do not have cystic fibrosis (CF). In March 2021, Japan's Ministry of Health, Labour and Welfare (MHLW) approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. NTM lung disease caused by MAC (which the Company refers to as MAC lung disease) is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The Company's clinical-stage pipeline includes brensocatib and treprostinil palmitil inhalation powder (TPIP). Brensocatib is a small molecule, oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1), which the Company is developing for the treatment of patients with bronchiectasis and other neutrophil-mediated diseases. TPIP is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for pulmonary arterial hypertension (PAH) and other rare pulmonary disorders.

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located in Bridgewater, New Jersey. The Company has legal entities in the US, France, Germany, Ireland, Italy, the Netherlands, Switzerland, the United Kingdom (UK), and Japan.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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.

The Company had $409.8 million in cash and cash equivalents as of March 31, 2021 and reported a net loss of $91.6 million for the three months ended March 31, 2021. 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 consolidated operating losses, including losses in its US and certain international entities, while funding research and development (R&D) activities for ARIKAYCE, brensocatib, TPIP and its other pipeline programs, and continuing and commencing pre-commercial, commercialization and regulatory activities for ARIKAYCE, 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 continued commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE, to develop brensocatib and TPIP and to develop, acquire, in-license or co-promote other products or product candidates, including those that address a broad range of 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. The Company believes it currently has sufficient funds to meet its financial needs for at least the next 12 months.

Risks and Uncertainties - There are many uncertainties regarding the novel coronavirus (COVID-19) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect the Company's financial results and business operations for the three months ended March 31, 2021, the

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Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

2. Summary of Significant Accounting Policies

The following are the required interim disclosure updates to the Company's significant accounting policies described in Note 2 of the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020:

Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:

•Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

•Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

•Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Each major category of financial assets and liabilities measured at fair value on a recurring basis is categorized based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1 generally include US treasuries and mutual funds listed in active markets.

The Company's only financial assets and liabilities, which were measured at fair value as of March 31, 2021 and December 31, 2020, 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):


	March 31, 2021
			Fair Value
	Carrying Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	409.8	$	409.8	$	—	$	—


	December 31, 2020
			Fair Value
	Carrying Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	532.8	$	532.8	$	—	$	—

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, 2021 and 2020, respectively.

As of March 31, 2021 and December 31, 2020, the Company held no securities that were in an unrealized gain or loss position.

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The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. The Company has determined that there were no other-than-temporary impairments during the quarter ended March 31, 2021. 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 March 31, 2021 was $512.3 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $361.6 million carrying value of the Convertibles Notes as of March 31, 2021 excludes the $83.1 million and $5.3 million of the unamortized portion of the debt discount and issuance costs, respectively.

Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, restricted stock, restricted stock units (RSUs) 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, 2021 and 2020:


	Three Months Ended March 31,
		2021		2020
		(in thousands, except per share amounts)
Numerator:
Net loss		$	(91,641)	$	(66,364)
Denominator:
Weighted average common shares used in calculation of basic net loss per share:		103,040		89,779
Effect of dilutive securities:
Common stock options		—		—
Restricted stock and RSUs		—		—
Convertible debt securities		—		—
Weighted average common shares outstanding used in calculation of diluted net loss per share		103,040		89,779
Net loss per share:
Basic and diluted		$	(0.89)	$	(0.74)

The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of March 31, 2021 and 2020 as their effect would have been anti-dilutive (in thousands):


	March 31,
	2021	2020
Common stock options	13,008	13,144
Unvested restricted stock and RSUs	915	930
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.

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The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The Company uses an expected loss methodology to calculate allowances for trade receivables. The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company does not currently have a material allowance for collectible trade receivables. The following table presents the percentage of total gross product revenue represented by the Company's three largest customers as of the three months ended March 31, 2021 and 2020.


	March 31,
	2021	2020
Customer A	26%	26%
Customer B	25%	27%
Customer C	22%	25%

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 manufacturers, or an adverse change in their business, could materially impact future operating results.

Revenue Recognition—In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each contract 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, net consist primarily of net sales of ARIKAYCE in the US. Product revenues are recognized once the Company performs and satisfies all five steps mentioned above. The Company's customers in the US include specialty pharmacies and specialty distributors.

Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for (a) customer credits, such as invoice discounts for prompt pay and specialty pharmacies fees, (b) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates, (c) estimated chargebacks, and (d) estimated costs of co-payment assistance. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (prompt pay discounts and chargebacks), prepaid expenses (co-payment assistance), or as a current liability (rebates). Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company's historical experience, current contractual and statutory requirements, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Customer credits: The Company's customers are offered various forms of consideration, including fees for enhanced services and prompt payment discounts. The payment terms for sales to specialty pharmacies for prompt payment discounts and fees for services are based on contractual rates agreed with the respective specialty pharmacies. The Company anticipates that its customers will earn these discounts and fees and, therefore, deducts the full amount of these discounts and fees from total gross product revenues at the time such revenues are recognized.

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Rebates: The Company contracts with government agencies and managed care organizations, or collectively, third-party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current liability is included in accrued expenses on the consolidated balance sheets. The Company estimates the rebates that it will provide to third-party payors based upon (i) the Company's contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) information obtained from the Company's specialty pharmacies.

Chargebacks: Chargebacks are discounts that occur when certain contracted customers, currently public health service institutions and federal government entities purchasing via the Federal Supply Schedule, purchase directly from the Company's specialty distributor. Contracted customers generally purchase the product at a discounted price and the specialty distributor, in turn, charges back to the Company the difference between the price the specialty distributor initially paid and the discounted price paid by the contracted customers. The Company estimates chargebacks provided to the specialty distributor and deducts these estimated amounts from gross product revenues, and from accounts receivable, at the time revenues are recognized.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Based upon the terms of the program and information regarding programs provided for similar specialty pharmaceutical products, the Company estimates the average co-pay mitigation amounts and the percentage of patients that it expects to participate in the program in order to establish accruals for co-payment assistance. These reserves are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue. The Company adjusts its accruals for co-pay assistance based on actual redemption activity and estimates of future redemptions related to sales in the current period.

If any, or all, of the Company's actual experience varies from its estimates, the Company may need to adjust prior period accruals, affecting revenue in the period of adjustment.

The Company also recognizes revenue related to certain early access programs (EAPs) in Europe, consisting of sales to the French National Agency for Medicines and Health Products Safety, which granted ARIKAYCE a Temporary Authorization for Use (Autorisation Temporaire d'Utilisation, or ATU) and from the named patient program in Germany and other countries. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations. In December 2020, the Company began recognizing product revenue from commercial sales of ARIKAYCE to Germany subsequent to receiving approval from the EC.

Inventory and Cost of Product Revenues (excluding amortization of intangible assets) - Inventory is stated at the lower of cost and net realizable value. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE in September 2018. Inventory is sold on a first-in, first-out (FIFO) basis. The Company periodically reviews inventory for expiry and obsolescence and, if necessary, writes down accordingly. If quality specifications are not met during the manufacturing process, such inventory is written off to cost of product revenues (excluding amortization of intangible assets) in the period identified.

Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses and revenue-based milestone payments. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods.

Prior to FDA approval of ARIKAYCE, the Company expensed all inventory-related costs in the period incurred. Inventory used for clinical development purposes is expensed to R&D expense when consumed.

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 or are amortized based on consumption, if this approach is more representative of the pattern in which benefit is expected to be derived from the underlying asset. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the 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.

Refer to Note 7 - Leases for details about the Company's lease portfolio, including Topic 842 required disclosures.

Recently Adopted Accounting Pronouncements - 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. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables. The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted ASU 2016-13 effective January 1, 2020. Different aspects of the guidance required modified retrospective or prospective adoption. Adoption of the standard did not have a material impact on the Company's consolidated financial statements.

New Accounting Pronouncements (Not Yet Adopted) - In August 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-06, Debt — Accounting for Convertible Instruments, to reduce the complexity associated with applying US generally accepted accounting principles (GAAP) to certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the number of accounting models for convertible debt instruments is reduced, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Only convertible instruments that meet the definition of a derivative or are issued with substantial premiums will continue to be subject to the separation models. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021. A modified retrospective and a fully retrospective transition method are both permitted. The Company is currently evaluating the impact of adoption of ASU 2020-06 on its consolidated financial statements.

3. Inventory

As of March 31, 2021 and December 31, 2020, the Company's inventory balance consists of the following (in thousands):


	March 31, 2021		December 31, 2020

Raw materials	$	23,052	$	21,601
Work-in-process	18,901		18,754
Finished goods	10,107		9,237
	$	52,060	$	49,592

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

4. Intangibles, Net

As of March 31, 2021, the Company's identifiable intangible assets consisted of acquired ARIKAYCE R&D and milestones 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 and EC approvals of ARIKAYCE in September 2018 and October 2020, respectively. Total intangible assets, net was $48.0 million and $49.3 million as of March 31, 2021 and December 31, 2020, respectively.

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The Company began amortizing its intangible assets in October 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. Amortization of intangible assets during each of the next five years is estimated to be approximately $5.1 million per year. A rollforward of the Company's intangible assets for the three months ended March 31, 2021 follows (in thousands):


	2021
Intangible Asset	January 1,		Additions		Amortization		March 31,

Acquired ARIKAYCE R&D	$	47,289	$	—	$	(1,213)	$	46,076
PARI milestones	1,972		—		(50)		1,922
	$	49,261	$	—	$	(1,263)	$	47,998

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. The Company determined that no indicators of impairment of finite-lived intangible assets existed at March 31, 2021.

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 Description	Estimated Useful Life (years)	March 31, 2021		December 31, 2020

Lab equipment	7	$	10,744	$	10,352
Furniture and fixtures	7	5,917		5,917
Computer hardware and software	3-5	7,366		7,267
Office equipment	7	88		88
Manufacturing equipment	7	1,567		1,567
Leasehold improvements	lease term	35,410		35,289
Construction in progress (CIP)	—	22,330		21,823
		83,422		82,303
Less: accumulated depreciation		(30,738)		(28,350)
		$	52,684	$	53,953

6. Accrued Expenses

As of March 31, 2021 and December 31, 2020, the Company's accrued expenses balance consists of the following (in thousands):


	March 31, 2021		December 31, 2020
Accrued clinical trial expenses	$	12,117	$	6,733
Accrued professional fees	9,804		8,594
Accrued technical operation expenses	6,308		9,164
Accrued royalty payable	3,385		3,423
Accrued interest payable	1,663		3,631
Accrued sales allowances and related costs	7,476		5,051
Accrued construction costs	140		364
Other accrued expenses	396		847
	$	41,289	$	37,807

7. Leases

The Company's lease portfolio consists primarily of office space, manufacturing facilities, research equipment and fleet vehicles. All of the Company's leases are classified as operating leases, except for the Company's corporate headquarters lease, which is classified as a finance lease. The terms of the Company's lease agreements that have commenced range from less

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than one year to ten years, ten months. 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. 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 does 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.

The Company also records variable consideration for variable lease payments in excess of fixed fees or minimum guarantees. Variable consideration related to the Company's leasing arrangements was $0.2 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively. Variable costs related to CMO manufacturing agreements are direct costs related to the manufacturing of ARIKAYCE and are capitalized within inventory in the Company's consolidated balance sheet, while the variable costs related to other leasing arrangements, not related to the manufacturing of ARIKAYCE, have been classified within operating expenses in the Company's consolidated statements of comprehensive loss.

The table below summarizes the supplemental noncash disclosures of the Company's leases included in its consolidated financial statements (in thousands).


	Three Months Ended March 31,
		2021		2020
Finance right-of-use assets obtained in exchange for lease obligations		$	—

SEC Form 10-Q filed by Insmed, Inc.