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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
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 0-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1972729
(State or other Jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
800 East Leigh Street (804) 828-6893
Richmond, Virginia 23219 (Registrant's telephone number
(Address of principal executive offices) including area code)
(zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title to Name of each exchange
each class on which registered
---------- ---------------------
Common Stock Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 short 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value on February 28, 2001, of the voting stock held by
non-affiliates of the registrant was $129,801,125 (based on the closing price
for shares of the registrant's Common Stock as reported on the Nasdaq National
Market on that date). In determining this figure, the registrant has assumed
that all of its directors, officers and persons owning 10% or more of the
outstanding Common Stock are affiliates. This assumption shall not be deemed
conclusive for any other purpose.
As of February 28, 2001, there were 32,818,951 shares of the registrant's
common stock, $.01 par value, outstanding.
Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the
registrant's fiscal year ended December 31, 2000 and to be delivered to
shareholders in connection with the 2001 Annual Meeting of Shareholders are
incorporated in Part III by reference.
INSMED INCORPORATED
INDEX
Page
REPORT: FORM 10-K......................................................... 1
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 22
ITEM 3. LEGAL PROCEEDINGS............................................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 23
PART II................................................................... 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.............................................................. 23
ITEM 6. SELECTED FINANCIAL DATA....................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................. 27
PART III.................................................................. 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 27
ITEM 11. EXECUTIVE COMPENSATION....................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 27
PART IV................................................................... 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.................................................................. 28
SIGNATURES................................................................ 29
CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
EXHIBIT INDEX ............................................................ E-1
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In this Form 10-K, the "Company," "Insmed," "Insmed Incorporated," "we,"
"us" and "our" refer to Insmed Incorporated, a Virginia corporation.
PART I
ITEM 1. BUSINESS
Introduction
We discover and develop pharmaceutical products for the treatment of
metabolic and endocrine diseases associated with insulin resistance. Insulin
resistance is a defect in the body that results in a decreased sensitivity to
insulin, the principal hormone that regulates glucose levels in the
bloodstream. Our lead product candidate, INS-1, is an orally-active insulin
sensitizer, which restores tissue sensitivity to insulin. We are developing
INS-1 for the treatment of type 2 diabetes and polycystic ovary syndrome,
commonly known as PCOS. Our second product candidate, SomatoKine, is a
recombinant protein that we are developing as an injectable insulin sensitizer
targeted towards the management of both type 1 and type 2 diabetics who are
less sensitive to insulin therapy. We believe our product candidates address
major clinical needs in the management of the diabetic population.
Medical Background
Insulin Resistance
Insulin resistance is a defect in the body's ability to properly respond to
insulin, the principal hormone that regulates glucose levels in the
bloodstream. Insulin resistance is an important metabolic disorder that
precedes the development of diseases such as type 2 diabetes and PCOS. It is
frequently asymptomatic and is thought to exist in approximately 25% of the
general population in the United States. Although the exact cause is unclear,
genetic and other factors such as obesity and a sedentary lifestyle are
contributing factors.
Diabetes
Diabetes is a metabolic disease characterized by an inability to properly
store and utilize glucose and is caused by either a deficiency of insulin or
insulin resistance. The diabetic population consists of two types. Type 1
diabetes, usually emerging during childhood, comprises between 5% and 10% of
the diabetic population and is caused by destruction of the cells of the
pancreas that produce insulin. In contrast, type 2 diabetes, which represents
between 90% and 95% of diabetes cases, usually emerges during middle age. The
common manifestation of both types of diabetes is a persistent state of
abnormally high levels of blood glucose, referred to as hyperglycemia. The
long-term dangers of diabetes arise from organ damage caused by sustained
elevations in the blood glucose level and are comprised of both life-
threatening and severely debilitating diseases, including kidney disease,
blindness and cardiovascular disease.
According to the American Diabetes Association, diabetes is the sixth
leading cause of death by disease in the United States and is estimated to
afflict 16 million Americans with approximately 800,000 new cases diagnosed
annually. Each year, approximately 200,000 Americans die from diabetes-related
complications. According to a recent report from the Centers for Disease
Control and Prevention, the current rapid increase in the prevalence of
diabetes in the United States should continue due to the increasing rate of
obesity in the population. The annual cost to the healthcare system for health
related expenditures associated with diabetes in the United States is
approximately $100 billion. Diabetes is the leading cause of blindness in
people aged 20 to 74 and approximately 40% of all new cases of kidney failure
are caused by diabetes. In addition, cardiovascular disease is two to four
times more prevalent in diabetics than in non-diabetics.
Current Therapies for Diabetes
There are few therapeutic options available for treatment of the diabetic
patient. The mainstay therapies consist primarily of insulin, particularly in
the type 1 diabetic, and oral hypoglycemic drugs for the type 2 diabetic who
has failed exercise and dietary modification. According to the American
Diabetes Association, 43% of all diabetic patients use insulin and a similar
amount use oral drugs.
1
The current marketplace consists of the following oral drugs: Glucophage,
sulfonylureas, and, more recently, Glucovance and thiazolidinediones such as
Avandia and Actos. In the last five years, the market for oral antidiabetic
drugs in the United States has grown from approximately $500 million to
approximately $3 billion in annual revenues. During 2000, the largest selling
product in the United States was Glucophage, a product marketed by Bristol-
Myers Squibb Company ("Bristol-Meyers Squibb") that generated approximately
$1.7 billion in sales.
Even though these drugs service a multi-billion dollar market, they have
several limitations in clinical use:
. Sulfonylureas have been associated with increased cardiovascular
mortality and are capable of producing severe hypoglycemia, which is a
state of low blood sugar;
. Thiazolidinediones may precipitate congestive heart failure and have
been associated with liver toxicity. Rezulin, which was manufactured by
Parke-Davis, a division of Warner-Lambert Company (now Pfizer Inc.) and
generated approximately $625 million in sales in 1999, was withdrawn
from the market on March 22, 2000, after being linked to liver damage;
. Glucophage has been associated with lactic acidosis which is a rare but
life-threatening complication; and
. Many of these agents cause weight gain and therefore exaggerate the
obese state that typically characterizes the type 2 diabetic population.
The effectiveness of many of these products in lowering blood glucose has
been shown to decrease in many patients over time, necessitating insulin
therapy. In turn, many patients will ultimately lose sensitivity to insulin,
requiring larger doses, and in time will no longer achieve effective control
of their blood glucose level. In these patients, there are currently no
remaining therapeutic options to achieve optimal blood glucose control.
Polycystic Ovary Syndrome (PCOS)
PCOS is a major women's health disorder that affects approximately 6% of
women in the United States of reproductive age. PCOS is characterized by high
levels of testosterone and the absence of ovulation and is the leading cause
of female infertility in the United States. Women with this disorder are often
overweight, have excess facial and body hair and have menstrual
irregularities. According to an April 2000 Practice Committee Report published
by the American Society for Reproductive Medicine, clinical studies have
demonstrated that excess testosterone concentrations decrease and ovulation
resumes when insulin resistance is reduced by either drugs or by diet,
suggesting that insulin resistance is one of the primary underlying causes of
this disorder. Studies have indicated that women with PCOS have a four-fold
increase in the risk of developing hypertension, a seven-fold increase in the
risk of developing type 2 diabetes and a seven-fold increase in the risk of
having a heart attack. In addition, women with PCOS have a higher risk of
developing endometrial cancer.
Current Therapies for PCOS
There are currently no drugs approved that address the underlying cause of
this disorder, namely insulin resistance. While there are drugs that have been
approved for the treatment of PCOS, these drugs target the symptoms of PCOS
rather than directly addressing insulin resistance. Such treatments include
various fertility agents and cosmetic approaches to treat excess facial and
body hair. In addition, Glucophage, which is indicated for the treatment of
type 2 diabetes, is sometimes prescribed although it is not approved by the
Food and Drug Administration ("FDA") for the treatment of PCOS.
2
Our Product Candidates
The following table describes our current drug candidates, their indications
and clinical trial status.
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Product Product Clinical Trial
Candidate Indication Discription Status
- -----------------------------------------------------------------------------------------
INS-1 Type 2 Diabetes Oral first line therapy Phase II
- -----------------------------------------------------------------------------------------
INS-1 PCOS Oral first line therapy Phase II
- -----------------------------------------------------------------------------------------
SomatoKine Type 1 and Type 2 Diabetes Injectable late stage management Phase II
- -----------------------------------------------------------------------------------------
INS-1
- -----
Our lead product candidate, INS-1, is an orally active insulin sensitizer.
Insulin is the primary hormone that circulates in the bloodstream to regulate
blood glucose levels. Insulin, when released from the pancreas, circulates in
the bloodstream and binds to receptors located on the outer surface of various
organs and tissues, such as the liver, skeletal muscle and fat. Following
binding of insulin to a surface receptor on a normal functioning cell, a key
"insulin mediator" is generated from the cell membrane, which enters the cell
and regulates and coordinates the effects of the hormone inside the cell.
Located inside the cell are various enzyme systems that control the metabolism
and disposal of glucose from the bloodstream; the activation of these enzymes
allows a tight regulation of blood glucose levels.
The mechanism of action of INS-1 is based on a fundamental understanding of
the regulation of insulin action in both normal cellular metabolism and the
abnormal condition of insulin resistance. We are presently characterizing
unique small molecular weight substances, called "mediators," which are
generated within the cell following insulin stimulation and which mediate the
actions of insulin. We believe that an impaired ability of the cell to
synthesize these mediators is the primary defect that results in the insulin
resistant condition. INS-1 is a naturally-occurring chemical precursor of one
of these mediators which we believe acts as a building block to restore
mediator formation and enhance insulin sensitivity.
We have a comprehensive, ongoing clinical program for the treatment of both
type 2 diabetes and polycystic ovary syndrome.
In April 1999, the New England Journal of Medicine published the results of
our first completed Phase II clinical trial demonstrating that INS-1 was
effective in improving insulin resistance in women with PCOS. This data was
obtained from a double-blind, single dose, placebo-controlled study involving 44
obese women with PCOS. In this study, 22 women received INS-1 and 22 women
received placebo. When compared to placebo, INS-1 showed statistically
significant reductions in insulin (p(less than)0.07) and testosterone
concentrations (p(less than)0.006) and an improvement in ovulation (p(less
than)0.001). The study was subsequently extended to explore dose response for a
total enrollment of 104 women.
In June 1999, we presented to the American Diabetes Association's annual
meeting data from our first completed Phase II clinical trial with INS-1 for
type 2 diabetes. This was a multi-center, double-blind, placebo-controlled
study involving 110 early stage type 2 diabetic patients with 57 patients
randomized to receive INS-1 and 53 receiving placebo. When compared to placebo,
INS-1 showed statistically significant reductions in glucose and lipid levels
(p(less than)0.01) in subjects that had both abnormally high circulating glucose
and lipid concentrations.
In January 2001, we reported that, in patients who received both INS-1 and a
sulfonylurea, there was a statistically significant improvement in glycosylated
hemoglobin (HbA1c) of 0.36% compared to patients receiving a sulfonylurea alone
(p(less than)0.05). This finding is consistent with those reported in previous
clinical trials of INS-1. In addition, the improvement in HbA1c was more
pronounced (0.80%, p(less than)0.01) in those patients who were either better
controlled by their sulfonylurea therapy or had a less severe form of their
disease as judged by their baseline fasting plasma glucose. The results of this
study also demonstrated that the improvement in glycemic control achieved in
patients with Type 2 diabetes receiving INS-1 was accompanied by a more
favorable lipid profile, thus confirming results from earlier trials.
3
In February 2001, we announced results of two additional Phase II clinical
trials of INS-1: one in obese women with PCOS and one in non-diabetic subjects
with dyslipidemia. The trial in obese women with PCOS was a multi-center,
double-blind, placebo-controlled, dose range-finding study designed to evaluate
the incidence of hyperandrogenic anovulation in women diagnosed with PCOS and
the effects of INS-1 in this population. The data demonstrated a statistically
significant improvement in ovulation and corroborated the company's previously
reported findings. The dyslipidemia trial was an exploratory, double-blind,
placebo-controlled study in which an improvement in lipid profiles after the
administration of INS-1 was observed in non-diabetic dyslipidemic subjects.
SomatoKine
- ----------
Our second product candidate, SomatoKine, is indicated for the treatment of
patients with type 1 and type 2 diabetes who are less sensitive to insulin
therapy. SomatoKine is a therapeutic composition of IGF-1 complexed to a
primary binding protein, BP3. In healthy individuals, IGF-1 circulates attached
to BP3, which serves to regulate the biological activity of IGF-1. IGF-1 is
known to enhance insulin action in patients with diabetes; however, its
administration has generally been associated with significant side effects that
have limited its clinical use. Previous attempts by other companies at boosting
IGF-1 levels in the human body to improve insulin sensitivity have focused on
delivery of the molecule without BP3. We believe this method does not recognize
the importance that the binding protein plays in regulating the actions of IGF-
1. We believe that by combining IGF-1 with BP3, we can demonstrate an ability
of IGF-1 to enhance insulin action, and limit side effects.
In April 2000, the Journal of Clinical Endocrinology & Metabolism published
the results of our first completed Phase II clinical trial with SomatoKine for
type 1 diabetes. This trial demonstrated that SomatoKine showed a statistically
significant improvement in insulin sensitivity in patients with type 1 diabetes
with no clinically relevant adverse effects. This data was based on a double-
blind, placebo-controlled study involving 12 patients with type 1 diabetes.
Specifically, data from this study revealed that when compared to placebo,
average daily insulin requirements were significantly reduced (p(less
than)0.01), average daily blood glucose levels declined (p(less than)0.02) and
cholesterol levels declined (p(less than)0.05). Published results of previous
studies by other companies of IGF-1 administered alone indicate that patients
frequently reported jaw pain, muscular pain, headache and tissue swelling. There
were no reports of clinically relevant side effects in this Phase II trial of
SomatoKine.
In November 2000, we reported that initial data from our second trial of
SomatoKine in type 2 diabetes patients demonstrated that the drug, whether
delivered via continuous infusion or subcutaneous injection, reduced insulin
consumption and fasting blood glucose levels in type 2 diabetics.
Business Strategy
We are a product-focused company whose goal is to become the leading
biopharmaceutical company treating metabolic and endocrine diseases. The key
elements of this strategy are listed below.
Focus on products to treat metabolic and endocrine diseases. We will work to
complete the development and approval of our products to treat diabetes and
PCOS. We believe these are largely underserved, high-growth markets. Our
management team has significant experience in drug development and we will use
this expertise to complete our clinical development programs and, if
successful, file for regulatory approval in the United States.
Retain commercial rights to market products in selected markets. We intend
to market and distribute INS-1 for the treatment of PCOS in the United States
through a direct sales force. For our other indications, our goal is to retain
marketing rights to our product candidates until the development of the
products is essentially complete. We believe this approach will allow us to
negotiate optimal terms for any such marketing agreements.
4
Establish corporate partnerships in target markets. We plan to establish
corporate partnerships and other relationships to develop, market and
commercialize both INS-1 and SomatoKine for all indications outside of the
United States. For example, we recently entered into a license agreement with
Taisho Pharmaceutical Co., Ltd. ("Taisho"), a Japanese company which has the
exclusive right to develop and market INS-1 for type 2 diabetes and PCOS in
Asia and a semi-exclusive right in China. We intend to establish corporate
partnerships in the United States to market INS-1 for the treatment of type 2
diabetes and to develop and market SomatoKine for the treatment of type 1 and
type 2 diabetes.
Outsource manufacturing to deploy resources efficiently. Our management team
has significant experience in negotiating and supervising contractual
arrangements with third parties for the manufacture of drug products on a cost
effective basis. To deploy our resources efficiently, we currently plan to
continue to outsource the manufacture of INS-1 and SomatoKine.
Acquire and in-license additional products and technologies. We intend to
acquire additional products and technologies that complement our activities
within the field of metabolic and endocrine diseases. We believe such
acquisitions in fields where we have expertise can be rapidly integrated into
our development programs.
Research and Development
We have devoted substantially all of our resources since we began our
operations to the research and development of pharmaceutical product candidates
for metabolic and endocrine diseases associated with insulin resistance. Our
research and development expenses were approximately $21.6 million, $5.7
million and $3.7 million in 2000, 1999 and 1998, respectively.
Strategic Licensing Agreements
UVA Patents Foundation
Our core technology is based on more than 20 years of insulin resistance
research at the University of Virginia. Our license agreement with The
University of Virginia Alumni Patents Foundation ("Foundation") grants a
worldwide, exclusive license, including the right to grant sublicenses, to use
and practice certain patents related to INS-1 for the treatment of diabetes.
The license extends for the full term of the patents. The Foundation may
terminate the license upon untimely payment of royalties or bankruptcy or
insolvency of Insmed. We may terminate the license upon 90 days notice to
Foundation. Either party may terminate upon a material breach by the other
party.
In consideration for the license agreement, we are obligated to pay minimum
annual licensing fees of $100,000, as well as patent costs through the
expiration of the patent rights. We may also have to pay a royalty on net sales
of any therapeutic drugs covered by the agreement. Royalties earned by the
Foundation will reduce licensing fees and, in the case of patent infringement,
we may use up to 50% of royalties otherwise payable to the Foundation to pay
for expenses we incur to defend the patents.
Taisho Pharmaceutical Co., Ltd.
In July 2000, we entered into an agreement with Taisho for the development
and commercialization of INS-1 in Japan and certain other Asian countries. We
have retained the rights to INS-1 in the rest of the world. The potential pre-
commercialization value of the collaboration is $32 million, which would
include license fees and payments upon achievement of certain development and
regulatory milestones as well as a completed equity investment of $3 million.
Taisho will also fund 20% of the development costs for INS-1 in North America
and Europe. We will also receive royalties on INS-1 sales in Japan and the
other Asian countries
5
covered by the agreement. Taisho may terminate the agreement upon six months
prior written notice to us. Either party may terminate upon material breach or
insolvency of the other party. However, in the event of our material breach or
insolvency, Taisho may continue to research, develop and sell INS-1 pursuant to
the agreement.
Elan Corporation, plc
In April 1999, our subsidiary, Celtrix Pharmaceuticals, Inc. ("Celtrix"),
entered into an agreement with Elan Corporation, plc ("Elan") to establish a
joint venture for the development of SomatoKine to treat severe osteoporosis
using Elan's MEDIPAD Delivery System. Celtrix has granted the joint venture an
exclusive license for the treatment of severe osteoporosis with SomatoKine. We
own 80.1% of the joint venture and Elan owns 19.9%. As part of the agreement,
Elan purchased shares of Celtrix's preferred stock, which converted into shares
of Insmed Common Stock in Celtrix's merger with Insmed. We are in discussions
with Elan regarding the design, conduct and funding of the first clinical trial
contemplated by this joint venture.
Patents and Proprietary Rights
Proprietary protection is important to our business, and our policy is to
protect our technology by filing patent applications for technology that we
consider important. We intend to file additional patent applications, when
appropriate, relating to improvements in our technology and other specific
products that we develop. As with any pending patent application, there can be
no assurance that any of these applications will be issued in the United States
or in foreign countries. There also cannot be any assurance that United States
or foreign patents issuing from any of these applications will not later be
held invalid or unenforceable.
INS-1
We own three issued United States patents related to our INS-1 technology.
In addition, we have exclusively licensed six issued patents from the
Foundation. We also own three pending patent applications and five provisional
patent applications covering the use and manufacture of INS-1 and additional
defined compounds. We have filed or intend to file patent applications in many
of the major international markets for the majority of these patents and
pending patents.
The various issued patents cover use of compounds to treat insulin
resistance in type 2 diabetes reducing elevated blood sugar in humans, treating
metabolic diseases characterized by hyperandrogenism and/or anovulation,
methods for production of INS-1 and purified insulin mediators and purification
processes. Pending applications contain broader claims for use and manufacture
of INS-1 or related compounds.
The initial terms of such patents expire at various times between May 2009
and January 2018. The patent that claims the use of INS-1 for the treatment of
type 2 diabetes expires in 2009. The patent that claims the use of INS-1 for
the treatment of PCOS expires in 2018.
SomatoKine
We own 24 United States issued or allowed patents related to the
composition, production, antibodies and methods of use for SomatoKine,
including:
. One patent with claims to a BP3 composition-of-matter;
. 11 therapeutic use patents for SomatoKine, IGF-1 or BP3, including their
use for the treatment of diabetes or osteoporotic hip repair;
. 10 patents regarding novel expression and production methods which may
be used for the manufacture of SomatoKine; and
. Two patents relating to methods of predicting drug response.
6
We also own 14 applications pending in the United States regarding the
therapeutic use of BP3, antibodies to BP3 and their uses, and therapeutic uses
and production of SomatoKine. These applications are in various stages of
review. We have filed or intend to file patent applications in many of the
major international markets for the majority of these pending patent
applications. In Europe, we have an issued patent with claims to:
. BP3 composition-of-matter;
. Certain therapeutic uses of that BP3; and
. Certain therapeutic uses of a complex of IGF-1 and BP3.
Genentech, Inc. ("Genentech") has two issued United States patents, one
directed to certain DNA molecules encoding BP3 and another directed to the BP3
protein. We can provide no assurance that we will not be found to infringe one
or both those patents. Those patents might have an adverse effect on our
ability to conduct our business, and prevent us from making, using or selling
certain products, including SomatoKine, in the United States. A European
counterpart of one of those patents has also been granted. This patent could
adversely affect our plans for European commercialization, and might prevent us
from producing and/or using SomatoKine in Europe. In addition, a patent has
been issued to Genentech for the co-administration of IGF-1 and BP3 by
subcutaneous bolus injection to produce a greater anabolic state. We can
provide no assurance that we will not be found to infringe this patent.
We have been granted a European patent with claims to recombinantly produced
BP3, therapeutic uses of BP3 and therapeutic uses of SomatoKine. Genentech has
opposed this patent and the date for a hearing is pending. We cannot provide
any assurance that some or all of our patent claims will not be revoked as a
consequence of this opposition.
Third parties, including Genentech, Chiron Corporation ("Chiron") and Amgen,
Inc. ("Amgen") have United States patents directed at the production of
recombinant IGF-1, BP3 and/or recombinant proteins in general. While we believe
that we have developed a process that avoids infringement of these patents, we
can provide no assurance that a third party will not assert a contrary
position, and further that such a party will not prevail.
Novartis AG ("Novartis"), Beth Israel Hospital and Chiron have United States
patents relating to the use of IGF-1 for the treatment of diabetes, and
Novartis has a United States patent relating to the treatment of osteoporosis
with IGF-1. Fujisawa Pharmaceuticals Co., Ltd. has a United States patent that
contains claims to methods for treating insulin-resistant diabetes using an
insulin-like growth factor. We can provide no assurance that we will not be
found to infringe any of these patents. These patents might have an adverse
effect on our ability to conduct our business, and prevent us from making,
using or selling certain products, including SomatoKine in the United States.
Through our joint venture with Elan, we have licensed five issued United
States patents, eight pending United States patent applications, nine granted
foreign patents and 32 foreign patent applications from Elan, all relating to
systems for administration of SomatoKine to patients.
The United States Drug Price Competition and Patent Term Restoration Act of
1984, known as the Waxman-Hatch Act, provides for the return of up to five
years of patent term for a patent that covers a new product or its use, to
compensate for time lost during the regulatory review process. This period is
generally one-half the time between the effective date of an investigational
new drug application and the submission date of a new drug application, plus
the time between the submission date of a new drug application and the approval
of that application, subject to a maximum extension of five years. The
application for patent term extension is subject to approval by the United
States Patent and Trademark Office (USPTO), in conjunction with the FDA. It
takes at least six months to obtain approval of the application for patent term
extension, and there can be no guarantee that the application will be granted.
Similar patent term extensions are available under European laws. We intend to
apply for such patent term extension(s), where appropriate. However, we cannot
provide any assurance that we will receive such patent term extension(s).
7
The Waxman-Hatch Act also establishes a five-year period of marketing
exclusivity from the date of New Drug Application (NDA) approval for new
chemical entities approved after September 24, 1984. In order to obtain this
exclusivity, the NDA applicant must submit to the FDA, at the appropriate time,
the number and expiration date of any patent which claims the drug that is the
subject of the NDA, or which claims a method of using the drug that is the
subject of the NDA. Failure to submit this patent information at the
appropriate time to the FDA may result in loss of the right to this marketing
exclusivity.
During this Waxman-Hatch marketing exclusivity period, no third-party may
submit an "abbreviated" NDA or "paper" NDA to the FDA for the same product,
using data generated by the NDA holder. Similarly, in the case of non-new
chemical entities approved for new indications, no abbreviated NDA or paper NDA
that includes data collected by the original NDA applicant may become effective
for three years from date of approval of any non-new chemical entity NDA
approved after September 24, 1984.
Finally, any abbreviated NDA or paper NDA applicant will be subject to the
notification provisions of the Waxman-Hatch Act, which should facilitate our
notification about potential infringement of our patent rights. The abbreviated
or paper NDA applicant must notify the NDA holder and the owner of any patent
applicable to the abbreviated NDA or paper NDA product, of the application and
intent to market the drug that is the subject of the NDA.
We intend to apply for such exclusivity, where appropriate. However, we
cannot provide any assurance that we will receive such exclusivity for any of
our products.
Manufacturing
We currently rely, and plan to continue to rely, on contract manufacturers
to produce INS-1 and SomatoKine. Our product candidates will need to be
manufactured in a facility by processes that comply with the FDA's good
manufacturing practices and other similar regulations. It may take a
substantial period of time to begin manufacturing our products in compliance
with such regulations. If we are unable to establish and maintain relationships
with third parties for manufacturing sufficient quantities of our product
candidates and their components that meet our planned time and cost parameters,
the development and timing of our clinical trials may be adversely affected.
INS-1
We rely upon contractors for both the supply of raw materials and for
manufacturing finished product. We purchase raw materials from more than one
commercially established firm. Our necessary raw materials are currently
commercially available in quantities far in excess of the scale required to
complete all of our future planned Phase II and Phase III clinical trials.
We believe that we have established the methods used to produce the finished
drug product and, although they have not been applied to large scale-up, we
believe they will meet our commercial supply requirements. The development of a
commercial scale manufacturing process is complex and expensive. We cannot
assure you that we will be able to develop this commercial scale manufacturing
capability in a timely manner or at all.
We currently purchase both raw materials and finished drug products in
accordance with forecast-and-purchase order arrangements, which we expect to
replace by long-term, semi-exclusive manufacturing agreements. We intend to
secure contractual commitments from at least two suppliers.
The bulk drug product is currently produced in the United States under
current good manufacturing practices applicable to investigational prescription
drugs, at two sites: Catalytica Pharmaceuticals, Inc. in Greenville, North
Carolina; and at Sigma-Aldrich Fine Chemicals of St. Louis, Missouri, in
facilities registered and subject to inspection by the FDA.
8
SomatoKine
SomatoKine is a complex of two proteins and is manufactured using
recombinant DNA technology. The manufacturing process is complicated and
involves expression of the two proteins by bacterial fermentation followed by
purification and combination of the two proteins.
We supplied in 2000, and are supplying in early 2001, all of our pre-
clinical and clinical Phase II study requirements with inventory of SomatoKine
active drug produced by our subsidiary, Celtrix. We have contracted to transfer
and scale-up the production process at an FDA-inspected manufacturer,
BioScience Contract Production Corporation in Baltimore, Maryland. The initial
scale-up and production contract is intended to supply active drug sufficient
to complete all of the currently planned Phase II clinical studies. Additional
scale-up and process optimization will be required to start producing Phase
III-scale clinical materials.
We recognize that, assuming successful SomatoKine Phase III clinical
development for diabetes, a separate manufacturing partner is likely to provide
for commercial-scale fermentation and purification capacity for the drug
substance. To the extent that SomatoKine manufacturing has not been performed
previously beyond Phase II scale, we cannot guarantee that the large scale-up
of capacity for the commercial marketing stage will be available.
Marketing and Sales
We currently have no sales, marketing or distribution capability. In order
to commercialize any of our product candidates, we must either internally
develop sales, marketing and distribution capabilities or make arrangements
with a third party to perform these services.
We intend to market and distribute INS-1 for the treatment of PCOS in the
United States through a direct sales force targeting the focused physician
audience that treats this condition. For our other indications, our goal is to
retain marketing rights to our product candidates until the development of the
products is essentially complete. We believe this approach will allow us to
negotiate optimal terms for any such marketing agreements. To market any of our
products directly, we must develop a marketing and sales force with technical
expertise and with supporting distribution capabilities.
In the United States, we do not intend to enter into co-promotion
arrangements or out-license our product candidates until our product candidates
are in the later stages of development, but at that point we may promote our
product candidates through marketing relationships with one or more companies
that have established distribution systems and direct sales forces. In
international markets, we intend to seek strategic relationships to market,
sell and distribute our product candidates.
Competition
We are engaged in an industry that is intensely competitive and
characterized by rapid technological progress. In each of our potential product
areas we face significant competition from large pharmaceutical, biotechnology
and other companies, and universities and research institutions. Most of these
have substantially greater capital resources, research and development staffs,
facilities and experience in conducting clinical trials and obtaining
regulatory approvals. In addition, many of these companies have greater
experience and expertise in manufacturing and marketing pharmaceutical
products.
Since all of our products are under development, we cannot predict the
relative competitive position of our products if they are approved for use.
However, we expect that the following factors will determine our ability to
compete effectively:
. safety and efficacy;
. product price;
9
. ease of administration; and
. marketing and sales capability.
Diabetes
In addition to insulin therapy, the primary existing oral therapies for type
2 diabetes are Glucophage marketed by Bristol-Myers Squibb, Avandia marketed by
GlaxoSmithKline plc, Actos marketed by Eli Lilly and Company and Takeda
Pharmaceuticals America, Inc., and sulfonylureas marketed by various companies,
including Pfizer Inc. under the trademark, Glucotrol XL and Glucotrol.
Glucovance, a product developed by Bristol-Myers Squibb, was recently
approved to treat type 2 diabetes. In addition, we are aware of other products
being developed for the treatment of type 2 diabetes. These include sustained
release and generic formulations of Glucophage, inhaled and oral insulins and
new thiazolidinedione compounds.
PCOS
While there are a number of drugs available for the treatment of PCOS, they
focus on relief of symptoms rather than the cause of the disease. Such
treatments include various fertility agents and cosmetic approaches to treat
excess facial and body hair. In addition, drugs such as Glucophage, which is
indicated for the treatment of type 2 diabetes, are prescribed although they
are not approved by the FDA for the treatment of PCOS.
Government Regulation
Government authorities in the United States and other countries extensively
regulate the research, development, testing, manufacture, promotion, marketing
and distribution of drug products. Drugs are subject to rigorous regulation by
the FDA in the United States and similar regulatory bodies in other countries.
The steps ordinarily required before a new drug may be marketed in the United
States are similar to steps required in most other countries and include:
. Pre-clinical laboratory tests, pre-clinical studies in animals and
formulation studies and the submission to the FDA of an investigational
new drug application for a new drug or antibiotic;
. Adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug for each indication;
. The submission of a new drug application to the FDA; and
. FDA review and approval of the new drug application before any
commercial sale or shipment of the drug.
Pre-clinical tests include laboratory evaluation of product chemistry and
stability, as well as animal studies to evaluate toxicity. The results of pre-
clinical testing are submitted to the FDA as part of an investigational new
drug application. The FDA requires a 30-day waiting period after the filing of
each investigational new drug application before beginning clinical tests in
humans. At any time during this 30-day period or at any time thereafter, the
FDA may halt proposed or ongoing clinical trials until the FDA authorizes
trials under specified terms. The investigational new drug application process
may become extremely costly and substantially delay development of our
products. Moreover, positive results of pre-clinical tests will not necessarily
indicate positive results in clinical trials.
Clinical trials to support new drug applications are typically conducted in
three sequential phases, but the phases may overlap. During Phase I -- the
initial introduction of the drug into healthy human subjects or
10
patients -- the drug is tested to assess metabolism, pharmacokinetics and
pharmacological actions and safety, including side effects associated with
increasing doses.
Phase II usually involves studies in a limited patient population to:
. Assess the efficacy of the drug in specific, targeted indications;
. Assess dosage tolerance and optimal dosage; and
. Identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials, also called pivotal
studies, are undertaken to further demonstrate clinical efficacy and to further
test for safety within an expanded patient population at geographically
dispersed clinical study sites.
After completion of the required clinical testing, a new drug application is
submitted. The FDA may request additional information before accepting a new
drug application for filing, in which case the application must be resubmitted
with the additional information. Once the submission has been accepted for
filing, the FDA has 180 days to review the application and respond to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification. The FDA may refer the new drug
application to an appropriate advisory committee for review, evaluation and
recommendation as to whether the application should be approved, but the FDA is
not bound by the recommendation of an advisory committee.
If FDA evaluations of the new drug application and related manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter. An approvable letter will usually contain a number of
conditions that must be met in order to secure final approval of the new drug
application and authorization of commercial marketing of the drug for certain
indications. The FDA may refuse to approve the new drug application or issue a
not-approvable letter, outlining the deficiencies in the submission or the
manufacturing site(s) and often requiring additional testing or information.
If regulatory approval of any of our products is granted, it will be limited
to certain disease states or conditions. The manufacturers of approved products
and their manufacturing facilities will be subject to continual review and
periodic inspections. Because we intend to contract with third parties for
manufacturing of these products, the control of compliance with FDA
requirements will be incomplete. In addition, identification of certain side
effects or the occurrence of manufacturing problems after any of its drugs are
on the market could cause subsequent withdrawal of approval, reformulation of
the drug, additional pre-clinical testing or clinical trials, and changes in
labeling of the product.
Outside the United States, our ability to market our products will also
depend on receiving marketing authorizations from the appropriate regulatory
authorities. The foreign regulatory approval process includes all of the risks
associated with FDA approval described above. The requirements governing the
conduct of clinical trials and marketing authorization vary widely from country
to country.
Employees
As of December 31, 2000, we had 40 full-time employees. Of these employees,
29 were engaged in research and development, and 11 were engaged in finance and
general administration. None of our employees is covered by any collective
bargaining agreement. We consider relations with our employees to be good.
Risk Factors Related to Our Business
Except for the historical information contained herein or incorporated
herein by reference, this annual report on Form 10-K and the information
incorporated herein by reference contain forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those discussed here. Factors
11
that could cause or contribute to differences in our actual results include
those discussed in the following section, as well as those discussed in Part
II, Item 7 entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere throughout this annual
report on Form 10-K and in any other documents incorporated by reference into
this annual report. You should consider carefully the following risk factors,
together with all of the other information included in this annual report on
Form 10-K. Each of these risk factors could adversely affect our business,
operating results and financial condition, as well as adversely affect the
value of an investment in our common stock.
Because our products are in an early stage of development, we have not received
regulatory approval for any of our products nor have we released any products
for commercial sale; therefore we can give you no assurances that we will
succeed in commercializing our products.
Our long-term viability and growth will depend on the successful
commercialization of products resulting from our development activities,
including INS-1 and SomatoKine. All of our potential products and production
technologies are in the research or development stages and we have generated no
revenues from product sales. We will need to conduct significant additional
development, laboratory and clinical testing and invest significant additional
amounts of capital before we can commercialize our products. We can give you no
assurances that we will identify, develop or produce products with commercial
potential or that we will secure market acceptance for our products. The
failure to commercialize our potential products will adversely affect our
business, financial condition and results of operations. In addition, the
research, development, testing, clinical trials and acquisition of the
necessary regulatory approvals with respect to any given product will take many
years and thus delay our receipt of revenues, if any, from any such products.
In addition, potential products that appear promising at early stages of
development may fail for a number of reasons, including the possibility that
the products:
. may be ineffective;
. may cause harmful side effects; or
. may be too expensive to manufacture.
Our products may also fail to receive regulatory approval. In addition, even
after regulatory authorities approve our products, the products may fail to
achieve market acceptance or the proprietary rights of third parties may
prevent their commercialization.
Since we have a limited operating history, a history of operating losses and
expect to generate operating losses for the foreseeable future, we may not
achieve profitability for some time, if at all.
We are focused on product development and we currently have no sales. Both
of our operating subsidiaries have incurred losses each year of their operation
and we expect to continue incurring operating losses for the foreseeable
future. The process of developing our products requires significant pre-
clinical testing and clinical trials as well as regulatory approvals for
commercialization and marketing before we can begin to generate any revenue
from product sales. In addition, commercialization of our drug candidates will
require us to establish a sales and marketing organization and contractual
relationships to enable product manufacturing and other related activity. We
expect that these activities, together with our general and administrative
expenses, will result in substantial operating losses for the foreseeable
future. As of December 31, 2000, our accumulated deficit was $102.6 million.
For the year ended December 31, 2000, our consolidated net loss was $79.9
million.
We will need additional funds in the future to continue our operations, but we
face uncertainties with respect to our access to capital that could adversely
impact our business, financial condition and results of operations.
We will require substantial future capital in order to continue to conduct
the time consuming research and development, clinical studies and regulatory
activities necessary to bring our therapeutic products to market and
12
to establish production, marketing and sales capabilities. There can be no
assurance that our cash reserves together with any subsequent funding will
satisfy our capital requirements. The failure to satisfy our capital
requirements will adversely affect our business, financial condition and
results of operations. Our future capital requirements will depend on many
factors, including the progress of pre-clinical testing and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing and prosecuting patent applications and enforcing patent
claims and the establishment of strategic alliances and activities required for
product commercialization. We believe that existing cash reserves will
sufficiently fund our activities until at least the end of 2002.
We may seek additional funding through strategic alliances, private or
public sales of our securities or by licensing all or a portion of our
technology. Such funding may significantly dilute existing shareholders or may
limit our rights to our currently developing technology. There can be no
assurance, however, that we can obtain additional funding on reasonable terms,
or at all. If we cannot obtain adequate funds, we may need to significantly
curtail our product development programs and/or relinquish rights to our
technologies or product candidates.
If our products fail in clinical trials or if we cannot enroll enough patients
to complete our clinical trials there may be an adverse effect on our business,
financial condition and results of operations.
In order to sell our products, we must receive regulatory approval for our
products. Before obtaining regulatory approvals for the commercial sale of any
of our products under development, we must demonstrate through pre-clinical
studies and clinical trials that the product is safe and effective for use in
each target indication. Therefore, if our products fail in clinical trials,
there will be an adverse effect on our business, financial condition and
results of operations. In addition, the results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in later
clinical trials. There can be no assurance that our clinical trials will
demonstrate sufficient safety and effectiveness to obtain regulatory approvals.
A number of companies in the biotechnology and pharmaceutical industries have
suffered significant setbacks in late stage clinical trials even after
promising results in early stage development.
The completion rate of our clinical trials is dependent on, among other
factors, the patient enrollment rate. Patient enrollment is a function of many
factors, including:
.patient population size;
.the nature of the protocol to be used in the trial;
.patient proximity to clinical sites; and
.eligibility criteria for the study; and
.competition from other companies' clinical trials for the same patient
population.
We believe our planned procedures for enrolling patients are appropriate;
however, delays in patient enrollment would increase costs and delay ultimate
sales, if any, of our products. Such delays could materially adversely affect
our business, financial condition and results of operations.
If we fail to obtain regulatory approvals for our products under development,
such failure may adversely affect our business, financial condition and results
of operations.
Because our products are in an early stage of development, none has received
regulatory approval or been released for commercial sale. The pre-clinical
testing and clinical trials of any compounds we develop and the manufacturing
and marketing of any drugs produced from such compounds must comply with
regulation by numerous federal, state and local governmental authorities in the
United States, principally the FDA, and by similar agencies in other countries.
No product can receive FDA approval unless human clinical trials show its
safety and effectiveness. There can be no assurance that clinical testing will
provide evidence of safety and effectiveness in humans or that regulatory
agencies will grant approvals for any of our products.
13
The regulatory process takes many years and requires the expenditure of
substantial resources. Data obtained from pre-clinical and clinical activities
are subject to varying interpretations that could delay, limit or prevent
regulatory agency approval. We may also encounter delays or rejections based on
changes in regulatory agency policies during the period in which we develop a
drug and/or the period required for review of any application for regulatory
agency approval of a particular compound. Delays in obtaining regulatory agency
approvals could adversely affect the marketing of any drugs our collaborative
partners or we develop. Such delays could impose costly procedures on our
collaborative partners' or our activities, diminish any competitive advantages
that our collaborative partners or we may attain, and adversely affect our
ability to receive royalties, any of which could materially adversely affect
our business, financial condition and results of operations.
If the FDA grants approval for a drug, such approval may limit the indicated
uses for which we may market the drug and this could limit the potential market
for such drug. Furthermore, if we obtain approval for any of our products, the
marketing and manufacture of such products remain subject to extensive
regulatory requirements. Even if the FDA grants approval, such approval would
be subject to continual review, and later discovery of unknown problems could
restrict the products future use or cause their withdrawal from the market.
Failure to comply with regulatory requirements could, among other things,
result in fines, suspension of regulatory approvals, operating restrictions and
criminal prosecution. In addition, many countries require regulatory agency
approval of pricing and may also require approval for the marketing in such
countries of any drug our collaborative partners or we develop.
We cannot be certain that we will obtain any regulatory approvals in other
countries and the failure to obtain such approvals may materially adversely
affect our business, financial condition and results of operations. In order to
market our products outside of the United States, our corporate partners and we
must comply with numerous and varying regulatory requirements of other
countries regarding safety and quality. The approval procedures vary among
countries and can involve additional product testing and administrative review
periods. The time required to obtain approval in other countries might differ
from that required to obtain FDA approval. The regulatory approval process in
other countries includes all of the risks associated with obtaining FDA
approval detailed above. Approval by the FDA does not ensure approval by the
regulatory authorities of other countries.
If our products fail to achieve market acceptance for any reason, such failure
may adversely affect our business, financial condition and results of
operations.
There can be no assurance that any of our product candidates, if approved
for marketing, will achieve market acceptance. If our products do not receive
market acceptance for any reason, it may adversely affect our business,
financial condition and results of operations. The degree of market acceptance
of any products we develop will depend on a number of factors, including:
. the establishment and demonstration in the medical community of the
clinical efficacy and safety of our products;
. their potential advantage over existing treatment methods; and
. reimbursement policies of government and third-party payers, including
insurance companies.
For example, even if we obtain regulatory approval to sell our products,
physicians and healthcare payers could conclude that our products are not safe
and effective and physicians could choose not to use them to treat patients.
Our competitors may also develop new technologies or products which are more
effective or less costly, or that seem more cost-effective than our products.
We can give no assurance that physicians, patients, third-party payers or the
medical community in general will accept and use any products that we may
develop.
We currently have no internal manufacturing or marketing capability, which may
make commercializing our products difficult.
We have no internal manufacturing capability. Failure to successfully
manufacture and market our products could materially adversely affect our
business, financial condition and results of operations. We intend
14
to enter strategic alliances with other parties that have established
commercial scale manufacturing and marketing capabilities. There can be no
assurance that we will enter such strategic alliances on terms favorable to us,
or at all. If we are unable to establish and maintain relationships with third
parties for manufacturing sufficient quantities of our product candidates and
their components that meet our planned time and cost parameters, the
development and timing of our clinical trials may be adversely affected. In
addition, there can be no assurance that an adverse FDA inspection of a
contractor's manufacturing facilities would not impede our commercial supply
capability. As an alternative, we may choose to commercialize such products on
our own, which would require substantial additional funds.
If the FDA or any other regulatory agency permits us to commence commercial
sales of products, we will face competition with respect to commercial sales,
marketing and distribution. These are areas in which we have no experience. To
market any of our products directly, we must develop a marketing and sales
force with technical expertise and with supporting distribution capability.
Alternatively, we may engage a pharmaceutical company with a large distribution
system and a large direct sales force to assist us. There can be no assurance
that we will successfully establish sales and distribution capabilities or gain
market acceptance for our proprietary products. To the extent we enter co-
promotion or other licensing arrangements, any revenues we receive will depend
on the efforts of third parties and there can be no assurance that our efforts
will succeed.
Materials necessary to manufacture SomatoKine may not be available, which may
adversely affect our business, financial condition and results of operations.
Only a few facilities make the recombinant proteins that comprise
SomatoKine. We believe we currently have sufficient quantities of the protein
necessary to produce SomatoKine in quantities sufficient to conduct our planned
clinical trials and have contracted with one of these facilities, BioScience
Contract Production Company, to produce product for additional clinical trials.
A shutdown or disruption in any of these facilities due to technical,
regulatory or other problems, resulting in an interruption in supply of these
materials, could delay our development activities and adversely impact our
business, financial condition and results of operations.
If the third-party clinical research organizations we intend to rely on to
conduct our future clinical trials do not perform in an acceptable and timely
manner, our clinical trials could be delayed or unsuccessful.
We do not have the ability to conduct all facets of our clinical trials
independently. We intend to rely on clinical investigators and third-party
clinical research organizations to perform a portion of these functions. If we
cannot locate acceptable contractors to run a portion of our clinical trials or
enter into favorable agreements with them, or if these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we
will be unable to obtain required approvals and will be unable to commercialize
our product candidates on a timely basis, if at all.
We need collaborative relationships for success.
We currently rely and may in the future rely on a number of significant
collaborative relationships, such as our license agreement with Taisho and our
joint venture with Elan, for research funding, clinical development and/or
sales and marketing. Reliance on collaborative relationships poses a number of
risks, including the following:
. we cannot effectively control whether our corporate partners will devote
sufficient resources to our programs or products;
. disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
. disagreements with corporate partners could delay or terminate the
research, development or commercialization of product candidates, or
result in litigation or arbitration;
15
. contracts with our corporate partners may fail to provide sufficient
protection of our intellectual property;
. we may have difficulty enforcing the contracts if one of these partners
fails to perform;
. corporate partners have considerable discretion in electing whether to
pursue the development of any additional products and may pursue
technologies or products either on their own or in collaboration with
our competitors; and
. corporate partners with marketing rights may choose to devote fewer
resources to the marketing of our products than they do to products of
their own development.
We are currently in discussions with Elan regarding the design, conduct and
funding of a Phase II clinical trial for SomatoKine for osteoporotic hip
fracture repair. No assurance can be given that we will reach an agreement with
Elan regarding these matters.
Given these risks, a great deal of uncertainty exists regarding the success
of our current and future collaborative efforts. Failure of these efforts could
delay our product development or impair commercialization of our products.
Uncertainty regarding third-party reimbursement and healthcare cost containment
initiatives may negatively affect our business, financial condition and results
of operations.
If we succeed in bringing any of our proposed products to the market, we
cannot assure you that third parties will consider the products cost-effective
or provide reimbursement in whole or in part for their use. Our commercial
success will depend in part on third-party payers agreeing to reimburse
patients for the costs of products. Government health administration
authorities, private health insurers and other organizations generally provide
reimbursement. Third-party payers frequently challenge the pricing of new
drugs. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Therefore, third-party payers may not approve our
products for reimbursement.
If third-party payers do not approve our products for reimbursement, sales
will suffer, as some patients will opt for a competing product that is approved
for reimbursement. Even if third-party payers make reimbursement available,
these payer's reimbursement policies may adversely affect our corporate
partners and our ability to sell such products on a profitable basis.
Moreover, the trend toward managed healthcare in the United States, the
growth of organizations such as health maintenance organizations, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products which could
adversely affect our business, financial condition and results of operations.
In addition, legislation and regulations affecting the pricing of
pharmaceuticals may change in ways adverse to us before or after the FDA or
other regulatory agencies approve any of our proposed products for marketing.
While we cannot predict the likelihood of any such legislative or regulatory
proposals, if the government or an agency adopts such proposals they could
materially adversely affect our business, financial condition and results of
operations.
Our growth strategy includes acquiring complementary businesses or technologies
that may not be available, or, if available and purchased or licensed, might
not improve our business, financial condition or results of operations.
As part of our business strategy, we expect to pursue acquisitions and in-
license new products and technologies. Nonetheless, we cannot assure you that
we will identify suitable acquisitions or products or that we can make such
acquisitions, or enter into such license agreements on acceptable terms. If we
acquire
16
businesses, those businesses may require substantial capital and we cannot
assure you that such capital will be available in sufficient amounts or that
financing will be available in amounts and on terms that we deem acceptable.
Furthermore, the integration of acquired businesses may result in unforeseen
difficulties that require a disproportionate amount of management's attention
and our other resources. Finally, we cannot assure you that we will achieve
productive synergies and efficiencies from these acquisitions.
We intend to conduct proprietary development programs with collaborators, and
any conflicts with them could harm our business, financial condition and
results of operations.
We intend to enter into collaborative relationships, such as our arrangement
with Taisho and our joint venture with Elan, which will involve our
collaborator conducting proprietary development programs. Any conflict with our
collaborators could reduce our ability to obtain future collaboration
agreements and negatively influence our relationship with existing
collaborators, which could reduce our revenues and have an adverse effect on
our business, financial condition and results of operations. Moreover,
disagreements with our collaborators could develop over rights to our
intellectual property.
Certain of our collaborators could also become competitors in the future.
Our collaborators could harm our product development efforts by:
. developing competing products;
. precluding us from entering into collaborations with their competitors;
. failing to obtain timely regulatory approvals;
. terminating their agreements with us prematurely; or
. failing to devote sufficient resources to the development and
commercialization of products.
If we fail to make payments required under the license agreement with the The
University of Virginia Alumni Patents Foundation, then the Foundation may
terminate the license agreement and our rights to the patents licensed to us,
which would adversely affect our business, financial condition and results of
operations.
We have a license agreement with the The University of Virginia Alumni
Patents Foundation with respect to a number of our patents that obligates us to
pay license fees and royalties. We must also pay filing and maintenance costs
for the patent rights associated with the license agreement and any new patent
applications. If we fail to make payments required under the license agreement,
then the Foundation may terminate the license agreement and our rights to the
patents licensed to us, which would materially adversely affect our business,
financial condition and results of operations.
We face uncertainties related to patents and proprietary technology that may
adversely affect our business, financial condition and results of operations.
Our success will depend in part on our ability to:
. obtain patent protection for our products;
. preserve trade secrets;
. prevent third parties from infringing on our patents; and
. refrain from infringing on the patents of others, both domestically and
internationally.
Our patent positions are highly uncertain, and any future patents we receive
for our potential products will be subject to this uncertainty, which may
adversely affect our business, financial condition and results of operations.
We intend to actively pursue patent protection for products arising from our
research and development activities that have significant potential commercial
value. Nevertheless, it is possible that, in the patent application process,
certain claims may be rejected or achieve such limited allowance that the value
of the patents would be diminished. Further, there can be no assurance that any
patents obtained will afford us adequate protection. In addition, any patents
we procure may require cooperation with companies holding related patents. We
may have difficulty forming a successful relationship with these other
companies.
17
We can give no assurance that a third party will not claim (with or without
merit) that we have infringed or misappropriated their proprietary rights. A
variety of third parties have obtained, and are attempting to obtain patent
protection relating to the production and use of IGF-1 and/or BP3. We can give
no assurances as to whether any issued patents, or patents that may later issue
to third parties, would affect our contemplated commercialization of SomatoKine
or INS-1. We can give no assurances that such patent(s) can be avoided,
invalidated or licensed. If any third party were to assert a claim for
infringement, we can give no assurances that we would be successful in the
litigation or that such litigation would not have a material adverse effect on
our business, financial condition and results of operation. Furthermore, we may
not be able to afford the expense of defending against such a claim.
Genentech has two issued United States patents, one directed to certain DNA
molecules encoding BP3 and another directed to the BP3 protein. We can provide
no assurance that we will not be found to infringe one or both of those
patents. Those patents might have an adverse effect on our ability to conduct
our business, and prevent us from making, using or selling certain products,
including SomatoKine, in the United States. A European counterpart of one of
those patents has also been granted. This patent could adversely affect our
plans for European commercialization, and might prevent us from producing
and/or using SomatoKine in Europe. In addition, a patent has been issued to
Genentech for the co-administration of IGF-1 and BP3 by subcutaneous bolus
injection to produce a greater anabolic state. We can provide no assurance that
we will not be found to infringe this patent.
We have been granted a European patent with claims to recombinantly produced
BP3, therapeutic uses of BP3 and therapeutic uses of SomatoKine. Genentech has
opposed this patent and the date for a hearing is pending. We cannot provide
any assurance that some or all of our patent claims will not be revoked as a
consequence of this opposition.
Third parties, including Genentech, Chiron and Amgen have United States
patents directed at the production of recombinant IGF-1, BP3 and/or recombinant
proteins in general. While we believe that we have developed a process that
avoids infringement of these patents, we can provide no assurance that a third
party will not assert a contrary position, and further that such a party will
not prevail.
Novartis, Beth Israel Hospital and Chiron have United States patents
relating to the use of IGF-1 for the treatment of diabetes, and Novartis has a
United States patent relating to the treatment of osteoporosis with IGF-1.
Fujisawa Pharmaceuticals Co., Ltd. has a United States patent that contains
claims to methods for treating insulin-resistant diabetes using an insulin-like
growth factor. We can provide no assurance that we will not be found to
infringe any of these patents. These patents might have an adverse effect on
our ability to conduct our business, and prevent us from making, using or
selling certain products, including SomatoKine in the United States.
We may have to undertake costly litigation to enforce any patents issued or
licensed to us or to determine the scope and validity of another party's
proprietary rights. We cannot assure that a court of competent jurisdiction
would validate our issued or licensed patents. An adverse outcome in litigation
or an interference or other proceeding in a court or patent office could
subject us to significant liabilities to other parties, require us to license
disputed rights from other parties or require us to cease using such
technology, any of which could materially adversely affect our business,
financial condition and results of operations.
Third-party claims that our products infringe on their proprietary rights may
adversely affect our business, financial condition and results of operations.
We have entered into license agreements and may enter into future license
agreements with other parties to develop and market our products, and we cannot
assure that third parties will not claim that ourselves and/or our licensees,
by practicing our technology, infringe their proprietary rights. If other
companies successfully bring legal actions against us or our licensees claiming
patent or other intellectual property infringements, in addition to any
potential liability for damages, a court could require us and/or our licensees
to obtain a license in order to continue to use the affected process or to
manufacture or use the affected products, or alternatively,
18
require us and/or our licensees to cease using such products or process. Such a
result may have an adverse effect on our business, financial condition and
results of operations. Any such claim, with or without merit, could result in
costly litigation or might require us and/or our licensees to enter into
royalty or licensing agreements, all of which could delay or otherwise
adversely impact the development of our potential products for commercial use.
If a court requires us to obtain licenses, there can be no assurance that we
and/or our licensees will be able to obtain them on commercially favorable
terms, if at all. Without such licenses, we and/or our licensees may be unable
to develop certain products. Our breach of an existing license, our failure to
obtain, or our delay in obtaining a license to any technology that we require
to commercialize our products may materially adversely impact our business,
financial condition and results of operations.
An inability to compete successfully would harm our business, financial
condition and results of operations.
We engage in a business characterized by extensive research efforts, rapid
developments and intense competition. We cannot assure that our products will
compete successfully or that research and development by others will not render
our products obsolete or uneconomical. Our failure to compete effectively would
materially adversely affect our business, financial condition and results of
operations. We expect that successful competition will depend, among other
things, on product efficacy, safety, reliability, availability, timing and
scope of regulatory approval and price. Specifically, we expect crucial factors
will include the relative speed with which we can develop products, complete
the clinical testing and regulatory approval processes and supply commercial
quantities of the product to the market. We expect competition to increase as
technological advances are made and commercial applications broaden. In each of
our potential product areas, we face substantial competition from large
pharmaceutical, biotechnology and other companies, universities and research
institutions. Relative to us, most of these entities have substantially greater
capital resources, research and development staffs, facilities and experience
in conducting clinical trials and obtaining regulatory approvals, as well as in
manufacturing and marketing pharmaceutical products. Many of our competitors
may achieve product commercialization or patent protection earlier than we
will. Furthermore, we believe that our competitors have used, and may continue
to use, litigation to gain a competitive advantage. Finally, our competitors
may use different technologies or approaches to the development of products
similar to the products we are seeking to develop.
Rapid technological change could make our products obsolete, which could
materially adversely affect our business, financial condition and results of
operations.
Biotechnology and related pharmaceutical technology have undergone and
should continue to experience rapid and significant change. We expect that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Our future will depend in large part on our
ability to maintain a competitive position with respect to these technologies.
Any compounds, products or processes that we develop may become obsolete before
we recover any expenses incurred in connection with their development. Rapid
technological change could make our products obsolete, which could materially
adversely affect our business, financial condition and results of operations.
We are dependent upon key personnel and others, the loss of which could
materially adversely affect our business, financial condition and results of
operations.
We highly depend on the principal members of our scientific and management
staff, the loss of whose services might significantly delay or prevent the
achievement of research, development, or business objectives and would
materially adversely affect our business, financial condition and results of
operations. Our success depends, in large part, on our ability to attract and
retain qualified management, scientific and medical personnel, and on our
ability to develop and maintain important relationships with commercial
partners, leading research institutions and key distributors. We face intense
competition for such personnel and relationships. We cannot assure that we will
attract and retain such persons or maintain such relationships.
19
We expect that our potential expansion into areas and activities requiring
additional expertise, such as further clinical trials, governmental approvals,
contract manufacturing and marketing, will place additional requirements on our
management, operational and financial resources. We expect these demands will
require an increase in management and scientific personnel and the development
of additional expertise by existing management personnel. The failure to
attract and retain such personnel or to develop such expertise could materially
adversely affect prospects for our success.
Our research and development activities involve the use of hazardous materials
and chemicals, which could expose us to damages, that could materially
adversely affect our business, financial condition and results of operations.
Our research and development activities involve the use of small amounts of
hazardous materials and chemicals, including radioactive materials. We believe
that our procedures for handling hazardous materials comply with federal and
state regulations; however, there can be no assurance that accidental injury or
contamination from these materials will not occur. In the event of an accident,
we could be held liable for any damages, which could exceed our available
financial resources, including our insurance coverage. This liability could
materially adversely affect our business, financial condition and results of
operations.
We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous or
radioactive materials and waste products. These laws and regulations may
require us to incur significant costs to comply with environmental laws and
regulations in the future that could materially adversely affect our business,
financial condition and results of operations.
We risk liability from potential product liability claims that our insurance
may not cover which could materially adversely affect our business, financial
condition and results of operations.
In testing, manufacturing and marketing our products, we risk liability from
the failure of products to perform as we expect. Such risks exist even with
respect to those potential products, if any, that receive regulatory approval
for commercial sale. Although we currently have product liability insurance and
seek to obtain indemnification from licensees of the products, obtaining
additional insurance or indemnification may be inadequate, unobtainable or
prohibitively expensive. Our insurance policies provide coverage for product
liability on a claims made basis and general liability on an occurrence basis.
We must renew these policies every year. We may not be able to renew our
current policies or obtain additional insurance in the future on acceptable
terms or at all. Our inability to obtain sufficient insurance coverage on
reasonable terms, or otherwise protect ourselves against potential product
liability claims in excess of our insurance coverage, if any, could materially
adversely affect our business, financial condition and results of operations.
We cannot guarantee that our present product liability insurance coverage is
adequate. Such existing coverage will not be adequate as we further develop our
products, and we cannot guarantee that we will obtain adequate insurance
coverage against potential claims in sufficient amounts or at a reasonable
cost.
We expect that our stock price will fluctuate significantly.
Our common stock is listed on the Nasdaq National Market under the ticker
symbol "INSM." The stock market, particularly in recent years, has experienced
significant volatility particularly with respect to biopharmaceutical and
biotechnology stocks. The volatility of biopharmaceutical and biotechnology
based stocks often does not relate to the operating performance of the
companies represented by the stock. Factors that could cause such volatility in
the market price of our common stock include:
. reports on the results of our clinical trials;
. announcements of the introduction of new products by our competitors or
us;
. market conditions in the biotechnology sectors;
20
. rumors relating to our competitors or us;
. litigation or public concern about the safety of our potential products;
. our quarterly operating results;
. deviations in our operating results from the estimates of securities
analysts; and
. FDA or international regulatory actions.
Future sales by existing shareholders may lower the price of our common stock,
which could result in losses to our shareholders.
Future sales of substantial amounts of common stock in the public market, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for our common stock or our future ability to raise capital
through an offering of equity securities. Substantially all of our common stock
is freely tradable in the public market without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless these shares
are held by "affiliates" of our company, as that term is defined in Rule 144
under the Securities Act. As of December 31, 2000:
. Our affiliates own 6,355,333 shares that may be sold subject to volume
restrictions imposed by Rule 144. Our affiliates also own options to
acquire an additional 859,062 shares. The shares to be issued upon
exercise of these options have been registered and may be freely sold
when issued.
. Our employees and consultants who are not deemed affiliates hold options
to buy a total of 842,673 shares. The shares to be issued upon exercise
of these options have been registered and may be freely sold when
issued.
. We may issue options to purchase up to an additional 1,041,752 shares
under our stock option plan. The shares to be issued upon exercise of
these options have been registered and may be freely sold when issued.
. We have issued warrants to purchase 1,725,330 shares of our common
stock. The shares that may be issued upon the exercise of these warrants
will be "restricted securities", as defined in Rule 144. These shares
may only be sold in the public market if they are registered or they
qualify for an exemption from registration. We have agreed under certain
circumstances to register the shares acquired upon exercise of such
warrants.
We have never paid dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future.
We have not thus far paid cash dividends on our common stock. We currently
intend to retain our future earnings, if any, to fund the development and
growth of our businesses and, therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
Certain provisions of Virginia law, our articles of incorporation and amended
and restated bylaws make a takeover by a third party difficult.
Certain provisions of Virginia law, our articles of incorporation and
amended and restated bylaws could hamper a third party's acquisition of, or
discourage a third party from attempting to acquire control of, us. The
conditions could also limit the price that certain investors might be willing
to pay in the future for shares of our common stock. These provisions include:
. a provision allowing us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
holders of the common stock. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to
the holders of common stock or could adversely affect the rights and
powers, including voting rights, of the holders of the common stock. In
certain circumstances, such issuance could have the effect of decreasing
the market price of the common stock;
21
. the existence of a staggered board of directors in which there are three
classes of directors serving staggered three-year terms, thus expanding
the time required to change the composition of a majority of directors
and perhaps discouraging someone from making an acquisition proposal for
us;
. the amended and restated bylaws' requirement that shareholders provide
advance notice when nominating our directors;
. the inability of shareholders to convene a shareholders' meeting without
the Chairman of the Board, the President or a majority of the board of
directors first calling the meeting; and
. the application of Virginia law prohibiting us from entering into a
business combination with the beneficial owner of 10% or more of our
outstanding voting stock for a period of three years after the 10% or
greater owner first reached that level of stock ownership, unless we
meet certain criteria.
ITEM 2. PROPERTIES
We lease a total of 14,750 square feet of office and laboratory space in
Richmond, Virginia at an annual cost of approximately $370,000. Our leases
expire at various times through February 2002. We believe that our existing
facilities are adequate for our current needs. We believe that suitable
additional or alternate space will be available on commercially reasonable
terms when our leases expire or when we need additional space.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any legal proceedings that, in our opinion, could
have a material adverse effect on our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our shareholders during the
quarter ended December 31, 2000.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock began trading on The Nasdaq SmallCap Market on June 1,
2000. We moved from The Nasdaq SmallCap Market to the Nasdaq National Market on
August 8, 2000. Our trading symbol is "INSM." The following table lists, for
the periods indicated, the high and low sale prices per share for our common
stock as reported on The Nasdaq SmallCap and Nasdaq National Markets.
Insmed
Common Stock
-------------
Fiscal Year 2000 High Low
---------------- ------ ------
Fourth Quarter................................................. $16.25 $ 2.56
Third Quarter.................................................. $19.94 $11.00
Second Quarter................................................. $18.00 $11.25
On February 28, 2001, the last reported sale price for our common stock on
the Nasdaq National Market was $5.00 per share. As of February 28, 2001, there
were 491 holders of record of our common stock.
We have never declared or paid dividends on our common stock. We anticipate
that we will retain all earnings, if any, to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends in the foreseeable future. Any future determination as to the
payment of dividends will be at the sole discretion of our board of directors
and will depend on our financial condition, results of operations, capital
requirements and other factors our board of directors deem relevant.
As of February 28, 2001, we had 32,818,951 shares of common stock
outstanding. Other than the shares discussed in the following paragraph,
substantially all of these shares are freely tradable in the public market
without restriction under the Securities Act, unless these shares are held by
"affiliates" of our company, as that term is defined in Rule 144 under the
Securities Act.
As of February 28, 2001, warrants to purchase 1,725,330 shares of our common
stock are outstanding. The shares which may be issued upon the exercise of
these warrants will be "restricted securities" as that term is defined under
Rule 144 under the Securities Act. We also have outstanding 30,000 shares that
are restricted securities. Restricted shares may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under Rule 144 under the Securities Act. We have agreed, pursuant
to a registration rights agreement, that under certain circumstances we will
register the shares acquired upon exercise of such warrants.
In January 2000, we, along with our subsidiary, Insmed Pharmaceuticals,
Inc., entered into a purchase agreement with a number of private investors led
by Cooper Hill Partners, LLC and including funds managed by OrbiMed Advisors,
Quantum Partners and Vector Fund Management. In May 2000, these investors
purchased 4,928,585 shares of our common stock and warrants exercisable for an
aggregate of 1,725,330 shares of our common stock in a private placement.
In connection with this financing, we entered into a registration rights
agreement with the investors. When we propose to register our securities under
the Securities Act, these shareholders will be entitled to notice of the
registration and the right to include their shares in the registration,
provided that the underwriters for the proposed offering will have the right to
limit the number of shares included in the registration. In addition, if, at
any time the company qualifies under applicable rules of the Securities and
Exchange Commission to file a registration statement on Form S-3 or any
successor form, those investors holding at least 50% of the securities sold in
connection with the private placement may request that the company register
their securities under the Securities Act provided that the resulting offering
would result in net proceeds of at least $3 million.
23
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with selected consolidated financial
data. This information has been derived from the audited consolidated financial
statements of Insmed for the five years ended December 31, 2000. The
acquisition of Celtrix closed on May 31, 2000. The purchase method of
accounting was used to account for the transaction. Accordingly, the results of
operations for Celtrix are included in the historical financial information
commencing June 1, 2000.
When you read this selected historical financial data, it is important that
you also read the historical financial statements and related notes, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 24 to 27.
Year Ended December 31,
-----------------------------
1996 1997 1998 1999 2000
------- ------- ------------ ------- --------
(in thousands, except per share data)
Historical Statement of
Operations Data:
Revenues.................... $ -- $ -- $ -- $ -- $ 60
Operating expenses:
Research and development.. 1,156 2,604 3,669 5,657 21,608
General and
administrative........... 943 979 1,626 2,189 5,989
Purchased research and
development.............. -- -- -- -- 50,434
Stock compensation........ -- -- -- 285 3,564
------- ------- ------- ------- --------
Total operating expenses.... (2,099) 3,583 5,295 8,131 81,595
------- ------- ------- ------- --------
Operating loss.............. (2,099) (3,583) (5,295) (8,131) (81,535)
Interest income, net........ 11 103 486 338 1,873
------- ------- ------- ------- --------
Loss before income taxes.... (2,088) (3.480) (4,809) (7,793) (79,662)
Income tax expense.......... -- -- -- -- 200
------- ------- ------- ------- --------
Net loss.................... $(2,088) $(3,480) $(4,809) $(7,793) $(79,862)
======= ======= ======= ======= ========
Basic and diluted net loss
per share.................. $ (0.99) $ (1.39) $ (1.68) $ (2.47) $ (4.36)
Weighted average shares..... 2,099 2,497 2,868 3,155 18,319
December 31,
------------
1996 1997 1998 1999 2000
------- ------- ------------ ------- --------
(in thousands)
Historical Balance Sheet
Data:
Cash, cash equivalents and
marketable securities...... $ 2,106 $ 2,050 $11,677 $ 4,635 $ 83,083
Total assets................ 2,386 2,365 11,938 5,296 102,718
Convertible participating
preferred stock............ 5,294 -- -- -- --
Stockholders' equity
(deficiency)............... (3,093) 2,151 11,661 4,462 96,782
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
Overview
We discover and develop pharmaceutical products for the treatment of
metabolic and endocrine diseases associated with insulin resistance. Insmed has
two lead drug candidates -- INS-1 and SomatoKine. We are actively developing
these drugs to treat diabetes and polycystic ovary syndrome (commonly known as
PCOS).
24
We have not been profitable and have accumulated a deficit of approximately
$102.6 million through December 31, 2000. We expect to incur significant
additional losses for at least the next several years and until such time as we
generate sufficient revenue to offset expenses. Research and development costs
relating to product candidates will continue to increase. We expect
manufacturing, sales and marketing costs will increase as we prepare for the
commercialization of our products.
Results of Operations
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
For the year ended December 31, 2000, we recorded a net loss of $79.9
million. The largest component of this loss relates to a one-time, non-cash
charge of $50.4 million to write-off research and development resulting from
the purchase of Celtrix in May 2000. The amount of the write-off is based on
the value assigned to Celtrix's in-process research and development by an
independent third-party appraisal company.
During 2000 we also recognized a $3.6 million non-cash charge for stock
compensation. The major component of this non-cash charge relates to stock
options exercised with a non-recourse note. Generally accepted accounting
principles require that compensation be recognized in the financial statements
based on the difference between the current market price of the underlying
stock and the market price utilized in the previous reporting period. The non-
recourse note to which the majority of the charge relates was repaid during the
year; accordingly, we do not anticipate similar charges in future periods.
On July 10, 2000, we signed a definitive agreement with Taisho for the
development and commercialization of INS-1 in Japan and other Asian countries.
The potential pre-commercialization value of the collaboration is $32 million,
which includes license fees and payments for achievement of certain development
and regulatory milestones and an equity investment, in March 2000, of $3
million. Taisho will also fund 20% of INS-1 development costs in North America
and Europe, and we will receive royalties on INS-1 sales in Japan and certain
other Asian countries covered by the agreement. Beginning in August 2000, we
began to accrete into revenue the initial license fee received from Taisho. The
life of the related license agreement is being utilized as the amortization
period.
Research and development expenses increased $16.0 million from $5.7 million
in 1999 to $21.6 million in 2000 as a result of increased clinical trial
activity. INS-1 expenses increased $8.9 million during 2000, compared to 1999,
as follows:
. Amounts paid to contract research organizations and for site grants,
monitoring, and other clinical trial-related costs increased
approximately $5.9 million.
. Contract manufacturing costs to supply INS-1 to our trials increased
$3.0 million.
We also incurred clinical and contract manufacturing costs of approximately
$5.0 million related to the development of SomatoKine, the compound we acquired
from Celtrix.
General and administrative expenses increased $3.8 million from $2.2 million
for 1999 to $6.0 million for 2000. Salaries and benefits account for the
majority of the increase. We increased our general and administrative staff to
adapt to our public status and to manage our growing portfolio of intellectual
property. Legal fees were also incurred to finalize the license agreement with
Taisho, transition the SomatoKine patent estate and other general corporate
matters, and we incurred fees to develop our new web site and other investor
materials.
As of December 31, 2000, cash, cash equivalents and marketable securities
increased to $83.1 million from $4.6 million at December 31, 1999. As a result
of the increase in cash balances, interest income, net increased $1.5 million
to $1.9 million. The issuance of equity securities produced net proceeds of
$97.3 million
25
and the acquisition of Celtrix provided net additional cash of $3.6 million. We
also recorded net receivables of $1.2 million from Taisho for its portion of
certain INS-1 development activities and approximately $16.7 million of
goodwill in connection with the Celtrix acquisition.
Accounts payable increased $2.7 million during 2000 as a result of increased
clinical and manufacturing activity and the acquisition of Celtrix, and payroll
liabilities increased $500,000 as a result of additional personnel and
potential bonus payouts. In addition, we deferred the amount paid by Taisho as
an initial license fee and are recognizing it as revenue over the life the
agreement. Stockholders' equity increased $92.3 million as a result of the
issuance of equity securities, the acquisition of Celtrix and option exercises.
The largest component of the increase in accumulated deficit is the $50.4
million non-cash charge for purchased research and development acquired from
Celtrix.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Research and development expense was $5.7 million for the year ended
December 31, 1999 compared to $3.7 million for the year ended December 31,
1998. The $2.6 million increase was caused by higher clinical trial costs.
General and administrative expenses increased $563,000 to $2.2 million for
the year ended December 31, 1999. The increase can be attributed to costs
expended to obtain patent protection for technology in various countries,
expenses incurred to develop strategic relationships, salary and benefits for
the chief financial officer hired in May, and increases in travel and office
expenses. We also recognized $285,000 of non-cash stock-based compensation.
Interest income declined $148,000 to $338,000 for the year ended December 31,
1999. Lower average cash balances caused this decrease in 1999 compared to
1998.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
For the year ended December 31, 1998, we expended $3.7 million on research
and development. This was an increase of $1.1 million from the year ended
December 31, 1997, in which $2.6 million was expended. In 1998, additional
development personnel were hired to manage and conduct an increasing number of
clinical trials. The number of pre-clinical toxicology studies increased
significantly over the prior year. Additional lab space was necessary to
accommodate the increase in activity and we utilized outside scientific
consultants.
General and administrative expenses increased $647,000 to $1.6 million from
$979,000 for the year ended December 31, 1997. The two primary components of
the increase were additional salary and wages associated with an increase in
personnel and expenditures on investor relations.
In June 1998, we received net proceeds of $14.1 million from the sale of
equity. This influx of cash caused an increase in the average cash balance in
1998 resulting in interest income of $486,000 for the year ending December 31,
1998, an increase of $383,000 over 1997.
Liquidity and Capital Resources
At December 31, 2000, our cash, cash investments and marketable securities
were approximately $83.1 million and were invested in money market instruments
and investment grade corporate debt. During the year ended December 31, 2000,
we completed three equity financings. In March 2000 we sold Taisho 93,413
shares of our common stock. In May 2000 we sold to a group of investors
4,928,585 shares of common stock together with warrants to purchase an
additional 1,725,330 shares of common stock. The warrants are exercisable for
five years at a price of $9.00 per share. In October 2000 we sold 5,500,000
shares of our common stock in an underwritten public offering. We received
aggregate net proceeds of $97.3 million from these three offerings. We believe
that our current cash position will be sufficient to fund our operations until
at least the end of 2002.
Our business strategy contemplates selling additional equity and entering
into agreements with corporate partners to fund research and development, and
provide milestone payments, license fees and equity
26
investments to fund operations. We will need to raise substantial additional
funds to continue development and commercialization of our products. There can
be no assurance that adequate funds will be available when we need them, or on
favorable terms. If at any time we are unable to obtain sufficient additional
funds, we will be required to delay, restrict or eliminate some or all of our
research or development programs, dispose of assets or technology, or cease
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest excess cash in investment grade, interest-bearing securities and,
at December 31, 2000, had $83.1 million invested in money market instruments
and investment grade corporate debt. Such investments are subject to interest
rate and credit risk. Our policy of investing in highly rated securities whose
maturities at December 31, 2000, are all less than one year minimizes such
risks. In addition, while a hypothetical decrease in market interest rates of
10% from December 31, 2000 levels would reduce interest income, it would not
result in a loss of the principal and the decline in interest income would not
be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth on pages F-1 to F-13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information presented under the caption "Nominees," "Directors Whose
Terms Expire at the 2002 Annual Meeting (Class II Directors)," "Directors Whose
Terms Expire at the 2003 Annual Meeting (Class III Directors)" and "Section
16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive
Proxy Statement for the 2001 Annual Meeting of Shareholders (the "2001 Proxy
Statement") is incorporated herein by reference. Such 2001 Proxy Statement will
be filed with the Securities and Exchange Commission in April 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information presented under the captions "Executive Officer
Compensation" and "Director Compensation" of the 2001 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information presented under the caption "Stock Ownership" of the 2001
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information presented under the caption "Certain Relationships and
Related Transactions" of the 2001 Proxy Statement is incorporated herein by
reference.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. FINANCIAL STATEMENTS. The following consolidated financial statements
of the Company are set forth herein, beginning on page F-1:
(i) Report of Ernst & Young LLP, Independent Auditors.
(ii) Consolidated Balance Sheets.
(iii) Consolidated Statements of Operations.
(iv) Consolidated Statement of Stockholders' Equity.
(v) Consolidated Statements of Cash Flows.
(vi) Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES.
None required.
3. EXHIBITS.
The exhibits that are required to be filed or incorporated by
reference herein are listed in the Exhibit Index. Exhibits 10.1 and
10.2 constitute management contracts or compensatory plans or
arrangements required to be filed as exhibits hereto.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K, dated November 9, 2000, filed November 8,
2000, disclosing the live web cast of a presentation to be made by Dr.
Geoffrey Allan, the Chairman of the Board, President and Chief Executive
Officer of the Company, at the Prudential Vector Healthcare Conference on
November 8, 2000.
2. Current Report on Form 8-K, dated November 24, 2000, filed November
27, 2000, disclosing preliminary data for two clinical trials.
3. Current Report on Form 8-K, dated November 28, 2000, filed December
1, 2000, disclosing slides relating to the prepared remarks of Dr. Geoffrey
Allan, the Chairman of the Board, President and Chief Executive Officer of
the Company, at the Company's public conference call with investors on
November 28, 2000.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of
Richmond, Commonwealth of Virginia, on the 22nd day of March 2001.
INSMED INCORPORATED
a Virginia corporation
(Registrant)
/s/ GEOFFREY ALLAN
By: _________________________________
Geoffrey Allan, Ph.D.
Chairman of the Board,
President and Chief
Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 22nd day of March 2001.
Signature Title
--------- -----
/s/ GEOFFREY ALLAN Chairman of the Board, President and Chief
______________________________________ Executive Officer (Principal Executive
Geoffrey Allan, Ph.D. Officer)
/s/ MICHAEL D. BAER Chief Financial Officer (Principal Financial
______________________________________ and Accounting Officer)
Michael D. Baer
/s/ KENNETH G. CONDON Director
______________________________________
Kenneth G. Condon
/s/ GRAHAM K. CROOKE MB.BS Director
______________________________________
Graham K. Crooke, MB.BS
/s/ STEINAR J. ENGELSEN M.D. Director
______________________________________
Steinar J. Engelsen, M.D.
/s/ EDGAR G. ENGLEMAN M.D. Director
______________________________________
Edgar G. Engleman, M.D.
29
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Insmed Incorporated
We have audited the accompanying consolidated balance sheets of Insmed
Incorporated as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Insmed
Incorporated at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
January 16, 2001
F-1
INSMED INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
2000 1999
--------- -------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 71,628 $ 317
Marketable securities.................................... 11,455 4,318
Due from Taisho Pharmaceutical Co., Ltd.................. 1,228 --
Other current assets..................................... 309 43
--------- -------
Total current assets................................... 84,620 4,678
Property and equipment, net................................ 1,628 242
Goodwill, net.............................................. 16,220 --
Other assets............................................... 250 376
--------- -------
Total assets........................................... $ 102,718 $ 5,296
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,391 $ 723
Payroll liabilities...................................... 604 111
Deferred revenue--current portion........................ 143 --
--------- -------
Total current liabilities.............................. 4,138 834
Deferred revenue........................................... 1,798 --
Stockholders' equity:
Series A convertible participating preferred stock, $.01
par value: authorized shares, 7,000,000; issued and
outstanding shares, 6,144,599 in 1999................... -- 61
Series B convertible preferred stock, $.01 par value:
authorized shares, 5,000,000; issued and outstanding
shares, 3,518,761 in 1999............................... -- 36
Common stock, $.01 par value: authorized shares
500,000,000 in 2000 and 20,000,000 in 1999; issued and
outstanding shares, 32,797,400 in 2000 and 968,113 in
1999.................................................... 328 10
Additional capital....................................... 198,930 27,210
Notes receivable from stock sales........................ -- (64)
Accumulated deficit...................................... (102,642) (22,780)
Accumulated other comprehensive income (loss)............ 166 (11)
--------- -------
Total stockholders' equity............................. 96,782 4,462
--------- -------
Total liabilities and stockholders' equity............. $ 102,718 $ 5,296
========= =======
See accompanying notes.
F-2
INSMED INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2000 1999 1998
-------- ------- -------
Revenues.......................................... $ 60 $ -- $ --
Operating expenses:
Research and development........................ 21,608 5,657 3,669
General and administrative...................... 5,989 2,189 1,626
Purchased research and development.............. 50,434 -- --
Non-cash stock compensation..................... 3,564 285 --
-------- ------- -------
Total operating expenses...................... 81,595 8,131 5,295
-------- ------- -------
Operating loss.................................... (81,535) (8,131) (5,295)
Interest income................................... 1,873 338 486
-------- ------- -------
Loss before income taxes.......................... (79,662) (7,793) (4,809)
Income tax expense................................ 200 -- --
-------- ------- -------
Net loss.......................................... $(79,862) $(7,793) $(4,809)
======== ======= =======
Basic and diluted net loss per share.............. $ (4.36) $ (2.47) $ (1.68)
======== ======= =======
Shares used in computing basic and diluted net
loss per share................................... 18,319 3,155 2,868
======== ======= =======
See accompanying notes.
F-3
INSMED INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(in thousands, except share amounts)
Series A
Convertible Series B Notes Accumulated
Participating Convertible Receivable Other
Preferred Preferred Common Additional from Stock Accumulated Comprehensive
Stock Stock Stock Capital Sales Deficit Income Total
------------- ----------- ------ ---------- ---------- ----------- ------------- --------
Balance at December 31,
1997................... $ 61 $ -- $ 8 $ 12,305 $(44) $ (10,178) $ -- $ 2,152
Issuance of 25,647
shares of common stock
upon exercise of stock
options................ -- -- -- 17 -- -- -- 17
Issuance of 25,750
shares of common stock
upon exercise of stock
warrants............... -- -- 1 259 -- -- 260
Issuance of 3,581,761
shares of Series B,
Convertible Preferred
Stock and related
issuance of 29,067
shares of common stock
to underwriter......... -- 36 -- 13,943 -- -- -- 13,979
Issuance of 32,508
shares of common stock
to licensor............ -- -- -- 65 -- -- -- 65
Accrued interest on
notes receivable....... -- -- -- -- (3) -- -- (3)
Net loss................ -- -- -- -- -- (4,809) -- (4,809)
---- ---- ---- -------- ---- --------- ---- --------
Balance at December 31,
1998 .................. 61 36 9 26,589 (47) (14,987) -- 11,661
Issuance of 47,160
shares of common stock
upon exercise of stock
options................ -- -- 1 186 -- -- -- 187
Issuance of 3,000 shares
of common stock upon
exercise of stock
warrants............... -- -- -- 16 (16) -- -- --
Issuance of 18,750
shares of common stock
upon exercise of stock
warrants............... -- -- -- 123 -- -- -- 123
Issuance of 2,278 shares
of common stock to
licensor............... -- -- -- 11 -- -- -- 11
Principal payment on
notes receivable....... -- -- -- -- 2 -- -- 2
Accrued interest on
notes receivable....... -- -- -- -- (3) -- -- (3)
Recognition of stock
compensation expense... -- -- -- 285 -- -- -- 285
Comprehensive earnings:
Unrealized loss on
marketable
securities........... -- -- -- -- -- -- (11) (11)
Net loss.............. -- -- -- -- -- (7,793) -- (7,793)
Comprehensive loss.... -- -- -- -- -- -- -- (7,804)
---- ---- ---- -------- ---- --------- ---- --------
Balance at December 31,
1999 .................. 61 36 10 27,210 (64) (22,780) (11) 4,462
Issuance of 792,298
shares of common stock
upon exercise of stock
options................ -- -- 8 906 -- -- -- 914
Issuance of 32,500
shares of common stock
upon exercise of stock
warrants............... -- -- -- 96 -- -- -- 96
Issuance of 93,413
shares of common stock
to Taisho
Pharmaceuticals Co.
Ltd.................... -- -- 1 2,999 -- -- -- 3,000
Issuance of 4,969 shares
of common stock to
licensor............... -- -- -- 541 -- -- -- 541
Issuance of 1,408,169
shares of common stock
and 1,725,330 warrants
for cash, net of
offering costs of
$1,775................. -- -- 14 32,711 -- -- -- 32,725
Issuance of 14,470,553
shares of common stock
in connection with the
acquisition of Insmed
Pharmaceuticals, Inc... (61) (36) 145 (48) -- -- -- --
Issuance of 9,527,385
shares of common stock
in connection with the
acquisition of Celtrix
Pharmaceuticals, Inc... -- -- 95 69,425 -- -- -- 69,520
Issuance of 5,500,000
shares of common stock
for cash, net of
offering costs of
$4,746................. -- -- 55 60,512 -- -- -- 60,567
Accrued interest on
notes receivable....... -- -- -- -- (2) -- -- (2)
Principal payment on
notes receivable....... -- -- -- -- 66 -- -- 66
Recognition of stock
compensation expense
for employee........... -- -- -- 3,564 -- -- -- 3,564
Recognition of stock
compensation expense
for consultants........ -- -- -- 1,014 -- -- -- 1,014
Comprehensive earnings:
Unrealized gain on
marketable
securities........... -- -- -- -- -- -- 177 177
Net loss.............. -- -- -- -- -- (79,862) -- (79,862)
Comprehensive loss.... -- -- -- -- -- -- -- (79,685)
---- ---- ---- -------- ---- --------- ---- --------
Balance at December 31,
2000 .................. $ -- $ -- $328 $198,930 $ -- $(102,642) $166 $ 96,782
==== ==== ==== ======== ==== ========= ==== ========
See accompanying notes.
F-4
INSMED INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2000 1999 1998
-------- ------- -------
Operating activities
Net loss.......................................... $(79,862) $(7,793) $(4,809)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization.................................... 487
Depreciation.................................... 302 87 78
Gain on sale of property and equipment.......... -- 1 --
Issuance of stock for services.................. 1,555 11 65
Interest accrued on notes receivable from stock
sales.......................................... (2) (3) (3)
Non-cash stock compensation..................... 3,564 285 --
Purchased research and development.............. 50,434 -- --
Changes in operating assets and liabilities:
Due from Taisho Pharmaceutical Co., Ltd....... (1,228) -- --
Other current assets.......................... (233) (277) (15)
Other assets.................................. (250) -- --
Accounts payable.............................. 1,384 434 63
Payroll liabilities........................... 492 22 --
Deferred revenue.............................. 1,941 -- --
-------- ------- -------
Net cash used in operating activities....... (21,416) (7,233) (4,621)
-------- ------- -------
Investing activities
Purchases of marketable securities................ (19,224) (4,330) --
Proceeds from marketable securities matured and
sold............................................. 12,264 -- --
Purchases of property and equipment............... (1,294) (109) (115)
Acquisition of Celtrix Pharmaceuticals, Inc., net
of cash acquired................................. 3,613 -- --
-------- ------- -------
Net cash used in investing activities....... (4,641) (4,439) (115)
-------- ------- -------
Financing activities
Proceeds from issuance of preferred stock......... -- -- 14,086
Proceeds from issuance of common stock............ 97,302 312 277
Repayment of notes receivable from stock sales.... 66 -- --
-------- ------- -------
Net cash provided by financing activities......... 97,368 312 14,363
-------- ------- -------
Increase (decrease) in cash and cash equivalents.. 71,311 (11,360) 9,627
Cash and cash equivalents at beginning of year.... 317 11,677 2,050
-------- ------- -------
Cash and cash equivalents at end of year.......... $ 71,628 $ 317 $11,677
======== ======= =======
See accompanying notes.
F-5
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Summary of Significant Accounting Policies
Insmed Incorporated (the "Company") discovers and develops pharmaceutical
products for the treatment of metabolic and endocrine diseases associated with
insulin resistance. Insulin resistance is a defect in the body that results in
a decreased sensitivity to insulin, the principal hormone that regulates
glucose levels in the bloodstream. The Company's lead product candidate, INS-1,
is an orally-active insulin sensitizer, which restores tissue sensitivity to
insulin. The Company is developing INS-1 for the treatment of type 2 diabetes
and polycystic ovary syndrome. The Company's second product candidate,
SomatoKine(R), is a recombinant protein that is being developed as an
injectable insulin sensitizer targeted towards the management of both type 1
and type 2 diabetics who are less sensitive to insulin therapy. The Company
believes its product candidates address major clinical needs in the management
of the diabetic population.
From the Company's inception in 1988 until 1999, the Company was a
development stage enterprise devoted primarily to raising capital, recruiting
personnel, identifying and acquiring drugs for further research and
development, and conducting preclinical and clinical development of its product
candidate. During 2000, the Company recruited key management positions,
completed its acquisition of Celtrix Pharmaceuticals, Inc., ("Celtrix")
completed $97.3 million in equity financings, closed a license agreement with
Taisho Pharmaceutical Co., Ltd. and, accordingly, is no longer considered a
development stage enterprise for accounting purposes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Insmed Pharmaceuticals, Inc. and Celtrix.
All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers investments with maturities of three months or less
when purchased to be cash equivalents.
Marketable Securities
Marketable securities consist of corporate debt securities, all of which
mature within one year. Management classifies the Company's marketable
securities as available for sale. Such securities are stated at market value,
with the unrealized gains and losses included as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary on securities available for sale, if any, are included
in operations. The cost of securities sold is calculated using the specific
identification method. As of December 31, 2000 and 1999 the cost basis of
marketable securities was $11,289,000 and $4,329,000, respectively. The
unrealized gain (loss) was $177,000 in 2000 and $(11,000) in 1999. Realized
gains have been insignificant.
F-6
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Depreciation is provided using the straight-line method over periods ranging
from three to seven years. Property and equipment is stated at cost and
consists of the following:
December
31,
2000 1999
------ ----
(in
thousands)
Research and development equipment............................ $1,747 $336
Furniture and office equipment................................ 429 168
------ ----
2,176 504
Accumulated depreciation...................................... (548) (262)
------ ----
Property and equipment, net................................... $1,628 $242
====== ====
Goodwill
Goodwill is being amortized on a straight-line basis over twenty years.
Accumulated amortization of goodwill was approximately $487,000 at December 31,
2000. Management re-evaluates goodwill using undiscounted operating cash flows
whenever significant events or changes occur which might impair recovery of
recorded costs, and writes down goodwill to its net realizable value, if
appropriate.
Fair Value of Financial Instruments
The Company considers the recorded cost of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, marketable
securities and accounts payable, to approximate the fair value of the
respective assets and liabilities at December 31, 2000.
Stock-Based Compensation
The Company recognizes expense for stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost is recognized for the excess, if any, of the estimated fair
value of the stock at the grant date over the exercise price. Disclosures
regarding alternative fair value measurement and recognition methods prescribed
by Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting
for Stock-Based Compensation, are presented in Note 3.
Stock options granted to non-employees are accounted for in accordance with
EITF 96-18, Accounting for Equity Instruments that are issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Accordingly, the estimated fair value of the equity instrument is recorded on
the earlier of the performance commitment date or the date the services
required are completed.
Revenue Recognition
Revenue from license agreements is generally recognized over the term of the
agreement, or in certain circumstances, when milestones are met. Amounts
received for which there is a future performance obligation, are deferred and
recognized on a straight-line basis over the life of the agreement.
F-7
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Income taxes are accounted for using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Net Loss Per Share
Basic net loss per share is computed based upon the weighted average number
of common shares outstanding during the year. The Company's diluted net loss
per share is the same as its basic net loss per share because all stock
options, warrants, and other potentially dilutive securities are antidilutive
and, therefore, excluded from the calculation of diluted net loss per share.
Comprehensive Loss
Under FASB Statement No. 130, Reporting Comprehensive Income, the Company is
required to display comprehensive loss and its components as part of the
consolidated financial statements. Comprehensive loss is comprised of the net
loss and other comprehensive income (loss), which includes certain changes in
equity that are excluded from the net loss. The Company includes unrealized
holding gains and losses on available-for-sale securities in other
comprehensive income (loss).
Segment Information
The Company currently operates in one business segment, which is the
development and commercialization of pharmaceutical products for the treatment
of metabolic and endocrine diseases associated with insulin resistance. The
Company is managed and operated as one business. A single management team that
reports to the Chief Executive Officer comprehensively manages the entire
business. The Company does not operate separate lines of business with respect
to its products or product candidates. Accordingly, the Company does not have
separately reportable segments as defined by FASB Statement No. 131, Disclosure
about Segments of an Enterprise and Related Information.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
There have been no recently issued accounting pronouncements that would have
a material impact on the Company's financial position or results of operations.
F-8
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisition of Celtrix Pharmaceuticals
In November 1999, Insmed Pharmaceuticals, Inc. entered into an agreement to
acquire Celtrix. Celtrix was a biopharmaceutical company focused on developing
novel therapeutics for the treatment of seriously debilitating, degenerative
conditions primarily associated with severe trauma, chronic diseases or aging.
The transaction closed on May 31, 2000. At closing:
. Celtrix and Insmed Pharmaceuticals, Inc. became wholly-owned subsidiaries
of the Company.
. Each issued and outstanding preferred and common share of Insmed
Pharmaceuticals, Inc. was exchanged for three and one-half shares on a
pre-split basis of the Company's common stock.
. Each issued and outstanding common share of Celtrix was exchanged for one
share of the Company's common stock.
. The liquidation preference per share ($1,000 per share) plus accrued but
unpaid dividends of Celtrix Series A Preferred Stock was convertible into
Celtrix common stock at a price per share of $2.006. The holders of
Celtrix Series A Preferred Stock received shares of the Company's common
stock on an as-converted basis.
. All options and warrants of Insmed Pharmaceuticals, Inc. and Celtrix
outstanding at the closing of the transaction converted into options and
warrants of the Company.
The purchase method of accounting was used to account for the transaction.
The historical basis of Insmed Pharmaceuticals, Inc.'s assets and liabilities
carried over to the Company. Approximately 9.5 million shares of the Company's
common stock were issued to former Celtrix preferred and common stockholders.
Aggregate consideration of $71.7 million, including $2.1 million in transaction
costs incurred by Insmed Pharmaceuticals, Inc. was allocated to cash ($5.4
million), equipment and other assets ($427,000), accounts payable ($1.2
million), in-process research and development ($50.4 million), and goodwill
($16.7 million). The fair value of in-process research and development was
determined by an independent third-party valuation.
F-9
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate consideration was determined by multiplying the average fair value
per share of the Celtrix common stock, for the five days prior to and
subsequent to the signing of a definitive agreement on November 30, 1999, by
the Celtrix shares outstanding, on an as-converted basis, as of November 30,
1999. The product of this calculation was added to the fair value of options
and warrants outstanding at November 30, 1999 and the transaction costs
incurred by Insmed Pharmaceuticals, Inc. The fair value of options and warrants
was determined by using the Black-Scholes pricing method. Pro forma
consolidated statements of operations for the years ended December 31, 2000 and
1999 are included below. These statements give effect to the acquisition of
Celtrix and related transactions as if such transactions had occurred on
January 1, 1999, and include the results of operations for Insmed Incorporated
and Celtrix for the periods presented.
For the year
Ended December
31,
2000 1999
-------- --------
Revenues.................................................. $ 188 $ 763
Operating expenses:
Research and development................................ 22,495 16,492
General and administrative.............................. 7,768 4,142
Purchased research and development...................... 50,434 --
Non-cash stock compensation............................. 3,564 285
-------- --------
Total operating expenses.............................. 84,261 20,919
-------- --------
Operating loss............................................ (84,073) (20,156)
Interest income........................................... 1,960 423
Other income.............................................. -- 600
-------- --------
Loss before income tax expense............................ (82,113) (19,133)
Income tax expense........................................ 200 --
-------- --------
Net loss.................................................. $(82,313) $(19,133)
======== ========
Net loss per share--basic and diluted..................... $ (3.01) $ (0.77)
======== ========
Shares used in computing basic and diluted net loss per
share.................................................... 27,380 24,827
======== ========
3. Stockholders' Equity
Common Stock
On July 28, 2000, the Company's stockholders approved a one-for-four reverse
stock split. The split was effective at the close of business on July 28, 2000,
and shares of common stock began trading on the post-split basis at the opening
of The Nasdaq Stock Market on July 31, 2000. Stockholders' equity has been
restated to give retroactive recognition to the reverse stock split. In
addition, all references in the consolidated financial statements to number of
shares and per share amounts have been restated.
On November 1, 2000, the Company sold 6,500,000 shares of common stock at
$11.875 per share in a public offering, including 1,000,000 shares that were
sold by certain selling shareholders. The proceeds from the sale of 5,500,000
shares approximated $60.6 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company.
Periodically, the Company has issued shares of common stock in exchange for
services provided by shareholders and others. These issuances have been
recorded at their estimated fair value at the time of the respective
transactions and corresponding amounts have been reflected as expense in the
accompanying consolidated statements of operations.
F-10
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Warrants and Options
On May 31, 2000 Insmed Pharmaceuticals, Inc. issued warrants to purchase
1,725,330 shares of the Company's common stock. The warrants are exercisable
for five years at a price of $9.00.
The Company issues stock options to attract and retain executive officers,
key employees, non-employee directors and other non-employee advisors and
service providers. The current plan provides for issuance of options to
purchase up to 3,000,000 shares of common stock, which increases each year by
one percent of the number of outstanding shares of common stock on the
preceding December 31. The maximum number of shares issuable under the plan is
6,250,000. At December 31, 2000, 1,041,752 options remain available for new
grants. Options may be granted at the discretion of the board of directors,
compensation committee or a delegate. The weighted-average fair value of
options granted during 2000, 1999, and 1998 was $8.23, $0.38, and $0.08,
respectively. A summary of stock option activity is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2000 Price 1999 Price 1998 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
January 1.............. 1,490,558 $ 1.06 1,253,722 $1.09 894,169 $0.80
Granted................. 1,060,444 11.37 465,924 0.91 516,688 1.35
Exercised............... (792,298) 1.21 (165,062) 1.13 (89,766) 0.18
Cancelled............... (56,969) 4.12 (64,026) 0.43 (67,369) 0.22
--------- ------ --------- ----- --------- -----
Options outstanding at
December 31............ 1,701,735 $ 7.39 1,490,558 $1.06 1,253,722 $1.09
========= ====== ========= ===== ========= =====
The following table summarizes options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted
Range of Contractual Average Weighted
Exercise Number Exercise Exercise Number Average
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$ 0.172--$ 0.916 632,720 3.47 $ 0.76 398,010 $ 0.70
$ 1.488--$ 4.572 147,377 5.91 4.02 120,877 4.27
$ 5.000--$ 9.752 132,708 4.94 7.70 132,708 7.70
$10.000--$13.063 209,791 7.87 11.47 102,295 10.71
$13.313--$ 14.00 576,250 7.36 7.36 -- --
$32.116 2,889 6.25 32.12 2,889 32.12
--------- ---- ------ ------- ------
1,701,735 5.66 $ 7.39 756,779 $ 3.96
========= ==== ====== ======= ======
If the Company had accounted for its employee stock awards under the fair
value based method, the net loss would have increased by approximately $627,000
for 2000, $48,000 for 1999 and $16,000 for 1998. The basic and diluted net loss
per share would have increased $.03 in 2000 and $.01 in 1999, with no change in
1998. These pro forma amounts are not indicative of future effects of applying
the fair value based method since stock-based awards granted may vary from year
to year and vesting periods of one to four years were used to measure pro forma
compensation expense. The fair value for these awards was estimated at the date
of grant using the Black-Scholes pricing method assuming a weighted average
volatility of 83% in 2000 and 25% in 1999 and 1998, a risk-free interest rate
of 6% in 2000, 1999 and 1998, no dividends, and a weighted-average expected
life of the option of 4 years in 2000 and 1999 and 2 years in 1998.
F-11
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A total of 4,975,330 shares of common stock were reserved at December 31,
2000 in connection with stock options, stock warrants, and the employee stock
purchase plan.
4. Income Taxes
The deferred tax assets of approximately $60.6 million and $8.3 million at
December 31, 2000 and 1999, respectively, arose primarily due to the
capitalization of in-process research and development and net operating loss
carryforwards for income tax purposes. Due to the Company's anticipated future
losses, these amounts have been entirely offset by a valuation allowance.
At December 31, 2000 and 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $160.4 million, of which
$115 million was acquired from Celtrix, and $20.6 million, respectively,
expiring in various years beginning in 2003. Utilization of these carryforwards
will be significantly limited due to changes in the ownership of the Company's
common stock.
The Company recognized $200,000 of income tax expense in the year ended
December 31, 2000 related to foreign taxes withheld from the initial license
fee received from Taisho Pharmaceutical Co., Ltd.
5. Leases
The Company leases office and laboratory space under operating lease
agreements expiring in February 2002. The leases provide for monthly rent of
approximately $14,300 with a 2.5% escalation per year. The Company also leases
a vehicle, office equipment and additional laboratory space. Future minimum
payments on these leases at December 31, 2000 were $294,000 and $35,000 in 2001
and 2002, respectively. Rent expense for all operating leases approximated
$319,000 in 2000, $243,000 in 1999 and $223,000 in 1998.
6. Employee Benefit Plans
In 2000, the Company adopted a stock purchase plan whereby eligible
employees may purchase common stock. Purchases may be made through payroll
deductions subject to annual limitations. The purchase price per share under
the plan is the lesser of 85% of the fair market value of a share of common
stock at the beginning of each offering period or 85% of the fair market value
on the date the purchase is made. As of December 31, 2000 there were 250,000
shares authorized for issuance under the plan and none have been issued.
The Company also maintains a tax-qualified employee savings and retirement
plan, (the "401(k) plan") for eligible employees. Participating employees may
defer up to the lesser of 25% of W-2 compensation or the maximum amount
permitted by the Internal Revenue Code, as amended. The 401(k) plan permits the
Company to make matching contributions on behalf of all participants who have
elected to make deferrals. To date, the Company has not made any contributions
to the plan.
7. License and Collaborative Agreements
UVA Patent Foundation
In 1988, the Company entered into a license agreement with The University of
Virginia Alumni Patents Foundation (the Foundation). The agreement, as amended,
provides the Company with an exclusive, worldwide license to develop and sell
products related to certain patent rights for insulin resistance and associated
disorders. The Company is obligated to pay minimum annual licensing fees of
$100,000, as well as patent costs through the expiration of patent rights. The
Company may also have to pay a royalty on net sales of any therapeutic drugs
covered by the agreement.
F-12
INSMED INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the license agreement, the Company was required to issue shares of its
common stock each time shares of any class of stock were issued so that the
Foundation at all times had a 3% undiluted interest in the Company. The right
to receive such stock expired May 31, 2000. Prior to the expiration of this
right, the Foundation had received 103,780 shares of common stock under the
license agreement. These issuances have been recorded at their estimated fair
value at the time of the respective transaction. Related expenses of $641,000
in 2000, $111,000 in 1999, and $165,000 in 1998 have been included in research
and development expense in the accompanying consolidated statements of
operations.
The Company also provided support for research at the University of Virginia
(UVA) that contributes toward commercial development of its planned products.
Total expense for research support to UVA amounted to $347,000 and $180,000 in
1999 and 1998, respectively.
Taisho Pharmaceutical Co., Ltd.
In July 2000, the Company entered into an agreement with Taisho
Pharmaceutical Co., Ltd. ("Taisho") for the development and commercialization
of INS-1 in Japan and certain other Asian countries. The collaboration includes
payments upon achievement of certain development and regulatory milestones as
well as the receipt of royalties on INS-1 sales in Japan and the other Asian
countries covered by the agreement. Taisho will also fund 20% of the
development costs for INS-1 in North America and Europe. Development costs
reimbursable by Taisho in 2000 approximated $2.3 million and have been applied
to reduce research and development expense. The agreement also provided for an
initial license fee of $2.0 million, which has been deferred and is being
amortized into revenue, on a straight-line basis, over the estimated life of
the agreement. In addition, Taisho has purchased 93,413 shares of the Company's
common stock.
F-13
EXHIBIT INDEX
Exhibit
Number Exhibit Title
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3.1 Articles of Incorporation of Insmed Incorporated, as amended
(previously filed as Annex H to the Joint Proxy Statement/Prospectus
contained in Part I of Insmed Incorporated's Registration Statement
on Form S-4 (Registration No. 333-30098) and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of Insmed Incorporated (previously filed
as Annex I to the Joint Proxy Statement/Prospectus contained in Part
I of Insmed Incorporated's Registration Statement on Form S-4
(Registration No. 333-30098) and incorporated herein by reference).
4.1 Description of Capital Stock (contained in the Articles of
Incorporation filed as Exhibit 3.1).
4.2 Specimen stock certificate representing common stock, $.01 par value
per share, of the Registrant (previously filed as Exhibit 4.2 to
Insmed Incorporated's Registration Statement on Form S-4
(Registration No. 333-30098) and incorporated herein by reference).
4.3 Article VI of the Articles of Incorporation of Insmed Incorporated
(previously filed as Exhibit 4.1 to Insmed Incorporated's
Registration Statement on Form S-4 (Registration No. 333-30098) and
incorporated herein by reference).
10.1 Insmed Incorporated 2000 Stock Purchase Plan (previously filed as
Exhibit 10.1 to Insmed Incorporated's Registration Statement on Form
S-4 (Registration No. 333-30098) and incorporated herein by
reference).
10.2 Insmed Incorporated 2000 Stock Incentive Plan (previously filed as
Exhibit 10.2 to Insmed Incorporated's Registration Statement on Form
S-4 (Registration No. 333-30098) and incorporated herein by
reference).
10.3 Amended and Restated License Agreement between Insmed Pharmaceuticals,
Inc. and The University of Virginia Alumni Patents Foundation
(previously filed as Exhibit 10.3 to Insmed Incorporated's
Registration Statement on Form S-4 (Registration No. 333-30098) and
incorporated herein by reference).
10.4+ Subscription, Joint Development and Operating Agreement by and among
Celtrix Pharmaceuticals, Inc., Elan Corporation, plc, Elan
International Services, Ltd., and Celtrix Newco Ltd. dated as of
April 21, 1999 (previously filed as Exhibit 10.8 to Insmed
Incorporated's Registration Statement on Form S-4 (Registration No.
333-30098) and incorporated herein by reference).
10.5+ License Agreement by and between Celtrix Newco Ltd. and Celtrix
Pharmaceuticals, Inc. dated as of April 21, 1999 (previously filed as
Exhibit 10.9 to Insmed Incorporated's Registration Statement on Form
S-4 (Registration No. 333-30098) and incorporated herein by
reference).
10.6+ License Agreement by and between Celtrix Newco Ltd. and Elan
Pharmaceutical Technologies, a division of Elan Corporation, plc,
dated as of April 21, 1999 (previously filed as Exhibit 10.10 to
Insmed Incorporated's Registration Statement on Form S-4
(Registration No. 333-30098) and incorporated herein by reference).
10.7 License Agreement, dated as of April 1, 1993, between Genentech, Inc.
and Celtrix Pharmaceuticals, Inc. (previously filed as Exhibit 10.11
to Insmed Incorporated's Registration Statement on Form S-4
(Registration No. 333-30098) and incorporated herein by reference).
10.8 Purchase Agreement among Insmed, Inc., Insmed Pharmaceuticals, Inc.
and certain investors named therein dated January 13, 2000
(previously filed as Exhibit 10.12 to Insmed Incorporated's
Registration Statement on Form S-4 (Registration No. 333-30098) and
incorporated herein by reference).
E-1
10.9 Form of Warrant of Insmed to be issued pursuant to Purchase Agreement
among Insmed Incorporated, Insmed Pharmaceuticals, Inc. and certain
investors dated January 13, 2000 (previously filed as Exhibit 10.13 to
Insmed Incorporated's Registration Statement on Form S-4 (Registration
No. 333-30098) and incorporated herein by reference).
10.10 Form of Registration Rights Agreement among Insmed Incorporated, Insmed
Pharmaceuticals, Inc. and certain investors party to the Purchase
Agreement among Insmed Incorporated, Insmed Pharmaceuticals, Inc. and
certain investors dated January 13, 2000 (previously filed as Exhibit
10.14 to Insmed Incorporated's Registration Statement on Form S-4
(Registration No. 333-30098) and incorporated herein by reference).
10.11+ License Agreement, dated as of July 10, 2000, between Insmed
Pharmaceuticals, Inc. and Taisho Pharmaceutical Co., Ltd. (previously
filed as Exhibit 10.15 to Insmed Incorporated's Registration Statement
on Form S-1 (Registration No. 333-46552) and incorporated herein by
reference).
10.12 Lease Agreement, dated March 24, 1997, between Virginia Biotechnology
Research Park Authority, a political subdivision of the Commonwealth
of Virginia, and Insmed Pharmaceuticals, Inc., as amended by Amendment
No. 1 (previously filed as Exhibit 10.16 to Insmed Incorporated's
Registration Statement on Form S-1 (Registration No. 333-46552) and
incorporated herein by reference).
10.13 Agreement of Lease, dated February 16, 1999, between Virginia
Biotechnology Research Park Authority, a political subdivision of the
Commonwealth of Virginia, and Insmed Pharmaceuticals, Inc. (previously
filed as Exhibit 10.17 to Insmed Incorporated's Registration Statement
on Form S-1 (Registration No. 333-46552) and incorporated herein by
reference).
10.14 Agreement of Lease, dated June 26, 2000, between Virginia Biotechnology
Research Park Authority, a political subdivision of the Commonwealth
of Virginia, and Insmed Incorporated (previously filed as Exhibit
10.18 to Insmed Incorporated's Registration Statement on Form S-1
(Registration No. 333-46552) and incorporated herein by reference).
21.1 Subsidiaries of Insmed Incorporated (previously filed as Exhibit 21.1
to Insmed Incorporated's Registration Statement on Form S-1
(Registration No. 333-46552) and incorporated herein by reference).
23.1 Consent of Ernst & Young LLP.
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+ The Securities and Exchange Commission has granted confidential treatment
with respect to certain information in these exhibits.
E-2