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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number 000-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section12(b) of the Act:
Title of each class Trading symbols Name of each exchange on which registered
Common stock, par value $0.01 per share INSM Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company 

Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
As of July 29, 2019, there were 89,207,638 shares of the registrant’s common stock outstanding.



Table of Contents
INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019
 
INDEX
 
 
3
 
4
5
 
7
 
8
19
31
31
31
31
31
31
32
34
 
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
June 30, 2019 December 31, 2018
  (unaudited)  
Assets    
Current assets:    
Cash and cash equivalents $ 601,260  $ 495,072 
Accounts receivable 11,638  5,515 
Inventory 20,160  7,032 
Prepaid expenses and other current assets 15,856  11,327 
Total current assets 648,914  518,946 
Intangibles, net 56,179  58,675 
Fixed assets, net 38,913  22,636 
Operating lease right-of-use assets 42,316  — 
Other assets 16,461  4,299 
Total assets $ 802,783  $ 604,556 
Liabilities and shareholders’ equity    
Current liabilities:    
Accounts payable $ 17,031  $ 17,741 
Accrued expenses 49,363  38,254 
Accrued compensation 10,218  22,208 
Lease liabilities 9,184  — 
Other current liabilities 234  1,529 
Total current liabilities 86,030  79,732 
Debt, long-term 326,128  316,558 
Long-term lease liabilities 33,530  — 
Other long-term liabilities 522  — 
Total liabilities 446,210  396,290 
Shareholders’ equity:    
Common stock, $0.01 par value; 500,000,000 authorized shares, 89,207,455 and 77,307,521 issued and outstanding shares at June 30, 2019 and December 31, 2018, respectively
892  773 
Additional paid-in capital 1,778,517  1,489,664 
Accumulated deficit (1,422,829) (1,282,162)
Accumulated other comprehensive loss (7) (9)
Total shareholders’ equity 356,573  208,266 
Total liabilities and shareholders’ equity $ 802,783  $ 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 June 30, Six Months Ended June 30,
  2019 2018 2019 2018
Revenues, net $ 29,972  $ —  $ 51,874  $ — 
Costs and expenses:        
Cost of product revenues (excluding amortization of intangible assets) 4,919  —  9,069  — 
Research and development 33,538  35,722  64,741  65,820 
Selling, general and administrative 52,433  37,160  107,243  69,813 
Amortization of intangible assets 1,248  —  2,496  — 
Total costs and expenses 92,138  72,882  183,549  135,633 
Operating loss (62,166) (72,882) (131,675) (135,633)
Investment income 2,578  2,729  4,994  4,769 
Interest expense (6,785) (6,488) (13,511) (12,130)
Loss on extinguishment of debt —  —  —  (2,209)
Other (expense) income, net (51) 244  (170) 330 
Loss before income taxes (66,424) (76,397) (140,362) (144,873)
Provision for income taxes 90  40  305  88 
Net loss $ (66,514) $ (76,437) $ (140,667) $ (144,961)
Basic and diluted net loss per share $ (0.81) $ (1.00) $ (1.77) $ (1.89)
Weighted average basic and diluted common shares outstanding
81,806  76,767  79,685  76,693 
Net loss $ (66,514) $ (76,437) $ (140,667) $ (144,961)
Other comprehensive income:        
Foreign currency translation (losses) gains (37) (21) 21 
Total comprehensive loss $ (66,551) $ (76,458) $ (140,665) $ (144,940)
 
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 April 1, 2018 76,623  $ 766  $ 1,460,460  $ (1,026,409) $ 39  $ 434,856 
Comprehensive loss:            
Net loss (76,437) (76,437)
Other comprehensive income (21) (21)
Exercise of stock options 369  5,639  5,643 
Equity component of convertible debt issuance (29) (29)
Issuance of common stock for vesting of RSUs 47  — 
Stock compensation expense 6,629  6,629 
Balance at June 30, 2018 77,039  $ 770  $ 1,472,699  $ (1,102,846) $ 18  $ 370,641 
Balance at April 1, 2019 77,596  $ 776  $ 1,499,646  $ (1,356,315) $ 30  $ 144,137 
Comprehensive loss:            
Net loss (66,514) (66,514)
Other comprehensive income (37) (37)
Exercise of stock options and ESPP shares 910  10,447  10,455 
Net proceeds from issuance of common stock 10,658  107  261,071  261,178 
Issuance of common stock for vesting of RSUs 43 1
Stock compensation expense 7,353  7,353 
Balance at June 30, 2019 89,207  $ 892  $ 1,778,517  $ (1,422,829) $ (7) $ 356,573 

See accompanying notes to consolidated financial statements


5

Table of Contents
INSMED INCORPORATED
Consolidated Statements of Shareholders' Equity (unaudited) (continued)
(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 (144,961) (144,961)
Other comprehensive income 21  21 
Exercise of stock options 381  5,781  5,785 
Equity component of convertible debt issuance 136,434  136,434 
Issuance of common stock for vesting of RSUs 47  — 
Stock compensation expense 12,303  12,303 
Balance at June 30, 2018 77,039  $ 770  $ 1,472,699  $ (1,102,846) $ 18  $ 370,641 
Balance at January 1, 2019 77,308  $ 773  $ 1,489,664  $ (1,282,162) $ (9) $ 208,266 
Comprehensive loss:            
Net loss (140,667) (140,667)
Other comprehensive income
Exercise of stock options and ESPP shares 1,163  11  13,493  13,504 
Net proceeds from issuance of common stock 10,658  107  261,071  261,178 
Issuance of common stock for vesting of RSUs 78  1
Stock compensation expense 14,289  14,289 
Balance at June 30, 2019 89,207  $ 892  $ 1,778,517  $ (1,422,829) $ (7) $ 356,573 

See accompanying notes to consolidated financial statements
6

Table of Contents
INSMED INCORPORATED
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
  Six Months Ended June 30,
  2019 2018
Operating activities    
Net loss $ (140,667) $ (144,961)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation 2,245  1,698 
Amortization of intangible assets 2,496  — 
Stock-based compensation expense 14,289  12,303 
Loss on extinguishment of debt —  2,209 
Amortization of debt issuance costs 698  585 
Accretion of debt discount and back-end fee 8,872  7,302 
Changes in operating assets and liabilities:    
Accounts receivable (6,123) — 
Inventory (13,128) — 
Prepaid expenses and other current assets (4,588) (3,653)
Other assets (12,087) — 
Accounts payable (1,284) 1,981 
Accrued expenses and other 7,390  5,037 
Accrued compensation (11,990) (4,826)
Net cash used in operating activities (153,877) (122,325)
Investing activities    
Purchase of fixed assets (14,638) (8,212)
Net cash used in investing activities (14,638) (8,212)
Financing activities    
Proceeds from exercise of stock options and ESPP 13,504  5,785 
Proceeds from issuance of common stock, net 261,178  — 
Payment on extinguishment of debt —  (2,835)
Payment of debt —  (55,000)
Proceeds from issuance of 1.75% convertible senior notes due 2025
—  450,000 
Payment of debt issuance costs —  (14,235)
Net cash provided by financing activities 274,682  383,715 
Effect of exchange rates on cash and cash equivalents 21  (14)
Net increase in cash and cash equivalents 106,188  253,164 
Cash and cash equivalents at beginning of period 495,072  381,165 
Cash and cash equivalents at end of period $ 601,260  $ 634,329 
Supplemental disclosures of cash flow information:    
Cash paid for interest $ 3,941  $ 1,276 
Cash paid for income taxes $ 200  $ 93 
 See accompanying notes to consolidated financial statements

7

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) in September 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options. MAC lung disease is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. The Company's clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1) with therapeutic potential in non-cystic fibrosis (non-CF) bronchiectasis and other inflammatory diseases. INS1009 is an inhaled formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are in Bridgewater, New Jersey. The Company has legal entities in the US, 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. All intercompany transactions and balances have been eliminated in consolidation and certain prior year amounts have been reclassified to conform to the current year presentation.
 
The Company had $601.3 million in cash and cash equivalents as of June 30, 2019 and reported a net loss of $140.7 million for the six months ended June 30, 2019. Historically, the Company has funded its operations through public offerings of equity securities and debt financings. The Company commenced commercial shipments of ARIKAYCE in October 2018. The Company expects to continue to incur operating losses both at 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.

  In the second quarter of 2019, the Company completed an underwritten offering of 10,657,692 shares of the Company's common stock, which included the underwriters' exercise in full of its over-allotment option of 1,042,307 shares from the Company at a price to the public of $26.00, less underwriting discounts and commissions. The Company's net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of $15.9 million, were $261.2 million. The offering also included the sale of 400,000 shares from the Company's Chairman and Chief Executive Officer, from which the Company received no proceeds. 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.


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:
8

 
Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Each major category of financial assets and liabilities measured at fair value on a recurring basis is categorized based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments in Level 1 generally include US treasuries and mutual funds listed in active markets.
 
The Company’s only financial assets and liabilities which were measured at fair value as of June 30, 2019 and December 31, 2018 were Level 1 assets comprised of cash and cash equivalents. The Company's cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. The following table shows assets and liabilities that are measured at fair value on a recurring basis and their carrying value (in millions):

As of June 30, 2019
Fair Value
Carrying Value Level 1 Level 2 Level 3
Cash and cash equivalents $ 601.3  $ 601.3  $ —  $ — 

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 six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019 and December 31, 2018, the Company held no securities that were in an unrealized gain or loss position.

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

The estimated fair value of the liability component of the Company's 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of June 30, 2019 was $431.9 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $326.1 million carrying value of the Convertibles Notes as of June 30, 2019 excludes the $116.1 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.
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The following table sets forth the reconciliation of the weighted average number of common shares used to compute basic and diluted net loss per share for the three and six months ended June 30, 2019 and 2018:
 
  Three Months Ended June 30, Six Months Ended June 30,
  2019 2018 2019 2018
  (in thousands, except per share amounts)
Numerator:        
Net loss $ (66,514) $ (76,437) $ (140,667) $ (144,961)
Denominator:        
Weighted average common shares used in calculation of basic net loss per share: 81,806  76,767  79,685  76,693 
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 81,806  76,767  79,685  76,693 
Net loss per share:        
Basic and diluted $ (0.81) $ (1.00) $ (1.77) $ (1.89)
 
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of June 30, 2019 and 2018 as their effect would have been anti-dilutive (in thousands):
 
As of June 30,
  2019 2018
Stock options to purchase common stock 11,034  9,578 
Unvested RSUs 475  236 
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 six months ended June 30, 2019.
Percentage of Total Gross Product Revenue
Customer A 31%   
Customer B 30%   
Customer C 19%   
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.
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Revenue Recognition—In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for the goods or services provided. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied. For all contracts that fall into the scope of ASC 606, the Company has identified one performance obligation: the sale of ARIKAYCE to its customers. The Company has not incurred or capitalized any incremental costs associated with obtaining contracts with customers.

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

Recently Adopted Accounting Pronouncements - In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. Among the updates, the standard requires debt extinguishment costs to be classified as cash outflows for
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financing activities. This standard update became effective as of the first quarter of 2018. As a result of the adoption of the standard, in the first quarter of 2018, the Company reported a $2.2 million loss on extinguishment of debt in the operating activities section of its consolidated statement of cash flows. The Company had no material debt extinguishment costs prior to the first quarter of 2018. The impact of adopting this standard was not material to the Company.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles. ASU 2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those years) and early adoption was permitted. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provided a transition option in which an entity would initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company used the new transition option and the package of practical expedients that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases; (2) lease classification for any expired or existing leases; and (3) initial direct costs for any expired or existing leases. The Company also used the practical expedient that allows it to treat the lease and non-lease components of its leases as a single component. The Company adopted ASU 2016-02 effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the consolidated balance sheet was $47.4 million. Refer to Note 7 - 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 June 30, 2019 and December 31, 2018, the Company's inventory balance consists of the following (in thousands):
June 30, 2019 December 31, 2018
Raw materials $ 9,216  $ 2,145 
Work-in-process 9,008  4,567 
Finished goods 1,936  320 
$ 20,160  $ 7,032 

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

4.                                      Intangibles, net
 
As of June 30, 2019, the Company's identifiable intangible assets consisted of acquired ARIKAYCE R&D and a milestone paid to PARI for the license to use PARI's Lamira® Nebulizer System for the delivery of ARIKAYCE to patients as a result of the FDA approval of ARIKAYCE in September 2018. Total intangible assets, net was $56.2 million as of June 30, 2019 and $58.7 million as of December 31, 2018.

Intangible assets are measured at their respective fair values on the date they were recorded and, with respect to the acquired ARIKAYCE milestone, at the date of subsequent adjustments of fair value. The Company began amortizing its intangible assets in October 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. A rollforward of the Company's intangible assets for the six months ended June 30, 2019 follows (in thousands):
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2019
Intangible Asset January 1, Additions Amortization June 30,
Acquired ARIKAYCE R&D $ 56,988  $ —  $ (2,425) $ 54,563 
PARI milestone upon FDA approval 1,687  —  (71) 1,616 
     Intangible assets $ 58,675  $ —  $ (2,496) $ 56,179 

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

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

Estimated
Useful Life (years)
Asset Description As of June 30, 2019 As of December 31, 2018
Lab equipment 7 $ 8,557  $ 7,935 
Furniture and fixtures 7 2,559  2,320 
Computer hardware and software
3-5
4,841  3,796 
Office equipment 7 65 65
Manufacturing equipment 7 1,398  1,166 
Leasehold improvements lease term 8,861  7,202 
Construction in Progress (CIP) —  29,050  14,325 
55,331  36,809 
Less accumulated depreciation (16,418) (14,173)
Fixed assets, net $ 38,913  $ 22,636 

Fixed assets, net of depreciation increased to $38.9 million as of June 30, 2019 from $22.6 million as of December 31, 2018. The increase was primarily due to $14.7 million in CIP for the manufacturing equipment related to the long-term capacity build-out at the Patheon UK Limited (Patheon) facility and build-out of the Company's new corporate headquarters.

6.                                      Accrued Expenses
 
As of June 30, 2019 and December 31, 2018, the Company's accrued expenses balance consist of the following (in thousands): 
June 30, 2019 December 31, 2018
Accrued clinical trial expenses $ 6,179  $ 6,635 
Accrued professional fees 10,014  13,398 
Accrued technical operation expenses 13,513  9,371 
Accrued royalty payable 1,389  409 
Accrued interest payable 3,631  3,631 
Accrued sales allowances and related costs 3,206  818 
Accrued construction costs 6,521  2,946 
Other accrued expenses 4,910  1,046 
  $ 49,363  $ 38,254 
 
7.                                    Leases

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

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

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

The table below summarizes the Company's total lease costs included in its consolidated financial statements, as well as other required quantitative disclosures (in thousands).
Three Months Ended Six Months Ended
June 30, 2019 June 30, 2019
Lease cost
 Operating lease cost $ 3,075  $ 6,154 
Total lease cost $ 3,075  $ 6,154 
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
  Operating cash flows for operating leases $ 3,141  $ 6,275 
Right-of-use assets obtained in exchange for new operating lease liabilities $ —  $ 47,396 
Weighted average remaining lease term - operating leases (years) 5.3 years 5.3 years
Weighted average discount rate - operating leases 7.3  % 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).

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Year ending December 31,
2019 (remaining) $ 6,230 
2020  11,000 
2021  10,287 
2022  6,000 
2023  6,000 
Thereafter
12,000 
Total 51,517 
Less: present value discount
8,803 
Present value of lease liabilities $ 42,714 
Balance sheet classification at June 30, 2019:
  Current lease liabilities $ 9,184 
  Long-term lease liabilities 33,530 
Total lease liabilities $ 42,714 


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 and the Company estimates the impact on its consolidated balance sheet will be approximately $20 million to $25 million.

Additionally, in October 2017, the Company entered into certain agreements with Patheon related to increasing its long-term production capacity for ARIKAYCE commercial inventory. Similar to the CMO arrangements previously described, the Company has determined that this agreement with Patheon contains an embedded lease for the manufacturing facility and the specialized equipment contained therein. Certain costs incurred by the Company under the agreement of $12.4 million, subsequent to the adoption of ASU 2016-02, have been classified within other assets in the Company's consolidated balance sheet. Upon the commencement date, the lease will be accounted for as an operating lease and prepaid costs and minimum guarantees specified in the agreement will be combined to establish an operating lease right-of-use asset and related lease liability.

8.                                    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
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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 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 5.5 years. The following table presents the carrying value of the Company’s debt balance (in thousands):
 
June 30, 2019 December 31, 2018
 1.75% convertible senior notes due 2025
$ 450,000  $ 450,000 
 Debt issuance costs, unamortized (7,742) (8,440)
 Discount on debt (116,130) (125,002)
Long-term debt, net $ 326,128  $ 316,558 
 
As of June 30, 2019, future principal repayments of the debt for each of the fiscal years through maturity were as follows (in thousands):
 
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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

Interest expense related to the Convertible Notes for the three and six months ended June 30, 2019 and June 30, 2018, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, and accretion of debt discount is as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2019  2018  2019  2018 
Contractual interest expense $ 1,970  $ 1,971  $ 3,941  $ 4,243 
Amortization of debt issuance costs 349  286  698  585 
Accretion of back-end fee on debt —  —  —  50 
Accretion of debt discount 4,466  4,231  8,872  7,252 
     Total interest expense $ 6,785  $ 6,488  $ 13,511  $ 12,130 

 
9.                                      Shareholders’ Equity
 
Common Stock — As of June 30, 2019, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 per share and 89,207,455 shares of common stock issued and outstanding. In addition, as of June 30, 2019, the Company had reserved 11,033,658 shares of common stock for issuance upon the exercise of outstanding stock options and 475,106 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 the second quarter of 2019, the Company completed an underwritten public offering of 10,657,692 shares of the Company's common stock, which included the underwriters' exercise in full of its over-allotment option of 1,042,307 shares from the Company at a price to the public of $26.00, less underwriting discounts and commissions. The Company's net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of $15.9 million, were $261.2 million. The offering also included the sale of 400,000 shares from the Company's Chairman and Chief Executive Officer, from which the Company received no proceeds.

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 8 Debt.

Preferred Stock — As of June 30, 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.

10.                                      Stock-Based Compensation
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The Company’s current equity compensation plan, the 2019 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 16, 2019. The 2019 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Under the terms of the 2019 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), RSUs, performance options/shares and other stock awards to eligible employees and non-employee directors. On May 16, 2019, upon the approval of the 2019 Incentive Plan by shareholders, 3,500,000 shares were authorized for issuance thereunder, plus any shares subject to then-outstanding awards under the 2017 Incentive Plan, 2015 Incentive Plan and the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. As of June 30, 2019, 3,817,005 shares remained for future issuance under the 2019 Incentive Plan. The 2019 Incentive Plan will terminate on May 16, 2029 unless it is extended or terminated earlier pursuant to its terms. 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 six months ended June 30, 2019, the Company granted inducement stock options covering 137,430 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 June 30, 2019, there was $38.7 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.9 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 June 30, 2019, there were no performance-condition options outstanding.
  
Restricted Stock Units — As of June 30, 2019, there was $9.7 million of unrecognized compensation expense related to unvested RSU awards which is expected to be recognized over a weighted average period of 3.2 years.
 
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 and six months ended June 30, 2019 and 2018, respectively (in millions): 
  Three Months Ended June 30, Six Months Ended June 30,
  2019 2018 2019 2018
Research and development $ 2.2  $ 2.7  $ 4.4  $ 4.6 
Selling, general and administrative 5.2  3.9  9.9  7.7 
Total $ 7.4  $ 6.6  $ 14.3  $ 12.3 
 
11.                                      Income Taxes
 
The Company’s provision for income taxes was $0.1 million and $0.0 million for the three months ended June 30, 2019 and June 30, 2018, respectively and $0.3 million and $0.1 million for the six months ended June 30, 2019 and June 30, 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 and six months ended June 30, 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 June 30, 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
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not have an impact on the balance sheet as of June 30, 2019 and December 31, 2018 or the income statement for the three and six months ended June 30, 2019 and June 30, 2018. 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.
 
12.                                      Commitments and Contingencies
 
Rent expense charged to operations was $0.8 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively, and was $1.6 million and $0.8 million for the six months ended June 30, 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:
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 payors 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 timely and successfully complete the study to verify a patient reported outcome (PRO) tool and 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 payors 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 conduct and 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;
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failure to obtain, or delays in obtaining, regulatory approvals for ARIKAYCE outside the US or for our product candidates in the US, Europe, Japan or other markets, including in the United Kingdom as a result of the United Kingdom’s planned exit from the European Union;
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 product 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, including any pricing reform, 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 FDA-approved 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, 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 in September 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options in a refractory setting, 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.

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Principal Product/Product Candidate   Status   Next Expected Milestones
ARIKAYCE for MAC lung disease  
• We continue to focus on the execution of a successful commercial launch of ARIKAYCE in the US. The product was granted accelerated approval by the FDA 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. We began commercial shipments of ARIKAYCE in October 2018.

• In July 2019, we filed a marketing authorization application (MAA) with the European Medicines Agency (EMA) for ARIKAYCE for the treatment of patients with persistent MAC lung infection. The MAA filing was subsequently validated. The proposed indication reflects the same population of refractory MAC lung disease patients for which ARIKAYCE is approved in the US.

• 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.


 
• In addition to our MAA, we intend to submit regulatory filings for ARIKAYCE in Japan in the first half of 2020. If approved by the relevant regulatory authorities, we expect ARIKAYCE would be the first inhaled therapy specifically indicated for the treatment of MAC lung disease in Europe and Japan.

• If approved by the relevant regulatory authorities, we plan to commercialize ARIKAYCE in certain countries in Europe, Japan and certain other countries.

• We continue to collaborate with the FDA on the post-approval confirmatory clinical trial required for full approval. We have initiated efforts to evaluate an appropriate patient reported outcome (PRO) tool that will enable the assessment of therapies for the treatment of NTM lung disease. If a PRO tool is verified through a short-term study, we plan to begin the confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease. In addition, we intend to conduct a separate study in patients with NTM lung disease caused by M. abscessus.
INS1007 (oral reversible inhibitor of DPP1) for non-CF bronchiectasis and other rare diseases

 
• In May 2019, we completed enrollment of 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 top-line data from the WILLOW clinical study of INS1007 in the first quarter of 2020.

• We are also 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 a 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.
 
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.


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Our Strategy

Our strategy focuses on the needs of patients with rare diseases. We secured accelerated approval from the FDA of ARIKAYCE for the treatment of refractory MAC lung disease in patients with limited or no alternative treatment options, and currently are primarily focused on the US commercial launch of ARIKAYCE. We are also seeking regulatory approval in Europe and Japan. 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;
Develop and validate a PRO tool for NTM lung disease to be used in, among other trials, the required confirmatory clinical trial required for the full US approval of ARIKAYCE by the FDA in patients with MAC lung disease;
Continue our global expansion efforts in Europe and Japan to support pre-commercial activities in those regions and support the potential regulatory filings for ARIKAYCE in 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 conducting the WILLOW study, our six-month Phase 2 trial of INS1007 in patients with non-CF bronchiectasis;
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, including 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 in PAH 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 in September 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.
 
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 regulatory exclusivity in the indication for which ARIKAYCE was approved.

Accelerated Approval

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In March 2018, we submitted a new drug application (NDA) for ARIKAYCE to the FDA to request accelerated approval. 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. In September 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 the FDA, will be designed 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. We have initiated efforts to evaluate an appropriate PRO tool that will enable the assessment of therapies for the treatment of NTM lung disease. If the PRO is verified through a short-term study, we plan to begin a confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease. In addition, we intend to conduct a separate study in patients with NTM lung disease caused by M. abscessus. We continue to collaborate with the FDA on the timetable as well as the design and validation of the PRO and the post-approval confirmatory clinical trial. The full approval of ARIKAYCE will be contingent upon verification and description of clinical benefit in this study.

Regulatory Pathway Outside of the US

Our regulatory filing in Europe was submitted in July 2019 and subsequently validated by the EMA. The primary efficacy endpoint is the proportion of patients who maintained durable culture conversion for three months off all therapy on ARIKAYCE plus GBT compared to GBT only. We intend to submit regulatory filings for ARIKAYCE in Japan in the first half of 2020.

Clinical Trials

Accelerated approval of ARIKAYCE was supported by preliminary data from the 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. In May 2019, we presented at the American Thoracic Society meeting that 41/65 (63.1%) of patients on ARIKAYCE plus GBT had maintained durable culture conversion for three months off all therapy compared to 0/10 (0%) on GBT only (p<0.0002). Safety data for these patients were consistent with safety data previously reported for patients by Month 6 of the CONVERT study.
Patients who did not culture convert by Month 6 may have been eligible to enroll in the 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. Final efficacy data regarding culture conversion were consistent with these interim data. We have analyzed the safety and efficacy data from the 312 study, and we have not observed any new safety signals. The 312 study has concluded.

Further Research and Lifecycle Management
 
We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE beyond treatment of refractory MAC lung disease as part of a combination antibacterial regimen for adult patients who have limited or
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no treatment options. Specifically, we are evaluating 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, if a PRO tool is verified through a short-term study, we plan to conduct our required confirmatory trial to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease.

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. If a PRO tool is verified, we plan to conduct a study in patients with NTM lung disease caused by M. abscessus. These initiatives also 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 completed enrollment in the WILLOW study in May 2019 and top-line data are expected in the first quarter of 2020. We enrolled 256 patients who had at least two documented pulmonary exacerbations in the twelve months prior to screening. Patients were randomized to receive INS1007 10mg once-daily, INS1007 25mg once-daily, or placebo for a period of 24 weeks. The primary endpoint for the study is time to first pulmonary exacerbation, with secondary endpoints covering a range of pulmonary measures including frequency of pulmonary exacerbations.
 
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, net
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
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program in Germany, both compassionate use programs.
Cost of Product Revenues (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses due to PARI. We began capitalizing inventory upon FDA approval of ARIKAYCE. All costs related to inventory for ARIKAYCE prior to FDA approval were expensed as incurred and therefore not included in cost of product revenues.
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 product 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 product 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 commercial activities, 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 June 30, 2019 and 2018
 
Overview - Operating Results
Our operating results for the quarter ended June 30, 2019, included the following:
Total revenues from sales of ARIKAYCE of $30.0 million during the quarter ended June 30, 2019;
Cost of product revenues (excluding amortization of intangibles) of $4.9 million during the quarter ended June 30, 2019 related to sales of ARIKAYCE;
Decreased R&D expenses of $2.2 million as compared to the same period in the prior year primarily resulting from external manufacturing expenses for ARIKAYCE being included as a component of inventory in 2019;
Increased SG&A expenses of $15.3 million as compared to the same period in the prior year resulting from an increase in US commercial activities related to ARIKAYCE and higher compensation and related expenses due to an increase in headcount;
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Amortization of intangible assets of $1.2 million during the quarter ended June 30, 2019; and
Increased interest expense of $0.3 million as compared to the same period in the prior year related to accretion of the debt discount on the $450.0 million aggregate principal amount of 1.75% convertible senior notes due 2025 (the Convertible Notes).
Revenues, net
Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA in September 2018 and launched in the US in October 2018. The following table summarizes the sources of revenue for the three months ended June 30, 2019 (in thousands):
For the Three Months Ended June 30, 2019
Net product revenues, US $ 28,964 
Net product revenues, EAPs 1,008 
    Total revenues $ 29,972 

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, and production-related overhead costs, 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 $4.9 million during the quarter ended June 30, 2019.
All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. 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 June 30, 2019 and June 30, 2018 were comprised of the following (in thousands):
 
  Quarters Ended June 30, Increase (decrease)
  2019  2018  $ %
External Expenses        
Clinical development & research $ 7,537  $ 6,920  $ 617  8.9  %
Manufacturing 3,938  10,946  (7,008) (64.0) %
Regulatory, quality assurance, and medical affairs 3,463  3,529  (66) (1.9) %
Subtotal—external expenses $ 14,938  $ 21,395  $ (6,457) (30.2) %
Internal Expenses        
Compensation and benefit related expenses $ 12,975  $ 8,968  $ 4,007  44.7  %
Stock-based compensation 2,171  2,625  (454) (17.3) %
Other internal operating expenses 3,454  2,734  720  26.3  %
Subtotal—internal expenses $ 18,600  $ 14,327  $ 4,273  29.8  %
Total $ 33,538  $ 35,722  $ (2,184) (6.1) %
 
R&D expenses decreased to $33.5 million during the quarter ended June 30, 2019 from $35.7 million in the same period in 2018. The $2.2 million decrease was primarily due to a $7.0 million decrease in external manufacturing expenses, (i) as raw materials purchased and CMO costs during the quarter ended June 30, 2019 were recorded as inventory, and (ii) construction costs relating to the build-out of the Patheon UK Limited (Patheon) production facility during the quarter ended June 30, 2019 were classified as other assets. This decrease was partially offset by an increase of $4.0 million in compensation
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and related expenses due to an increase in headcount and an increase of $0.6 million primarily due to increases in clinical expenses related to the phase 2 WILLOW trial for INS1007.

During the quarter ended June 30, 2019, external R&D expenses of $14.9 million consisted of $8.0 million related to ARIKAYCE, $5.7 million related to INS1007, and $1.2 million related to other research expenses. During the quarter ended June 30, 2018, external R&D expenses of $21.4 million consisted of $17.9 million related to ARIKAYCE, $2.8 million related to INS1007, and $0.7 million related to other research expenses.

  SG&A Expenses 

SG&A expenses for the quarters ended June 30, 2019 and June 30, 2018 were comprised of the following (in thousands):
 
  Quarters Ended June 30, Increase (decrease)
2019  2018  $ %
Compensation and benefit related expenses $ 16,201  $ 14,065  $ 2,136  15.2  %
Stock-based compensation 5,183  4,004  1,179  29.4  %
Professional fees and other external expenses 26,040  14,606  11,434  78.3  %
Facility related and other internal expenses 5,009  4,485  524  11.7  %
Total SG&A expenses $ 52,433  $ 37,160  $ 15,273  41.1  %

SG&A expenses increased to $52.4 million during the quarter ended June 30, 2019 from $37.2 million in the same period in 2018. The $15.3 million increase was primarily due to an $11.4 million in commercial expenses related to ARIKAYCE, including disease awareness, patient support activities, field operations, professional fees and other external expenses and $3.3 million in higher compensation and related expenses due to an increase in headcount, included stock-based compensation.
Amortization of Intangible Assets
Amortization of intangible assets for the quarter ended June 30, 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 $6.8 million for the quarter ended June 30, 2019 as compared to $6.5 million in the same period in 2018. The $0.3 million increase in interest expense in the quarter ended June 30, 2019 as compared to the prior year period relates to accretion of the debt discount on the Convertible Notes.

Comparison of the Six Months Ended June 30, 2019 and 2018
 
Overview - Operating Results
Our operating results for the six months ended June 30, 2019, included the following:
Total revenues from sales of ARIKAYCE of $51.9 million during the six months ended June 30, 2019;
Cost of product revenues (excluding amortization of intangibles) of $9.1 million during the six months ended June 30, 2019 related to sales of ARIKAYCE;
Decreased R&D expenses of $1.1 million as compared to the same period in the prior year primarily resulting from external manufacturing expenses for ARIKAYCE being included as a component of inventory in 2019;
Increased SG&A expenses of $37.4 million as compared to the same period in the prior year resulting from an increase in commercial activities related to ARIKAYCE and higher compensation and related expenses due to an increase in headcount;
Amortization of intangible assets of $2.5 million during the quarter ended June 30, 2019; and
Increased interest expense of $1.4 million as compared to the same period in the prior year related to interest on the Convertible Notes and accretion of the debt discount.
Revenues, net
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Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA in September 2018 and launched in the US in October 2018. The following table summarizes the sources of revenue for the six months ended June 30, 2019 (in thousands):
For the Six Months Ended June 30, 2019
Net product revenues, US $ 49,947 
Net product revenues, EAPs 1,927 
    Total revenues $ 51,874 

Cost of Product Revenues (excluding amortization of intangibles)
Cost of product revenues (excluding amortization of intangible assets) was $9.1 million during the six months ended June 30, 2019.
All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. 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 six months ended June 30, 2019 and June 30, 2018 were comprised of the following (in thousands):
 
  Six Months Ended June 30, Increase (decrease)
  2019  2018  $ %
External Expenses        
Clinical development & research $ 18,066  $ 14,738  $ 3,328  22.6  %
Manufacturing 4,494  18,880  (14,386) (76.2) %
Regulatory, quality assurance, and medical affairs 5,255  5,159  96  1.9  %
Subtotal—external expenses $ 27,815  $ 38,777  $ (10,962) (28.3) %
Internal Expenses        
Compensation and benefit related expenses $ 25,732  $ 16,921  $ 8,811  52.1  %
Stock-based compensation 4,362  4,555  (193) (4.2) %
Other internal operating expenses 6,832  5,567  1,265  22.7  %
Subtotal—internal expenses $ 36,926  $ 27,043  $ 9,883  36.5  %
Total $ 64,741  $ 65,820  $ (1,079) (1.6) %
 
R&D expenses decreased to $64.7 million during the six months ended June 30, 2019 from $65.8 million in the same period in 2018. The $1.1 million decrease was primarily due to a $14.4 million decrease in external manufacturing expenses, (i) as raw materials purchased and CMO costs during the quarter ended June 30, 2019 were recorded as inventory, and (ii) construction costs relating to the build-out of the Patheon production facility during the quarter ended June 30, 2019 were classified as other assets, partially offset by a $8.8 million increase in compensation and related expenses due to an increase in headcount and an increase of $3.3 million in expenses related to the phase 2 WILLOW trial for INS1007.

During the six months ended June 30, 2019, external R&D expenses of $27.8 million consisted of $13.0 million related to ARIKAYCE, $11.6 million related to INS1007, and $3.2 million related to other research expenses. During the six months ended June 30, 2018, external R&D expenses of $38.8 million consisted of $32.5 million related to ARIKAYCE, $5.1 million related to INS1007, and $1.2 million related to other research expenses.

  SG&A Expenses 

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SG&A expenses for the six months ended June 30, 2019 and June 30, 2018 were comprised of the following (in thousands):
 
  Six Months Ended June 30, Increase (decrease)
2019  2018  $ %
Compensation and benefit related expenses $ 35,737  $ 25,773  $ 9,964  38.7  %
Stock-based compensation 9,928  7,748  2,180  28.1  %
Professional fees and other external expenses 47,631  27,535  20,096  73.0  %
Facility related and other internal expenses 13,947  8,757  5,190  59.3  %
Total SG&A expenses $ 107,243  $ 69,813  $ 37,430  53.6  %

SG&A expenses increased to $107.2 million during the six months ended June 30, 2019 from $69.8 million in the same period in 2018. The $37.4 million increase was primarily due to a $20.1 million increase in commercial expenses related to ARIKAYCE, including disease awareness, patient support activities, field operations and other professional fees, and $12.1 million in higher compensation and related expenses due to an increase in headcount, including the hiring of our field force, including stock-based compensation.
Amortization of Intangible Assets
Amortization of intangible assets for the six months ended June 30, 2019 was $2.5 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 $13.5 million for the six months ended June 30, 2019 as compared to $12.1 million in the same period in 2018. The $1.4 million increase in interest expense in the six months ended June 30, 2019 as compared to the prior year period relates to interest on the Convertible Notes issued in late January 2018 and accretion of the debt discount. 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 at 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 the second quarter of 2019, we completed an underwritten public offering of 10,657,692 shares of common stock, which included the underwriters' exercise in full of its over-allotment option of 1,042,307 shares from the Company at a price to the public of $26.00, less underwriting discounts and commissions. Our net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of $15.9 million, were $261.2 million. The offering also included the sale of 400,000 shares from our Chairman and Chief Executive Officer, from which we received no proceeds.

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-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
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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 the next twelve months, 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 to fund our global expansion efforts to support pre-commercial activities in Europe and Japan including obtaining regulatory approvals for ARIKAYCE in those regions. Our cash requirements for the next twelve months 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 June 30, 2019, we had cash and cash equivalents of $601.3 million, as compared with $495.1 million as of December 31, 2018. The $106.2 million increase was due to cash provided by financing activities related to cash proceeds received from our underwritten public offering offset, in part, by cash used in operating activities and, to a lesser extent, cash used in investing activities. Our working capital was $562.9 million as of June 30, 2019 as compared with $439.2 million as of December 31, 2018.
 
Net cash used in operating activities was $153.9 million and $122.3 million for the six months ended June 30, 2019 and 2018, respectively. The net cash used in operating activities during the six months ended June 30, 2019 and 2018 was primarily for the commercial (in 2019), pre-commercial (in 2018), clinical and manufacturing activities related to ARIKAYCE, as well as other SG&A expenses. In addition, net cash used in operating activities during both the six months ended June 30, 2019 and 2018 included clinical trial expenses related to INS1007. Beginning in 2019, certain payments related to the long-term production capacity build-out at Patheon that are currently classified as other assets will be reclassified to operating lease right-of-use assets on our balance sheet upon the lease inception date.
 
Net cash used in investing activities was $14.6 million and $8.2 million for the six months ended June 30, 2019 and 2018, respectively. The net cash used in investing activities during the six months ended June 30, 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 manufacturing equipment located at Patheon.
 
Net cash provided by financing activities was $274.7 million and $383.7 million for the six months ended June 30, 2019 and 2018, respectively. Net cash provided by financing activities for the six months ended June 30, 2019 was primarily due to cash proceeds from our underwritten public offering, as well as stock option exercises and our employee stock purchase plan. Net cash provided by financing activities for the six months ended June 30, 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 six months ended June 30, 2019 from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2018

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

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

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ITEM 3.                                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As of June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 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 Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation as of June 30, 2019, our Chief Executive Officer and Principal 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 six months ended June 30, 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 June 30, 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 June 30, 2019.
  
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ITEM 5. OTHER INFORMATION

Effective as of July 31, 2019, our Board of Directors has authorized John Goll, 48, who has served as our Chief Accounting Officer since March 2019 and our Vice President and Corporate Controller since March 2014, to also serve as our “Principal Financial and Accounting Officer” solely in connection with the review, execution and certification of our filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. There are no arrangements or understandings between Mr. Goll and any other person pursuant to which he was selected as an officer, and there are no family relationships between Mr. Goll and any of our directors or executive officers. Mr. Goll has no direct or indirect material interest in any existing or currently proposed transaction that would require disclosure under Item 404(a) of Regulation S-K.

ITEM 6. EXHIBITS
 
Exhibit Index
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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).
Insmed Incorporated 2019 Incentive Plan.
Form of Restricted Unit Award Agreement under the Insmed Incorporated 2019 Incentive Plan.
Form of Non-Qualified Stock Option Agreement under the Insmed Incorporated 2019 Incentive Plan.
Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2019 Incentive Plan.
Amendment to Employment Agreement, effective as of July 31, 2019, between Insmed Incorporated and William H. Lewis.
Amendment to Employment Agreement, effective as of July 31, 2019, between Insmed Incorporated and Roger Adsett.
Second Amendment to Employment Agreement, effective as of July 31, 2019, between Insmed Incorporated and Christine Pellizzari.
Separation Agreement and General Release between Insmed Incorporated and Paolo Tombesi, dated as of May 3, 2019 (incorporated by reference from Exhibit 10.1 to Insmed Incorporated’s Current Report on Form 8-K filed on May 7, 2019).
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 John Goll, Chief Accounting Officer (Principal Financial 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 John Goll, Chief Accounting Officer (Principal Financial 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 June 30, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, (iv) Notes to the Unaudited Consolidated Financial Statements, and (v) Cover Page.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    INSMED INCORPORATED
 
 
Date: August 1, 2019 By /s/ John Goll
    John Goll
    Chief Accounting Officer
    (Principal Financial and Accounting Officer)

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INSMED INCORPORATED
2019 INCENTIVE PLAN
1.Purpose
The purpose of the Plan is to advance the interests of the Company by aligning the individual interests of employees, officers, non-employee directors and other service providers, in each case who are selected to be participants, with the interests of Company shareholders and by providing such individuals with an incentive to continue working toward and contributing to the success and progress of the Company. The Plan provides for the grant of Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units, any of which may be performance-based, as determined by the Administrator. The Plan replaces the Insmed Incorporated 2017 Incentive Plan (the “2017 Plan”) with respect to future awards granted by the Company, and no future awards will made under the 2017 Plan after the Effective Date (as defined herein) of the Plan except as otherwise provided herein.
2.Definitions
As used in the Plan, the following terms shall have the meanings set forth below:
a.“Administrator” means the Administrator of the Plan in accordance with Section 6 of the Plan.
b.“Affiliate” means any entity in which the Company has a substantial direct or indirect equity interest, as determined by the Committee from time to time.
c.“Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor thereto.
d.“Approval Date” has the meaning set forth in Section 4 of the Plan.
e.“Award” means an Option, Stock Appreciation Right, Restricted Stock, or Restricted Stock Unit granted to a Participant pursuant to the provisions of the Plan.
f.“Award Agreement” means any written or electronic agreement or other instrument evidencing any Award, which may (but need not) require execution or acknowledgment by a Participant.
g.“Board” means the board of directors of the Company.
h.“Change in Control” means the occurrence of any one of the following:



i.any Person becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Act) of at least 50% of either (A) the value of the then outstanding shares of Common Stock (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”) (the foregoing beneficial ownership hereinafter being referred to as a “Controlling Interest”); provided, however, that for purposes of this definition, the following acquisitions shall not constitute or result in a Change in Control: (v) any acquisition directly from the Company; (w) any acquisition by the Company; (x) any acquisition by any Person that as of the Effective Date has beneficial ownership of a Controlling Interest; (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or an Affiliate; or (z) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) below; or
ii.during any period of two consecutive years (not including any period prior to the Effective Date) individuals who constitute the Board on the Effective Date (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs after the Effective Date as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
2


iii.consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the Persons who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the “Acquiring Corporation”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) of the Company or such Acquiring Corporation) beneficially owns, directly or indirectly, more than 50% of the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the Board of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
iv.the complete liquidation or dissolution of the Company.
Notwithstanding the foregoing, to the extent an Award provides for deferred compensation under Section 409A of the Code and payment is made upon a Change in Control, no event or transaction will constitute a Change in Control hereunder unless it also constitutes a “change in control event” under Section 409A of the Code.
i.“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, and the rulings and regulations issued thereunder.
j.“Committee” means the Compensation Committee of the Board (or any successor committee).
k.“Common Stock” means the common stock of the Company, par value $0.01 per share, or such other class or kind of shares or other securities as may be applicable under Section 14 of the Plan.
l.“Company” means Insmed Incorporated, a Virginia corporation, and except as utilized in the definition of Change in Control, any successor corporation.
m.“Dividend Equivalents” mean an amount payable in cash or Common Stock, as determined by the Administrator, with respect to a Restricted Stock Unit Award equal to what would have been received if the shares underlying the Award had been owned by the Participant.
n.“Effective Date” has the meaning set forth in Section 4 of the Plan.
o.“Fair Market Value” means as of any date, the value of the Common Stock determined as follows: (i) if the Common Stock is listed on any established stock exchange, system or market, the closing price for the Common Stock on such date (or if Common Stock was not traded on such exchange, system, or market on such date, then on the next preceding date on which shares of Common Stock were traded) as quoted on such exchange, system or market as reported in the Wall Street Journal or such other source as the Administrator deems reliable; and (ii) in the absence of an established market for the Common Stock, as determined in good faith by the Administrator by the reasonable application of a reasonable valuation method, taking into account factors consistent with Treas. Reg. § 409A-1(b)(5)(iv)(B) as the Administrator deems appropriate.
p.“Freestanding SARs” has the meaning set forth in Section 9(a) of the Plan.
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q.“Full-Value Award” means an Award that results in the Company transferring the full value of a share of Common Stock under the Award, whether or not an actual share of stock is issued. Full-Value Awards shall include Restricted Stock and Restricted Stock Units to the extent payable in Common Stock (including, but not limited to, Awards that are performance-based) for which the Company transfers the full value of a share of Common Stock under the Award, but shall not include Dividend Equivalents.
r. “Incentive Stock Option” means a stock option that is designated as potentially eligible to qualify as an “incentive stock option” within the meaning of Section 422 of the Code.
s.“Nonqualified Stock Option” means a stock option that is not intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code.
t.“Option” means a stock option awarded under Section 8 of the Plan, which may be an Incentive Stock Option or a Nonqualified Stock Option.
u.“Participant” means any individual described in Section 3 of the Plan to whom Awards have been granted or who has received a Substitute Award and any authorized transferee of such individual.
v. “Person” shall have the meaning given in Section 3(a)(9) of the Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its Affiliates, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.
w.“Plan” means the Insmed Incorporated 2019 Incentive Plan as set forth herein and as amended from time to time.
x.“Prior Plan” means the Insmed Incorporated 2013 Incentive Plan, Insmed Incorporated 2015 Incentive Plan or the 2017 Plan.
y.“Restricted Stock” means an Award or issuance of Common Stock the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to such conditions (including continued employment or performance conditions) and terms as the Administrator deems appropriate.
z.“Restricted Stock Unit” means an Award denominated in units of Common Stock under which the issuance of shares of Common Stock (or cash payment in lieu thereof) is subject to such conditions (including continued employment or performance conditions) and terms as the Administrator deems appropriate.
aa.“Separation from Service” means the termination of Participant’s employment with the Company and all Subsidiaries that constitutes a “separation from service” within the meaning of Section 409A of the Code.
ab.“Share Pool” has the meaning set forth in Section 5(a) of the Plan.
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ac.“Stock Appreciation Right” means a right granted pursuant to Section 9 of the Plan that entitles the Participant to receive, in cash or Common Stock or a combination thereof, value equal to the excess of (i) the aggregate market price of a specified number of shares of Common Stock at the time of exercise over (ii) the exercise price of the right, as established by the Administrator on the date of grant.
ad.“Subsidiary” means any entity in which the Company, directly or indirectly, possesses 50% or more of the total combined voting power of all classes of its equity interests or, for Incentive Stock Options, a “subsidiary corporation” (as defined in Section 424(f) of the Code).
ae.“Substitute Awards” means Awards granted or Common Stock issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines.
af.“Tandem SARs” has the meaning set forth in Section 9(a) of the Plan.
ag.“2017 Plan” has the meaning set forth in Section 1 of the Plan.
3.Eligibility
Any employee of the Company or an Affiliate (including an officer or director who is such an employee), member of the Board (whether or not such Board member is employed by the Company or an Affiliate), or other non-employee advisor or service provider of the Company or an Affiliate shall be eligible to receive an Award under the Plan. Notwithstanding the foregoing, a person who would otherwise be eligible to receive an Award under the Plan shall not be eligible in any jurisdiction where such person’s participation in the Plan would be unlawful.
4.Effective Date and Termination of Plan
The Plan was adopted by the Board on April 3, 2019 (the “Approval Date”), and it will become effective when it is approved by the Company’s shareholders (the “Effective Date”). All Awards granted under the Plan are subject to, and may not be exercised before, the approval of the Plan by the shareholders prior to the first (1st) anniversary of the Approval Date; provided that if such approval by the shareholders of the Company is not forthcoming prior to such date, all Awards previously granted under the Plan shall be void and the 2017 Plan shall remain in effect. The Plan shall remain available for the grant of Awards until the tenth (10th) anniversary of the Approval Date. Notwithstanding the foregoing, the Plan may be terminated at such earlier time as the Board may determine. Termination of the Plan will not affect the rights and obligations of the Participants and the Company arising under Awards theretofore granted.
5.Shares Subject to the Plan and to Awards
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a.Aggregate Limits. The aggregate number of shares of Common Stock issuable under the Plan (the “Share Pool”) shall be equal to the sum of 3,500,000 shares of Common Stock plus any shares of Common Stock subject to outstanding awards under the Prior Plans as of the Effective Date that, after the Effective Date, are canceled, terminate unearned, expire, are forfeited, lapse for any reason, or are settled in cash without the delivery of shares. On the grant date of an Award, the Share Pool shall be reduced either by 1 share of Common Stock for each share subject to an Award other than a Full-Value Award or by 1.25 shares of Common Stock for each share subject to a Full-Value Award. The aggregate number of shares of Common Stock available for grant under the Plan and the number of shares of Common Stock subject to Awards outstanding shall be subject to adjustment as provided in Section 14 of the Plan. The shares of Common Stock issued pursuant to Awards granted under the Plan may be shares that are authorized and unissued or shares that were reacquired by the Company, including shares purchased in the open market.
b.Issuance of Shares. The Share Pool shall be increased when and to the extent that an Award (or an award under any Prior Plan that is outstanding as of the Effective Date) is canceled, terminates unearned, expires, is forfeited, or lapses for any reason, or an Award (or an award under any Prior Plan that is outstanding as of the Effective Date) is settled in cash without the delivery of shares to the Participant, such that any shares of Common Stock subject to such Award (or such award under any Prior Plan that is outstanding as of the Effective Date) shall again be available for the grant of an Award pursuant to the Plan. Notwithstanding anything to the contrary contained herein, shares subject to an Award (or an award under any Prior Plan that is outstanding as of the Effective Date) shall not again be made available for issuance or delivery under the Plan if such shares are (a) shares tendered in payment of an Option, (b) shares delivered or withheld by the Company to satisfy any tax withholding obligation, or (c) shares covered by a stock-settled Stock Appreciation Right that were not issued upon full settlement. The payment of Dividend Equivalents in cash in conjunction with any outstanding Awards shall not be counted against the shares available for issuance under the Plan. Any shares of Common Stock with respect to Awards issued under the Plan (or awards issued under a Prior Plan) that again become available for future grants pursuant to this Section 5 shall be added back to the Share Pool as 1 share for each share subject to an Award other than a Full-Value Award or as 1.25 shares for each share subject to a Full-Value Award, and, for purposes of this sentence, awards issued under a Prior Plan shall be (i) considered Full-Value Awards if they would have been Full-Value Awards if issued under this Plan and (ii) added back to the Share Pool as 1 share in all other cases.
c.Tax Code Limit. The aggregate number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options granted under the Plan shall not exceed 3,500,000 (subject to adjustment pursuant to Section 14 of the Plan).
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d.Substitute Awards. Substitute Awards shall not reduce the shares of Common Stock authorized for issuance under the Plan or authorized for grant to a Participant in any calendar year. Additionally, in the event that a company acquired by the Company or any Subsidiary, or with which the Company or any Subsidiary combines, has shares available under a pre-existing plan approved by such acquired company’s shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the shares of Common Stock authorized for issuance under the Plan; provided that Awards using such available shares shall not be made after the last day awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall not be granted to individuals who were employed by the Company or its Subsidiaries at the time the acquisition or combination was consummated.
6.Administration of the Plan
a.Administrator of the Plan. The Plan shall be administered by the Administrator, which shall be the Committee, or, in the absence of the Committee, the Board itself. Any power of the Administrator may also be exercised by the Board. To the extent that any permitted action taken by the Board conflicts with action taken by the Administrator, the Board action shall control.
b.Powers of Administrator. Subject to the express provisions of the Plan, the Administrator shall be authorized and empowered to do all things that it determines to be necessary or appropriate in connection with the administration of the Plan, including, without limitation:
i.to prescribe, amend and rescind rules and regulations relating to the Plan and to define terms not otherwise defined herein;
ii.to determine which persons are eligible to receive Awards under the Plan, to which of such persons, if any, Awards shall be granted hereunder, and the timing of any such Awards;
iii.to prescribe and amend the terms of the Award Agreements, to grant Awards and determine the terms and conditions thereof;
iv.to establish and verify the extent of satisfaction of any performance goals or other conditions applicable to the grant, issuance, retention, vesting, exercisability or settlement of any Award;
v.to prescribe and amend the terms of or form of any document or notice required to be delivered to the Company by Participants under the Plan;
vi.to determine the extent to which adjustments are required pursuant to Section 14 of the Plan;
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vii.to interpret and construe the Plan, any rules and regulations under the Plan and the terms and conditions of any Award granted hereunder, and to make exceptions to any such provisions if the Administrator, in good faith, determines that it is appropriate to do so;
viii.to approve corrections in the documentation or administration of any Award; and
ix.to make all other determinations deemed necessary or advisable for the administration of the Plan.
The Administrator may, in its sole and absolute discretion, without amendment to the Plan but subject to the limitations otherwise set forth in Section 18 of the Plan, waive or amend the operation of Plan provisions respecting exercise after termination of employment or service to the Company or an Affiliate. The Administrator may, in its sole and absolute discretion and, except as otherwise provided in Section 18 of the Plan, waive, settle or adjust any of the terms of any Award so as to avoid unanticipated consequences or address unanticipated events (including any temporary closure of an applicable stock exchange, disruption of communications or natural catastrophe).
c.Determinations by the Administrator. All decisions, determinations and interpretations by the Administrator regarding the Plan, any rules and regulations under the Plan and the terms and conditions of or operation of any Award granted hereunder, shall be final and binding on all Participants, beneficiaries, heirs, assigns or other persons holding or claiming rights under the Plan or any Award. The Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select. Members of the Board and members of the Committee acting under the Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability except for gross negligence or willful misconduct in the performance of their duties.
d.Delegation of Authority. To the maximum extent permitted by applicable law, the Committee may by resolution delegate to a committee of one or more members of the Board or one or more officers of the Company the authority to perform any or all things that the Administrator is authorized and empowered to do or perform under the Plan, and for all purposes under the Plan, such officer or officers shall be treated as the Administrator; provided, however, that the resolution so authorizing such officer or officers shall specify the total number of Awards (if any) such officer or officers may award pursuant to such delegated authority; and provided further that in no event shall an officer of the Company be delegated the authority to grant Awards to, or amend Awards held by, individuals who are subject to Section 16 of the Act or who report directly to such officer. No such officer shall designate himself or herself as a recipient of any Awards granted under authority delegated to such officer. In addition, the Administrator may delegate any or all aspects of the day-to-day administration of the Plan to one or more officers or employees of the Company or any Subsidiary, and/or to one or more agents.
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e.Subsidiary Awards. In the case of a grant of an Award to any Participant employed by a Subsidiary, such grant may, if the Administrator so directs, be implemented by the Company issuing any subject shares of Common Stock to the Subsidiary, for such lawful consideration as the Administrator may determine, upon the condition or understanding that the Subsidiary will transfer the shares of Common Stock to the Participant in accordance with the terms of the Award specified by the Administrator pursuant to the provisions of the Plan. Notwithstanding any other provision hereof, such Award may be issued by and in the name of the Subsidiary and shall be deemed granted on such date as the Administrator shall determine.
7.Plan Awards
a.Terms Set Forth in Award Agreement. The terms and conditions of each Award shall be set forth in an Award Agreement in a form approved by the Administrator for such Award, which Award Agreement may contain such terms and conditions as specified from time to time by the Administrator, provided such terms and conditions do not conflict with the Plan. The Award Agreement for any Award, as applicable, shall include the time or times at or within which and the consideration, if any, for which any shares of Common Stock may be acquired from the Company. The terms of Awards may vary among Participants, and the Plan does not impose upon the Administrator any requirement to make Awards subject to uniform terms. Accordingly, the terms of individual Award Agreements may vary.
b.Separation from Service. Subject to the express provisions of the Plan, the Administrator shall specify before, at, or after the time of grant of an Award the provisions governing the effect(s) upon an Award of a Participant’s Separation from Service or other termination of service.
c.Rights of a Shareholder. A Participant shall have no rights as a shareholder with respect to shares of Common Stock covered by an Award until the date the Participant becomes the holder of record of such shares of Common Stock. No adjustment shall be made for dividends or other rights for which the record date is prior to such date, except as provided in Section 10(b) or Section 14 of the Plan or as otherwise provided by the Administrator.
d.Minimum Vesting. Notwithstanding anything in the Plan to the contrary, all Awards granted under the Plan shall be subject to a vesting period of not less than one year from the date of grant; provided, that up to 5% of the Share Pool may be issued pursuant to Awards that are not subject to the minimum vesting requirement set forth in this Section 7(d); provided, further, that the minimum vesting requirement set forth in this Section 7(d) shall not apply with respect to Substitute Awards or with respect to Awards that vest in connection with a Change in Control or upon a Participant’s death, disability, or involuntary termination of employment.
e.No Payment of Dividends Prior to Vesting. Notwithstanding anything in the Plan to the contrary, to the extent a Participant is eligible to receive dividends or Dividend Equivalents with respect to an Award granted under the Plan, such dividends or Dividend Equivalents shall in no case be paid to the Participant before the vesting of the portion of the Award to which such dividends or Dividend Equivalents relate.
8.Options
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a.Grant, Term and Price. The grant, issuance, retention, vesting and/or settlement of any Option shall occur at such time and be subject to such terms and conditions as determined by the Administrator or under criteria established by the Administrator, which may include conditions based on continued employment, passage of time, attainment of age and/or service requirements, and/or satisfaction of performance conditions. The term of an Option shall in no event be greater than ten years; provided, however, the term of an Option (other than an Incentive Stock Option) shall be automatically extended if, at the time of its scheduled expiration, the Participant holding such Option is prohibited by law or the Company’s insider trading policy from exercising the Option, which extension shall expire on the thirtieth (30th) day following the date such prohibition no longer applies. The Administrator will establish the price at which Common Stock may be purchased upon exercise of an Option, which, in no event will be less than the Fair Market Value of such shares on the date of grant; provided, however, that the exercise price per share of Common Stock with respect to an Option that is granted as a Substitute Award may be less than the Fair Market Value of the shares of Common Stock on the date such Option is granted if such exercise price is based on a formula set forth in the terms of the options held by such optionees or in the terms of the agreement providing for such merger or other acquisition that satisfies the requirements of Section 409A and/or Section 424 of the Code, as applicable. The exercise price of any Option may be paid in cash or such other method as determined by the Administrator, including an irrevocable commitment by a broker to pay over such amount from a sale of the Shares issuable under an Option, the delivery of previously owned shares of Common Stock or withholding of shares of Common Stock deliverable upon exercise.
b.No Repricing without Shareholder Approval. Other than in connection with a change in the Company’s capitalization (as described in Section 14 of the Plan), at any time when the exercise price of an Option is above the Fair Market Value of a share of Common Stock, the Company shall not, without shareholder approval, (i) reduce the exercise price of such Option, (ii) exchange such Option for cash, another Award or a new Option or Stock Appreciation Right with a lower exercise or base price or (iii) otherwise reprice such Option.
c.No Reload Grants. Options shall not be granted under the Plan in consideration for and shall not be conditioned upon the delivery of shares of Common Stock to the Company in payment of the exercise price and/or tax withholding obligation under any other employee stock option.
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d.Incentive Stock Options. Notwithstanding anything to the contrary in this Section 8, in the case of the grant of an Option intended to qualify as an Incentive Stock Option, if the Participant owns stock possessing more than 10% of the combined voting power of all classes of stock of the Company, the exercise price of such Option must be at least 110% of the Fair Market Value of the shares of Common Stock on the date of grant and the Option must expire within a period of not more than five (5) years from the date of grant. Notwithstanding anything in this Section 8 to the contrary, options designated as Incentive Stock Options shall not be eligible for treatment under the Code as Incentive Stock Options (and will be deemed to be Nonqualified Stock Options) to the extent that either (a) the aggregate Fair Market Value of shares of Common Stock (determined as of the time of grant) with respect to which such Options become exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Subsidiary) exceeds $100,000, taking Options into account in the order in which they were granted, or (b) such Options otherwise remain exercisable but are not exercised within three (3) months (or such other period of time provided in Section 422 of the Code) of separation of service (as determined in accordance with Section 3401(c) of the Code).
e.No Shareholder Rights. Participants shall have no voting rights and will have no rights to receive dividends or Dividend Equivalents in respect of an Option or any shares of Common Stock subject to an Option until the Participant has become the holder of record of such shares.
9.Stock Appreciation Rights
a.General Terms. The grant, issuance, retention, vesting and/or settlement of any Stock Appreciation Right shall occur at such time and be subject to such terms and conditions as determined by the Administrator or under criteria established by the Administrator, which may include conditions based on continued employment, passage of time, attainment of age and/or service requirements, and/or satisfaction of performance conditions. Stock Appreciation Rights may be granted to Participants from time to time either in tandem with or as a component of Options granted under the Plan (“tandem SARs”) or not in conjunction with other Awards (“freestanding SARs”). Upon exercise of a tandem SAR as to some or all of the shares covered by the grant, the related Option shall be canceled automatically to the extent of the number of shares covered by such exercise. Conversely, if the related Option is exercised as to some or all of the shares covered by the grant, the related tandem SAR, if any, shall be canceled automatically to the extent of the number of shares covered by the Option exercise. Any Stock Appreciation Right granted in tandem with an Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option, provided that the Fair Market Value of Common Stock on the date of the tandem SAR’s grant is not greater than the exercise price of the related Option. All freestanding SARs shall be granted subject to the same terms and conditions applicable to Options as set forth in Section 8 of the Plan and all tandem SARs shall have the same exercise price as the Option to which they relate. Subject to the provisions of Section 8 of the Plan and the immediately preceding sentence, the Administrator may impose such other conditions or restrictions on any Stock Appreciation Right as it shall deem appropriate. Stock Appreciation Rights may be settled in Common Stock, cash or a combination thereof, as determined by the Administrator and set forth in the applicable Award Agreement.
b.No Repricing without Shareholder Approval. Other than in connection with a change in the Company’s capitalization (as described in Section 14 of the Plan), at any time when the exercise price of a Stock Appreciation Right is above the Fair Market Value of a share of Common Stock, the Company shall not, without shareholder approval (i) reduce the exercise or base price of such Stock Appreciation Right, (ii) exchange such Stock Appreciation Right for cash, another Award or a new Option or Stock Appreciation Right with a lower exercise or base price or (iii) otherwise reprice such Stock Appreciation Right.
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c.No Shareholder Rights. Participants shall have no voting rights and will have no rights to receive dividends or Dividend Equivalents in respect of an Award of Stock Appreciation Rights or any shares of Common Stock subject to an Award of Stock Appreciation Rights until the Participant has become the holder of record of such shares.
10.Restricted Stock and Restricted Stock Units
a.Vesting and Performance Conditions. The grant, issuance, retention, vesting and/or settlement of any Restricted Stock or Restricted Stock Unit Award shall occur at such time and be subject to such terms and conditions as determined by the Administrator or under criteria established by the Administrator, which may include conditions based on continued employment, passage of time, attainment of age and/or service requirements, and/or satisfaction of performance conditions.
b.Dividends and Distributions. Participants in whose name Restricted Stock is granted shall be entitled to receive all dividends and other distributions paid with respect to those shares of Common Stock, unless determined otherwise by the Administrator. The Administrator will determine whether any such dividends or distributions will be automatically reinvested in additional Restricted Stock and/or subject to the same restrictions on transferability as the Restricted Stock with respect to which they were distributed or whether such dividends or distributions will be paid in cash. Unless otherwise provided in the Award Agreement, during the period prior to shares being issued in the name of a Participant under any Restricted Stock Unit, the Company shall pay or accrue Dividend Equivalents on each date dividends on Common Stock are paid, subject to such conditions as the Administrator may deem appropriate. The time and form of any such payment of Dividend Equivalents shall be specified in the Award Agreement. Notwithstanding anything herein to the contrary, in no event will dividends or Dividend Equivalents be paid with respect to any Award of Restricted Stock or Restricted Stock Units prior to the time specified in Section 7(e).
c.Voting Rights. Unless otherwise determined by the Administrator, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those shares during the period of restriction. Participants shall have no voting rights with respect to shares of Common Stock underlying Restricted Stock Units unless and until such shares are reflected as issued and outstanding shares on the Company’s stock ledger.
11.Performance Awards
a.General Terms. The Administrator may establish performance conditions and level of achievement versus such conditions that shall determine the number of Options, Stock Appreciation Rights or shares of Common Stock to be granted, retained, vested, issued or issuable under or in settlement of, or the cash amount payable pursuant to, an Award.
b.Timing and Form of Payment. The Administrator shall determine the timing of payment of any award subject to performance conditions. Payment of the amount due under such an award may be made in cash or in Common Stock, as determined by the Administrator.
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c.Discretionary Adjustments. Notwithstanding satisfaction of any performance goals, the amount paid under an award subject to either financial performance and/or personal performance evaluations may be adjusted by the Administrator on the basis of such further considerations as the Administrator shall determine.
12.Deferral of Payment and Section 409A
The Administrator may, in an Award Agreement or otherwise, provide for the deferred delivery of shares of Common Stock upon settlement, vesting or other events with respect to Restricted Stock or Restricted Stock Units. Notwithstanding anything herein to the contrary, the Administrator may, in its sole and absolute discretion, deny any deferral of the delivery of shares of Common Stock or any other payment with respect to any Award if the Administrator determines, in its sole and absolute discretion, that the deferral would result in the imposition of the additional tax under Section 409A(a)(1)(B) of the Code. The Plan and each Award Agreement shall be interpreted such that each Award complies with, or is exempt from, Section 409A of the Code. However, the Company shall have no liability to a Participant, or any other party, if an Award that is intended to be exempt from, or compliant with, Section 409A of the Code is not so exempt or compliant or for any action taken by the Administrator or the Board.
13.Conditions and Restrictions Upon Securities Subject to Awards
The Administrator may provide that the Common Stock issued upon exercise of an Option or Stock Appreciation Right or otherwise subject to or issued under an Award shall be subject to such further agreements, restrictions, conditions or limitations as the Administrator in its discretion may specify prior to the exercise of such Option or Stock Appreciation Right or the grant, vesting or settlement of such Award, including without limitation, conditions on vesting or transferability, forfeiture or repurchase provisions and method of payment for the Common Stock issued upon exercise, vesting or settlement of such Award (including the actual or constructive surrender of Common Stock already owned by the Participant) or payment of taxes arising in connection with an Award. Without limiting the foregoing, such restrictions may address the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any shares of Common Stock issued under an Award, including without limitation (i) restrictions under an insider trading policy or pursuant to applicable law, (ii) restrictions designed to delay and/or coordinate the timing and manner of sales by the Participant and holders of other Company equity compensation arrangements, (iii) restrictions as to the use of a specified brokerage firm for such resales or other transfers and (iv) provisions requiring Common Stock be sold on the open market or to the Company in order to satisfy tax withholding or other obligations.
14.Adjustment of and Changes in the Stock; Change in Control
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a.Adjustments Upon Certain Unusual or Nonrecurring Events. The number and kind of shares of Common Stock available for issuance under the Plan (including under any Awards then outstanding), and the number and kind of shares of Common Stock subject to the limits set forth in Section 5 of the Plan, shall be equitably adjusted by the Administrator to reflect any reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, dividend or distribution of securities, property or cash (other than regular, quarterly cash dividends), or any other event or transaction that affects the number or kind of shares of Common Stock outstanding. Such adjustment may be designed to comply with Section 424 of the Code or may be designed to treat the shares of Common Stock available under the Plan and subject to Awards as if they were all outstanding on the record date for such event or transaction or to increase the number of such shares of Common Stock to reflect a deemed reinvestment in shares of Common Stock of the amount distributed to the Company’s security holders. The terms of any outstanding Award shall also be equitably adjusted by the Administrator as to price, number or kind of shares of Common Stock subject to such Award, vesting, and other terms to reflect the foregoing events, which adjustments need not be uniform as between different Awards or different types of Awards. No fractional shares of Common Stock shall be issued pursuant to such an adjustment.
b.Adjustments Upon Other Events. In the event there shall be any other change in the number or kind of outstanding shares of Common Stock, or any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, by reason of a Change in Control, other merger, consolidation or otherwise, then the Administrator shall determine the appropriate and equitable adjustment to be effected, which adjustments need not be uniform between different Awards or different types of Awards. In addition, in the event of such change described in this paragraph, the Administrator may accelerate the time or times at which any Award may be exercised, consistent with and as otherwise permitted under Section 409A of the Code, and may provide for cancellation of such accelerated Awards that are not exercised within a time prescribed by the Administrator in its sole and absolute discretion.
c.Change in Control. Unless otherwise provided in the applicable Award Agreement, in the event of a Change in Control after the Effective Date, unless provision is made in connection with the Change in Control for (i) assumption of Awards previously granted or (ii) substitution for such Awards of new awards covering stock of a successor corporation or its “parent corporation” (as defined in Section 424(e) of the Code) or “subsidiary corporation” (as defined in Section 424(f) of the Code) with appropriate adjustments as to the number and kinds of shares and the exercise prices, if applicable, (A) the Administrator shall make an adjustment to any or all Awards as the Administrator deems appropriate to reflect such Change in Control or (B) (1) in the case of an Option or Stock Appreciation Right, the Participant shall have the ability to exercise such Option or Stock Appreciation Right, including any portion of the Option or Stock Appreciation Right not previously exercisable, and the unexercised portion of such Option or Stock Appreciation Right shall be cancelled upon consummation of the Change in Control; (2) in the case of an Award subject to performance conditions, the Participant shall have the right to receive a payment based on performance through a date determined by the Administrator prior to the Change in Control (unless such performance cannot be determined, in which case the Participant shall have the right to receive a payment equal to the target amount payable); and (3) in the case of outstanding Restricted Stock and/or Restricted Stock Units not subject to performance conditions, all conditions to the grant, issuance, retention, vesting or transferability of or any other restrictions applicable to, such Award shall immediately lapse.
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d.Termination Following a Change in Control. Unless otherwise expressly provided for in the Award Agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a Change in Control, the following shall occur upon a Participant’s involuntary termination of employment within twenty-four (24) months following a Change in Control, provided that such termination does not result from the Participant’s termination for disability, cause or gross misconduct: (i) in the case of an Option or Stock Appreciation Right, each Option or Stock Appreciation Right shall immediately become exercisable and shall remain exercisable for three (3) years following such termination (or until the expiration of such Option or Stock Appreciation Right, if earlier); (ii) in the case of an Award subject to performance conditions, the Participant shall have the right to receive a payment based on performance through a date determined by the Administrator prior to the Change in Control (unless such performance cannot be determined, in which case the Participant shall have the right to receive a payment equal to the target amount payable); and (iii) in the case of outstanding Restricted Stock and/or Restricted Stock Units not subject to performance conditions, all conditions to the grant, issuance, retention, vesting or transferability of, or any other restrictions applicable to, such Award shall immediately lapse.
e.The Company shall notify Participants holding Awards subject to any adjustments pursuant to this Section 14 of such adjustment, but (whether or not notice is given) such adjustment shall be effective and binding for all purposes of the Plan.
15.Transferability
No Award may be sold, transferred for value, pledged, assigned, or otherwise alienated or hypothecated by a Participant other than by will or the laws of descent and distribution, and each Option or Stock Appreciation Right shall be exercisable only by the Participant during his or her lifetime. Notwithstanding the foregoing, outstanding Options may be exercised following the Participant’s death by the Participant’s beneficiaries or as permitted by the Administrator.
16.Compliance with Laws and Regulations
The Plan, the grant, issuance, vesting, exercise and settlement of Awards hereunder, and the obligation of the Company to sell, issue or deliver shares of Common Stock under such Awards, shall be subject to all applicable foreign, federal, state and local laws, rules and regulations, stock exchange rules and regulations, and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to register in a Participant’s name or deliver Common Stock prior to the completion of any registration or qualification of such shares under any foreign, federal, state or local law or any ruling or regulation of any government body which the Administrator shall determine to be necessary or advisable. To the extent the Company is unable to or the Committee deems it infeasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issua