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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number 000-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia
 
54-1972729
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
 
 
 
10 Finderne Avenue, Building 10
 
 
Bridgewater, New Jersey
 
08807
(Address of principal executive offices)
 
(Zip Code)
(908) 977-9900
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Securities registered pursuant to Section12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange on which registered
Common stock, par value $0.01 per share
INSM
Nasdaq Global Select Market
As of May 2, 2019, there were 77,666,309 shares of the registrant’s common stock outstanding.
 

Table of Contents

INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
 
INDEX
 
 
 
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
17
27
27
 
 
 
 
 
 
27
27
27
28
 
 
 
29
 
Unless the context otherwise indicates, references in this Form 10-Q to “Insmed Incorporated” refers to Insmed Incorporated, a Virginia corporation, and “Company,” “Insmed,” “we,” “us” and “our” refer to Insmed Incorporated together with its consolidated subsidiaries. INSMED, ARIKAYCE, and CONVERT are trademarks of Insmed Incorporated. This Form 10-Q also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-Q is the property of its owner.


2
Table of Contents

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

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
420,231

 
$
495,072

Accounts receivable
9,347

 
5,515

Inventory
12,682

 
7,032

Prepaid expenses and other current assets
12,372

 
11,327

Total current assets
454,632

 
518,946

 
 
 
 
Intangibles, net
57,427

 
58,675

Fixed assets, net
27,933

 
22,636

Right-of-use assets
44,609

 
—

Other assets
11,314

 
4,299

Total assets
$
595,915

 
$
604,556

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
30,223

 
$
17,741

Accrued expenses
38,317

 
38,254

Accrued compensation
16,271

 
22,208

Lease liabilities
9,359

 
—

Other current liabilities
82

 
1,529

Total current liabilities
94,252

 
79,732

 
 
 
 
Debt, long-term
321,313

 
316,558

Long-term lease liabilities
35,709

 
—

Other long-term liabilities
504

 
—

Total liabilities
451,778

 
396,290

 
 
 
 
Shareholders’ equity:
 

 
 

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

 
773

Additional paid-in capital
1,499,646

 
1,489,664

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

 
(9
)
Total shareholders’ equity
144,137

 
208,266

Total liabilities and shareholders’ equity
$
595,915

 
$
604,556

 
See accompanying notes to consolidated financial statements

3
Table of Contents

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

 
$
—

 
 
 
 
Costs and expenses:
 

 
 

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

 
—

Research and development
31,203

 
30,098

Selling, general and administrative
54,810

 
32,653

Amortization of intangible assets
1,248

 
—

Total costs and expenses
91,411

 
62,751

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

 
2,040

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

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

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

 
48

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

 
76,619

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

 
 

Foreign currency translation gains
39

 
42

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


4
Table of Contents

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

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

 
$
766

 
$
1,318,181

 
$
(957,885
)
 
$
(3
)
 
$
361,059

Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

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

 
42

Exercise of stock options
12

 


 
142

 
 
 
 
 
142

Equity component of convertible debt issuance
 
 
 
 
136,463

 
 
 
 
 
136,463

Stock compensation expense
 
 
 
 
5,674

 
 
 
 
 
5,674

Balance at March 31, 2018
76,623

 
$
766

 
$
1,460,460

 
$
(1,026,409
)
 
$
39

 
$
434,856

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
77,308

 
$
773

 
$
1,489,664

 
$
(1,282,162
)
 
$
(9
)
 
$
208,266

Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

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

 
39

Exercise of stock options and ESPP shares
253

 
3

 
3,046

 
 
 
 
 
3,049

Issuance of common stock for vesting of RSUs
35

 
 
 
 
 
 
 
 
 
—

Stock compensation expense
 
 
 
 
6,936

 
 
 
 
 
6,936

Balance at March 31, 2019
77,596

 
$
776

 
$
1,499,646

 
$
(1,356,315
)
 
$
30

 
$
144,137




See accompanying notes to consolidated financial statements


5
Table of Contents

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

 
 

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

 
 

Depreciation
1,069

 
769

Amortization of intangible assets
1,248

 
—

Stock-based compensation expense
6,936

 
5,674

Loss on extinguishment of debt
—

 
2,209

Amortization of debt issuance costs
349

 
299

Accretion of debt discount
4,406

 
3,021

Accretion of back-end fee on debt
—

 
50

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(3,832
)
 
—

Inventory
(5,650
)
 
—

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

Accounts payable
9,499

 
(828
)
Accrued expenses and other
323

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

 
 

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

 
 

Proceeds from exercise of stock options and ESPP
3,049

 
142

Payment on extinguishment of debt
—

 
(2,835
)
Payment of debt
—

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

 
450,000

Payment of debt issuance costs
—

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

 
378,166

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

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

Cash and cash equivalents at beginning of period
495,072

 
381,165

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

 
$
686,581

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
3,939

 
$
1,275

Cash paid for income taxes
$
178

 
$
54

 
See accompanying notes to consolidated financial statements


6
Table of Contents

INSMED INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.                                    The Company and Basis of Presentation

Insmed is a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare diseases. The Company's first commercial product, ARIKAYCE (amikacin liposome inhalation suspension), received accelerated approval in the United States (US) on September 28, 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. MAC lung disease is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The Company's clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis (non-CF) bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are in Bridgewater, New Jersey. The Company has legal entities in the US, Ireland, Germany, France, the United Kingdom (UK), the Netherlands, Bermuda and Japan.
 
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.
 
The Company had $420.2 million in cash and cash equivalents as of March 31, 2019 and reported a net loss of $74.2 million for the three months ended March 31, 2019. Historically, the Company has funded its operations through public offerings of equity securities and debt financings. The Company commenced commercial shipments of ARIKAYCE in October 2018. The Company expects to continue to incur operating losses both in our US and certain international entities while funding research and development (R&D) activities for ARIKAYCE and our other pipeline programs, continuing commercial launch activities for ARIKAYCE in the US, continuing to invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and funding other general and administrative activities. The Company expects its future cash requirements to be substantial, and the Company may need to raise additional capital to fund operations, including the commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE, to develop INS1007 and INS1009 and to develop, acquire, in-license or co-promote other products or product candidates that address orphan or rare diseases.

The source, timing and availability of any future financing or other transaction will depend principally upon continued progress in the Company’s commercial, regulatory and development activities. Any equity or debt financing will also be contingent upon equity and debt market conditions and interest rates at the time. If the Company is unable to obtain sufficient additional funds when required, the Company may be forced to delay, restrict or eliminate all or a portion of its development programs or commercialization efforts.

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

2.                                      Summary of Significant Accounting Policies
 
The following are the required interim disclosure updates to the Company's significant accounting policies described in Note 2 of the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018:
 
Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to

7

measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:
 
•
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
•
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
•
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Each major category of financial assets and liabilities measured at fair value on a recurring basis is categorized based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1 generally include US treasuries and mutual funds listed in active markets.
 
The Company’s only financial assets and liabilities which were measured at fair value as of March 31, 2019 and December 31, 2018 were Level 1 assets comprised of cash and cash equivalents. The Company's cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. The following table shows assets and liabilities that are measured at fair value on a recurring basis and their carrying value (in millions):

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

 
$
420.2

 
$
—

 
$
—



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

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

The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making its determination, the Company considers a number of factors, including: (1) the significance of the decline; (2) whether the securities were rated below investment grade; (3) how long the securities have been in an unrealized loss position; and (4) the Company’s ability and intent to retain the investment for a sufficient period of time for it to recover.

The estimated fair value of the liability component of the 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of March 31, 2019 was $438 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $321.3 million carrying value of the Convertibles Notes as of March 31, 2019 excludes the $120.6 million of the unamortized portion of the debt discount.
 
Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, restricted stock units (RSUs) and convertible debt securities would be anti-dilutive as the Company incurred a net loss. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock options and from the assumed conversion of the Convertible Notes are determined based on the treasury stock method.
 
The following table sets forth the reconciliation of the weighted average number of common shares used to compute basic and diluted net loss per share for the three months ended March 31, 2019 and 2018:

8

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

 
 

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

 
 

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

 
76,619

Effect of dilutive securities:
 

 
 

Common stock options
—

 
—

RSUs
—

 
—

Convertible debt securities
—

 
—

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

 
76,619

Net loss per share:
 

 
 

Basic and diluted
$
(0.96
)
 
$
(0.89
)

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

 
9,866

Unvested RSUs
170

 
234

Convertible debt securities
11,492

 
11,492


 
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high credit-quality financial institutions and may invest its short-term investments in US treasury securities, mutual funds and government agency bonds. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.
The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The following table presents the percentage of gross product revenue represented by the Company's three largest customers as of the quarter ended March 31, 2019.
 
Percentage of Total Gross Product Revenue
Customer A
33%
Customer B
31%
Customer C
16%

The Company did not have product revenue prior to US FDA approval of ARIKAYCE in September 2018. The Company relies on third-party manufacturers and suppliers for manufacturing and supply of its products. The inability of the suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future operating results. A change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially impact future operating results.
Revenue Recognition—In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an

9

amount that reflects the consideration the Company expects to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, the Company has identified one performance obligation: the sale of ARIKAYCE to its customers. The Company has not incurred or capitalized any incremental costs associated with obtaining contracts with customers.

Product revenues consist primarily of sales of ARIKAYCE in the US. Product revenues are recognized once the Company performs and satisfies all five steps mentioned above. In October 2018, the Company began shipping ARIKAYCE to its customers in the US, which include specialty pharmacies and specialty distributors. The Company recognizes revenues for product received by its customers, net of allowances for customer credits, including prompt pay discounts, service fees, estimated rebates, including government rebates such as Medicaid rebates and Medicare Part D coverage gap reimbursements in the US, chargebacks and returns.
 
Customer credits: The Company’s customers are offered various forms of consideration, including service fees and prompt payment discounts. The Company anticipates that its customers will earn prompt payment discounts and, therefore, deducts the full amount of these discounts from total gross product revenues when revenues are recognized. Service fees are also deducted from total gross product revenues as they are earned.
 
Rebates: The Company contracts with Medicaid, other government agencies and various private organizations, or collectively, third-party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized.
 
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, currently public health service institutions and federal government entities purchasing via the Federal Supply Schedule, purchase directly from the Company's specialty distributor. Contracted customers generally purchase the product at a discounted price and the specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor and the discounted price paid by the contracted customers. The Company estimates the chargebacks it provides to the specialty distributor and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized.
Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by a third-party administrator.
If any, or all, of the Company’s actual experience vary from the estimates above, the Company may need to adjust prior period accruals, affecting revenue in the period of adjustment.
The Company has initiated early access programs (EAPs) in Europe and other countries, some of which may be fully reimbursed. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.
Cost of product revenues (excluding amortization of intangible assets) - Prior to FDA approval of ARIKAYCE, the Company expensed all inventory related costs in the period incurred. Inventory used for clinical development purposes is expensed to research and development (R&D) expense when consumed.

Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, allocation of overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI Pharma GmbH (PARI).

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

10

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

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

 
$
2,145

Work-in-process
7,059

 
4,567

Finished goods
1,169

 
320

 
$
12,682

 
$
7,032


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


11

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

 
$
6,635

Accrued professional fees
11,380

 
13,398

Accrued technical operation expenses
9,536

 
9,371

Accrued royalty payable
1,000

 
409

Accrued interest payable
1,663

 
3,631

Accrued sales allowances and related costs
2,642

 
818

Accrued construction costs
2,475

 
2,946

Other accrued expenses
1,989

 
1,046

 
$
38,317

 
$
38,254


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

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

 
$
—

 
$
(1,212
)
 
$
55,776

PARI milestone upon FDA approval
1,687

 
—

 
(36
)
 
1,651

     Intangible assets
$
58,675

 
$
—

 
$
(1,248
)
 
$
57,427


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

12

6.                                    Leases

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

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

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

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

Total lease cost
$
3,078

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

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

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

Weighted average discount rate - operating leases
7.3
%


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

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

2020
11,000

2021
10,287

2022
6,000

2023
6,000

Thereafter
12,000

Total
$
54,631

Less: present value discount
9,563

Present value of lease liabilities
$
45,068




13

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

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


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

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

14

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

 
$
450,000

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

 
$
316,558


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

2019
$
—

2020
—

2021
—

2022
—

2023
—

2024 and thereafter
450,000

 
$
450,000


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

Interest Expense

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

15

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

 
$
2,272

Amortization of debt issuance costs
349

 
299

Accretion of back-end fee on debt
—

 
50

Accretion of debt discount
4,406

 
3,021

     Total interest expense
$
6,726

 
$
5,642



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

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

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

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

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

16

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

 
$
1.9

Selling, general and administrative expenses
4.7

 
3.8

Total
$
6.9

 
$
5.7


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

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

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

17
Table of Contents

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

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

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conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018.
 
OVERVIEW
     We are a global biopharmaceutical company on a mission to transform the lives of patients with serious and rare diseases. Our first commercial product, ARIKAYCE (amikacin liposome inhalation suspension), received accelerated approval in the US on September 28, 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options in a refractory setting, as defined by patients who do not achieve negative sputum cultures after a minimum of 6 consecutive months of a multidrug background regimen therapy. MAC lung disease is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Our clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis (non-CF) bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).
The table below summarizes the current status and anticipated milestones for ARIKAYCE and our product candidates INS1007 and INS1009.

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

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

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

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

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

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

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

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

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

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

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

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


Our Strategy

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

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

Accelerated Approval

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

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

Clinical Trials

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

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

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

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

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

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

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Cost of Product Revenues (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, allocation of overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI. We began capitalizing inventory upon FDA approval of ARIKAYCE.
Research and Development (R&D) Expenses

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

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

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

Net product revenues, EAPs
919

    Total revenues
$
21,902


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

 
 

 
 

 
 

Clinical development & research
$
10,529

 
$
7,818

 
$
2,711

 
34.7
 %
Manufacturing
556

 
7,934

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

 
1,630

 
162

 
9.9
 %
Subtotal—external expenses
$
12,877

 
$
17,382

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

 
 

 
 

 
 

Compensation and benefit related expenses
$
12,757

 
$
7,953

 
$
4,804

 
60.4
 %
Stock-based compensation
2,191

 
1,930

 
261

 
13.5
 %
Other internal operating expenses
3,378

 
2,833

 
545

 
19.2
 %
Subtotal—internal expenses
$
18,326

 
$
12,716

 
$
5,610

 
44.1
 %
Total
$
31,203

 
$
30,098

 
$
1,105

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

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

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

     SG&A Expenses 

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

 
$
11,708

 
$
7,828

 
66.9
%
Stock-based compensation
 
4,745

 
3,744

 
1,001

 
26.7
%
Professional fees and other external expenses
 
21,591

 
12,929

 
8,662

 
67.0
%
Facility related and other internal expenses
 
8,938

 
4,272

 
4,666

 
109.2
%
Total SG&A expenses
 
$
54,810

 
$
32,653

 
$
22,157

 
67.9
%

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

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

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

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

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

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

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


26
Table of Contents

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

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

ITEM 1A.                                       RISK FACTORS

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

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

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Table of Contents

ITEM 6.                                                EXHIBITS
 
Exhibit Index
3.1
 
Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012 (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Annual Report on Form 10-K filed on March 18, 2013).
 
 
 
3.2
 
Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Quarterly Report on Form 10-Q filed on August 6, 2015).
 
 
 
 
Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2017 Incentive Plan.
 
 
 
 
First Amendment to Lease, dated October 1, 2016, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
 
 
 
 
Second Amendment to Lease, dated October 17, 2018, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
 
 
 
 
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
 
 
Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
 
101
 
The following materials from Insmed Incorporated’s quarterly report on Form 10-Q for the quarter ended March 31, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, (ii) Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, and (iv) Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

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


29

INSMED INCORPORATED
RESTRICTED UNIT AWARD AGREEMENT
UNDER THE 2017 INCENTIVE PLAN
FOR MEMBERS OF THE BOARD OF DIRECTORS


Grantee Name: _______________
Number of RSUs: __________
Grant Date: __________


Pursuant to the Insmed Incorporated 2017 Incentive Plan (the “Plan”) as amended through the date hereof and this Restricted Stock Unit Award Agreement (this “Agreement”), Insmed Incorporated (the “Company”) hereby grants an award of [_____] restricted stock units (the “Restricted Stock Units” or the “RSU Award”) to the individual named above (the “Grantee”).  The RSU Award shall be referred to herein as the “Award.” Subject to the restrictions and conditions set forth herein and in the Plan, the Grantee shall receive the number of Restricted Stock Units specified above.

The Company acknowledges the receipt from the Grantee of consideration with respect to the par value of the shares of Common Stock subject to the Award in the form of cash, past or future services rendered to the Company by the Grantee or such other form of consideration as is acceptable to the Administrator and permitted under the Plan and applicable law.

1.Agreement with Terms. Execution of this Agreement by the Grantee or receipt of any benefits under this Agreement by the Grantee shall constitute the Grantee’s acknowledgement of and agreement with all of the provisions of this Agreement and of the Plan that are applicable to this Award, and the Company shall administer this Agreement accordingly.

2.    Restrictions and Conditions on Award. Restricted Stock Units granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by the Grantee other than by will or the laws of descent and distribution, and shall be subject to all the terms, conditions and restrictions set forth herein and in the Plan.

3.    Timing and Form of Payout of Restricted Stock Units. As soon as practicable (but in no event later than 30 days) following the Vesting Date (as defined below) or, if earlier, the date the Award vests in accordance with Section 5 or Section 6 of this Agreement, the vested Restricted Stock Units shall be settled in shares of Common Stock.

4.    Vesting of Award. Except as set forth in Section 5 of this Agreement, the restrictions and conditions in Section 2 of this Agreement shall lapse, with respect to 100% of the RSU Award, on the first anniversary of the Grant Date (the “Vesting Date”) so long as (a) the Grantee remains a member of the Board on such Vesting Date and (b) the Grantee attends at least seventy-five percent (75%) of the Board meetings that take place during the period of time commencing from the Grant Date and ending on the first anniversary of the Grant Date.

Except as otherwise provided in Sections 5 and 6 of this Agreement, the Grantee shall forfeit any unvested portion of the RSU Award if either the following shall occur: (i) in the event the Grantee’s service as a member of the Board is terminated for any reason prior to the Vesting Date; or (ii) in the event that the Grantee fails to attend at least seventy-five percent (75%) of the Board meetings that take place during the period of time commencing from the Grant Date and ending on the first anniversary of the Grant Date.

Notwithstanding anything to the contrary herein or in the Plan, the Administrator may at any time accelerate the vesting schedule specified in this Section 4.

5.    Change in Control. In the event of a Change in Control of the Company, the unvested portion of the RSU Award, to the extent not previously forfeited or cancelled, shall immediately vest as of the date of such Change in Control.

6.    Termination of Service. Except as otherwise provided herein, any unvested portion of the RSU Award shall be forfeited without payment of consideration upon the termination of the Grantee’s service with the Company or its Affiliates for any reason, except as otherwise provided in this Section 6. Notwithstanding the foregoing, upon the Grantee’s death (while an active member of the Board) or upon the termination of the Grantee’s service due to Disability (as defined below), the RSU Award to extent not previously forfeited or cancelled, shall immediately vest as of the date of the Grantee’s death or Disability. For purposes of this Agreement, the Grantee will be considered “Disabled” if, as a result of the Grantee’s incapacity due to physical or mental illness, the Grantee shall have been absent from his duties to the Company or its Affiliates on a full-time basis for 180 calendar days in the aggregate in any 12-month period.

7.    Voting Rights and Dividends. If and until such time as Restricted Stock Units are paid out in shares of Common Stock (if at all), the Grantee shall not have any voting rights with respect to any shares of Common Stock underlying this RSU Award (“Underlying Shares”). However, bookkeeping equivalents of all dividends and other distributions paid with respect to the Common Stock shall accrue with respect to the Underlying Shares and shall be converted to additional Restricted Stock Units (rounded to the nearest whole share of Common Stock) based on the closing price of the Common Stock on the dividend distribution date. Such additional Restricted Stock Units shall be subject to the same restrictions on transferability as are the Restricted Stock Units with respect to which they were paid.

8.    Adjustments Upon Certain Unusual or Nonrecurring Events or Other Events. Upon certain unusual or nonrecurring events, or other events, the terms of these Restricted Stock Units shall be adjusted by the Administrator pursuant to Section 15 of the Plan.

9.    Incorporation of Plan. Notwithstanding anything herein to the contrary, this Award and this Agreement shall be subject to and governed by all the terms and conditions of the Plan. To the extent any provision hereof is inconsistent with a provision of the Plan, the provisions of the Plan will govern. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein.

10.    Taxes. The Grantee is ultimately liable and responsible for all taxes owed by Grantee in connection with this RSU Award. The Company makes no representation or undertaking regarding the tax treatment of the grant, vesting, or settlement of this RSU Award or the subsequent sale of any of the Underlying Shares. The Company does not commit and is under no obligation to structure this RSU Award to reduce or eliminate Grantee’s tax liability.

11.    Section 409A of the Code. This Award is intended to comply with the requirements of Section 409A of the Code or an exemption thereto, and this Agreement shall be interpreted in a manner consistent with this intent in order to avoid the imposition of any additional tax, interest or penalties under Section 409A of the Code. In no event shall the Company be liable for any additional tax, interest or penalties that may be imposed on the Grantee pursuant to Section 409A of the Code or any damages for failing to comply with Section 409A of the Code or an exemption thereto.

12.    No Right to Re-Election or Continued Service. Nothing in the Plan or this Agreement shall interfere with or limit in any way the right of the Company, its Subsidiaries and/or its Affiliates to terminate the Grantee’s service on the Board at any time or for any reason in accordance with the Company’s Bylaws and governing law, nor shall any terms of the Plan or this Agreement confer upon Grantee any right to continue his or her service for any specified period of time. Neither this Agreement nor any benefits arising under the Plan shall constitute an employment contract with the Company, any Subsidiary and/or its Affiliates.

13.    Notices. Any notice or other communication given pursuant to this Agreement shall be in writing and shall be personally delivered or mailed by United States registered or certified mail, postage prepaid, return receipt requested, to the Company at its principal place of business or to the Grantee at the address on the Company’s records or, in either case, at such other address as one party may subsequently furnish to the other party in writing.  Additionally, if such notice or communication is by the Company to the Grantee, the Company may provide such notice electronically (including via email). Any such notice shall be deemed to have been given (a) on the date of postmark, in the case of notice by mail, or (b) on the date of delivery, if delivered in person or electronically.


INSMED INCORPORATED
By:        
Name:    [NAME]
Title:        [TITLE]


The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned.
Dated:            By: ___________________________________    
  



1



{80155736:3}    
FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (this "Amendment") made as of the 1st day of October, 2016 by and between CIP II/AR BRIDGEWATER HOLDINGS LLC, a Delaware limited liability company ("Landlord") and INSMED INCORPORATED, a Virginia corporation ("Tenant").

BACKGROUND

By that certain lease dated as of July 1, 2016 (the "Lease") Landlord leased to Tenant the entire lower level of the Building L (the "Building") containing approximately 13,274 rentable square feet (the “Original Premises”) located in the Township of Bridgewater, Somerset County, New Jersey within the Research and Development project commonly known as the New Jersey Center of Excellence at Bridgewater (the "Project").
Landlord and Tenant now desire to amend the Lease as hereinafter provided

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties, intending to be legally bound, agree as follows:

1. Any capitalized term not defined herein and defined in the Lease, is used herein with the meaning set forth in the Lease.

2. Subject to and in accordance with the terms and conditions of the Lease and this Amendment, effective as of the date hereof (the "Effective Date") the Lease is hereby amended as follows:

(a)    Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, that portion of Building K consisting of approximately 1,037 rentable square feet of additional space (as shown on Exhibit "A" annexed hereto and made a part hereof, and being hereinafter referred to as the "Storage Space"). As of the Effective Date, the term “Premises” as used throughout the Lease shall be deemed amended to include both the Original Premises and the Storage Space for all purposes under the Lease, such that from and after the Effective Date the Premises shall be deemed to be 14,311 rentable square for all purposes of the Lease.
(b)     Tenant shall use the Storage Space for storage of Tenant’s raw materials, chemicals, lab samples, empty drums and other personal property used by Tenant from time to time in connection with the conduct of Tenant’s business in the Original Premises and for no other purposes.

(c) On the Effective Date, Tenant shall accept the Storage Space in its then "as-is" condition, and Tenant acknowledges that Landlord has no obligation under the provisions of this Amendment to perform any Landlord’s Base Building Work or make any repairs or perform any other work to prepare the Storage Space for Tenant’s use, except for the work performed by Landlord in the Storage Space as set forth on Exhibit “B” annexed hereto and made a part hereof (the “Storage Space Work”). If Tenant wants to perform any Alterations in and to the Storage Space, if any, such Alterations shall be subject in all respects to the terms of the Lease, including without limitation, the provisions of Section 22.
(d)     Landlord and Tenant acknowledge and agree that as of Effective Date; (i) the amount of the Construction Credit set forth in Paragraph B(1) in Exhibit M of the Lease is increased from $66,370.00 to $71,555.00, (ii) Landlord has substantially completed the Initial Tenant Improvements Work and the Storage Space Work, (iii) Landlord has paid the entire Construction Credit ($71,555.00) collectively for the performance and completion of the Initial Tenant Improvements Work and the Storage Space Work, and (iv) Landlord has satisfied all of its obligations under the Lease to prepare the Original Premises and the Storage




Space for Tenant’s use and occupancy.
(e) From and after the Effective Date, the Base Rent table in Section 3(a) of the Lease shall be deleted and the following Base Rent table inserted in lieu thereof:
Period
Annual Rent PSF
Annual Base Rent
Monthly Base Rent
Year 1*
$29.00
$415,019.00
$34,584.92
Year 2
$29.87
$427,469.57
$35,622.46
Year 3
$30.77
$440,349.47
$36,695.79
Year 4
$31.69
$453,515.59
$37,792.97
Year 5
$32.64
$467,111.04
$38,925.92
Year 6**
$33.62
$481,135.82
$40,094.65
*Base Rent to be abated for the first three (3) months.
**Year 6 represents only three (3) months of the year.

(f)    From and after the Effective Date, the Common Expense Rent table in Section 5(a) of the Lease shall be deleted and the following Common Expense Rent table inserted in lieu thereof:


Period
Annual Operating Expenses PSF*
Annual Expense Reimbursement
Monthly Expense Reimbursement
Year 1
$14.00
$0.00
$0.00
Year 2
$14.42
$6,010.62
$500.89
Year 3
$14.85
$12,164.35
$1,013.70
Year 4
$15.30
$18,604.30
$1,550.36
Year 5
$15.76
$25,187.36
$2,098.95
Year 6
$16.23
$31,913.53
$2,659.46
*Annual Operating Expenses includes common area maintenance, central utility plant operations, and direct utilities.

(g)    The second sentence in Section 5(c) of the Lease shall be deleted and the following sentences inserted in lieu thereof:

“For purposes of the Section 5(c), Tenant’s proportionate share shall mean a fraction (i) the numerator of which is the total rentable square footage of the Original Premises, as same may change from time to time during the Term and the denominator of which shall be the total rentable square footage of the Building L with respect to the Original Premises, and (ii) the numerator of which is the total rentable square footage of the Storage Space, as same may change from time to time during the Term and the denominator of which shall be the total rentable square footage of the Building K with respect to the Storage Space.”





3. Landlord and Tenant represent and warrant to each other that they have dealt and negotiated solely and only with Jones Lang LaSalle for this Amendment and with no other broker. Landlord shall pay Jones Lang LaSalle a brokerage commission pursuant to a separate agreement. Landlord and Tenant hereby agree to indemnify, defend and hold the other harmless from and against any and all claims, suits, damages, liabilities, counsel fees, costs, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord or Tenant by reason of the actions or inactions of the indemnifying party.
4. Landlord and Tenant each hereby ratify and confirm its obligations under the Lease, and represent and warrant to the other party that it has no defenses thereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, (a) the Lease is and remains in good standing and in full force and effect, and (b) Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Lease or in any way relating thereto or arising out of any other transaction between Landlord and Tenant.
5.    Except as modified hereby, the Lease shall remain in full effect and this Amendment shall be binding upon Landlord and Tenant and their respective successors and assigns. If any inconsistency exists or arises between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall prevail. This Amendment shall be governed by the laws of the State of New Jersey.

1.This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one document. To facilitate execution of this Amendment, the parties hereto may execute and exchange, by electronic mail PDF, counterparts of the signature pages. Signature pages may be detached from the counterparts and attached to a single copy of this Amendment to physically form one document.

2.This Amendment may not be changed orally and shall be binding upon and inure to the benefit of the parties hereto and their respective successors, permitted assigns and legal representatives.

3.If any provisions of this Amendment shall be held invalid or unenforceable according to law, the remaining provisions herein shall not be affected thereby and shall continue in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written.

CIP II/AR BRIDGEWATER HOLDINGS LLC,
a Delaware limited liability company


By: CIP II/AR Bridgewater LLC,
a Delaware limited liability company,
its sole Member

By: AR at Bridgewater LLC,
a New Jersey limited liability company,
its Administrative Manager

By: ACP Land Holdings, LLC,
a New Jersey limited liability company,
its sole Member





By: Padco Management, Inc.,
a New Jersey corporation,
its Managing Member

By: /s/ Kurt Padavano
Name: Kurt Padavano
Title: Senior Vice President
1


INSMED INCORPORATED

By: /s/ S. Nicole Schaeffer
Name: S. Nicole Schaeffer
Title: SVP, Human Resources & Corporate Services


















EXHIBIT “A”

STORAGE SPACE





EXHIBIT102IMAGE.JPG








EXHIBIT “B”

STORAGE SPACE WORK

Paint
4” Vinyl Cove Base
Wax floors
Lighting
Ceiling tiles





{80199265:7}


SECOND AMENDMENT TO LEASE

THIS SECOND AMENDMENT TO LEASE (this “Second Amendment”) made as of the 17th day of October, 2018 (the “Effective Date”) by and between CIP II/AR BRIDGEWATER HOLDINGS LLC, a Delaware limited liability company (“Landlord”); and INSMED INCORPORATED, a Virginia corporation (“Tenant”).

BACKGROUND

Whereas, by that certain Lease Agreement dated as of July 1, 2016 (the “Original Lease”) Landlord leased to Tenant a portion of the lower level of the Building L (the “Building”) containing approximately 13,274 rentable square feet (the “Original Premises”) located in the Township of Bridgewater, Somerset County, New Jersey within the Research and Development project commonly known as the New Jersey Center of Excellence at Bridgewater (the “Project”); and
Whereas, by that certain First Amendment to Lease dated as of October 1, 2016 (the “First Amendment” and, together with the Original Lease and this Second Amendment, the “Lease”) Landlord leased to Tenant an additional approximately 1,037 rentable square feet in Building K (the “Storage Space”); and
Whereas, Landlord and Tenant have agreed that the Commencement Date under the Original Lease is October 1, 2016, and the Expiration Date under the Original Lease is December 31, 2021.
Whereas, Landlord and Tenant now desire to amend the Original Lease and First Amendment to provide for the lease by Tenant of an additional 13,691 rentable square feet, consisting of a portion of the second floor of the Building (the “Second Expansion Premises”), and for such other agreements as are hereinafter provided.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties, intending to be legally bound, agree as follows:

1. Any capitalized term not defined herein and defined in the Original Lease or in the First Amendment, is used herein with the meaning set forth in the Original Lease or the First Amendment.

2. Subject to and in accordance with the terms and conditions of the Original Lease, the First Amendment and this Second Amendment, effective as of the Effective Date, the Original Lease and the First Amendment are hereby amended as follows:

(a)    From and after the SEP Commencement Date (as hereinafter defined), Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, through the end of the Term, that portion of the second floor of the Building, agreed to consist of 13,691 rentable square feet (as shown on Exhibit “A” annexed hereto and made a part hereof, and being hereinafter referred to as the “Second Expansion Premises”). From and after the SEP Commencement Date, the term “Premises” as used throughout the Lease shall be 28,002 rentable square feet for all purposes of the Lease.
(b)     Tenant shall use the Second Expansion Premises for the Permitted Use, and for no other purposes.




(c)    Following the execution and delivery of this Second Amendment by Landlord and Tenant and subject to the terms of Exhibit “B” attached hereto in all respects, including the Landlord’s obtaining all required building, construction and any other permits, approvals or consents to the extent same are required to comply with all applicable Laws, Landlord shall separately demise the Second Expansion Premises, by performing the following work in accordance with the plan attached hereto as Exhibit “A-1”: build demising walls and entry doors, install card readers for the entry doors, and remove non-affixed lab benches and other personal property (other than the Retained FFE) from the Second Expansion Premises (the “Demising Work”), and subject to Section F of the Second Expansion Premises Work Letter attached hereto as Exhibit “B” (the “Second Expansion Premises Work Letter”), shall perform the work more particularly described as “Tenant’s Work” in the Second Expansion Premises Work Letter as part of the preparation of the Second Expansion Premises for Tenant’s occupancy. The Demising Work shall be at Landlord’s sole cost and expense.

(d) Tenant agrees that Landlord shall have no obligation to do any work or perform any services to prepare the Second Expansion Premises for Tenant’s occupancy, other than the Demising Work and, subject to Section F of the Second Expansion Premises Work Letter, the Tenant’s Work. Tenant shall accept the Second Expansion Premises in its then “as-is” condition, subject to Landlord’s completion of the Demising Work and, subject to Section F of the Second Expansion Premises Work Letter, the Tenant’s Work and latent defects. From and after the Effective Date, the provisions of Section 2(c) of the Original Lease shall apply to the Second Expansion Premises with “Demising Work” substituted for “Landlord’s Base Building Work” and “Tenant’s Work” substituted for “Initial Tenant Improvements Work.”
(e)    Landlord shall advise Tenant, in writing, at least two (2) Business Days prior to the anticipated date of Substantial Completion (hereinafter defined) of each of the Demising Work and the Tenant’s Work. Within two (2) Business Days after Tenant’s receipt of Landlord’s notice of Substantial Completion of each of the Demising Work and the Tenant’s Work, Tenant shall be granted an opportunity to walk-through the Second Expansion Premises, with a representative of Landlord, in order to verify Substantial Completion of the Demising Work and the Tenant’s Work. Tenant shall provide Landlord written notice of any defects or incomplete work within two (2) Business Days following the walk-through. For purposes of this Second Amendment the terms “Substantial Completion” or “Substantially Complete” when referring to the Demising Work or the Tenant’s Work, as applicable, shall mean that (x) such work has been completed in accordance with (i) the provisions of the Lease applicable thereto, (ii) the plans and specifications for such work, and (iii) all applicable Laws, except for minor details of construction, decoration and mechanical adjustments, if any, the non-completion of which does not materially interfere with the performance of the Demising Work or the Tenant’s Work, as applicable, or which, in accordance with good construction practice, should be completed after the completion of the Demising Work or the Tenant’s Work, as applicable, and (y) with respect to the Tenant’s Work, the Second Expansion Premises is broom clean with all construction debris and equipment removed from the Second Expansion Premises, and the Second Expansion Premises is delivered to Tenant, and (z) Landlord has obtained a certificate permitting Tenant to occupy the Second Expansion Premises from the applicable local governing authority, if required by Law. It is agreed that Tenant and Landlord shall promptly review any defects or incomplete work that are described in the written notice given by Tenant to Landlord and based upon such review, Landlord and Tenant shall prepare a list setting forth those items of Demising Work and the Tenant’s Work which are not completed (these items agreed to by Landlord and Tenant are hereinafter collectively referred to as “SEP Punchlist Items”). Landlord agrees to cause such SEP Punchlist Items to be completed by the date which shall be thirty (30) days after the applicable date of Substantial Completion; provided, however, if any SEP Punchlist Items cannot be reasonably completed within the applicable thirty (30) period for any reason, including, without limitation, for any Force Majeure Delay or Tenant Delay, then Landlord shall have such longer period of time as shall be reasonably necessary to complete such SEP Punchlist Items so long as Landlord




is prosecuting such work with due diligence. Notwithstanding the foregoing, this subsection (e) shall not apply with respect to the Tenant Work if Tenant assumes responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter.
(f)    Landlord shall use commercially reasonable efforts to cause the Demising Work to be Substantially Completed on or before January 1, 2019, subject to a day-for-day extension for each day of Tenant Delay, if any (the “Demising Work Delivery Date”). In the event Landlord does not cause the Demising Work to be Substantially Completed by the date which is forty-five (45) days after the Demising Work Delivery Date (the “First Demising Outside Date”), then Tenant shall be entitled to a credit against Base Rent for the Second Expansion Premises in an amount equal to one (1) day of Base Rent for the Second Expansion Premises prorated on a daily basis for each (1) day of delay after the First Demising Outside Date that Landlord fails to cause the Demising Work to be Substantially Completed. In the event Landlord does not cause the Demising Work to be Substantially Completed by the date which is thirty (30) days after the First Demising Outside Date (the “Second Demising Outside Date”), then Tenant shall be entitled to a credit against Base Rent for the Second Expansion Premises in an amount equal to two (2) days of Base Rent for the Second Expansion Premises prorated on a daily basis for each (1) day of delay after the Second Demising Outside Date that that Landlord fails to cause the Demising Work to be Substantially Completed. In the event Landlord does cause the Demising Work to be Substantially Completed by the date which is ninety (90) days after the Demising Work Delivery Date (the “Demising Termination Date”), Tenant may, at its option, terminate this Second Amendment by written notice to Landlord delivered any time after the Demising Termination Date but prior to the Demising Work being Substantially Completed; provided however, if Landlord delivers possession of the Second Expansion Premises to Tenant with the Demising Work Substantially Completed within ten (10) days after receipt of Tenant’s termination notice, such termination shall be void. In the event of such termination, this Second Amendment shall be terminated and of no further force and effect, the Additional Security Deposit (as hereinafter defined) shall be promptly returned to Tenant by Landlord, any amounts paid by Tenant for Additional Cost (as defined in Exhibit “B”) shall be promptly reimbursed to Tenant by Landlord, and the Original Lease and the First Amendment shall remain in full force and effect with respect to the Original Premises and the Storage Space.
(g)    Promptly after the Working Drawings have been approved by Landlord and Tenant and become the Final Plans in accordance with the terms of the Second Expansion Premises Work Letter annexed hereto as Exhibit “B”, Landlord and Tenant shall mutually agree in writing upon the date that Landlord shall use commercially reasonable efforts to cause the Second Expansion Premises to be delivered to Tenant with the Demising Work and Tenant’s Work Substantially Completed using customary and prudent construction practices (the “TW Delivery Date”). The agreed upon TW Delivery Date shall be subject to a day-for-day extension for each day of Tenant Delay, if any. In the event Landlord does not deliver possession of the Second Expansion Premises to Tenant with the Tenant’s Work Substantially Completed by the date which is forty-five (45) days after the agreed upon TW Delivery Date (the “First TW Outside Date”), then Tenant shall be entitled to a credit against Base Rent for the Second Expansion Premises in an amount equal to one (1) day of Base Rent for the Second Expansion Premises prorated on a daily basis for each (1) day of delay after the First TW Outside Date that Landlord fails to deliver possession of the Premises to Tenant with the Tenant’s Work Substantially Completed. In the event Landlord does not deliver possession of the Second Expansion Premises to Tenant with the Tenant’s Work Substantially Completed by the date which is thirty (30) days after the First TW Outside Date (the “Second TW Outside Date”), then Tenant shall be entitled to a credit against Base Rent for the Second Expansion Premises in an amount equal to two (2) days of Base Rent for the Second Expansion Premises prorated on a daily basis for each (1) day of delay after the Second TW Outside Date that Landlord fails to deliver possession of the Premises to Tenant with the Tenant’s Work Substantially Completed. In the event Landlord does not deliver possession of the Second Expansion Premises to Tenant with the Tenant’s Work Substantially Completed by the date which is ninety




(90) days after the TW Delivery Date (the “TW Termination Date”), Tenant may, at its option, terminate this Second Amendment by written notice to Landlord delivered any time after the TW Termination Date but prior to delivery of possession of the Second Expansion Premises to Tenant with the Tenant’s Work Substantially Completed; provided however, if Landlord delivers possession of the Second Expansion Premises to Tenant with the Tenant’s Work Substantially Completed within ten (10) days after receipt of Tenant’s termination notice, such termination shall be void. In the event of such termination, this Second Amendment shall be terminated and of no further force and effect, the Additional Security Deposit (as hereinafter defined) shall be promptly returned to Tenant by Landlord, any amounts paid by Tenant for Additional Cost (as defined in Exhibit “B”) shall be promptly reimbursed to Tenant by Landlord, and the Original Lease and the First Amendment shall remain in full force and effect with respect to the Original Premises and the Storage Space. Notwithstanding the foregoing, this subsection (g) shall not apply with respect to the Tenant’s Work if Tenant assumes responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter.            

(h)    The commencement date for the Second Expansion Premises shall be the earlier of: (1) the later of (x) January 1, 2019, or (y) the date of Substantial Completion of the Demising Work, or such earlier date as the Demising Work would have been substantially completed but for a Tenant Delay (as defined in Exhibit “B”), or (2) the date on which Tenant takes possession of the Second Expansion Premises for the conduct of its business (the “SEP Commencement Date”). The need to perform SEP Punchlist Items shall not be deemed to delay the SEP Commencement Date. Upon the occurrence of the SEP Commencement Date, the parties shall memorialize the same in a Commencement Date Agreement.

(i)    From and after the SEP Commencement Date, the Base Rent for the Second Expansion Premises shall be as follows:
Period
Annual Rent PSF
Annual Base Rent
Monthly Base Rent
Year 1
$44.00
$602,404.00
$50,200.33
Year 2
$45.32
$620,476.12
$51,706.34
Year 3 (through December 31, 2021)
$46.68
$639,095.88
$53,257.99

(j)    From and after the SEP Commencement Date, the Common Expense Rent for the Second Expansion Premises shall be as follows:


Period
Annual Common Expenses PSF
Annual Common Expense Rent
Monthly Common Expense Rent
2019
Estimated to be $15.00, but final amount to be set forth in the Landlord’s final budget for 2019
 $0.00
 $0.00
2020
2019 amount multiplied by 1.03 ($15.45 based on a $15.00 estimate)
 $6,160.95 (based on a $15.00 estimate)
 $513.41 (based on a $15.00 estimate)
2021
2020 amount multiplied by 1.03 ($15.91 based on a $15.00 estimate)
 $12,458.81 (based on a $15.00 estimate)
 $1,038.23 (based on a $15.00 estimate)





* Common Expense Costs include, without limitation, maintenance of Common Areas, central utility plant operations, Landlord’s insurance premiums, utilities for the Common Areas and utilities to be provided by Landlord pursuant to this Lease and security for the Project. The parties acknowledge that the amount of Common Expense Rent is fixed, Landlord shall not be entitled to reimbursement by Tenant is the actual Common Expense Costs during the year are greater than the amount set forth above, nor shall Tenant be entitled to a refund in the event actual Common Expense Costs during the year are less than the amount set forth above.

(k)    Commencing on the SEP Commencement Date, the first and second sentences in Section 5(c) of the Original Lease (as amended by the First Amendment) shall be deleted and the following sentences inserted in lieu thereof:

“From the SEP Commencement Date through the day immediately preceding the Real Property Tax Conversion Date, Tenant’s proportionate share of Real Property Taxes shall be calculated based upon the amount by which the Real Property Taxes allocated to the Building utilizing the methodology described in Exhibit “H” attached hereto for any calendar year during the Term subsequent to the Base Tax Year (as hereafter defined) exceeds the Real Property Taxes allocated to the Building utilizing the methodology described in Exhibit “H” for (i) the 2016 calendar year with respect to the Original Premises and the Storage Space, and (ii) the 2019 calendar year with respect to the Second Expansion Premises (as applicable, the “Base Tax Year”). For purposes of the Section 5(c), Tenant’s proportionate share of Building L with respect to (iii) the Original Premises shall mean a fraction the numerator of which is the total rentable square footage of the Original Premises, as same may change from time to time during the Term and the denominator of which shall be the total rentable square footage of the Building L, and (iv) the Second Expansion Premises shall mean a fraction the numerator of which is the total rentable square footage of the Second Expansion Premises, as same may change from time to time during the Term and the denominator of which shall be the total rentable square footage of the Building L, as applicable. For purposes of the Section 5(c), Tenant’s proportionate share of Building K with respect to the Storage Space shall mean a fraction the numerator of which is the total rentable square footage of the Storage Space and the denominator of which shall be the total rentable square footage of the Building K.”

(l)    Commencing on the SEP Commencement Date, the first sentence in Section 5(d) of the Lease shall be deleted and the following sentences inserted in lieu thereof:

“Notwithstanding anything to the contrary contained in Section 5(c) above, from and after the Real Property Tax Conversion Date; the Tenant’s proportionate share of Real Property Taxes with respect to the Original Premises shall mean the amount by which the sum of (i) (A) the product of the then assessed valuation for Building L (as determined by the valuation of Building L set forth on the Property Record Card maintained in the office Tax Assessor for Bridgewater Township, or any successor thereto) and a fraction, the numerator of which is the rentable square footage of the Original Premises, and the denominator of which is the rentable square footage of Building L, multiplied by (B) the then applicable tax rate for Bridgewater Township, and (ii) the product of the then assessed valuation of the land located within Condominium Unit 2 and the then applicable tax rate for Bridgewater Township, which product shall then be multiplied by the fraction, the numerator of which shall be the then current rentable square footage of the Original Premises, and the denominator of which shall be the then current rentable square footage of all tenantable buildings located within Condominium Unit 2, exceeds the Real Property Taxes allocated to Building L utilizing the methodology described in Exhibit “H” for the Original Premises Base Tax Year. Notwithstanding anything to the contrary contained in Section 5(c) above, from and after the Real Property Tax Conversion Date; the Tenant’s proportionate share of Real Property Taxes with respect to the Second Expansion Premises shall mean the amount by which the sum of (i) (A) the product of the then assessed valuation for Building L (as determined by the valuation of Building L set forth on the Property Record Card maintained in the office Tax Assessor for Bridgewater Township, or any successor thereto) and a fraction, the numerator of which




is the rentable square footage of the Second Expansion Premises, and the denominator of which is the rentable square footage of Building L, multiplied by (B) the then applicable tax rate for Bridgewater Township, and (ii) the product of the then assessed valuation of the land located within Condominium Unit 2 and the then applicable tax rate for Bridgewater Township, which product shall then be multiplied by the fraction, the numerator of which shall be the then current rentable square footage of the Second Expansion Premises, and the denominator of which shall be the then current rentable square footage of all tenantable buildings located within Condominium Unit 2, exceeds the Real Property Taxes allocated to Building L utilizing the methodology described in Exhibit “H” for the Second Expansion Premises Base Tax Year. Notwithstanding anything to the contrary contained in Section 5(c) above, from and after the Real Property Tax Conversion Date; the Tenant’s proportionate share of Real Property Taxes with respect to the Storage Space shall mean the amount by which the sum of (i) (A) the product of the then assessed valuation for Building K (as determined by the valuation of Building K set forth on the Property Record Card maintained in the office Tax Assessor for Bridgewater Township, or any successor thereto) and a fraction, the numerator of which is the rentable square footage of the Storage Space, and the denominator of which is the rentable square footage of Building K, multiplied by (B) the then applicable tax rate for Bridgewater Township, and (ii) the product of the then assessed valuation of the land located within Condominium Unit 2 and the then applicable tax rate for Bridgewater Township, which product shall then be multiplied by the fraction, the numerator of which shall be the then current rentable square footage of the Storage Space, and the denominator of which shall be the then current rentable square footage of all tenantable buildings located within Condominium Unit 2, exceeds the Real Property Taxes allocated to Building K utilizing the methodology described in Exhibit “H” for the Storage Space Base Tax Year.”

(m)    From and after the SEP Commencement Date, the term “Base Rent” as used in the Original Lease shall include Base Rent payable under this Second Amendment with respect to the Second Expansion Premises, and the term “Additional Rent” as used in the Original Lease shall include Common Expense Rent and Real Property Taxes payable under this Second Amendment with respect to the Second Expansion Premises.

(n)    From and after Substantial Completion of the Tenant’s Work (or the Transfer Date (as defined in the Second Expansion Premises Work Letter) if Tenant assumes responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter), Tenant shall be solely responsible for the replacement, repair and maintenance of any utility equipment within the Second Expansion Premises that only services the Second Expansion Premises.

(o)    From and after Substantial Completion of the Tenant’s Work (or the Transfer Date if Tenant assumes responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter), Tenant shall provide for all cleaning and extermination services required by Tenant, and shall furnish, install and replace all lighting tubes, lamps, bulbs and ballasts required by Tenant during the Term, at Tenant’s sole cost and expense.

(p)    The first paragraph, only, of Section 2(e) of the Original Lease is deleted, and is replaced by the following: “Landlord hereby grants to Tenant two (2) options to extend the Term, each option for a period of five (5) years. The first extension option may be exercised with respect to: (1) the entire Premises; (2) the entirety of the Original Premises and the Storage Space; (3) the Second Expansion Premises; or (4) the entirety of the Second Expansion Premises and the Storage Space. If the first extension option is exercised with respect to the entire Premises, the second extension option may be exercised with respect to: ((1) the entire Premises; (2) the entirety of the Original Premises and the Storage Space; (3) the Second Expansion Premises; or (4) the entirety of the Second Expansion Premises and the Storage Space. If the first extension option is exercised with respect to less than the entire Premises, then the second extension option may only be exercised with respect to that same space. Such option(s), if exercised, must be exercised by




Tenant giving written notice of its exercise to Landlord in the manner provided in this Lease not less than 12 months prior to the expiration of the Term, or the first extension of the Term, as the case may be. The applicable extension period shall commence on the day immediately following the expiration of the initial Term, or the first extension of the Term, as the case may be. No extension option may be exercised by Tenant if an Event of Default exists at the time of the exercise of the option. In the event Tenant exercises its option with respect to less than the entire Premises, the term ‘Premises’ as used in the remainder of this Section 2(e) shall mean only that portion of the Premises as to which Tenant has exercised its option.”

(q)    Any and all equipment and fixtures more particularly described on Exhibit “C” attached hereto shall be Retained FFE and governed by Section 1(b) of the Original Lease.

(r)    From and after the SEP Commencement Date, the definition of “Delivery Condition” in the last sentence of Section 12(a) of the Original Lease is amended to replace the phrase “Landlord’s Base Building Work and the Initial Tenant Improvements” with the phrase “Landlord’s Base Building Work, the Demising Work, the Initial Tenant Improvements and, unless Tenant assumes responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter, the Tenant’s Work”.
(s)    From and after the SEP Commencement Date, Section 8(a)(iv) shall be deleted in its entirety and the following Section 8(a)(iv) shall be inserted in lieu thereof:
“Special Form coverage, including, but not limited to, standard fire and extended coverage insurance with vandalism and malicious mischief endorsements, on all personal property of Tenant and on all improvement and alterations made by, on behalf of and/or at the expense of Tenant in or about the Premises or other portions of the Building (including, without limitation, that portion of the Initial Tenant Improvement Work and/or the Tenant’s Work completed at the sole cost and expense of Tenant) to the extent of their full replacement value; and”
(t)    Clause (a), only, of the second sentence of Section 38(i) of the Original Lease is deleted, and is replaced by the following: “(a) any Hazardous Materials or violations of Law affecting the Original Premises, the Building or the Project prior to the Commencement Date or affecting the Second Expansion Premises prior to the SEP Commencement Date, or”.
3.    Concurrently with the execution and delivery of this Second Amendment, Tenant shall deliver to landlord a one (1) year, irrevocable, unconditional letter of credit, compliant with all provisions of Section 18(a) of the Original Lease, in the amount of One Hundred and Fifty One Thousand Dollars ($151,000.00) (the “Additional Security Deposit”). Delivery of the Additional Security Deposit may be satisfied by Tenant’s delivery of a replacement letter of credit in an amount equal to the sum of the current Security Deposit pursuant to the Original Lease plus the Additional Security Deposit, which sum Landlord and Tenant agree is Three Hundred Seventy Five Thousand, Five Hundred Fifty One and 81/100 Dollars ($375,551.81) as of the Effective Date. The Additional Security Deposit shall be treated in all respects as the Security Deposit is treated, except that Section 18(h) of the Original Lease shall not be applicable to the Additional Security Deposit. Section 18(h) of the Original Lease shall continue to apply with respect to the Security Deposit pursuant to the Original Lease.

4.    Subject to the Rules and Regulations attached to the Original Lease as Exhibit J, as the same may be modified by Landlord from time to time during the Term, in accordance with the Lease, Tenant shall have the right to use thirty three (33) non-exclusive, un-assigned and un-reserved parking spaces in the parking garage located in the Project for non-commercial vehicles, in common with other tenants of the property. These parking spaces referenced in this Section are in relation to the leasing of the Second Expansion




Premises only, such that if the Tenant does not exercise its renewal option for the Second Expansion Premises, it shall have no further rights with respect to such 33 parking spaces. The right to use parking spaces as set forth in Section 24(a) of the Original Lease with respect to the Original Premises shall apply in addition to the rights set forth in this Section; provided that if the Tenant does not exercise its renewal option for the Original Premises, it shall have no further rights with respect to the parking spaces as set forth in Section 24(a) of the Original Lease.

5. Landlord and Tenant represent and warrant to each other that they have dealt and negotiated solely and only with Jones Lang LaSalle for this Second Amendment and with no other broker. Landlord shall pay Jones Lang LaSalle a brokerage commission pursuant to a separate agreement. Landlord and Tenant hereby agree to indemnify, defend and hold the other harmless from and against any and all claims, suits, damages, liabilities, counsel fees, costs, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord or Tenant by reason of the actions or inactions of the indemnifying party.
6. Landlord and Tenant each hereby ratify and confirm its obligations under the Original Lease and the First Amendment, and represent and warrant to the other party that it has no defenses thereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, (a) the Original Lease and the First Amendment are and remain in good standing and in full force and effect, and (b) Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Original Lease and the First Amendment or in any way relating thereto or arising out of any other transaction between Landlord and Tenant.
7.    Except as modified by this Second Amendment, the Original Lease and the First Amendment shall remain in full effect and shall be applicable to the Second Expansion Premises. This Second Amendment shall be binding upon Landlord and Tenant and their respective successors and assigns. If any inconsistency exists or arises between the terms of this Second Amendment and the terms of the Original Lease or the First Amendment, the terms of this Second Amendment shall prevail with respect to the Second Expansion Premises. This Second Amendment shall be governed by the laws of the State of New Jersey, without regard to conflicts of law provisions.

8.        This Second Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one document. To facilitate execution of this Second Amendment, the parties hereto may execute and exchange, by electronic mail PDF, counterparts of the signature pages. Signature pages may be detached from the counterparts and attached to a single copy of this Second Amendment to physically form one document.

9.        This Second Amendment may not be changed orally and shall be binding upon and inure to the benefit of the parties hereto and their respective successors, permitted assigns and legal representatives.

10.    If any provisions of this Second Amendment shall be held invalid or unenforceable according to law, the remaining provisions herein shall not be affected thereby and shall continue in full force and effect.







[no further text on this page; signatures appear on next page]


































IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Lease as of the day and year first above written.

CIP II/AR BRIDGEWATER HOLDINGS LLC,
a Delaware limited liability company


By: CIP II/AR Bridgewater LLC,
a Delaware limited liability company,
its sole Member

By: AR at Bridgewater LLC,
a New Jersey limited liability company,
its Administrative Manager

By: ACP Land Holdings, LLC,
a New Jersey limited liability company,
its sole Member

By: Padco Management, Inc.,
a New Jersey corporation,
its Managing Member





By: /s/ Kurt Padavano
Name: Kurt Padavano
Title: Senior Vice President


INSMED INCORPORATED

By: /s/ S. Nicole Schaeffer
Name: S. Nicole Schaeffer
Title: Chief People Strategy Officer





EXHIBIT “A”

SECOND EXPANSION PREMISES





EXHIBIT103IMAGE1.JPG













EXHIBIT “A-1”

DEMISING WORK




EXHIBIT103IMAGE2.JPG







EXHIBIT “B”

SECOND EXPANSION PREMISES WORK LETTER


This Exhibit “B” is attached to and made a part of that certain Second Amendment to Lease dated October         , 2018 (the “Second Amendment”), between CIP II/AR BRIDGEWATER HOLDINGS LLC (“Landlord”) and INSMED INCORPORATED (“Tenant”). The terms used in this Exhibit that are defined in the Second Amendment shall have the same meanings as provided in the Second Amendment.

The purpose of this Exhibit “B” is to set forth the relative rights and obligations of Landlord and Tenant with respect to the preparation and approval of preliminary drawings, final plans and the construction and installation of the initial tenant improvements in the Second Expansion Premises (the “Tenant’s Work”). This Exhibit “B” contemplates that the performance of the Tenant’s Work will proceed in accordance with the following terms and conditions.

A.    Preliminary Plans

(1)    Tenant has advised Landlord that Tenant desires Landlord to perform certain Tenant’s Work in the Second Expansion Premises pursuant to plans and specifications which Tenant is currently preparing. Tenant shall cause preliminary schematic drawings and outline specifications (collectively, the “Preliminary Drawings”) to be provided to the Landlord for its review and approval. Prior to the Effective Date, Tenant has provided to Landlord a space plan which constitutes only a partial set of the Preliminary Drawings. Tenant acknowledges and agrees that (i) Tenant shall provide a complete set of Preliminary MEP Drawings based upon the space plan provided to Landlord prior to the Effective Date for its review and approval, subsequent to the Effective Date, and (ii) the Preliminary Drawings shall consist of the space plan provided by Tenant to Landlord prior to the Effective Date and the complete set of Preliminary MEP Drawings to be provided by Tenant subsequent to the Effective Date. Landlord shall approve or provide reasonable detail of its disapproval of such Preliminary Drawings within five (5) Business Days after Landlord receives the complete set of Preliminary MEP Drawings from Tenant, such approval not to be unreasonably withheld, conditioned or delayed. If Landlord denies approval, Tenant shall cause the Preliminary Drawings to be revised and resubmitted to Landlord within five (5) Business Days. Landlord shall then have three (3) Business Days to approve or provide reasonable detail of its disapproval of such revised Preliminary Drawings. If Landlord denies approval, such process will continue until Landlord’s approval of the Preliminary Drawings is provided. If Landlord fails to approve or deny approval within the time periods set forth above, Landlord shall be deemed to have approved the Preliminary Drawings in the form to which Landlord did not respond.

B.    Final Plans

(1)Promptly following the Landlord’s approval of the Preliminary Drawings, Tenant shall be solely responsible for the timely preparation and submission to Landlord of all architectural, electrical and mechanical construction drawings, plans and specifications necessary to construct the Tenant’s Work, which plans shall be prepared consistent with the approved Preliminary Drawings (collectively, the “Working Drawings”). Tenant shall provide a complete set of the Working Drawings to Landlord for its review and approval by no later than sixty (60) days after the Landlord’s approval of the Preliminary Drawings (the “Working Drawings Outside Date”). Landlord shall approve or




provide reasonable detail of its disapproval of such Working Drawings within five (5) Business Days, such approval not to be unreasonably withheld, conditioned or delayed. If Landlord denies approval, Tenant shall cause the Working Drawings to be revised and resubmitted to Landlord within five (5) Business Days. Landlord shall then have three (3) Business Days to approve or provide reasonable detail of its disapproval of such revised Working Drawings. If Landlord denies approval, such process will continue until Landlord’s approval of the Working Drawings is provided. If Landlord fails to approve or deny approval within the time periods set forth above, Landlord shall be deemed to have approved the Working Drawings in the form to which Landlord did not respond. The Working Drawings as approved in accordance with this subsection are referred to as the “Final Plans”. Landlord and Tenant agree that promptly following the approval of the Final Plans, Landlord and Tenant shall mutually agree upon the TW Delivery Date in accordance with the provisions of Section 2(g) of the Second Amendment.

(2)Notwithstanding anything to the contrary contained herein, Tenant shall be responsible for all elements of the design of Tenant’s Preliminary Drawings, Working Drawings and Final Plans (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the Second Expansion Premises and the placement of Tenant’s furniture, appliances and equipment), and Landlord’s approval of Tenant’s Preliminary Drawings, Working Drawings and Final Plans shall in no event relieve Tenant of the responsibility for such design. Tenant covenants and agrees to use commercially reasonable efforts to cause (x) the Preliminary Drawings to be provided to the Landlord for its review and approval by no later than the Preliminary Drawings Outside Date, and (y) the Working Drawings shall be provided to Landlord for its review and approval by no later than the Working Drawings Outside Date and to devote such time as may be necessary in consultation with said architect and engineers to enable them to complete and submit the Preliminary Drawings and/or the Working Drawings within the required time limit. The parties agree that in no event shall Tenant’s failure to comply with the timing requirements contained in this Exhibit “B”, constitute a default by Tenant under the Lease.

(3)    Subject to Section F below, Landlord shall act as construction manager with respect to the Tenant’s Work. The parties acknowledge that there shall be no general contractor for the Tenant’s Work, and Landlord shall enter into direct contracts with subcontractors for each of the trades necessary to perform the Tenant’s Work. Promptly following approval of the Final Plans, Landlord shall submit the Final Plans to at least three (3) subcontractors for each of the trades necessary to perform the Tenant’s Work, who shall be requested to submit a fixed price contract bid on a straight time basis. Prior to approval of the Final Plans, Tenant shall have the right to provide Landlord with a list of subcontractors which Tenant desires to obtain bids from (one for each trade), which subcontractors shall be subject to Landlord’s reasonable approval. Landlord and Tenant shall monitor the bidding process and jointly review the bids and shall adjust the bids based upon any inconsistent assumptions to reflect an “apple to apples” comparison. Within ten (10) Business Days following the joint review and adjustment of the bids, Landlord and Tenant shall pick the subcontractors to perform the Tenant’s Work, and Tenant shall approve the budget for the Tenant’s Work (the “Approved Budget”). Thereafter, Landlord shall enter into fixed price contracts with such subcontractors consistent with the Approved Budget (the “Contracts”), which Contracts shall be subject to Tenant’s reasonable approval, shall include the insurance requirements set forth in Schedule 1 hereto and shall be assignable to Tenant, or its designee without consent of the subcontractors. Tenant shall approve or provide reasonable detail of its disapproval of any Contract within three (3) Business Days after Tenant’s receipt, such approval not to be unreasonably withheld, conditioned or delayed. Landlord may, at its election, designate a list of approved subcontractors for the performance of those portions of the Tenant’s Work involving electrical, mechanical, plumbing, heating, air conditioning, ventilation, life safety or other Building systems, from which list the subcontractors, as the case may be, must be selected.





C.    Tenant Improvements

(1)    Subject to Section F below, as soon as reasonably practicable after selection of the subcontractors to perform the Tenant’s Work, and Landlord’s receipt of all required permits and approvals for the Tenant’s Work (which permits and approvals shall be obtained by Landlord), and subject to Section F below, Landlord shall cause the subcontractors to construct the installations and improvements and complete the Tenant’s Work in accordance with the approved Final Plans. In connection with the performance of the Tenant’s Work, Landlord shall be responsible for the cost of the Tenant’s Work up to $41,073.00 (representing $3.00 per rentable square foot of the Second Expansion Premises) (the “SEP Construction Credit”). The Landlord shall make (i) fifty percent (50%) of the SEP Construction Credit ($20,536.50) (the “Initial SEP Construction Credit Payment”) available for funding following Landlord’s receipt of Tenant’s payment of the Initial Additional Cost Payment (as hereafter defined), and (ii) fifty percent (50%) of the SEP Construction Credit ($20,536.50) available for funding within thirty (30) days after the Tenant’s Work is Substantially Completed; provided that Landlord shall not be required to fund any of the SEP Construction Credit while an Event of Default exists. The cost of the Tenant’s Work in excess of the SEP Construction Credit, including any costs to be paid pursuant to Section 2(b) below, shall be referred to as an “Additional Cost” and paid by Tenant in accordance with Section (2)(c) below.

(2)    (a)    Landlord shall be paid a construction management fee in the amount of five percent (5%) of the gross amount of all of the Contracts, plus an additional five percent (5%) of such amount for overhead. In no event shall Landlord be paid a construction management fee on soft costs for the Tenant’s Work or on any costs for any Tenant Installations (as defined below).
   
(b)    Any changes requested by Tenant from the work indicated on the Final Plans shall be performed by Landlord pursuant to a change order approved and executed by Landlord and Tenant. All changes to the Final Plans requested by Tenant, or required based on field conditions must be approved by Landlord in advance, which approval shall not be unreasonably withheld, delayed or conditioned. Landlord shall respond to changes to the Final Plans within ten (10) Business Days. All increases in the cost of the Tenant’s Work resulting from such change orders shall be borne by Tenant, subject to payment as part of the SEP Construction Credit.

(c)    Tenant shall pay to Landlord (i) fifty percent (50%) of the total of any Additional Cost to be incurred by Landlord in connection with the Tenant’s Work within ten (10) days after Tenant approves the Approved Budget (the “Initial Additional Cost Payment”), or any change order pursuant to subsection (b) above, as applicable, and (ii) following the Landlord’s payment of the full amount of the Initial Additional Cost Payment and the Initial SEP Construction Credit Payment to the subcontractors during the performance of the Tenant’s Work, Tenant shall pay to Landlord the total amount of each Payment Request (as hereafter defined) within thirty (30) days after the Landlord’s giving of such Payment Request to Tenant, which process shall continue until the Tenant’s Work is completed. From time to time during the performance of Tenant’s Work (following the Landlord’s payment of the full amount of the Initial Additional Cost Payment and the Initial SEP Construction Credit Payment to the subcontractors during the performance of the Tenant’s Work), but not more frequently than once per month, the Landlord shall submit a written request for payment (a “Payment Request”) to Tenant that contains the following documentation: (1) an Application for Payment (AIA documents G702 and G703) from Advance Realty Management, Inc (“Advance Realty”) or another affiliate of Advance Realty identifying percentage of completion by trade; (2) a statement signed by Advance Realty or another affiliate of Advance Realty briefly describing the portions of Tenant’s Work that have been completed in accordance with the Final Plans, (3) a copy of all invoices relating to that portion of Tenant’s Work described in the Application for Payment and all other invoices for any Additional Cost for which




Landlord is requesting payment, and (4) partial lien waivers from all contractors, subcontractors, suppliers and materialmen who performed work, furnished services or provided material in connection with such portion of the Tenant’s Work identified in the Application for Payment (collectively, the “Required Documents”). Upon Substantial Completion of the Tenant’s Work, the Landlord shall submit a final Payment Request to Tenant together with the Required Documents (including final lien waivers from all contractors, subcontractors, suppliers and materialmen who performed work, furnished services or provided material in connection with the Tenant’s Work) and a copy of the certificate permitting Tenant to occupy the Second Expansion Premises from the applicable local governing authority, if required by Law in connection with the Substantial Completion of the Tenant’s Work. Notwithstanding anything to the contrary contained in this Section C (2)(c), Tenant shall receive a credit equal to fifty percent (50%) of the SEP Construction Credit ($20,536.50) in the Final Payment Request.

(3)    The Demising Work and, subject to Section F below, the Tenant’s Work constitute all of the improvements to be Substantially Completed by Landlord in order to prepare the Second Expansion Premises for occupancy by Tenant.

D.    Tenant Installations

(1)    Tenant, at its own cost and expense, shall perform all work related to installation of furniture, moveable furnishings, telephone systems (including, without limitation, voice and data cabling and telecommunications equipment) and office equipment (the “Tenant Installations”), subject to the provisions of Section D. Tenant shall have access to the Second Expansion Premises to perform such Tenant Installations in accordance with the provisions of this Section D. All Tenant Installations which adversely affect the structure of the Building, require any permit from a governmental authority, involve electrical work or adversely affect the Building systems shall require the prior written consent of Landlord, which consent shall not be unreasonably withheld. All Tenant Installations shall be performed in accordance with Section 22 of the Original Lease and accomplished in a good and workmanlike manner so as not to damage the Second Expansion Premises (including the Tenant’s Work) or the Building or the plumbing, electrical line or other utilities. Notwithstanding anything to the contrary contained herein, Landlord’s contractor shall, in Landlord’s contractor’s reasonable discretion, coordinate the performance of the Tenant’s Work and the Tenant’s performance of the Tenant Installations in accordance with customary and prudent construction practices in order to effectuate such installations in an orderly and efficient manner, subject to the provisions of this Section D.

(2)    In the event that Tenant performs any Tenant Installations pursuant to this Second Amendment, Tenant agrees promptly to notify Landlord in writing of the names of its agents, contractors or subcontractors who are to work in the Second Expansion Premises, and to furnish Landlord with such other information as Landlord may reasonably require. All work done by Tenant, its agents, contractors, subcontractors or employees shall be scheduled and performed so as not to conflict, interfere with, or delay any work undertaken by Landlord in the Building or Landlord's completion of the Tenant’s Work. In the event that Tenant, its agents, contractors, subcontractors or employees do not work in harmony with, or interfere with, labor employed by Landlord, its agents, contractors, subcontractors or employees or in the event any work stoppage, jurisdictional labor dispute or other interference with Landlord, its agents, contractors, subcontractors or employees occurs Landlord shall have the right to require Tenant, upon written demand, to remove or cause the removal forthwith all of Tenant's agents, contractors and employees from the Second Expansion Premises and Tenant agrees to comply with such demand immediately. Any of Tenant's Installations shall be installed solely at Tenant's risk. Tenant shall be liable to Landlord for all costs and expenses incurred by Landlord in the event Tenant, its employees, agents, contractors or subcontractors damage the Tenant’s Work, the Second Expansion Premises or the Building.





E.    Tenant Delay

“Tenant Delay” means a delay in the Substantial Completion of the Tenant’s Work by reason of (a) failure of Tenant or its employees or agents to reasonably cooperate with Landlord; (b) any change order requested by Tenant; (c) Tenant’s performance of any Tenant’s Installation; and/or (d) the failure to provide clarifications or additional information requested by Landlord regarding the Final Plans within a reasonable time period following Landlord’s request.

F.    Sale of Property

In the event that (i) closing on the sale of the Property will occur prior to Substantial Completion of the Tenant’s Work, and (ii) the buyer of the Property (“Buyer”) does not intend to, or fails to engage, Advance Realty or another affiliate of Advance Realty to manage construction of the Tenant’s Work on Buyer’s behalf, then Landlord shall deliver written notice to Tenant (the “New Construction Manager Notice”), which New Construction Manager Notice shall specify the person or entity that will manage construction of the Tenant’s Work on Buyer’s behalf (the “New Construction Manager”) and such other information concerning the construction management capabilities of the New Construction Manager that Tenant may reasonably request. If the New Construction Manager is unacceptable to Tenant in its sole discretion, Tenant may elect, by written notice to Landlord within ten (10) Business Days following Tenant’s receipt of the New Construction Manager Notice (the “Assumption Notice”), to assume responsibility for managing construction of the Tenant’s Work, in which event the following shall apply:

(1)     No later than five (5) Business Days after Landlord’s receipt of the Assumption Notice (the “Transfer Date”), (a) Landlord and Tenant (or Tenant’s designee) shall execute an assignment and assumption agreement for the Contracts in substantially the form attached hereto as Exhibit “B-1”; provided that if the assignment and assumption agreement is executed by Tenant’s designee, Tenant shall join in the assignment and assumption agreement for purposes of agreeing to be indemnify Landlord as set forth therein; (b) Landlord shall execute an assignment in form reasonably acceptable to Landlord and Tenant assigning to Tenant any and all warranties for materials or for work completed prior to the Transfer Date, and (c) Landlord shall deliver to Tenant (i) executed originals (or if originals are not available, certified copies) of the Contracts, including all amendments and change orders, and all correspondence relating to such Contracts, (ii) a summary in reasonable detail of the status of construction of the Tenant’s Work, broken down by Contract, including work completed to the date of as of the Transfer Date and work remaining to be completed, (iii) a summary for each Contract identifying the amounts invoiced to date, the amounts paid to date, retainage amounts and the balance of the Contract price, and (iv) copies of all invoices received and lien waivers for amounts paid to date.

(2)    Effective as of the Transfer Date, Section 2(g) of the Second Amendment and Section C(2)(a) of this Second Expansion Premises Work Letter shall be deemed deleted in their entirety. Notwithstanding anything to the contrary contained herein, Tenant agrees that Landlord shall be entitled to the construction management fee plus the additional amount for overhead more particularly described in Section C(2)(a) of this Second Expansion Premises Work Letter, based upon the gross amount of all Paid Costs (as hereafter defined).

(3)    From and after the Transfer Date until the date that Tenant’s Work is completed (the “Tenant’s Work Period”), Tenant shall (i) cause the Tenant’s Work to be performed in accordance with Section 22(b) of the Original Lease, and (ii) within fifteen (15) days after each Landlord’s written request to Tenant, provide Landlord with a description of the Tenant’s Work completed by Tenant (each a “Tenant’s Work Report”) since the Transfer Date, or the date of the most recent Tenant’s Work Report given to Landlord, as the case may be. Notwithstanding anything to the contrary contained herein, in no event shall Tenant be required to




furnish a Tenant’s Work Report to Landlord more frequently than one (1) time per calendar month during the Tenant’s Work Period. Each Tenant’s Work Report shall also contain the following documentation: (1) a statement signed by the Tenant or Tenant’s construction manager briefly describing the portions of Tenant’s Work that have been completed in accordance with the Final Plans, (2) a copy of all invoices relating to that portion of Tenant’s Work described in the Tenant’s Work Report, and (3) partial lien waivers from all contractors, subcontractors, suppliers and materialmen who performed work, furnished services or provided material in connection with such portion of the Tenant’s Work identified in the Tenant’s Work Report (collectively, the “Tenant’s Work Required Documents”). Upon Substantial Completion of the Tenant’s Work, the Tenant shall submit a final Tenant’s Work Report to Landlord together with the Tenant’s Work Required Documents (including final lien waivers from all contractors, subcontractors, suppliers and materialmen who performed work, furnished services or provided material in connection with the Tenant’s Work), a copy of the certificate permitting Tenant to occupy the Second Expansion Premises from the applicable local governing authority, if required by Law in connection with the completion of the Tenant’s Work and Tenant’s request for disbursement of the balance of the SEP Construction Credit. Provided the final Tenant’s Work Report includes all Tenant’s Work Required Documents, and no Event of Default exists at the time of the Landlord receives the final Tenant’s Work Report and Tenant’s request for disbursement of the balance of the SEP Construction Credit, then Landlord shall disburse the balance of the SEP Construction Credit to Tenant within thirty (30) days after the Landlord’s receipt of such final Tenant’s Work Report.

(4)    Notwithstanding anything in the Second Amendment to the contrary, from and after the Transfer Date, Landlord shall have no obligation to manage construction of, or cause the completion of, the Tenant’s Work.

(5)    All sums paid by Landlord to subcontractors pursuant to the Contracts prior to the Transfer Date are referred to as “Paid Costs”. If Tenant shall have paid the Initial Additional Cost Payment to Landlord prior to such Transfer Date, and the then remaining balance of the Initial Additional Cost Payment and the Initial SEP Construction Credit, if any, on the Transfer Date exceeds the total amount of Paid Costs, then Landlord shall pay to Tenant the amount of any such excess on the Transfer Date. Notwithstanding the foregoing, if an Event of Default exists on the Transfer Date, Landlord shall not be required to pay to Tenant on the Transfer Date that portion of the excess consisting of the Initial SEP Construction Credit.











SCHEDULE 1


INSURANCE REQUIREMENTS





EXHIBIT103IMAGE3.JPG






EXHIBIT “B-1”

FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF CONTRACTS (this “Assignment”) dated as of [        ], is by and between CIP II/AR BRIDGEWATER HOLDINGS LLC, a Delaware limited liability company (“Assignor”), and [            ], a [            ] (“Assignee”), with the joinder of INSMED INCORPORATED, a Virginia corporation (“Tenant”).
BACKGROUND
A.    Assignor and Tenant are parties to that certain Lease Agreement dated as of July 1, 2016 (the “Original Lease”), as amended by that certain First Amendment to Lease dated as of October 1, 2016 (the “First Amendment”), and that certain Second Amendment to Lease dated as of October [    ], 2018 (the “Second Amendment” and together with the Original Lease and the First Amendment, collectively, the “Lease”). Capitalized terms used but not defined herein have the meanings assigned to such terms in the Second Amendment; and
B.    Pursuant to the Second Amendment, Assignor is a party to certain contracts with respect to the Tenant’s Work, which contracts are described in Schedule 1 attached hereto (the “Contracts”); and
C.    Tenant has exercised its option to assume responsibility for managing construction of the Tenant’s Work pursuant to Section F of the Second Expansion Premises Work Letter; and
E.    Assignor desires to assign its interest in the Contracts to Assignee, and Assignee desires to accept the assignment thereof, on the terms and conditions below.
NOW, THEREFORE, in consideration of the premises, the parties, intending to be legally bound, agree as follows:
1.    Assignor hereby assigns to Assignee all of its right, title, and interest in and to the Contracts, and Assignee hereby accepts such assignment and assumes all of the Assignor’s obligations under the Contracts arising from and after the date hereof.
2.    Tenant agrees to indemnify Assignor and hold Assignor harmless from and against any and all claims, liens, damages, demands, causes of action, liabilities, lawsuits, judgments, losses, costs and expenses (including but not limited to reasonable attorneys’ fees and expenses) asserted against or incurred by Assignor by reason of or arising out of any failure by Assignee or Tenant to its obligations under the Contracts arising from and after the date hereof, including without limitation, failure to pay any amounts due under the Contracts other than those amounts set forth on Schedule 2 attached hereto.
3.    Assignor agrees to indemnify Tenant and Assignee and hold Tenant and Assignee harmless from and against any and all claims, liens, damages, demands, causes of action, liabilities, lawsuits, judgments, losses, costs and expenses (including but not limited to reasonable attorneys’ fees and expenses) asserted against or incurred by Tenant or Assignee by reason of or arising out of any failure by Assignor to perform its obligations under the Contracts arising prior to the date hereof, including without limitation, failure to pay any amounts due under the Contracts set forth on Schedule 2 attached hereto.
4.    This Assignment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
5.    This Assignment shall be governed by and construed in accordance with the laws of the State of New Jersey.




6.    This Assignment may be executed in any number of counterparts and by each party on separate counterparts, and all such counterparts shall constitute one and the same instrument.
7.    Assignor shall, at no out-of-pocket expense to Assignor, reasonably cooperate with Assignee and Tenant in connection with Tenant’s assumption of construction management for the Tenant’s Work, including without limitation, providing Tenant and Assignee with access to all documents, books and records in Assignor’s possession or control reasonably requested by Buyer in connection with the Contracts or such other information as reasonably requested by Tenant or Assignee in order to enforce the Contracts against the counterparties thereto.

 
EXHIBIT “C”

RETAINED FFE IN THE SECOND EXPANSION PREMISES


Location
Quantity
Name Brand
Name/Model Number
Serial Number
L- 203
1
Eppendorf
Centrifuge
5436B
L- 203
1
KDS Scientific
 
2390
L- 203
1
KDS Scientific
 
2391
L- 203
1
KDS Scientific
 
1024
L- 203
1
KDS Scientific
 
4886
L- 203
1
KDS Scientific
 
5022
L- 203
1
KDS Scientific
 
1134
L- 203
1
Hamilton
Hood (15252395)
 
L- 206
1
Hamilton
Hood (15252395)
 
L- 207
1
Hamilton
Hood (15252395)
 
L- 209
2
Kewaunee
Air Flow II
 
L- 215
4
Kewaunee
Air Flow II
 
L- 218
1
Kewaunee
Air Flow II
 
L- 219
1
Kewaunee
Air Flow II
 






EXHIBIT 31.1
 
Section 302 Certification
 
I, William H. Lewis, Chief Executive Officer of Insmed Incorporated, certify that:
 
(1) I have reviewed this Quarterly Report on Form 10-Q of Insmed Incorporated;
 
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  May 7, 2019
/s/ William H. Lewis
William H. Lewis
Chairman and Chief Executive Officer
(Principal Executive Officer)
 






EXHIBIT 31.2
 
Section 302 Certification
 
I, Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, certify that:
 
(1) I have reviewed this Quarterly Report on Form 10-Q of Insmed Incorporated;
 
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  May 7, 2019
/s/ Paolo Tombesi
Paolo Tombesi
Chief Financial Officer
(Principal Financial and Accounting Officer)
 





EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
 
Solely for the purposes of complying with 18 U.S.C. § 1350, I, William Lewis, Chief Executive Officer of Insmed Incorporated (the “Company”), hereby certify, based on my knowledge, that:
 
(1)
 the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
 the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ William H. Lewis
William H. Lewis
Chairman and Chief Executive Officer
(Principal Executive Officer)

May 7, 2019
 
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Insmed Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.  A signed original of this statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
 
Solely for the purposes of complying with 18 U.S.C. § 1350, I, Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated (the “Company”), hereby certify, based on my knowledge, that:
 
(1)
 the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Paolo Tombesi
Paolo Tombesi
Chief Financial Officer
(Principal Financial and Accounting Officer)

May 7, 2019
 
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Insmed Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.  A signed original of this statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.