INSMED INC (Form: 10-Q, Received: 11/05/2013 07:31:32)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-30739

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.)

9 Deer Park Drive, Suite C
Monmouth Junction, NJ		08852
(Address of principal executive offices)		(Zip Code)

(732) 997-4600

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting Company (See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting Company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Small Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 31, 2013, there were 39,109,854 shares of the registrant’s common stock, $0.01 par value, outstanding.

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INSMED INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

IND EX

PART I. FINANCIAL INFORMATION

ITEM 1	Financial Statements

	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	3

	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2013 and 2012	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012	5

	Notes to Consolidated Financial Statements (unaudited)	6


ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	39
ITEM 4	Controls and Procedures	40

PART II. OTHER INFORMATION

ITEM 1	Legal Proceedings	42
ITEM 1A	Risk Factors	43
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
ITEM 3	Defaults Upon Senior Securities	43
ITEM 4	Mine Safety Disclosures (Not Applicable)	43
ITEM 5	Other Information	43
ITEM 6	Exhibits	44

SIGNATURE		45

EXHIBIT INDEX		46

In this Form 10-Q, we use the words “Insmed Incorporated” to refer to Insmed Incorporated, a Virginia corporation, and we use the words “Company,” “Insmed,” “Insmed Incorporated,” “we,” “us” and “our” to refer to Insmed Incorporated and its consolidated subsidiaries. ARIKACE ® is a registered trademark and Insmed ™ is a trademark of Insmed Incorporated. This Form 10-Q also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-Q is the property of its owner.

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PART I. FIN ANCIAL INFORMATION

ITEM 1. FINA NCIAL STATEMENTS

INSMED INCORPORATED

Consolidated Bal ance Sheets

(in thousands, except par value, share and per share data)

	September 30, 2013			December 31, 2012
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	128,025		$	90,782
Certificate of deposit	—			2,153
Prepaid expenses and other current assets	1,720			643
Total current assets	129,745			93,578

In-process research and development	58,200			58,200
Other assets	101			117
Fixed assets, net	1,904			1,666
Total assets	$	189,950		$	153,561

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	4,661		$	7,060
Accrued expenses	5,652			2,933
Accrued compensation	1,953			2,207
Accrued lease expense, current	303			295
Deferred rent	134			149
Capital lease obligations, current	64			96
Current portion of long term debt	7,055			3,007
Total current liabilities	19,822			15,747

Accrued lease expense, long-term	449			647
Capital lease obligations, long-term	16			64
Debt, long-term	12,538			16,221
Total liabilities	32,825			32,679

Shareholders’ equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 39,100,899 and 31,488,204 issued and outstanding shares at September 30, 2013 and December 31, 2012, respectively	391			315
Additional paid-in capital	532,141			455,325
Warrant to purchase common stock	—			790
Accumulated deficit	(375,407		)	(335,548		)
Total shareholders’ equity	157,125			120,882
Total liabilities and shareholders’ equity	$	189,950		$	153,561

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statements of C omprehensive Loss (Unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Other revenue	$	—		$	—		$	11,500		$	—

Operating expenses:
Research and development	12,095			5,706			34,654			18,190
General and administrative	4,747			3,647			16,267			8,410
Total operating expenses	16,842			9,353			50,921			26,600

Operating loss	(16,842		)	(9,353		)	(39,421		)	(26,600		)

Investment income	40			193			141			901
Interest expense	(525		)	(222		)	(1,802		)	(225		)
Gain on sale of assets, net	—			—			2			5
Loss before income taxes	(17,327		)	(9,382		)	(41,080		)	(25,919		)

Provision (benefit) for income taxes	—			—			(1,221		)	4

Net loss	$	(17,327	)	$	(9,382	)	$	(39,859	)	$	(25,923	)

Basic and diluted net loss per share	$	(0.46	)	$	(0.38	)	$	(1.19	)	$	(1.04	)

Weighted average basic and diluted common shares outstanding	37,389			25,013			33,577			24,916

Net loss	$	(17,327	)	$	(9,382	)	$	(39,859	)	$	(25,923	)
Comprehensive loss:
Unrealized (loss) gain on short-term investments, net of taxes	—			199			—			385
Comprehensive loss	$	(17,327	)	$	(9,183	)	$	(39,859	)	$	(25,538	)

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statement s of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2013			2012
Operating activities
Net loss	$	(39,859	)	$	(25,923	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	475			412
Stock based compensation expense	6,410			1,518
Gain on sale of assets, net	(2		)	(5		)
Amortization of debt discount and debt issuance costs	256			55
Accrual of the end of term charge on the debt	126			—
Changes in operating assets and liabilities:
Accounts receivable	—			757
Prepaid expenses and other assets	(1,078		)	(175		)
Accounts payable	(2,399		)	651
Accrued expenses and deferred rent	3,908			31
Accrued lease expense	(190		)	(193		)
Accrued compensation	(254		)	786
Net cash used in operating activities	(32,607		)	(22,086		)

Investing activities
Purchase of fixed assets	(713		)	(122		)
Proceeds from sale of asset	2			5
Maturity of a certifcate of deposit	2,153
Sales of short-term investments				17,050
Net cash provided by investing activities	1,442			16,933

Financing activities
Payments on capital lease obligations	(80		)	(91		)
Borrowings of long-term debt, net of issuance costs	—			9,726
Net proceeds from issuance of common stock	67,017			25,659
Proceeds from exercise of stock options	1,471			—
Net cash provided by financing activities	68,408			35,294

Increase in cash and cash equivalents	37,243			30,141
Cash and cash equivalents at beginning of period	90,782			14,848

Cash and cash equivalents at end of period	$	128,025		$	44,989

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,416		$	164
Cash paid for taxes	$	—		$	4

Supplemental disclosures of non-cash investing and financing activities:
Unrealized gain on investments	$	—		$	385
Value of warrant exercised by converting the warrant into shares of common stock (“net issuance method”)	$	790		$	—
Value of warrant granted in connection with debt financing	$	—		$	790

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Business and Basis of Presentation

Description of Business - Insmed is a biopharmaceutical company focused on developing and commercializing an inhaled anti-infective to treat patients battling serious lung diseases that are often life-threatening. The Company’s lead product candidate, ARIKACE ® , or liposomal amikacin for inhalation, is an inhaled antibiotic treatment that delivers a proven and potent anti-infective directly to the site of serious lung infections.

During July 2013, the Company reported top-line results from its Phase 3 registrational clinical trial of ARIKACE in cystic fibrosis (“CF”) patients who have lung infections caused by Pseudomonas aeruginosa (“Pa”) that was conducted in Europe and Canada. In summary, once-daily ARIKACE achieved its primary endpoint of non-inferiority when compared to twice-daily “TOBI” (“tobramycin inhalation solution”) for relative change in FEV 1 from baseline to the end of the study. The Company is conducting a Phase 2 clinical trial of ARIKACE in patients who have lung infections caused by non-tuberculous mycobacteria (“NTM”) in the U.S. and Canada. During October 2013, we concluded the patient enrollment phase of the study with 90 patients enrolled in the study. The Company is also conducting a two-year, open-label safety study that enrolled eligible patients who have also completed our Phase 3 registrational clinical trial in CF patients in Europe and Canada. The Company’s primary development focus is to obtain regulatory approval for ARIKACE for these two initial indications and to prepare for commercialization initially in Europe and Canada and then in the United States (“US”). If approved, ARIKACE will be the first once-a-day inhaled antibiotic treatment option available for these CF and NTM indications. The Company’s strategy is to continue to develop ARIKACE for additional indications beyond CF patients with Pa infections and patients with NTM infections.

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located in Monmouth Junction, New Jersey.

Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Transave, LLC, Insmed Pharmaceuticals, Incorporated, Insmed Limited, and Celtrix Pharmaceuticals, Incorporated. All significant intercompany balances and transactions have been eliminated in consolidation.

Prior Period Reclassifications - Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current-year presentation. Specifically, the Company allocated a portion of certain operating expenses from general and administrative expense to research and development expense in 2013 and recast prior year amounts to conform to the current year presentation for comparability purposes.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The consolidated balance sheet as of December 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013.

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2. Summary of Significant Accounting Policies

Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of revenue and expenses reported for each period presented are effected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, stock-based compensation, income taxes, loss contingencies, the warrant fair value calculation, impairment of intangibles and long lived assets and accounting for research and development costs. Actual results could differ from those estimates.

Investment Income and Interest Expense - Investment income consists of interest and dividend income earned on our cash, cash equivalents and short-term investments, along with realized gains (losses) on the sale of investments. Interest expense consists primarily of interest costs related to our debt and capital lease obligations.

Cash and Cash Equivalents and Short-Term Investments - The Company considers cash equivalents to be highly liquid investments with maturities of three months or less from the date of purchase. The Company invests its available cash primarily in mutual and money market funds, US treasury obligations, and bank certificates of deposit. For purposes of determining realized gains and losses, the cost of securities sold is based on specific identification.

Fixed Assets, Net - Fixed assets are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of three to seven years are used for computer equipment, laboratory equipment, office equipment and furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Long-lived assets, such as lab equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.

Identifiable Intangible Assets and Goodwill - Identifiable intangible assets are measured at their respective fair values and are not amortized until commercialization of the related product commences. Once commercialization occurs, these intangible assets will be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on reasonable estimates and assumptions given available facts and circumstances. Unanticipated events or circumstances may occur that may require us to review the assets for impairment. Events or circumstances that may require an impairment assessment include negative pre-clinical or clinical trial results, the non-approval of a new drug application by a regulatory agency, material delays in our development program or a sustained decline in market capitalization.

Indefinite-lived intangible assets are not subject to periodic amortization. Rather, indefinite-lived intangibles are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred. Events or circumstances that may require an interim impairment assessment are consistent with those described above. The Company performs its annual impairment test as of October 1 of each year. We are not aware of any indicators of impairment that would necessitate an impairment test as of September 30, 2013.

The Company uses the income approach to derive the fair value of in-process research and development assets. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. The Company did not use a market based valuation approach because the Company lacks revenues and profits. The income approach requires significant management judgment with respect to unobservable inputs such as future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with the Company’s business plans.

Debt Issuance Costs - Debt issuance costs are amortized using the effective interest rate method, and are amortized to interest expense over the term of the debt. Debt issuance costs paid to the lender are reflected as a

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discount to the debt, and debt issuance costs paid to other third parties are reflected as other assets in the consolidated balance sheets.

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 judgments 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 are 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.

As of September 30, 2013 and December 31, 2012, the Company did not have any Level 2 or 3 financial assets or liabilities. The following table presents the Company’s Level 1 assets measured at fair value as of September 30, 2013 and December 31, 2012.

	Level 1
	As of		As of
	September 30, 2013		December 31, 2012
	(in thousands)
Cash, cash equivalents and money market funds	$	128,025	$	90,782
Certificate of deposit	—		2,153

	$	128,025	$	92,935

The Company’s cash, cash equivalents, and money market funds consist of liquid investments with a maturity of three months or less from the date of purchase. The certificate of deposit matured on July 26, 2013. We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers in or out of Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2013 and 2012. As of September 30, 2013 and December 31, 2012, the Company held no securities that were in an unrealized loss or gain position.

The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making our determination, we consider 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) our ability and intent to retain the investment for a sufficient period of time for it to recover.

Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company places its cash equivalents with financial institutions that it believes have high credit quality. The Company has established investment guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.

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The Company sources each of its raw materials from a single supplier. In addition, the production of the Company’s lead product candidate is performed by a sole manufacturer. The inability of the suppliers or manufacturer to fulfill supply requirements of the Company could materially adversely affect future operating results or the Company’s business generally. A change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially adversely affect the Company’s future operating results.

Revenue Recognition — As disclosed in more detail in Note 7, “ License and Collaborative Agreements ”, Other revenue during the nine months ended September 30, 2013 solely consists of an $11.5 million payment the Company received from Premacure Holdings AB and Premacure AB of Sweden (collectively “Premacure”) (which was since acquired by Shire plc) in May 2013 in exchange for the Company’s right to receive future royalties under its license agreement with Premacure. The Company recorded this as Other revenue in the three months ended June 30, 2013, since all four revenue recognition criteria (see below) were met and the Company had no continuing performance obligations related to the payment received.

The Company recognizes revenues when all of the following four criteria are present: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.

Where the Company has continuing performance obligations under the terms of a collaborative arrangement, non-refundable upfront license payments received upon contract signing are recorded as deferred revenue and recognized as revenue as the related activities are performed. The period over which these activities are to be performed is based upon management’s estimate of the development period. Changes in management’s estimate could change the period over which revenue is recognized. Research and/or development payments are recognized as revenues as the related research and/or development activities are performed and when the Company has no continuing performance obligations related to the research and development payment received.

Where the Company has no continuing involvement under a collaborative arrangement, the Company records nonrefundable license fee revenues when the Company has the contractual right to receive the payment, in accordance with the terms of the collaboration agreement, and records milestones upon appropriate notification to the Company of achievement of the milestones by the collaborative partner.

The Company recognizes revenue from milestone payments when earned, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. Any amounts received by the Company under the agreement in advance of the Company’s performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations.

With regard to recognizing revenue for multiple deliverable revenue arrangements, each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

In addition, multiple deliverable revenue arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. The Company also applies a selling price hierarchy for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available.

Deferred revenue associated with a non-refundable payment received under a collaborative agreement that is terminated prior to its completion results in an immediate recognition of the deferred revenue.

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Research and Development - Research and development expenses consist primarily of salaries, benefits and other related costs, including stock based compensation, for personnel serving in our research and development functions, and other internal operating expenses, the cost of manufacturing our drug candidate, including the medical devices for drug delivery, for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. The Company’s expenses related to manufacturing its drug candidate and medical devices for clinical study are primarily related to activities at contract manufacturing organizations that manufacture ARIKACE and the medical devices for the Company’s use. The Company’s expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on the Company’s behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

Stock-Based Compensation — The Company recognizes stock-based compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of those awards. The grant-date fair value of the award is recognized as compensation expense ratably over the requisite service period, which generally equals the vesting period of the award, and if applicable, is adjusted for expected forfeitures. We also grant performance-based stock options to employees. The grant-date fair value of the performance-based stock options is recognized as compensation expense over the implicit service period using the accelerated attribution method once it is probable that the performance condition will be achieved. Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the Consolidated Statements of Comprehensive Loss.

Certain awards deemed to be granted outside of the Company’s equity incentive plans, require the Company to use liability accounting. These type of awards are classified as a liability and are remeasured at fair value at the end of each reporting period until such time they are deemed to be granted under the Company’s equity incentive plans. Changes in fair value are included in compensation expense in the Consolidated Statements of Comprehensive Loss (see additional disclosures related to awards granted outside of the 2000 Stock Incentive Plan in Note 6, Stock-Based Compensation ).

Income Taxes - The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss carryforwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is recorded to reduce the deferred tax assets to the amount that is expected to be realized. In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in the evaluation of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

The Company uses a model for how it measures, presents and discloses an uncertain tax position taken or expected to be taken in a tax return. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood to be sustained upon ultimate settlement. The Company has no uncertain tax positions as of September 30, 2013 or December 31, 2012 that qualify for either recognition or disclosure in the consolidated financial statements.

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The Company’s policy for interest and penalties related to income tax exposures is to recognize interest and penalties as a component of the income taxes on continuing operations in the Consolidated Statements of Comprehensive Loss.

Net Income (Loss) Per Common Share - Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, the restricted stock units and the warrant would be antidilutive as the Company incurred a net loss. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock options and warrants are determined based on the treasury stock method.

The following table sets forth the reconciliation of the weighted average number of shares attributable to common stockholders used to compute basic net income (loss) per share for the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(In thousands, except per share amounts)						(In thousands, except per share amounts)
Numerator:
Net income (loss):	$	(17,327	)	$	(9,382	)	$	(39,859	)	$	(25,923	)
Denominator:
Weighted average common shares used in calculation of basic net income (loss) per share:	37,389			25,013			33,587			24,916
Effect of dilutive securities:
Common stock options	—			—			—			—
Restricted stock and restricted stock units	—			—			—			—
Common stock warrant	—			—			—			—
Weighted average common shares outstanding used in calculation of diluted net income (loss) per share	37,389			25,013			33,587			24,916
Net income (loss) per share:
Basic and Diluted	$	(0.46	)	$	(0.38	)	$	(1.19	)	$	(1.04	)

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average common shares outstanding as of September 30, 2013 and 2012 as their effect would have been anti-dilutive.

	As of September 30,
	2013	2012
	(In thousands)

Stock options to purchase common stock	3,439	1,690
Warrant to purchase common stock	—	330
Restricted stock units	106	496

Segment Information - The Company currently operates in one business segment, which is the development and commercialization of inhaled therapies for patients with serious lung infections. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to its products or product candidates. Accordingly, the Company does not have separate reportable segments.

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3. Accrued Expenses

Accrued expenses consist of the following:

	As of September 30,		As of December 31,
	2013		2012
	(in thousands)

Accrued clinical trial and manufacturing expenses	$	5,033	$	1,460
Liability for stock-based compensation awards	—		1,204
Accrued professional fees	465		185
Accrued interest payable	154		80
Other accrued expenses	—		4
	$	5,652	$	2,933

4. Debt

On June 29, 2012, the Company and its domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement that allowed the Company to borrow up $20.0 million in $10.0 million increments (“Loan Agreement”). The Company borrowed the first and second $10.0 million increments by signing two Secured Promissory Notes (“Note A” and “Note B” and collectively, the “Notes”) on June 29, 2012 and December 27, 2012, respectively. Notes A and B bear interest at 9.25%. Note A was originally scheduled to be repaid over a 42-month period with the first twelve monthly payments representing interest only followed by thirty monthly equal payments of principal and interest. Note B was originally scheduled to be repaid over a 36-month period with the first six monthly payments representing interest only followed by thirty monthly equal payments of principal and interest. The Loan Agreement provided that in certain circumstances the Company could delay the first principal payment by five months. In July 2013, subsequent to the completion of certain ARIKACE-related development milestones, the Company elected to extend the interest only period under the Notes from July 31, 2013 to December 31, 2013 and delay the first monthly principal repayments for Notes A and B from August 1, 2013 to January 1, 2014. The election did not change the maturity date for Notes A and B, which is January 1, 2016. The “Current portion of long-term debt” and “Debt, long-term” balances included in the consolidated Balance Sheet as of September 30, 2013 and the future principal repayments summarized in the table below reflect this extension of the interest-only period.

In connection with entering into the Loan Agreement, the Company granted the lender a first position lien on all of the Company’s assets, excluding intellectual property. Prepayment of the loans made pursuant to the Loan Agreement is subject to a prepayment penalty. The Company will be required to pay an “end of term” charge of approximately $0.4 million upon termination of the Loan Agreement, which is being charged to interest expense (and accreted to the debt) using the effective interest method over the term of the Notes. Debt issuance costs paid to the lender were recorded as a discount on the debt and are being amortized to interest expense using the effective interest method over the life of the Loan Agreement. Debt issuance costs paid to third parties were capitalized and are being amortized to interest expense using the effective interest method over the term of the Notes.

The Loan Agreement also contains representations and warranties by the Company and the lender, indemnification provisions in favor of the lender, customary covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends, but no financial covenants), and events of default (including with respect to payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of the lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency). Upon the occurrence of an event of default, a default interest rate of the base rate plus an additional 5%

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may accrue on the outstanding loan balances, and the lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Loan Agreement. In addition, pursuant to the Loan Agreement, the lender has the right to participate, in an amount of up to $1.0 million, in certain future private equity financing(s) by the Company.

In conjunction with entering into the Loan Agreement, the Company granted a warrant to the lender to purchase shares of the Company’s common stock. Since the warrant was granted in conjunction with entering into the Loan Agreement, the relative fair value of the warrant was recorded as equity and debt discount. The portion of the fair value allocated to debt discount is being amortized to interest expense over the term of the related debt using the effective interest method.

The following table presents the components of the Company’s debt balance as of September 30, 2013.

	September 30, 2013
	(in thousands)
Debt:
Notes payable	$	20,000
Add:
Accreted end of term charge	170
Less:
Unamortized debt issuance fees paid to lender	(140		)
Unamortized discount from warrant	(437		)
Current portion of long-term debt	(7,055		)
Long-term debt	$	12,538

Future principal repayments of the Notes are as follows (in thousands):

Year Ending December 31:
2014	9,519
2015	10,451
2016	30
Total	$	20,000

The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are currently in place. We believe the estimated fair value at September 30, 2013 approximates the gross carrying amount.

5. Shareholders’ Equity

Common Stock — As of September 30, 2013, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 and 39,100,899 shares of common stock issued and outstanding. Of the shares outstanding as of September 30, 2013, 1,765,271 shares represent holdback shares held by the Company as security for potential indemnification payments, as described in the Agreement and Plan of Merger with Transave, Inc. (the “Merger Agreement”), filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (see Footnote 9, Commitments and Contingencies, Legal Proceedings, Pilkiewicz v. Transave LLC for additional information regarding these holdback shares). In addition, as of September 30, 2013, the Company has reserved 3,438,621 shares of common stock for issuance upon the exercise of outstanding common stock options and 105,544 shares for issuance upon the vesting of restricted stock units.

On July 22, 2013, the Company completed an underwritten public offering of 6,900,000 shares of the Company’s common stock, which included the underwriter’s exercise in full of its over-allotment option of 900,000

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shares, at a price to the public of $10.40 per share. The Company’s net proceeds from the sale of the shares, after deducting the underwriter’s discount and offering expenses of $4.7 million, were $67.0 million.

Warrant - In conjunction with entering into the Loan Agreement (See Note 4 — Debt), the Company granted a warrant to the lender to purchase 329,932 shares of the Company’s common stock at an exercise price of $2.94 per share. The fair value of the warrant of $0.8 million was calculated using the Black-Scholes warrant-pricing methodology at the date of issuance and is recorded as equity and as a discount to the debt and is being amortized to interest expense over the term of the promissory notes using the effective interest method. On April 30, 2013, the lender exercised the warrant in full via the “net issuance” method specified in the warrant agreement. In accordance with such provisions, the Company issued and delivered 223,431 shares of common shares to the lender on May 1, 2013. As a result of the exercise, the warrant is no longer outstanding and there are no additional shares issuable under this instrument.

6. Stock Based Compensation

The Company has three equity compensation plans: the 2013 Incentive Plan, which was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 23, 2013, the Amended and Restated 2000 Stock Incentive Plan, as amended (the “2000 Stock Incentive Plan”) and the Amended and Restated 2000 Employee Stock Purchase Plan (the “Stock Purchase Plan”). Both the 2000 Stock Incentive Plan and the Stock Purchase Plan were adopted by the Company’s Board of Directors in 2000. Upon the approval of the 2013 Incentive Plan, no additional awards will be issued under the 2000 Stock Incentive Plan and the shares remaining for future grant under the 2000 Stock Incentive Plan were transferred to the 2013 Incentive Plan.

Under the terms of the 2013 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on our common stock, including stock options (both incentive stock options and non-qualified stock options), performance shares and other stock awards, as well as the payment of incentive bonuses to all employees and non-employee directors. The 2013 Incentive Plan provides for a single aggregate per person annual sub-limit of 1,500,000 stock options, performance shares (including RSUs) and shares of restricted stock. The 2013 Incentive Plan provides for the issuance of a maximum of 3,053,833 shares of common stock. Shares subject to outstanding awards under the 2000 Stock Incentive Plan that are cancelled, expired, forfeited or otherwise not issued will also be added to the number of shares available under the 2013 Incentive Plan. As of September 30, 2013, 2,333,966 shares of the Company’s common stock were reserved for future grants (or issuances) of restricted stock, restricted stock units, stock options, and stock warrants under the 2013 Incentive Plan. The 2013 Incentive Plan will terminate on April 16, 2023 unless it is extended or terminated earlier pursuant to its terms.

Under the terms of the 2000 Stock Incentive Plan, the Company was authorized to grant a variety of incentive awards based on our common stock, including stock options, (both incentive stock options and non-qualified stock options), performance shares, and other stock awards to all employees and non-employee directors. On March 15, 2013, the Company’s Board of Directors amended the 2000 Stock Incentive Plan to provide for a single aggregate per person annual sub-limit for the issuance of a maximum of 1,500,000 stock options, performance shares (including RSUs) and shares of restricted stock. The 2000 Stock Incentive Plan ceased to be available for additional grants once the Company’s shareholders approved the 2013 Incentive Plan on May 23, 2013.

Under the terms of the Stock Purchase Plan, eligible employees may, from time-to-time, have the opportunity to purchase our common stock at a discount. An option gives its holder the right to purchase shares of our common stock, up to a maximum value of $25,000 per year. The Stock Purchase Plan provides for the issuance of a maximum of 150,000 shares of our common stock to participating employees. Since the Company’s merger with Transave, Inc. in 2010, the Company has not offered employees the right to purchase common stock under the Stock Purchase Plan. As of September 30, 2013, 150,000 shares of the Company’s common stock were reserved for future issuances of common stock under the Stock Purchase Plan (See Part II. Other Information, Item 5. Other Information, “Termination of a Material Definitive Agreement” for information regarding the termination of our Stock Purchase Plan on October 31, 2013).

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During the first quarter of 2013, the Company completed a review of equity compensation awards granted under its 2000 Stock Incentive Plan and determined that it had inadvertently exceeded the annual per-person sub-limits involving certain awards previously made to certain of its current and past officers and directors (the “excess awards”). The aggregate amount of common stock represented by these excess awards, which consisted of RSUs and stock options, was approximately 1.4 million shares. These awards were deemed to be granted outside of the 2000 Stock Incentive Plan and as such the Company applied liability accounting to these awards. On May 23, 2013 (the date of the Company’s 2013 Annual Meeting of Stockholders), shareholders approved the grants associated with the excess awards, which as of this date, allowed the excess awards to be deemed granted under the 2000 Stock Incentive Plan. As a result, the excess awards were remeasured at fair value on May 23, 2013 and the liability was reclassified to Additional paid-in capital. The unrecognized fair value calculated for the excess awards as of May 23, 2013 will be recognized as compensation expense ratably over the remaining requisite service period for each award.

In connection with the appointment of the Company’s Chief Commercial Officer on April 1, 2013, the Company made inducement grants of stock options totaling 300,000 shares of the Company’s common stock.

Stock Options - The Company calculates the fair value of stock options granted using the Black-Scholes valuation model. The following table summarizes the grant date fair value and assumptions used in determining the fair value of stock options granted under the 2013 Incentive Plan and the 2000 Stock Incentive Plan, as well grants of inducement shares during the three and nine months ended September 30, 2013.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012

Volatility	87.7% - 90.3%	100.2% - 104.5%	87.7% - 96.0%	100.2% - 107.1%
Risk-free interest rate	1.39% - 1.65%	0.57% - 0.80%	0.65%-1.65%	0.57% - 0.99%
Dividend yield	0.0%	0.0%	0.0%	0.0%
Expected option term (in years)	6.25	6.25	6.25	6.25
Weighted-average fair value of stock options granted	$8.91	$2.89	$7.53	$2.89

For the three and nine months ended September 30, 2013, the volatility factor was based on the Company’s historical volatility since the closing of the merger with Transave on December 1, 2010. The expected option term (in years) was determined using the simplified method as described in ASC Topic 718, “ Accounting for Stock Compensation ”, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the US Treasury yield in effect at the date of grant. Forfeitures are based on actual percentage of option forfeitures since the closing of the merger on December 1, 2010, and are the basis for future forfeiture expectations.

The following table summarizes stock option activity for stock options granted under the 2013 Incentive Plan and the 2000 Stock Incentive Plan, as well as grants of inducement shares during the nine months ended September 30, 2013 as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value

Options outstanding at December 31, 2012	1,817,839		$	4.10
Granted	1,983,800		9.84
Exercised	(343,918	)	4.28
Forfeited and expired	(19,100	)	10.03
Options outstanding at September 30, 2013	3,438,621		7.36		9.16	$	28,364,114
Vested and expected to vest at September 30, 2013	3,197,438		7.33		9.15	26,490,791
Exercisable at September 30, 2013	387,187		3.81		7.85	4,570,290

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The following table summarizes the stock-based compensation recorded in the Consolidated Statements of Comprehensive Loss related to stock options during the three and nine months ended September 30, 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012
	(in millions)

Research and development expenses	$	0.3	$	0.1	$	0.7		$	0.2
General and administrative expenses	0.9		0.3		4.1			0.5

Total	$	1.2	$	0.4	$	4.8	(1)	$	0.7

(1) - Included in the $4.8 million is $2.9 million of expense that resulted from the remeasurement of certain stock options that occurred during May 2013.

As of September 30, 2013, there was $22.9 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.73 years. The following table summarizes by range of exercise prices the number of stock options outstanding and exercisable as of September 30, 2013:

Outstanding as of September 30, 2013								Exercisable as of September 30, 2013
Range of Exercise Prices				Number of Options	Weighted Average Remaining Contractual Term (in Years)	Weighted Average Excersise Price		Number of Options	Weighted Average Excersise Price
$	3.03	$	3.29	305,712	8.18	$	3.04	110,139	$	3.04
$	3.40	$	3.40	708,314	8.95	$	3.40	177,079	$	3.40
$	3.48	$	6.65	474,645	8.42	$	5.59	94,719	$	5.21
$	6.70	$	6.70	20,000	9.29	$	6.70	—	$	6.50
$	6.90	$	6.90	384,700	9.47	$	6.90	—	$	—
$	6.96	$	7.44	109,500	9.27	$	6.99	—	$	—
$	7.45	$	7.45	375,000	9.50	$	7.45	—	$	—
$	8.30	$	11.46	312,950	9.68	$	10.96	5,250	$	8.30
$	12.44	$	12.44	591,300	9.64	$	12.44	—	$	—
$	12.78	$	15.88	156,500	9.81	$	13.98	—	$	—

Restricted Stock and Restricted Stock Units — The Company grants Restricted Stock Units (“RSUs”) to its directors and to employees, including executives. Each RSU represents a right to receive one share of the Company’s common stock upon the completion of a specific period of continued service or achievement of a certain milestone. RSUs granted under the Company’s 2000 Stock Incentive Plan are generally valued at the market price of the Company’s common stock on the date of grant. The Company recognizes compensation expense for the fair values of these RSUs on a straight-line basis over the requisite service period of these awards, which is generally one to three years. In prior years certain RSUs were granted in excess of certain plan sub-limits. Such awards were deemed to be granted outside the 2000 Stock Incentive Plan. The Company used liability accounting and remeasured these excess awards at fair value at the end of each reporting period, and changes in fair value were included in compensation expense in the Consolidated Statements of Comprehensive Loss. As of September 30, 2013, no outstanding RSUs are deemed to be granted outside of the Company’s incentive plans.

The following table summarizes the RSU activity for awards granted under the 2000 Stock Incentive Plan during the nine months ended September 30, 2013:

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			Weighted
	Number of		Average
	RSUs		Grant Price
Outstanding as of December 31, 2012	215,525		$	6.26
Granted	53,730		$	6.67
Released	(147,878	)	$	6.48
Forfeited	(15,833	)	$	5.90
Outstanding as of September 30, 2013	105,544		$	6.24
Expected to Vest as of September 30, 2013	103,845		$	6.24

The following table summarizes the stock-based compensation recorded in the Consolidated Statements of Comprehensive Loss related to RSUs during the three and nine months ended September 30, 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012
	(in millions)

Research and development expenses	$	0.1	$	0.1	$	0.9		$	0.3
General and administrative expenses	0.1		—		0.7			0.5

Total	$	0.2	$	0.1	$	1.6	(1)	$	0.8

(1) - Included in the $1.6 million is $1.0 million of expense that resulted from the remeasurement of certain RSUs that occurred during May 2013.

As of September 30, 2013, there was $0.3 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 0.3 years.

7. License and Collaborative Agreements

Premacure (now Shire plc) - In May 2012, the Company entered into an agreement with Premacure (now Shire plc) pursuant to which the Company granted to Premacure an exclusive, worldwide license to develop, manufacture and commercialize IGF-1, with its natural binding protein, IGFBP-3, for the prevention and treatment of complications of preterm birth in exchange for royalty payments on commercial sales of IGF-1 (the “Premacure License Agreement”). In March 2013, we amended the Premacure License Agreement to provide Premacure with the option, exercisable by Premacure any time prior to April 30, 2013, to pay us $11.5 million (the “Buyout Amount”) and assume any of our royalty obligations to other parties in exchange for a fully paid license. On April 29, 2013, Premacure exercised this option and paid the Company $11.5 million in exchange for a fully paid license. The Company recorded this payment as Other revenue in the three months ended June 30, 2013. The Company is not entitled to any additional future royalties from Premacure, and Premacure has assumed the Company’s royalty obligations to other parties under the Premacure License Agreement.

8. Income Taxes

The provision (benefit) for income taxes was $0 during the three months ended September 30, 2013 and 2012, and ($1.2 million) and $0 during the nine months ended September 30, 2013 and 2012, respectively. The Company’s effective tax rate was 0% during the three months ended September 30, 2013 and 2012, and (3.0%) and 0% for the nine months ended September 30, 2013 and 2012, respectively. The benefit for income taxes recorded and the effective tax rate for the nine months ended September 30, 2013 solely reflect the reversal of a valuation allowance previously recorded against the Company’s New Jersey State net operating losses (“NOL”) that resulted from the Company’s sale of $27.0 million of its New Jersey State NOLs under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”) for cash of $1.2 million, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. The remaining net deferred tax asset as of September 30, 2013 remains fully offset by a valuation allowance due to the Company’s history of losses.

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The Company is not currently subject to any open tax audits and the statute of limitations for tax audits is generally open for the years 2009 and later. However, except in 2009, the Company has incurred net operating losses since inception. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin.

The Company’s policy is to recognize interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company has not recorded such expenses. As of September 30, 2013, the Company did not record any reserves for unrecognized income tax benefits, nor did it record 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 twelve months.

As of December 31, 2012, the Company had NOL carryforwards for income tax purposes of $350.0 million available to offset future taxable income, if any. The NOL carryforwards expire in various years beginning in 2013. Utilization of the Company’s NOL and general business tax credit carryforwards generated in prior years through September 2012 (the “September 2012 and prior NOLs”) are likely subject to substantial limitations under Section 382 of the Internal Revenue Code (“Section 382”) due to ownership changes that occurred at various points during years prior to 2012 and during September 2012. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, it has raised capital through the issuance of common stock on several occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, likely resulted in multiple changes in ownership, as defined by Section 382 since the Company’s formation in 1999. The substantial limitations on the use of the September 2012 and prior NOLs are likely to result in expiration of a substantial portion of these NOL or general business tax credit carryforwards before utilization which would substantially reduce the Company’s gross deferred tax assets. The Company plans to complete a Section 382 analysis regarding the limitation of its NOL and general business tax credit carryforwards and intends to disclose the results of this analysis when it is completed.

9. Commitments and Contingencies

Commitments

The Company has two operating leases for office and laboratory space located in Monmouth Junction, NJ through December 31, 2014. Future minimum rental payments under these two leases total approximately $0.9 million. We continue to lease office space in Richmond, VA, where the Company’s corporate headquarters were previously located through October 2016. Future minimum rental payments under this lease total approximately $1.5 million. During 2011, we recorded a net present value charge of $1.2 million in general and administrative expenses associated with vacating the Richmond facility. The remaining accrual for this charge was $0.8 million as of September 30, 2013.

Rent expense charged to operations was $0.2 million for each of the three month periods ended September 30, 2013 and 2012. Future minimum rental payments required under the Company’s operating leases are as follows (in thousands).

Year Ending December 31:
2013	$	297
2014	1,201
2015	498
2016	425
Total	$	2,421

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Legal Proceedings

Cacchillo v. Insmed

On October 6, 2010, a complaint was filed against the Company by Angeline Cacchillo (“Plaintiff”) in the U.S. District Court for the Northern District of New York (the “Court”), captioned Cacchillo v. Insmed, Inc. , No. 1:10-cv-0199, seeking monetary damages and a court order requiring Insmed to support Plaintiff’s compassionate use application to the FDA and if approved, to provide Plaintiff with IPLEX. Plaintiff was a participant in the Phase 2 clinical trial of IPLEX sponsored by us evaluating the effectiveness of the investigational drug in patients with type 1 myotonic muscular dystrophy (“MMD”). In the complaint, Plaintiff alleged (i) violation of constitutional due process and equal protection by depriving Plaintiff of continued access to IPLEX, (ii) fraudulent inducement to enter the Phase 2 clinical trial with the false promise to support Plaintiff’s compassionate use application to the FDA, (iii) negligent representation that the Company would support Plaintiff’s compassionate use application, (iv) breach of contract, seeking monetary and non-monetary damages, (v) intentional infliction of emotional distress by refusing to support Plaintiff’s compassionate use application after providing IPLEX, (vi) violation of an assumed duty of care to Plaintiff, (vii) breach of fiduciary duty to Plaintiff, (viii) negligence and (ix) unjust enrichment. Plaintiff sought compensatory and punitive monetary damages and injunction relief as noted above.

On October 7, 2010, Plaintiff filed a motion for a preliminary injunction that would require us to provide a written statement supporting the “compassionate use” of IPLEX for Plaintiff and directing us to provide IPLEX to Plaintiff at cost in the event that the compassionate use application were granted by the FDA. On October 22, 2010, the Court denied Plaintiff’s motion for the preliminary injunction concluding that the Court lacked subject matter jurisdiction with respect to her claim for a preliminary injunction. Plaintiff appealed the Court’s denial of her motion for a preliminary injunction to the U.S. Court of Appeals for the Second Circuit, which affirmed the trial court’s order denying the Plaintiff’s motion for a preliminary injunction.

We filed a motion with the Court to dismiss all of the outstanding claims, and on June 29, 2011, the Court dismissed six of Plaintiff’s claims, leaving outstanding the claims for (i) fraudulent inducement, (ii) negligent misrepresentation, and (iii) breach of contract. The Company filed an answer and affirmative defenses with the Court on July 12, 2011, and the parties completed discovery on or about June 1, 2012. The Company filed a Motion for Summary Judgment on August 1, 2012 seeking judgment in our favor on the three claims remaining in the case. On January 19, 2013, the Court granted the Company’s Motion for Summary Judgment and dismissed all of the outstanding claims. Plaintiff appealed the Court’s decision to the U.S. Court of Appeals for the Second Circuit. The Company anticipates a decision in the first half of 2014.

Pilkiewicz v. Transave LLC

On March 28, 2011, Frank G. Pilkiewicz and other former stockholders of Transave, Inc. (collectively, the “Petitioners”) filed an appraisal action against the Company’s subsidiary Transave, LLC in the Delaware Court of Chancery captioned Frank G. Pilkiewicz, et al. v. Transave, LLC , C.A. No. 6319-CS. On December 13, 2011, following the mailing of the revised notice of appraisal rights in accordance with the settlement terms of Mackinson et al. v. Insmed , the Petitioners filed an Amended Petition for Appraisal of Stock.

The Petitioners seek appraisal under Delaware law of their total combined common stock holdings representing total dissenting shares of approximately 7.77 million shares of Transave, Inc. common stock (the “Transave Stock”). The Petitioners are challenging the value of the consideration that they would be entitled to receive for their Transave Stock under the terms of the merger.

Under the terms of the Merger Agreement, certain of the former stockholders of Transave, Inc. (the “Transave Stockholders”) are obligated to indemnify the Company for certain liabilities in connection with the appraisal action. The Company notified the Transave Stockholders in May 2012 that the Company is seeking indemnification in accordance with the Merger Agreement and that it will continue to retain the aggregate amount of the holdback shares totaling 1,765,271 shares, as security for any indemnification payments due under the Merger Agreement. Discovery is nearly completed and the trial is expected to begin during the first quarter of 2014. Following trial, the court will determine the fair value of the Transave Stock. It is not possible at this time to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of this action.

From time to time, the Company is a party to various other lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. While the outcomes of these matters are uncertain, management

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does not expect that the ultimate costs to resolve these matters will materially adversely affect the Company’s business, 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. “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 include, but are not limited to: failure or delay of European, Canadian, U.S. Food and Drug Administration and other regulatory reviews and approvals, competitive developments affecting the Company’s product candidates, delays in product development or clinical trials or other studies, patent disputes and other intellectual property developments relating to the Company’s product candidates, unexpected regulatory actions, delays or requests, the failure of clinical trials or other studies or results of clinical trials or other studies that do not meet expectations, the fact that subsequent analyses of clinical trial or study data may lead to different (including less favorable) interpretations of trial or study results or may identify important implications of a trial or study that are not reflected in Company’s prior disclosures, and the fact that trial or study results or subsequent analyses may be subject to differing interpretations by regulatory agencies, the inability to successfully develop the Company’s product candidates or receive necessary regulatory approvals, inability to make product candidates commercially successful, changes in anticipated expenses, changes in the Company’s financing requirements or ability raise additional capital; our ability to complete development of, receive regulatory approval for, and successfully commercialize ARIKACE®; our estimates of expenses and future revenues and profitability; our plans to develop and market new products and the timing of these development programs; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; our ability to attract third parties with acceptable development, regulatory and commercialization expertise; the benefits to be derived from corporate license agreements and other third party efforts, including those relating to the development and commercialization of our product candidates; the degree of protection afforded to us by our intellectual portfolio; the safety and efficacy of our product candidates; sources of revenues and anticipated revenues, including contributions from license agreements and other third party efforts for the development and commercialization of products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly; the rate and degree of market acceptance of our product candidates; the timing and amount of reimbursement for our product candidates; the success of other competing therapies that may become available; and the availability of adequate supply and manufacturing capacity and quality for our product candidates.

Forward-looking statements are based upon our current expectations and beliefs, and involve known and unknown risk, 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 factors include, among others, the factors discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, 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, 2012.

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OVERVIEW

Insmed is a biopharmaceutical company focused on developing and commercializing an inhaled anti-infective to treat patients battling serious lung diseases that are often life-threatening. Our lead product candidate, ARIKACE ® or liposomal amikacin for inhalation, is an inhaled antibiotic treatment that delivers a proven and potent anti-infective directly to the site of serious lung infections.

Recent Developments and ARIKACE Clinical Summary

We are conducting a Phase 2 clinical trial in patients who have lung infections caused by non-tuberculous mycobacteria (“NTM”) in the U.S and Canada. During October 2013, we concluded the patient enrollment phase of the study with 90 patients enrolled in the study. In addition, Insmed commenced the Scientific Advice Working Party (SAWP) process with the European Medicines Agency (EMA) and expects to have discussions with the EMA regarding ARIKACE for NTM lung disease during the fourth quarter of 2013.

In July 2013, we reported top-line results from our Phase 3 registrational clinical trial of ARIKACE in cystic fibrosis (“CF”) patients who have lung infections caused by Pseudomonas aeruginosa (“ Pa” ) that was conducted in Europe and Canada. In summary, once-daily ARIKACE achieved its primary endpoint of non-inferiority when compared to twice-daily “TOBI” (“tobramycin inhalation solution”) for relative change in FEV 1 from baseline to the end of the study. On October 17, 2013, we reported additional results from this study at the North American Cystic Fibrosis Conference that were consistent with our previously reported top-line results. We are also conducting a two-year, open-label safety study that enrolled patients who also completed our Phase 3 registrational clinical trial in CF patients in Europe and Canada.

Our primary development focus is to obtain regulatory approval for ARIKACE for these two initial indications and to prepare for commercialization initially in Europe and Canada and then in the United States (“US”). If approved, ARIKACE will be the first once-a-day inhaled antibiotic treatment option available for these CF and NTM indications. Our strategy is to continue to develop ARIKACE for additional indications beyond CF patients with Pa infections and patients with NTM lung infections. The following table summarizes the current status of ARIKACE development.

Product
Candidate/Target
Indications

Status

Next Expected Milestone(s)

ARIKACE

Pa lung infections in CF patients

· Completed a Phase 3 registrational clinical trial that was conducted in Europe and Canada.

· Reported top-line results from our Phase 3 registrational clinical trial in July 2013 and reported additional results during October 2013.

· Conducting a two-year, open-label safety study in patients that completed our Phase 3 registrational clinical trial in Europe and Canada. We expect to complete this study in mid-2015.

· Granted orphan drug designation in Europe and the US.

· We expect to submit regulatory filings with the European Medicines Agency (“EMA”) and Health Canada during the first half of 2014.

· We plan to evaluate our plans for CF in the US after reviewing the results from our Phase 2 clinical trial in NTM.

· If approved, we plan to commercialize ARIKACE ourselves in Europe and in Canada and it would be the only once-a-day treatment for Pa lung infections in CF patients.

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ARIKACE

Non-tuberculous mycobacteria (NTM) lung infections

· Completed enrollment of 90 patients in a Phase 2 clinical trial in the US and Canada.

· Commenced the SAWP process with the EMA.

· Granted Qualified Infectious Disease Product (“QIDP”) designation by the U.S. Food and Drug Administration (“FDA”) in June 2013.

· Granted Fast Track designation by the FDA in June 2013.

· Granted orphan drug designation in the US.

· We expect to launch a single arm, open-label, supportive study in the U.S. and Europe during the fourth quarter of 2013.

· We expect to have discussions with the EMA under the SAWP process during the fourth quarter of 2013.

· We expect to report top-line clinical results from our Phase 2 clinical trial and related regulatory pathway dialogue with the FDA by the end of the first quarter of 2014.

· If approved, ARIKACE would be the first approved inhaled antibiotic treatment for NTM lung infections.

· If approved, we plan to commercialize ARIKACE ourselves initially in the U.S. and eventually in Europe and in Canada.

ARIKACE

Pa and other susceptible organisms causing lung infections in non-CF bronchiectasis patients

· Phase 2 clinical trial in the US completed.

· Granted orphan drug designation in the US.

· We expect to evaluate development and commercialization strategies when we complete our Phase 2 clinical trial in patients with NTM infections.

ARIKACE is considered a new molecular entity (NME) by the FDA primarily due to its proprietary liposomal technology. The key active ingredient, amikacin, is an FDA-approved antibiotic with proven efficacy in the treatment of a broad range of gram-negative infections, including Pa and NTM. ARIKACE is in the aminoglycoside class of antibiotics.

ARIKACE is differentiated from other inhaled antibiotics used to treat serious lung infections by our proprietary advanced liposomal technology, which is designed specifically to enhance the delivery profile, safety and efficacy of pharmaceuticals delivered to the lung via inhalation. We believe ARIKACE provides potential improvements over existing treatments for these indications. In our Phase 3 study in CF patients with Pa lung infections, ARIKACE, administered once-daily demonstrated improvements in patient lung function that were comparable to TOBI (“tobramycin inhalation solution”), administered twice-daily and that remained above baseline at the end of the study.

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If approved for CF patients with Pa lung infections, we expect ARIKACE would be the first inhaled antibiotic to be approved for once-daily administration in this indication. If approved for NTM patients, we expect ARIKACE would be the first and only approved treatment for NTM lung infections. ARIKACE has been granted orphan drug designation for CF patients who have Pa lung infections in both the European Union (“EU”) and the US, and for NTM patients in the US. We plan to file for orphan drug designation for NTM lung infections in Europe during the fourth quarter of 2013. On June 28, 2013, ARIKACE was granted QIDP designation and Fast Track designation by the FDA for the “treatment of Non-Tuberculous Mycobacterial lung infections.”

Corporate History

We were incorporated in the Commonwealth of Virginia on November 29, 1999. On December 1, 2010, we completed a business combination with Transave, Inc. (or “Transave”) a privately held, New Jersey-based pharmaceutical company focused on the development of differentiated and innovative inhaled pharmaceuticals for the site-specific treatment of serious lung infections. Our current operations are based on the technology and product candidates historically developed by Transave.

Lead Product Candidate - ARIKACE

Our lead product candidate, ARIKACE or liposomal amikacin for inhalation, is a once-a-day inhaled antibiotic treatment engineered to deliver a proven and potent anti-infective directly to the site of serious lung infections. There are two key components of ARIKACE: the liposomal formulation of the drug and the nebulizer device through which ARIKACE is inhaled through the mouth and into the lung. The nebulizer technology is owned by PARI Pharma GmbH (“PARI”), but through our licensing agreement with PARI, we have exclusive access to this technology, which is specifically developed for the delivery of our liposomal encapsulation of amikacin. Our proprietary liposomal technology and nebulizer are designed specifically for delivery of pharmaceuticals to the lung and provides for potential improvements to existing treatments. We believe that ARIKACE has potential usage for at least two orphan patient populations with high unmet need: CF patients who have Pa lung infections and patients who have NTM lung infections. We estimate the combined global market potential for these two orphan indications to be approximately $1 billion.

ARIKACE has the potential to be differentiated from other marketed drugs for the treatment of chronic lung infections by improving efficacy, safety and patient convenience. We believe efficacy may be improved for the treatment of certain lung infections due to the ability of ARIKACE to deliver high, sustained levels of amikacin directly to the lung and to the specific site of the underlying infection. In addition, the inhalation delivery of ARIKACE may reduce the potential for adverse events such as ototoxicity (hearing loss, ringing in the ears and/or loss of balance) and nephrotoxicity (toxicity to the kidneys), as compared with intravenous (IV) administration of amikacin. If approved, we expect that ARIKACE will be administered once daily for approximately 13 minutes via inhalation using the eFlow ® Nebulizer System, which has been optimized specifically for ARIKACE by PARI. We believe that this nebulizer system will reduce treatment time or dosing frequency, as compared with the currently marketed inhaled antibiotics, which require dosing two to three times daily with treatment times ranging from approximately 10 to 40 minutes per day. By easing the patient’s treatment burden we believe that ARIKACE can potentially improve patient compliance, which we believe may in turn lead to a reduction in the development of antibiotic resistance and, ultimately, lead to clinical benefit.

We believe that ARIKACE may provide: (1) improved efficacy resulting from sustained deposition of drug in the lung and improved ability to reach the site of infection (for CF Pa infections, this means penetration of biofilm and facilitated drug release by factors that are secreted by the bacteria, and for NTM, this means enhanced uptake into macrophages, where NTM often grows); (2) decreased adverse events and improved tolerability as compared with amikacin delivered intravenously; and (3) reduced dosing frequency or treatment time as compared to existing products.

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ARIKACE for CF Patients with Pseudomonas aeruginosa (“Pa” ) Lung Infections

Disease

CF is an inherited chronic disease that affects the lungs and digestive system and is often diagnosed before the age of two. CF occurs primarily in individuals of central and western European origin. CF affects roughly 70,000 children and adults worldwide, including 30,000 children and adults in the US (Cystic Fibrosis Foundation Patient Registry, 2011) and 35,000 patients in Europe (Hoiby, BMC Medicine, 2011, 9:32). There is no cure for CF.

Despite extensive treatment with multiple antibiotics, improved nutrition, and other treatments, the life expectancy of a CF patient is only about 37 years (Cystic Fibrosis Foundation Patient Registry, 2011). Median predicted age of survival is calculated using life table analysis (as calculated by actuaries) given the ages of the patients in the registry and the distribution of deaths. Using this calculation, half of the people in the patient registry are expected to live beyond the median predicted survival age, and half are expected to live less than the median predicted survival age.

Among other issues, in CF patients a defective gene and its protein product cause the body to produce unusually thick, sticky mucus that clogs the lungs. This creates an ideal environment for various pathogens, such as Pa, to colonize and lead to chronic infection of the lung, inflammation and progressive loss of lung function. In fact, chronic bronchial infections with Pa are a major cause of morbidity and mortality among patients with CF. Once a CF patient acquires a Pa infection, it is difficult to eradicate. The current, best available treatment is chronic administration of antibiotics to suppress the bacteria, reduce inflammation and preserve lung function for as long as possible. The rate of infection with Pa in CF patients increases with age. It is estimated that 70% of adult CF patients have chronic infection due to Pa (CFF Patient Registry, 2011). A study reported in the Journal of Cystic Fibrosis (Liou, 2010) found that deterioration in lung function of CF patients is the main cause of death and that, despite best efforts, lung function declines by 1% to 3% annually.

Current Clinical Program

We completed a registrational Phase 3 clinical trial of ARIKACE for CF patients with Pa lung infections in Europe and Canada during the second quarter of 2013. The Phase 3 trial was a randomized, open label, multi-center study designed to access the comparative safety and efficacy of once-daily ARIKACE administered for approximately 13 minutes via the eFlow Nebulizer System and twice-daily TOBI (tobramycin inhalation solution) administered for approximately 15 minutes per treatment via the PARI LC Plus Nebulizer System for a daily total of approximately 30 minutes per day in CF patients with Pa. A total of 302 adult and pediatric CF patients with chronic Pa were randomized to receive 28-days of ARIKACE treatment or TOBI delivered twice-daily via the PARI LC Plus ® Nebulizer System over a 24-week treatment period. The primary endpoint of the study was relative change in forced expiratory volume in one second (“FEV 1 ”) measured after three treatment cycles, with each cycle consisting of 28 days “on” treatment and 28 days “off” treatment. The study was designed to demonstrate non-inferiority to TOBI at a 5% non-inferiority margin with 80% power agreed upon by us and the European Medicines Agency (EMA). Secondary endpoints measured were relative changes in FEV 1 at other time points, time to and number of pulmonary exacerbations, time to antibiotic rescue treatment, change in density of Pa in sputum, respiratory hospitalizations and changes in Patient Reported Outcomes assessing Quality of Life. Top-line results from this study indicated:

· ARIKACE achieved its primary endpoint of non-inferiority to TOBI for relative change in FEV 1 from baseline to the end of the study;

· Overall, secondary endpoints, as summarized above, showed comparability of once-daily ARIKACE compared with twice-daily TOBI; and

· The safety profile of ARIKACE was comparable to TOBI during all three treatment cycles, with adverse events consistent with those seen in similar studies and expected in a population of CF patients receiving inhaled antibiotics. There was no difference between arms in the reporting of serious adverse events and there were no unexpected adverse events.

On October 17, 2013, we presented additional results from this study at the North American Cystic Fibrosis Conference that were consistent with our previously reported top-line results.

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We are conducting a two-year, open label safety study in patients that also completed our registrational Phase 3 clinical study of ARIKACE for CF patients with Pa lung infections in Europe and Canada. Approximately 75% of the eligible patients that completed our registrational Phase 3 clinical study consented to participate in the safety study. The patients in this study will receive ARIKACE for up to a two year period, using the same cycles of a 28 day on-treatment period and a 28 day off-treatment period. We expect to use interim data from this study as part of our regulatory filings with the EMA and Health Canada, which we expect to submit during the first half of 2014, and we expect to complete this study in mid-2015.

ARIKACE has been granted orphan drug status in the US and Europe for the treatment of Pa lung infections.

Strategy for Commercialization

We currently plan to retain marketing rights for ARIKACE in certain countries in Europe, and in Canada and the US. We believe ARIKACE will require a limited commercial infrastructure in these regions because of the small focused nature of the potential physician prescribing population for CF patients. We may license ARIKACE in certain countries in Europe, as well as outside of Europe, and Canada and the US.

In 2013, we commenced preparations for the potential commercialization of ARIKACE, including hiring Matt Pauls, our chief commercial officer. We plan to fill several other new positions to support our sales and marketing efforts.

ARIKACE for Patients with NTM Lung Infections

Disease

Non-tuberculous mycobacteria, or NTM, are bacteria commonly found in soil and water that have been associated with lung disease in select patient groups. NTM have characteristics that are similar to tuberculosis, or TB, but NTM are not contagious. Many people have NTM in their bodies, but NTM do not normally lead to an infection, perhaps because the body’s immune system successfully overcomes the threat of infection. It is not completely understood why certain individuals are susceptible to NTM infections. However, the patients who become infected with NTM often are immuno-compromised or have structural damage in their lungs at the time of the infection.

NTM are bacteria that invade and multiply chiefly within macrophages. They are characteristically resistant to most antibiotics. NTM lung infections are chronic, debilitating and progressive and often require lengthy, repeat hospitalizations. Signs and symptoms of NTM pulmonary disease are variable and nonspecific. They include chronic cough, sputum production and fatigue. Less commonly, malaise, dyspnea, fever, hemoptysis, and weight loss also can occur, usually with advanced NTM pulmonary disease. Evaluation is often complicated by the symptoms caused by co-existing lung diseases. According to a study published in the American Journal of Respiratory and Critical Care Medicine , these conditions include chronic obstructive airway disease associated with smoking, bronchiectasis, previous mycobacterial diseases, CF and pneumoconiosis (Olivier et al. 2003).

In the US, the prevalence of human disease attributable to NTM has increased over the past two decades. In 2012, in collaboration with the NIH, we funded a study performed by Clarity Pharma Research that showed there were an estimated 50,000 cases in the US in 2011 and that such cases were estimated to be growing at a rate of 10% per year. NTM is four to five times more prevalent than TB in the US (Incidence of TB from Center for Disease Control and Prevention Morbidity and Mortality Weekly Report, March 2012). In a decade-long study, researchers found that the diagnosis of NTM is increasing at approximately 8% per year and that those NTM patients over the age of 65 are 40% more likely to die than those who do not have the disease (Adjemian et al. Prevalence of Pulmonary Nontuberculous Mycobacterial Disease among Medicare Beneficiaries, USA, 1997-2007, American Journal of Respiratory and Critical Care Medicine, April 2012).

Although there are many species of NTM that have been reported to cause lung infections, ARIKACE is intended to treat two of the most common, Mycobacterium Avium Complex (MAC) and Mycobacterium abscessus

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( M. abscessus ) . MAC accounts for the vast majority of NTM lung infections with prevalence rates from 72% to more than 85% in the US. The reported prevalence rates for M. abscessus range from 3% to 11% in the US and the rate may even be higher in recalcitrant patients. The diagnosed prevalence of NTM species causing lung infections varies geographically with MAC rates of 25% to 55% reported in Europe.

We conducted a chart audit to more specifically quantify the incidence of NTM lung infections in both Europe and Japan. We believe the diagnosed prevalence of NTM lung disease in Europe is approximately 30,000 patients, and we believe the diagnosed prevalence of NTM lung disease in Japan is also approximately 30,000 patients.

Current Clinical Program

We are currently conducting a Phase 2 clinical trial in the US and Canada for ARIKACE in adult patients with recalcitrant NTM lung infections. We began enrolling patients in June 2012 and during October 2013, we concluded patient enrollment with 90 patients enrolled in this Phase 2 clinical study. In addition, during October 2013 Insmed commenced the Scientific Advice Working Party (SAWP) process with the European Medicines Agency (EMA) and expects to have discussions with the EMA regarding ARIKACE for NTM lung disease during the fourth quarter of 2013.

The Phase 2 clinical trial is a randomized, placebo-controlled study of 90 adult patients with recalcitrant NTM lung infections. There are two parts to the study: a randomized portion and an open-label portion.

In the randomized portion of the study, patients are screened initially to include in the study those who have NTM lung infections with persistent sputum culture for MAC or M. abscessus while on American Thoracic Society and Infectious Disease Society of America (ATS/IDSA)-guidelines-based treatment regimen for at least six months prior to screening. Patients who are NTM culture positive and meet the eligibility criteria to enroll in the study will receive, in addition to their ongoing antibiotic treatment regimen, either ARIKACE or a placebo both delivered once daily for approximately 13 minutes via an optimized, investigational eFlow Nebulizer System. The primary efficacy endpoint for this study is the semi-quantitative measurement of the change in mycobacterial density on a seven-point scale from baseline (day one) to the end of the randomized portion of the trial on the 84th day of treatment. At a public workshop discussion in September 2012, the FDA agreed that the microbiological end-point is an appropriate primary end-point for NTM lung disease. The study will also measure secondary, tertiary and exploratory endpoints, including but not limited to the proportion of patients with culture conversion to negative, the time to “rescue” anti-mycobacterial drugs, the change from baseline in six-minute walk distance and oxygen saturation, the change from baseline in patient reported outcomes, and evaluation of safety and tolerability.

At the conclusion of the randomized portion of the study, eligible patients will receive ARIKACE once daily for an additional 84 days during the open-label portion of the study, primarily to measure longer-term safety and efficacy. We previously agreed with the FDA on this clinical trial design.

On June 28, 2013, the FDA designated ARIKACE as a Qualified Infectious Disease Product (“QIDP”) for the treatment of NTM. The QIDP designation for ARIKACE enables us to benefit from certain incentives for the development of new antibiotics, including potentially more frequent and ongoing dialogue with FDA, priority review, and if ARIKACE is ultimately approved by the FDA, a five-year exclusivity extension under the “The Drug Price Competition and Patent Term Restoration Act, also known as the “Hatch-Waxman” Act. These incentives are provided under the “Generating Antibiotic Incentives Now” Act (the “GAIN” Act), which was signed into law in July 2012.

Additionally, on June 28, 2013, the FDA granted Fast Track designation to ARIKACE for the treatment of NTM. The Fast Track designation is intended to expedite the review of new drugs that have the potential to serve unmet medical needs in serious or life-threatening conditions.

ARIKACE has been granted orphan drug designation in the US for the treatment of patients with NTM.

Pursuant to ARIKACE’s recently designated QIDP status, we expect to continue our dialogue with the FDA regarding the regulatory pathway for registration and approval of ARIKACE for the treatment of NTM, and

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we expect to complete our review of the results from this clinical trial and related dialogue with the FDA by the end of the first quarter of 2014.

In addition to the Phase 2 clinical trial outlined above, we intend to launch a single arm, open label supportive study in the U.S. and Europe during the fourth quarter of 2013. We currently anticipate enrolling approximately 50 patients in this study who have NTM lung infections that were not eligible for enrollment into our Phase 2 clinical trial. We believe that clinical data collected from our experience with these patients will further help regulatory authorities evaluate ARIKACE’s safety and suitability for treating patients with NTM lung infections.

Strategy for Commercialization

We currently plan to retain marketing rights for ARIKACE in certain countries in Europe, and in Canada and the US. Given the current lack of approved treatments for NTM lung infections, we believe we will immediately have a strong market position if ARIKACE is approved for commercialization in the NTM indication. We believe ARIKACE will require a limited commercial infrastructure in these regions because of the small focused nature of the potential physician prescribing population for NTM patients. We believe there will be substantial overlap among lung specialist physicians who treat CF patients and Pa lung infections and those who have NTM lung infections thereby allowing us to leverage our commercial infrastructure across both indications. We may seek to out-license ARIKACE in certain countries in Europe, as well as outside of Europe, Canada and the US.

ARIKACE for Non-CF Bronchiectasis Patients with Pseudomonas aeruginosa (“Pa” ) Lung Infections

Disease

We believe ARIKACE has the potential to be used to treat non-CF bronchiectasis characterized by Pa lung infections. However, we are currently concentrating our development efforts on the treatment of Pa lung infections in CF patients and patients with NTM lung infections. We will evaluate our development and commercialization strategies for this indication when we complete our Phase 2 study in patients with NTM infections.

Non-CF bronchiectasis is a serious pulmonary condition characterized by localized, irreversible enlargement of the bronchial tubes. Accumulation of mucus in the bronchi leads to frequent infections, which causes inflammation and further reduces lung function. Patients evolve to a chronic inflammation-infection cycle. Disease burden has primarily been linked to productive cough and high levels of sputum production.

Development Program

In May 2009, we completed our randomized, placebo controlled US Phase 2 study (TR02-107) of ARIKACE for the treatment of chronic Pa infection in non-CF patients with bronchiectasis. In the study, 64 study subjects were randomized (1:1:1) to receive ARIKACE 280 mg, ARIKACE 560 mg or a placebo on a daily basis during a 28-day on-treatment period. The subjects completed follow-up assessments at the end of a 28-day off-treatment period. This study provided an initial evidence of safety, tolerability and clinically meaningful improvement in pulmonary function throughout the on-treatment period in the treatment of chronic Pa infection in non-CF patients with bronchiectasis.

In the study, both ARIKACE 280 mg and ARIKACE 560 mg were well tolerated. The adverse events experienced by patients during the study were consistent with underlying chronic lung disease in bronchiectasis patients. There was no evidence of renal toxicity or ototoxicity. Patients in the 560-mg cohort appear to have a slightly higher frequency of dry cough post administration than patients in the 280 mg cohort. Cough was of short duration and self-limiting. One patient discontinued treatment due to dysphonia (hoarseness or difficulty speaking) and cough.

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There was a statistically significant reduction in Pa density observed in the 560 mg ARIKACE cohort relative to the placebo cohort. Patients receiving ARIKACE experienced fewer pulmonary exacerbations at a rate of 4.7%, as compared to 10.5% in those receiving placebo. No patients in the ARIKACE cohorts required anti-Pa rescue treatment, whereas 15% of patients in the placebo cohort required treatment. Hospitalization from any cause occurred at a 5.3% rate for patients in the placebo cohort, as compared to a 2.3% rate for patients in the ARIKACE cohort. Patients receiving ARIKACE achieved improvements in patient respiratory symptoms and quality of life assessments compared with patients receiving placebo.

Although we believe there is an opportunity to develop ARIKACE for non-CF bronchiectasis, we do not intend to initiate further clinical studies with respect to a non-CF bronchiectasis indication until we have completed additional clinical studies for CF patients with Pa lung infections and for patients with NTM lung infections. Following those studies, we will evaluate whether to develop ARIKACE further for non-CF bronchiectasis.

ARIKACE has been granted orphan drug status in the US for the treatment of bronchiectasis in patients with Pa or other susceptible pathogens.

INTELLECTUAL PROPERTY

Patents

In addition to the intellectual property already granted to us, during September and October 2013, we were informed of two U.S. patent allowances as follows:

· The U.S. Patent and Trademark Office (USPTO) intends to grant U.S. Patent Application No. 13/666,420 for ARIKACE in a patent titled, “Lipid-based compositions of anti-infectives for treating pulmonary infections and methods of use thereof.” Once granted, it will provide exclusivity at least through December 5, 2026. This new patent will cover an aerosolized composition of Insmed’s novel, once-daily inhalation formulation comprising amikacin and liposomal delivery technology for the treatment of pulmonary infections, including Pseudomonas aeruginosa and mycobacterial infections, among others.

· The USPTO intends to grant U.S. Patent Application No. 13/527,213 for ARIKACE in a patent entitled, “Lipid-based compositions of anti-infectives for treating pulmonary infections and methods of use thereof.” Once granted, it will provide exclusivity at least through December 5 , 2026. This new patent will cover a method for treating a pulmonary infection, including a Pseudomonas aeruginosa and a mycobacterial infection, among others, in a cystic fibrosis patient, with an aerosolized pharmaceutical formulation comprising an aminoglycoside together with Insmed’s liposomal delivery technology. Specifically, the patent will cover a method for treating a pulmonary infection in a cystic fibrosis patient comprising administering to the patient an aerosolized composition comprising ARIKACE.

On September 4, 2013, the European Patent Office granted Patent No. 1909759 entitled “Sustained Release of Anti-infective Aminoglycosides” for ARIKACE. The granted patent provides protection for novel anti-infective formulations comprising an aminoglycoside and our liposomal delivery technology, including ARIKACE. The composition of matter patent provides exclusivity in any of the European Patent Office’s member states where we choose to validate the patent, at least through July 19, 2026. The granted patent also includes claims relating to the use of the aforementioned aminoglycoside/lipid formulations for treating pulmonary infections, including those caused by Pa lung infections and certain mycobacterial infections, among others.

On October 16, 2013, the European Patent Office granted EU Patent No. 1581236, for ARIKACE in a patent titled, “Sustained release of anti-infectives.” This patent provides exclusivity at least through October 29, 2023 in any European Patent Office member state where Insmed chooses to validate the patent. The patent provides protection for the use of ARIKACE’s formulation comprising amikacin and liposomal delivery technology for the treatment of pulmonary infections in CF patients. Specifically, the patent includes claims relating to the use of the

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aforementioned formulation for treating Pseudomonas aeruginosa pulmonary infections, as well as certain mycobacterial infections, among others.

KEY COMPONENTS OF OUR STATEMENT OF OPERATIONS

Other Revenue

Other revenue during the nine months ended September 30, 2013 solely consists of an $11.5 million payment the Company received from Premacure (now Shire plc) in exchange for the Company’s right to receive royalties under its license agreement with Premacure (see Note 7. License and Collaborative Agreements to the consolidated financial statements included in Part 1. Financial Information, Item 1. Financial Statements for additional information regarding our agreement with Premacure). The Company recorded this as Other revenue after all four revenue recognition criteria were present and the Company had no continuing performance obligations related to the payment received.

Research and Development Expenses

Research and development expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, and other internal operating expenses, the cost of manufacturing our drug candidate for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. Our expenses related to manufacturing our drug candidate for clinical study are primarily related to activities at a contract manufacturing organization that manufactures ARIKACE for our use. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend mainly on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

Since 2011, we have focused our development activities principally on our proprietary, advanced liposomal technology designed specifically for inhalation lung delivery. We recently completed a registrational Phase 3 clinical trial of ARIKACE for CF patients with Pa lung infections in Europe and Canada. We are currently conducting two clinical trials: (1) a two-year, open label safety study in consenting patients who completed the Phase 3 trial of ARIKACE for CF patients with Pa lung infections in Europe and Canada, and (2) a Phase 2 trial in the US in which we are evaluating ARIKACE for NTM infections. Since our business combination with Transave through September 30, 2013, our external research and development expenses for our ARIKACE program have been approximately $68.8 million. We expect that our development efforts during the remainder of 2013 and 2014 will principally relate to the study of ARIKACE in the CF and NTM indications.

Our clinical trials with ARIKACE are subject to numerous risks and uncertainties that are outside of our control, including the possibility that necessary regulatory approvals may not be obtained. In addition, the duration and the cost of clinical trials may vary significantly from trial to trial over the life of a project as a result of differences in the study protocol for each trial as well as differences arising during the clinical trial, including, among others, the following:

· the number of patients that ultimately participate in the trial;

· the duration of patient follow-up that is determined to be appropriate in view of results;

· the number of clinical sites included in the trials;

· the length of time required to enroll suitable patient subjects; and

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· the efficacy and safety profile of the product candidate.

Our clinical trials may be subject to delays, particularly if we are unable to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our clinical trials. Moreover, all of our product candidates must overcome significant regulatory, technological, manufacturing and marketing challenges before they can be successfully commercialized. Any significant delays that occur or additional expenses that we incur may have a material adverse effect on our financial position and may require us to raise additional capital sooner or in larger amounts than is presently expected. In addition, as a result of the risks and uncertainties related to the development and approval of our product candidates and the additional uncertainties related to our ability to market and sell these products once approved for commercial sale, we are unable to provide a meaningful prediction regarding when, if at all, we will generate positive cash inflow from these projects.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance and accounting, legal, market research, and human resource functions. General and administrative expenses also include professional fees for legal, including patent-related expenses, consulting, insurance, board of director fees, and audit, tax and accounting services. We expect that our general and administrative expenses will increase in order to support increased levels of development activities and commencement of commercialization activities for our lead product candidate, ARIKACE.

Investment Income and Interest Expense

Investment income consists of interest and dividend income earned on our cash and cash equivalents, and in the prior year periods also includes realized gains (losses) on the sale of our short-term investments. Interest expense consists primarily of interest costs related to our debt.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2013 and 2012

Net Loss

Net loss for the three months ended September 30, 2013 was $17.3 million (or $0.46 per common share — basic and diluted) compared with a net loss of $9.4 million (or $0.38 per common share — basic and diluted) for the three months ended September 30, 2012. The increase in our net loss in 2013 of $7.9 million was primarily due to:

· A $6.4 million increase in our research and development expenses that primarily resulted from (1) a $2.6 million increase in expense for our two-year extension study in CF patients in Europe and Canada and our Phase 2 NTM clinical study in the US, (2) a $2.1 million increase in costs related to process improvements (and related validation work) to our ARIKACE manufacturing process, and (3) a $1.0 million increase in compensation expenses resulting from an increase in headcount; and

· A $1.1 million increase in our general and administrative expenses primarily resulted from a $1.3 million increase in professional fees related to market research and other related costs, and legal fees.

Research and Development Expenses

Research and development expenses for the three months ended September 30, 2013 and 2012 comprised the following:

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	Three Months Ended
	September 30,				Increase (Decrease)
	2013		2012		$			%
	(in thousands)
External expenses
Clinical development	$	4,731	$	2,116	$	2,615		124	%
Manufacturing	3,291		1,179		2,112			179	%
Regulatory and quality assurance	550		632		(82		)	-13	%
Subtotal - external	8,572		3,927		4,645			118	%

Internal expenses
Compensation and related expenses	2,482		1,491		991			66	%
Other internal operating expenses	1,041		288		753			261	%
Subtotal - internal	3,523		1,779		1,744			98	%

Total	$	12,095	$	5,706	$	6,389		112	%

Research and development expenses increased to $12.1 million during the three months ended September 30, 2013 from $5.7 million in the same period in 2012. The $6.4 million increase is primarily due to a $4.6 million increase in external costs primarily consisting of (1) a $2.6 million increase in expenses for our two-year, open-label safety study in CF patients in Europe and Canada and our Phase 2 NTM clinical study in the US and Canada, and (2) a $2.1 million increase in costs related to process improvements (and related validation work) we made to our ARIKACE manufacturing process during the three months ended September 30, 2013. We initiated the Phase 2 NTM study in the second quarter of 2012 and the two-year extension study in October 2012. Also contributing to the $6.4 million increase was a $1.7 million increase in internal expenses, including a $1.0 million increase in compensation and related expenses and a $0.7 million increase in recruiting expenses, travel expenses to clinical trial sites and manufacturing locations, consulting fees and other internal research and development expenses.

General and Administrative Expenses

General and administrative expenses increased to $4.7 million during the three months ended September 30, 2013 from $3.6 million in the same period in 2012. The $1.1 million increase was primarily due to a $1.3 million increase in professional fees that was primarily related to market research and other related costs, and legal fees. Partially offsetting this increase was a $0.2 million net decrease in other general and administrative expenses.

Investment Income

Investment income decreased to $0.0 million during the three months ended September 30, 2013 from $0.2 million in the same period in 2012. The $0.2 million decrease is a result of our decision to amend our investment policy and only invest in certain types of mutual and money market funds, US Treasury obligations, and bank certificates of deposit. During the three months ended September 30, 2013, the majority of our cash was invested in money market funds that have lower rates of return than the returns we received from our short-term investments in the same period in 2012.

Interest Expense

Interest expense increased to $0.5 million during the three months ended September 30, 2013 from $0.2 in 2012. The $0.3 million increase was due to the second increment of $10.0 million we borrowed in December 2012 under our Loan Agreement we entered into in June 2012.

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Comparison of the Nine Months Ended September 30, 2013 and 2012

Net Loss

Net loss for the nine months ended September 30, 2013 was $39.9 million (or $1.19 per common share — basic and diluted) compared with a net loss of $25.9 million (or $1.04 per common share — basic and diluted) for the nine months ended September 30, 2012. The increase in our net loss in 2013 of $14.0 million was primarily due to a $16.5 million increase in our research and development expenses that primarily resulted from the activities under our Phase 3 clinical study in CF patients and related two-year, open-label safety study in Europe and Canada, and our Phase 2 NTM clinical study in the US. We initiated the Phase 2 CF study and Phase 2 NTM study in the second quarter of 2012 and initiated the two-year extension study in October 2012. Also contributing to the increase in the net loss was a $7.9 million increase in our general and administrative expenses that was primarily due to a $3.9 million increase in compensation expense (including $3.7 million in non-cash stock-based compensation expense) and a $3.9 million increase in professional fees, including a $2.2 million increase in legal fees related to the investigation, accounting and reporting of excess equity awards and $1.8 million for consulting expenses, mainly for market research and other related costs. Partially offsetting these increases in operating expenses was Other revenue of $11.5 million related to a one-time payment for the sale of the Company’s right to receive future royalties under its license agreement with Premacure (now Shire plc).

Other Revenue

Other revenue during the nine months ended September 30, 2013 solely consists of a one-time $11.5 million payment the Company received from Premacure (now Shire plc) in exchange for the Company’s right to receive royalties under its license agreement with Premacure. The Company recorded this as Other revenue during the three months ended June 30, 2013, since all revenue recognition criteria were present and the Company has no continuing performance obligations related to the payment received.

Research and Development Expenses

Research and development expenses for the nine months ended September 30, 2013 and 2012 comprised the following:

	Nine Months Ended
	September 30,				Increase (Decrease)
	2013		2012		$			%
	(in thousands)
External expenses
Clinical development	$	16,685	$	6,075	$	10,610		175	%
Manufacturing	6,447		5,242		1,205			23	%
Regulatory and quality assurance	1,357		1,550		(193		)	-12	%
Subtotal - external	24,489		12,867		11,622			90	%

Internal expenses
Compensation and related expenses	7,124		4,451		2,673			60	%
Other internal operating expenses	3,041		872		2,169			249	%
Subtotal - internal	10,165		5,323		4,842			91	%

Total	$	34,654	$	18,190	$	16,464		91	%

Research and development expenses increased to $34.7 million during the nine months ended September 30, 2013 from $18.2 million in the same period in 2012. The $16.5 million increase is primarily due to:

· An $11.6 million increase in external costs primarily consisting of a $10.6 million increase in expenses for our Phase 3 CF clinical study and our two-year, open-label safety study in Europe and Canada, and our Phase 2 NTM clinical study in the US during the nine months ended September 30, 2013. We initiated the Phase 2 CF study and Phase 2 NTM study in the second quarter of 2012 and initiated the two-year extension study in October 2012. Also contributing to the $11.6 million increase was a $1.2 million

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increase in costs related to process improvements we made to our ARIKACE manufacturing process; and

· A $4.8 million increase in internal expenses, including a $2.7 million increase in compensation and related expenses (including a $1.2 million in non-cash stock-based compensation expense), a $0.7 million increase in recruiting expenses, a $0.5 million increase in travel expenses to clinical trial sites and manufacturing locations, and a $0.9 million increase in other research and development expenses.

General and Administrative Expenses

General and administrative expenses increased to $16.3 million during the nine months ended September 30, 2013 from $8.4 million in the same period in 2012. The $7.9 million increase was primarily due to:

· A $3.9 million increase in compensation expense (including $3.7 million in non-cash stock-based compensation expense); and

· A $3.9 million increase in professional fees that was primarily related to a $2.2 million increase in legal fees primarily resulting from the investigation, accounting and reporting of excess equity awards (see Note 6, “Stock Based Compensation” to the consolidated financial statements for additional information) and $1.8 million for consulting expenses, mainly for market research and other related costs.

Investment Income

Investment income decreased to $0.1 million during the nine months ended September 30, 2013 from $0.9 million in the same period in 2012. The $0.8 million decrease is a result of our decision to amend our investment policy and only invest in certain types of mutual and money market funds, U.S. Treasury obligations, and bank certificates of deposit. During the nine months ended September 30, 2013, the majority of our cash was invested in money market funds that have lower rates of return than the returns we received from our short-term investments in the same period in 2012.

Interest Expense

Interest expense increased to $1.8 million during the nine months ended September 30, 2013 from $0.2 million in the same period in 2012. The $1.6 million increase was due to the $20.0 million of borrowings ($10.0 million in June 2012 and $10.0 million in December 2012) under our Loan Agreement we entered into in June 2012.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes was ($1.2 million) and $0.0 during the nine months ended September 30, 2013 and 2012, respectively. The Company’s effective tax rate was (3.0%) and 0% for the nine months ended September 30, 2013 and 2012, respectively. The benefit for income taxes recorded and the effective tax rate for the nine months ended September 30, 2013 solely reflect the reversal of a valuation allowance previously recorded against the Company’s New Jersey State net operating losses (“NOL”) that resulted from the Company’s sale of $27.0 million of its New Jersey State NOLs under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”) for cash of $1.2 million, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. The remaining net deferred tax asset as of September 30, 2013 remains fully offset by a valuation allowance due to the Company’s history of losses.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

There is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point of regulatory approval and commercialization. Historically, we have funded our operations through public and private placements of equity securities, through debt financing, from the proceeds from the sale of our follow-on biologics (“FOB”) platform to Merck in 2009 and from revenues related to sales of product and our IPLEX expanded access program, which was discontinued in 2011. We expect to continue to incur losses because we plan to fund our research and development activities and commercial launch activities, and we do not expect material revenues for at least the next few years.

As of September 30, 2013, we had total cash and cash equivalents on hand of $128.0 million, as compared with $92.9 million of cash, cash equivalents, and a certificate of deposit on hand as of December 31, 2012. The $35.1 million net increase was due principally to $67.0 million of net proceeds we received from an underwritten public offering of our common stock we completed during July 2013 and an $11.5 million payment we received from Premacure (now Shire plc) during May 2013. These inflows were partially offset by our use of $44.1 million to fund our operations. Our working capital was $109.9 million as of September 30, 2013.

On July 22, 2013, the Company completed an underwritten public offering of 6,900,000 shares of the Company’s common stock, which includes the underwriter’s exercise in full of its over-allotment option of 900,000 shares, at a price to the public of $10.40 per share. The Company’s net proceeds from the sale of the shares, after deducting the underwriter’s discount and estimated offering expenses of $4.7 million, were $67.0 million.

We believe that our cash and cash equivalents of $128.0 million as of September 30, 2013 will be sufficient to fund our operations through 2014. However, our business strategy may require us to, or we may otherwise determine to, raise additional capital at any time through equity or debt financing(s), strategic transactions or otherwise. Such additional funding may be necessary to continue to develop our potential product candidates, to pursue the license or purchase of complementary technologies, to commercialize our product candidates or to purchase other products. In addition, we may determine to raise capital opportunistically. We cannot assure you that adequate capital will be available on favorable terms, or at all, when needed. If we are unable to obtain sufficient additional funds when required, we may be forced to delay, restrict or eliminate all or a portion of our research or development programs, dispose of assets or technology or cease operations.

Cash Flows

Net cash used in operating activities was $32.6 million and $22.1 million for the nine months ended September 30, 2013 and 2012, respectively. Absent the one-time $11.5 million cash payment we received from Premacure in May 2013, net cash used in operating activities for the nine months ended September 30, 2013 would have been $44.1 million. The net cash used in operating activities during 2013 and 2012 was primarily for the clinical development of our lead product candidate, ARIKACE, which included the initiation of three clinical trials for the study of ARIKACE during 2012 and the continued advancement of two of these clinical trials through September 2013 and completion of one of these clinical trials during the quarter ended September 30, 2013.

Net cash provided by investing activities was $1.4 million and $16.9 million during the nine months ended September 30, 2013 and 2012, respectively. The net cash provided by investing activities in 2013 of $1.4 million related to the maturity of a certificate of deposit of $2.2 million that was partially offset by fixed asset purchases of $0.7 million for lab and computer equipment. The net cash provided by investing activities in the nine months ended September 30, 2012 was primarily a result of $17.1 million of sales of short-term investments.

Net cash provided by financing activities was $68.4 million and $35.3 million for the nine months ended September 30, 2013 and 2012, respectively. The net cash provided by financing activities of $68.4 million during 2013 primarily consists of $67.0 million of net proceeds we received from an underwritten public offering of our common stock we completed during July 2013 and $1.5 million of proceeds received from stock option exercises. The net cash provided by financing activities of $35.3 million during 2012 primarily consisted of $25.7 million of proceeds received from the issuance of common stock and $9.7 million of borrowings of long-term debt.

On June 29, 2012, we entered into a Loan and Security Agreement that allowed us to borrow up $20.0 million in $10.0 million increments (“Loan Agreement”). We borrowed the first and second $10.0 million increments by signing two Secured Promissory Notes (“Note A” and “Note B” and collectively, the “Notes”) on

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June 29, 2012 and December 27, 2012, respectively. Notes A and B bear interest at 9.25%. Note A was originally scheduled to be repaid over a 42-month period with the first twelve monthly payments representing interest only followed by thirty monthly equal payments of principal and interest. Note B was originally scheduled to be repaid over a 36-month period with the first six monthly payments representing interest only followed by thirty monthly equal payments of principal and interest. The Loan Agreement provided that in certain circumstances the Company could delay the first principal payment by five months. In July 2013, subsequent to the completion of certain ARIKACE-related development milestones, the Company elected to extend the interest only period under the Notes from July 31, 2013 to December 31, 2013 and delay the first monthly principal repayments for Notes A and B from August 1, 2013 to January 1, 2014. The election did not change the maturity date for Notes A and B, which is January 1, 2016. In connection with the Loan Agreement, we granted the lender a first position lien on all of our assets, excluding intellectual property. Prepayment of the loans made pursuant to the Loan Agreement is subject to a prepayment penalty and we will be required to pay an “end of term” charge of $0.4 million upon termination of the Loan Agreement.

Contractual Obligations

We have two operating leases for office and laboratory space located in Monmouth Junction, NJ that terminate on December 31, 2014. Future minimum rental payments under these two leases total approximately $0.9 million. We continue to lease office space in Richmond, VA where our corporate headquarters were previously located. Future minimum rental payments under this lease total approximately $1.5 million. During 2011, we recorded a net present value charge of $1.2 million in general and administrative expenses associated with vacating the Richmond, VA facility. The remaining accrual for this charge was $0.8 million as of September 30, 2013.

We executed two secured promissory notes totaling $20.0 million; $10.0 million in June 2012 and $10.0 million in December 2012. We also have a capital lease for leasehold improvements with monthly payments through December 2014. As of September 30, 2013, future payments under the two promissory notes (taking into consideration the extension of the interest-only period from August 1, 2013 to December 31, 2013 that we executed with our lender during July 2013), the capital lease and minimum future payments under non-cancellable operating leases are as follows:

			As of September 30, 2013
			Payments Due By Period
			Less than						After
	Total		1 year		1-3 Years		4-5 Years		5 Years
	(In thousands)
Debt obligations
Debt maturities	$	20,000	$	7,055	$	12,945	$	—	$	—
Contractual interest	2,481		1,656		825		—		—
Capital lease obligations	—						—
Debt maturities	80		64		16		—		—
Contractual interest	1		1		—		—		—
Operating leases	2,421		1,196		1,182		42
Purchase obligations	—		—		—		—		—

Total contractual obligations	$	24,983	$	9,972	$	14,968	$	42	$	—

This table does not include (a) any milestone payments which may become payable to third parties under our license and collaboration agreements as the timing and likelihood of such payments are not known, (b) any royalty payments to third parties as the amounts of such payments, timing and/or the likelihood of such payments are not known, and (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above.

We currently have a licensing agreement with PARI for use of the optimized eFlow Nebulizer System for delivery of ARIKACE in treating patients with CF, bronchiectasis and NTM infections. We have rights to several US and foreign issued patents, and patent applications involving improvements to the optimized eFlow Nebulizer

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System. Under the licensing agreement, PARI is entitled to receive payments either in cash, qualified stock or a combination of both, at PARI’s discretion, based on achievement of certain milestone events including Phase 3 trial initiation (which occurred in 2012), first acceptance of MAA submission (or equivalent) in the US of ARIKACE and the device, first receipt of marketing approval in the US for ARIKACE and the device, and first receipt of marketing approval in a major EU country for ARIKACE and the device, and NDA acceptance and regulatory approval of ARIKACE. In addition, PARI is entitled to receive royalty payments on commercial sales of ARIKACE pursuant to the licensing agreement.

In 2005 and 2009, we entered into a research funding agreements with Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT) whereby we received $1.7 million and $2.2 million for each respective agreement in research funding for the development of its ARIKACE product. If ARIKACE becomes an approved product for CF patients in the US, we will owe a payment to CFFT of up to $13.4 million that is payable over a three-year period after approval as a commercialized drug in the US. Furthermore, if certain sales milestones are met within 5 years of the drug commercialization approval in the US, we would owe an additional $3.9 million in additional payments. Since there is significant development risk associated with ARIKACE, we have not accrued these obligations.

In 2009 and 2012, we entered into a cooperative research and development agreement (CRADA) with National Institutes of Allergy and Infectious Diseases (NIAID) to design and conduct our Phase 2 study of ARIKACE in patients with NTM. NIAID has also agreed to provide biostatistical advisory input in connection with the Phase 2 NTM study. If we decide not to continue with the commercialization of ARIKACE in NTM, NIAID will have the right to complete the clinical trial. Further NIAID may elect to pursue its rights to obtain license rights to certain inventions made under the CRADA.

Future Funding Requirements

We may need to raise additional capital to fund our operations and to develop and commercialize ARIKACE. Our future capital requirements may be substantial and will depend on many factors, including:

· the decisions of the FDA and EMA with respect to our applications for marketing approval of ARIKACE in the U.S. and Europe; the costs of activities related to the regulatory approval process; and the timing of approvals, if received;

· the timing and cost of our anticipated clinical trials of ARIKACE for the treatment of adult patients with CF and patients with NTM;

· the cost of putting in place the sales and marketing capabilities necessary to be prepared for a potential commercial launch of ARIKACE, if approved;

· the cost of filing, prosecuting and enforcing patent claims;

· the costs of our manufacturing-related activities;

· the costs associated with commercializing ARIKACE if we receive marketing approval; and

· subject to receipt of marketing approval, the levels, timing and collection of revenue received from sales of approved products, if any, in the future.

During July 2013, we issued approximately $71.8 million of our common stock utilizing the $100.0 million shelf registration statement we filed with the Securities and Exchange Commission in May 2013. We believe that our cash and cash equivalents totaling $128.0 million as of September 30, 2013 will be sufficient to fund our operations through 2014. However, our business strategy may require us to, or we may otherwise determine to, raise additional capital at any time through equity or debt financing(s), strategic transactions or otherwise. Such additional funding may be necessary to continue to develop our potential product candidates, to pursue the license or purchase of complementary technologies, to commercialize our product candidates or to purchase other products. In addition, we may determine to raise capital opportunistically. If we are unable to obtain additional financing, we may be required to reduce the scope of our planned product development and commercialization or our plans to establish a sales and marketing force, any of which could harm our business, financial condition and results of operations. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, our continued progress in our regulatory, development and commercial activities. We cannot assure you that such capital funding will be available on favorable terms or at all. If we are unable to obtain sufficient additional funds when required, we may be forced to delay, restrict or eliminate all or a portion of our research or development programs, dispose of assets or technology or cease operations.

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To date, we have not generated any revenue from ARIKACE. We do not know when or if we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless or until we obtain marketing approval of, and commercialize, ARIKACE.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than operating leases, 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

Preparation of financial statements in accordance with generally accepted accounting principles in the US requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions. The amounts of assets and liabilities reported in our consolidated balance sheets and the amounts of revenue reported in our consolidated statements of comprehensive loss are effected by estimates and assumptions, which are used for, but not limited to, the accounting for research and development, revenue recognition, stock-based compensation, in process research and development intangible assets, and accrued expenses. The accounting policies discussed below are considered critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment. Actual results could differ from our estimates. For additional information about our significant accounting policies, see Note 2 to our Consolidated Financial Statements — “Summary of Significant Accounting Policies.”

Research and Development

Research and development expenses consist primarily of the cost of conducting our clinical trials, the cost of manufacturing our drug candidate for use in our clinical studies, salaries, benefits and other related costs, including stock-based compensation, for personnel serving our research and development functions, and other internal operating expenses, and the cost of conducting preclinical and research activities. Our expenses related to manufacturing our drug candidate for use in our clinical studies are primarily related to activities at contract manufacturing organizations that manufacture ARIKACE for our use. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf, as well as activities at the location(s) of the trials. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend mainly on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol.

Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

Revenue Recognition

We recognize revenues when all of the following four criteria are present: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.

Where we have continuing performance obligations under the terms of a collaborative arrangement, non-refundable upfront license payments received upon contract signing are recorded as deferred revenue and recognized as revenue as the related activities are performed. The period over which these activities are to be performed is based upon management’s estimate of the development period. Changes in management’s estimate could change the

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period over which revenue is recognized. Research and/or development payments are recognized as revenues as the related research and/or development activities are performed and when we have no continuing performance obligations related to the research and development payment received.

Where we have no continuing involvement under a collaborative arrangement, we record nonrefundable license fee revenues when we have the contractual right to receive the payment, in accordance with the terms of the collaboration agreement, and record milestones upon appropriate notification to us of achievement of the milestones by the collaborative partner.

We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. Any amounts received by us under the agreement in advance of our performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations.

In addition, multiple deliverable revenue arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. We also apply a selling price hierarchy for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available.

Stock-Based Compensation

We recognize stock-based compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of those awards. The grant-date fair value of the award is recognized as compensation expense ratably over the requisite service period, which generally equals the vesting period of the award, and if applicable, is adjusted for expected forfeitures. We also grant performance-based stock options to employees. The grant-date fair value of the performance-based stock options is recognized as compensation expense over the implicit service period using the accelerated attribution method once it is probable that the performance condition will be achieved. Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the Consolidated Statements of Comprehensive Loss. For awards deemed to be granted outside of the Company’s incentive plans, the Company uses liability accounting. These awards are classified as a liability and are remeasured at fair value at the end of each reporting period. Changes in fair value are included in compensation expense in the Consolidated Statements of Comprehensive Loss.

The following table summarizes the assumptions used in determining the fair value of stock options granted during the three and nine months ended September 30, 2013 and 2012.

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	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012

Volatility	87.7% - 90.3%	100.2% - 104.5%	87.7% - 96.0%	100.2% - 107.1%
Risk-free interest rate	1.39% - 1.65%	0.57% - 0.80%	0.65%-1.65%	0.57% - 0.99%
Dividend yield	0.0%	0.0%	0.0%	0.0%
Expected option term (in years)	6.25	6.25	6.25	6.25

For the three and nine months ended September 30, 2013, the volatility factor was based on our historical volatility since the closing of our merger with Transave on December 1, 2010. The expected life was determined using the simplified method as described in ASC Topic 718, “Accounting for Stock Compensation”, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the US Treasury yield in effect at the date of grant. Forfeitures are based on actual percentage of option forfeitures since the closing of the merger with Transave on December 1, 2010 and are the basis for future forfeiture expectations.

Identifiable Intangible Assets

Identifiable intangible assets are measured at their respective fair values and are not amortized until commercialization of the related product commences. Once commercialization occurs, these intangible assets will be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on reasonable estimates and assumptions given available facts and circumstances. Unanticipated events or circumstances may occur that may require us to review the assets for impairment. Events or circumstances that may require an impairment assessment include negative pre-clinical or clinical trial results, the non-approval of a new drug application by a regulatory agency, material delays in our development program or a sustained decline in market capitalization. We are not aware of any indicators of impairment that would necessitate an impairment test as of September 30, 2013.

We use the income approach to derive the fair value of in-process research and development assets. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. We did not use a market based valuation approach because we lack revenues and profits. The income approach requires significant management judgment with respect to unobservable inputs such as future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with our business plans.

Accrued Expenses

We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level of service performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs associated with services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. We accrue for expenses associated with these external services by determining the total cost of a given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of the trials and the invoices received from our external service providers. In the case of clinical trials, the estimated cost normally relates to the projected costs of having subjects enrolled in our trials, which we recognize over the estimated term of the trial according to the number of subjects enrolled in the trial on an ongoing basis, beginning with subject enrollment. As actual costs become known to us, we adjust our accruals.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2013, our cash and cash equivalents were in cash accounts or were invested in money market funds. Such accounts or investments are not insured by the federal government.

As of September 30, 2013, we had $20.0 million of fixed rate borrowings in the form of two secured promissory notes that bear interest at 9.25% outstanding under a Loan and Security Agreement we entered into in

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June 2012. A hypothetical 10% change in interest rates occurring on September 30, 2013 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 U.S. dollars. However, we do conduct certain transactions in other currencies, including Euros or British Pounds. Historically, fluctuations in foreign currency exchange rates have not materially affected our results of operation and during the three and nine month periods ended September 30, 2013 and 2012, our results of operation 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 principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. These disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.

Based on management’s evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective, as a result of the material weakness over the administration, accounting and oversight of our 2000 Stock Incentive Plan discussed below under “Update on Management’s Annual Report on Internal Control Over Financial Reporting”, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Update on Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive and principal financial and accounting officers and effected by our board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and board of directors; and

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· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Based on management’s assessment, including consideration of the control deficiencies discussed below, management concluded that the company’s internal control over financial reporting was ineffective as of December 31, 2012, due to the fact that there was a material weakness in our internal control over the administration, accounting and oversight of its 2000 Stock Incentive Plan. Specifically, as initially disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013, in connection with a review of our equity compensation grants, we determined that we had inadvertently exceeded the annual per-person sub-limits that, at the time, were applicable to grants of equity awards provided for by our 2000 Stock Incentive Plan. During the three months ended March 31, 2013 and the two years ended December 31, 2012, we granted equity compensation to employees and directors relating to an aggregate of 1.4 million shares of common stock in excess of such sub-limits (the “excess awards”). Among other items, we agreed to condition the continued vesting and exercise of the excess awards on approval of the excess awards by our shareholders. Such approval was received at our Annual Meeting of Shareholders held on May 23, 2013 (“2013 Annual Meeting”). We have not exceeded the overall share reserve previously provided for by the 2000 Stock Incentive Plan or currently provided for by our 2013 Incentive Plan, which was approved by our shareholders at our 2013 Annual Meeting, whether as a result of previously-issued awards or currently outstanding awards.

Remediation Plan

Management and our Board of Directors are actively engaged in implementing a remediation plan to address the material weakness over the administration, accounting and oversight of our 2000 Stock Incentive Plan. In November 2012, we hired a new Chief Financial Officer and in the first quarter of 2013, we hired a new Senior Vice President of Human Resources and a Vice-President, Finance. During the second quarter of 2013, we hired an Assistant Controller and during the third quarter of 2013, we hired a new General Counsel and Corporate Secretary. We believe these additions have helped strengthen our internal control environment and our internal controls. Remediation efforts we have implemented to date include modification of certain forms, adding and strengthening internal controls within certain processes, training of certain personnel and our Board members, rotation of Board members to different committees or committee positions, and pursuant to our Board’s approval, amendment to our 2000 Stock Incentive Plan to replace the three individual annual per person sub-limits with a single aggregate stock option, performance share and restricted stock sub-limit of 1,500,000 shares. Additional remediation efforts we expect to implement include, among other things, adding and continued strengthening of internal controls within certain processes, additional training of certain personnel, and a review of each of the charters for our Board committees.

Except for the changes in internal control resulting from the implementation of our remediation plan as described above, there were no other changes in internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Cacchillo v. Insmed

On October 6, 2010, a complaint was filed against us by Angeline Cacchillo (“Plaintiff”) in the U.S. District Court for the Northern District of New York (the “Court”), captioned Cacchillo v. Insmed, Inc. , No. 1:10-cv-0199, seeking monetary damages and a court order requiring Insmed to support Plaintiff’s compassionate use application to the FDA and if approved, to provide Plaintiff with IPLEX. Plaintiff was a participant in the Phase 2 clinical trial of IPLEX sponsored by us evaluating the effectiveness of the investigational drug in patients with type 1 myotonic muscular dystrophy (“MMD”). In the complaint, Plaintiff alleged (i) violation of constitutional due process and equal protection by depriving Plaintiff of continued access to IPLEX, (ii) fraudulent inducement to enter the Phase 2 clinical trial with the false promise to support Plaintiff’s compassionate use application to the FDA, (iii) negligent representation that we would support Plaintiff’s compassionate use application, (iv) breach of contract, seeking monetary and non-monetary damages, (v) intentional infliction of emotional distress by refusing to support Plaintiff’s compassionate use application after providing IPLEX, (vi) violation of an assumed duty of care to Plaintiff, (vii) breach of fiduciary duty to Plaintiff, (viii) negligence and (ix) unjust enrichment. Plaintiff seeks compensatory and punitive monetary damages and sought injunction relief as noted above.

We filed a motion with the Court to dismiss all of the outstanding claims, and on June 29, 2011, the Court dismissed six of Plaintiff’s claims, leaving outstanding the claims for (i) fraudulent inducement, (ii) negligent misrepresentation, and (iii) breach of contract. We filed an answer and affirmative defenses with the Court on July 12, 2011, and the parties completed discovery on or about June 1, 2012. We filed a Motion for Summary Judgment on August 1, 2012 seeking judgment in our favor on the three claims remaining in the case. On January 19, 2013, the Court granted our Motion for Summary Judgment and dismissed all of the outstanding claims. Plaintiff appealed the Court’s decision to the U.S. Court of Appeals for the Second Circuit. We anticipate a decision in the first half of 2014.

Pilkiewicz v. Transave LLC

On March 28, 2011, Frank G. Pilkiewicz and other former stockholders of Transave (collectively, the “Petitioners”) filed an appraisal action against our subsidiary Transave, LLC in the Delaware Court of Chancery captioned Frank G. Pilkiewicz, et al. v. Transave, LLC , C.A. No. 6319-CS. On December 13, 2011, following the mailing of the revised notice of appraisal rights in accordance with the settlement terms of Mackinson et al. v. Insmed , Petitioners filed an Amended Petition for Appraisal of Stock.

The Petitioners seek appraisal under Delaware law of their common stock holdings, representing approximately 7.77 million dissenting shares of Transave common stock (the “Transave Stock”). The Petitioners have challenged the value of the consideration that they would be entitled to receive for their Transave Stock under the terms of the merger.

Under the terms of the Merger Agreement, certain of the former stockholders of Transave (the “Transave Stockholders”) are obligated to indemnify us for certain liabilities in connection with the appraisal action. Certain indemnification and other obligations of the Transave Stockholders were secured by a holdback of 1,765,271 shares of our common stock. In May 2012, we notified the Transave Stockholders that we are seeking indemnification from them and that we will continue to retain all 1,765,271 holdback shares as security for any indemnification payments due to us. Discovery is nearly complete and the trial is expected to begin during the first quarter of 2014. Following trial, the court will determine the fair value of the Transave Stock. It is not possible at this time to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of this action.

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From time to time, we are a party to various other lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. While the outcome of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will materially adversely affect our business, financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. These factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors may have a material adverse effect upon our business, results of operations and financial condition.

You should consider carefully the risk factors, together with all of the other information included in our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the three months ended June 30, 2013. Each of these risk factors could adversely affect our business, results of operations and financial condition, as well as adversely affect the value of an investment in our common stock. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the three months ended June 30, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of the Company’s equity securities during the quarter ended September 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Adoption of an Executive Bonus Plan

On October 31, 2013, the Company’s Board of Directors adopted the Insmed Incorporated Senior Executive Bonus Plan (the “Executive Bonus Plan”). Under its terms, the Executive Bonus Plan is available to members of the Company’s senior executive team that are Section 16 reporting persons. For each fiscal year, the Company’s Compensation Committee will express a performance bonus amount payable in terms of a target bonus. Bonuses are to be paid after the completion of a fiscal year upon the achievement of targets and designated performance criteria, as specified in the Executive Bonus Plan. To receive a bonus payment under the Executive Bonus Plan, an individual must be employed by the Company on the date such bonus is paid. A copy of the Executive Bonus Plan is attached as an exhibit to this Form 10-Q.

Termination of a Material Definitive Agreement

On October, 31, 2013, the Company’s Board of Directors terminated the Amended and Restated Insmed Incorporated 2000 Employee Stock Purchase Plan (the “Stock Purchase Plan”). Under the terms of the Stock

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Purchase Plan, employees were entitled to purchase common stock of the Company at a price equal to 85% of the fair market value of the shares on the purchase date. The Stock Purchase Plan was intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code.

The foregoing description does not purport to be a complete description of the rights and obligations of the Company or the participants under the Stock Purchase Plan. The above description is qualified in its entirety by reference to the Stock Purchase Plan, a copy of which is included as Exhibit 10.22 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 16, 2007.

Departure of Director and Appointment of New Director

On October 30, 2013, the Board of Directors of the Company appointed Mr. David W.J. McGirr as a director of the Board and as a member of the Company’s Audit Committee. On October 31, 2013, the Board appointed Mr. McGirr to be Chairman of the Audit Committee and Mr. Richard Kollender tendered his resignation from the Board and as Chairman of the Audit Committee. As a result of Mr. Kollender’s resignation and Mr. McGirr’s appointment, the Insmed Board of Directors currently consists of seven directors, including six independent directors.

ITEM 6. EXHIBITS

A list of exhibits filed herewith is included on the Exhibit Index, which immediately precedes such exhibits and is incorporated herein by reference.

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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: November 5, 2013	By	/s/ Andrew T. Drechsler
		Andrew T. Drechsler
		Chief Financial Officer

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EXHIBIT INDEX

10.1	Employment Agreement, effective as of July 29, 2013, between Insmed Incorporated and Christine Pellizzari

10.2	Insmed Incorporated Senior Executive Bonus Plan

31.1	Certification of William H. Lewis, Chief 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

31.2	Certification of Andrew T. Drechsler, Chief 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

32.1	Certification of William H. Lewis, Chief 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

32.2	Certification of Andrew T. Drechsler, Chief 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.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL		XBRL Taxonomy Extension Definition Linkbase Document

101.CAL		XBRL Taxonomy Extension Label Linkbase Document

101.CAL		XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (“Agreement”) is effective on the 29 day of July, 2013, by and between Insmed Incorporated, a Virginia corporation (the “Company”), and Christine A. Pellizzari (hereinafter, the “Executive”).

WITNESSETH:

WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed by the Company on the terms herein described.

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the Company and the Executive hereby agree as follows:

1. Definitions . When used in this Agreement, the following terms shall have the following meanings:

(a) “ Accrued Obligations ” means:

(i) all accrued but unpaid Base Salary through the end of the Term of Employment;

(ii) any unpaid or unreimbursed expenses incurred in accordance with Company policy, including amounts due under Section 5(a) hereof, to the extent incurred during the Term of Employment;

(iii) any accrued but unpaid benefits provided under the Company’s employee benefit plans, subject to and in accordance with the terms of those plans;

(iv) rights to indemnification by virtue of the Executive’s position as an officer or director of the Company or its subsidiaries and the benefits under any directors’ and officers’ liability insurance policy maintained by the Company, in accordance with its terms thereof; and

(v) any accrued but unused vacation pay.

(b) “ Base Salary” means the salary provided for in Section 4(a) hereof or any increased salary granted to Executive pursuant to Section 4(a) hereof.

(c) “ Beneficial Ownership ” shall have the meaning ascribed to such term in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended.

(d) “ Board ” means the Board of Directors of the Company.

(e) “ Bonus ” means any bonus payable to the Executive pursuant to Section 4(b) hereof.

(f) “ Cause ” means:

(i) a conviction of the Executive, or a plea of nolo contendere, to a felony involving moral turpitude; or

(ii) willful misconduct or gross negligence by the Executive resulting, in either case, in material economic harm to the Company or any Related Entities; or

(iii) a willful failure by the Executive to carry out the reasonable and lawful directions of the Board and failure by the Executive to remedy the failure within thirty (30) days after receipt of written notice of same from the Board; or

(iv) fraud, embezzlement, theft or dishonesty of a material nature by the Executive against the Company or any Related Entity, or a willful material violation by the Executive of a policy or procedure of the Company or any Related Entity, resulting, in any case, in material economic harm to the Company or any Related Entity; or

(v) a willful material breach by the Executive of this Agreement and failure by the Executive to remedy the material breach within 30 days after receipt of written notice of same, by the Board.

(g) “ Change in Control ” means:

(i) The acquisition by any Person of Beneficial Ownership of at least 40% of either (A) the value of the then outstanding shares of common stock of the Company (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 of Control: (v) any acquisition directly from the Company; (w) any acquisition by the Company; (x) any acquisition by any person that as of the Commencement Date owns Beneficial Ownership of a Controlling Interest; (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company; or (z) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) below; or

(ii) During any period of two consecutive years (not including any period prior to the Commencement Date) individuals who constitute the Board on the Commencement 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 Commencement 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 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

(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 60% 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 40% 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 Directors 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) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing, 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.

(h) “ COBRA ” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time.

(i) “ Code ” means the Internal Revenue Code of 1986, as amended.

(j) “ Commencement Date ” means July 29, 2013.

(k) “ Competitive Activity ” means (i) the discovery, design, development, distribution, marketing or sale of inhalation therapies for lung diseases and/or disorders, or (ii) any other activity in competition with the material activities of the Company or any of its Related Entities, in either case in any of the States within the United States, or countries within the world, in which the Company or any of its Related Entities conducts business. For this purpose, the activities of the Company and its Related Entities, and where the Company and its Relates Entities do business, will be determined as of the earlier of the date of the application of this definition or the Termination Date.

(l) “ Confidential Information ” means all trade secrets and information disclosed to the Executive or known by the Executive as a consequence of or through the unique position of his employment with the Company or any Related Entity (including information conceived, originated, discovered or developed by the Executive and information acquired by the Company or any Related Entity from others) prior to or after the date hereof, and not generally or publicly known (other than as a result of unauthorized disclosure by the Executive), about the Company or any Related Entity or its business. Confidential Information includes, but is not limited to, inventions, ideas, designs, computer programs, circuits, schematics, formulas, algorithms, trade secrets, works of authorship, mask works, developmental or experimental work, processes, techniques, improvements, methods of manufacturing, know-how, data, financial information and forecasts, product plans, marketing plans and strategies, price lists, customer lists and contractual obligations and terms thereof, data, documentation and other information, in whatever form disclosed, relating to the Company or any Related Entity, including, but not limited to, financial statements, financial projections, business plans, listings and contractual obligations and terms thereof, components of intellectual property, unique designs, methods of manufacturing or other technology of the Company or any Related Entity.

(m) “ Disability ” means the Executive’s inability, or failure, to perform the essential functions of his position, with or without reasonable accommodation, for any period of six months or more in any 12 month period, by reason of any medically determinable physical or mental impairment.

(n) “Equity Awards ” means any stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock or other equity based awards granted by the Company to the Executive.

(o) “ Excise Tax ” means any excise tax imposed by Section 4999 of the Code, together with any interest and penalties imposed with respect thereto, or any interest or penalties are incurred by the Executive with respect to any such excise tax.

(p) “ Good Reason ” means the occurrence of any of the following: (i) a material diminution in the Executive’s base compensation; (ii) a material diminution in the Executive’s authority, duties, or responsibilities; (iii) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report; (iv) the Company’s or Related Entity’s requiring the Executive to be based at any office or location outside of 50 miles from the location of employment or service as of the effective date of this Agreement, except for travel reasonably required in the performance of the Executive’s responsibilities; or (v) any other action or inaction that constitutes a material breach by the Company of this Agreement. For purposes of this Agreement, Good Reason shall not be deemed to exist unless the Executive’s termination of employment for Good Reason occurs within six months following the initial existence of one of the conditions specified in clauses (i) through (v) above, the Executive provides the Company with written notice of the existence of such condition within 90 days after the initial existence of the condition, and the Company fails to remedy the condition within 30 days after its receipt of such notice.

(q) “ Group ” shall have the meaning ascribed to such term in Section 13(d) of the Securities Exchange Act of 1934.

(r) “ Person ” shall have the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934 and used in Sections 13(d) and 14(d) thereof.

(s) “Pro-Rata Bonus” means the Bonus that (but for the cessation of the Executive’s employment) would otherwise have been payable to the Executive for the fiscal year in which the Termination Date occurs (based on actual performance outcomes for that year), multiplied by the following fraction: (i) the number of days that the Executive was employed by the Company during that fiscal year, divided by (ii) 365. For this purpose, the Bonus that would otherwise have been payable to the Executive shall be determined in good faith and in the same manner applicable to active named executive officers of the Company.

(t) “ Related Entity ” means any Person controlling, controlled by or under common control with the Company or any of its subsidiaries. For this purpose, the terms controlling,” “controlled by” and “under common control with” mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including (without limitation) the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person.

(u) “ Restricted Period ” shall be the Term of Employment and the one year period immediately following termination of the Term of Employment.

(v) “ Severance Amount ” shall mean an amount equal to one-half of the Executive’s annual Base Salary, as in effect immediately prior to the Termination Date.

(w) “ Severance Term ” means the six month period following the date on which the Term of Employment ends.

(x) “ Target Bonus ” has the meaning described in Section 4(b).

(y) “ Term of Employment ” means the period during which the Executive shall be employed by the Company pursuant to the terms of this Agreement, which period shall begin on the Commencement Date and continue until terminated in accordance with Section 6 hereof.

(z) “ Termination Date ” means the date on which the Term of Employment ends.

2. Employment . The Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company during the Term of Employment on the terms and conditions set forth herein.

3. Duties of Executive . During the Term of Employment, the Executive shall be employed and serve as the General Counsel and Secretary, and shall have such duties typically associated with such title, including, without limitation all legal and corporate compliance activities. The Executive shall faithfully and diligently perform all services as may be assigned to him by Executive Management or the Board in their discretion of the company or its

subsidiaries. The Executive shall devote his full business time, attention and efforts to the performance of his duties under this Agreement, render such services to the best of his ability, and use his reasonable best efforts to promote the interests of the Company. The Executive shall not engage in any other business or occupation during the Term of Employment, including, without limitation, any activity that (i) conflicts with the interests of the Company or its subsidiaries, (ii) interferes with the proper and efficient performance of his duties for the Company, or (iii) interferes with the exercise of his judgment in the Company’s best interests. Notwithstanding the foregoing or any other provision of this Agreement, it shall not be a breach or violation of this Agreement for the Executive to (w) serve on up to two outside corporate or scientific advisory boards with prior notice to, and approval by, the Board, (x) serve on civic or charitable boards or committees, (y) deliver lectures, fulfill speaking engagements or teach at educational institutions, or (z) manage personal investments, so long as such activities do not constitute a Competitive Activity or significantly interfere with or significantly detract from the performance of the Executive’s responsibilities to the Company in accordance with this Agreement.

4. Compensation .

(a) Base Salary . The Executive shall receive a Base Salary at the annual rate of $350,000.00 during the Term of Employment, with such Base Salary payable in installments consistent with the Company’s normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall be reviewed, at least annually, for merit increases and may, by action and in the discretion of the Board, be increased at any time or from time to time, but may not be decreased from the then current Base Salary.

(b) Bonuses . During the Term of Employment, the Executive shall participate in the Company’s annual incentive compensation plan, program and/or arrangements applicable to senior-level executives, as established and modified from time to time by the Compensation Committee of the Board in its sole discretion. During the Term of Employment, the Executive shall have a target bonus opportunity under such plan or program equal to 40% of his current Base Salary, (the “Target Bonus”), based on satisfaction of performance criteria to be established by the Compensation Committee of the Board within the first three months of each fiscal year that begins during the Term of Employment (or, for 2013, within 30 days of the Commencement Date). The bonus calculation for 2013 shall be prorated based on the Executive’s date of hire. Payment of annual incentive compensation awards shall be made in the same manner and at the same time that other senior-level executives receive their annual incentive compensation awards and, except as otherwise provided herein, will be subject to the Executive’s continued employment through the applicable payment date.

(c) Sign On Bonus . Upon completion of 60 days of employment you are eligible to receive a $15,000 sign-on bonus less all applicable withholdings. Should your resign your employment within six months of your start date, you will be responsible for repayment of this bonus to Insmed.

5. Expense Reimbursement and Other Benefits .

(a) Reimbursement of Expenses . Upon the submission of proper substantiation by the Executive, and subject to such rules and guidelines as the Company may from time to time adopt with respect to the reimbursement of expenses of executive personnel, the Company shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive during the Term of Employment in the course of and pursuant to the business of the Company. The Executive shall account to the Company in writing for all expenses for which reimbursement is sought and shall supply to the Company copies of all relevant invoices, receipts or other evidence reasonably requested by the Company. In addition, the Company shall reimburse the Executive for (or directly pay) reasonable attorneys’ fees incurred by the Executive in the negotiation and drafting of this Agreement, up to a maximum of $5,000.

(b) Compensation/Benefit Programs . During the Term of Employment, the Executive shall be entitled to participate in all medical, dental, hospitalization, accidental death and dismemberment, disability, travel and life insurance plans, and any and all other plans as are from time to time offered by the Company to its executive personnel, including savings, pension, profit-sharing and deferred compensation plans, subject to the general eligibility and participation provisions set forth in such plans.

(c) Working Facilities . During the Term of Employment, the Company shall furnish the Executive with an office, administrative help and such other facilities similar to those provided to similarly situated executives of the Company. The Executive’s principal place of employment (subject to reasonable travel) shall be Monmouth Junction, NJ.

(d) Stock Options .

(i) As soon as is practicable, following Executive’s employment hereunder, and subject to final approval of the Compensation Committee of the Board of Directors, the Company will grant to the Executive a stock option with respect to 150,000 shares of the Company’s common stock in accordance with the Company’s standard option agreement. During the Term of Employment, the Executive shall be eligible to be granted additional Equity Awards. The number and type of such additional Equity Awards, and the terms and conditions thereof, shall be determined by the Compensation Committee of the Board, in its discretion.

(e) Vacation . The Executive shall be entitled to four weeks of paid vacation each calendar year during the Term of Employment, to be taken at such times as the Executive and the Company shall mutually determine and provided that no vacation time shall significantly interfere with the duties required to be rendered by the Executive hereunder. Up to two weeks of unused vacation time may be carried forward into any succeeding calendar year; provided, however, in no event shall the amount of vacation time available to the Executive annually under this Agreement, inclusive of any carryover time, exceed six weeks in the aggregate.

6. Termination .

(a) General . The Term of Employment shall terminate upon the earliest to occur of (i) the Executive’s death, (ii) a termination by the Company by reason of the Executive’s Disability, (iii) a termination by the Company with or without Cause, or (iv) a termination by Executive with or without Good Reason. Upon any termination of Executive’s

employment for any reason, except as may otherwise be requested by the Company in writing and agreed upon in writing by Executive, the Executive shall resign from any and all directorships, committee memberships or any other positions Executive holds with the Company or any of its Related Entities.

(b) Termination By Company for Cause. The Company shall at all times have the right, upon written notice to the Executive, to terminate the Term of Employment, for Cause. In no event shall a termination of the Executive’s employment for Cause occur unless the Company gives written notice to the Executive in accordance with this Agreement stating with reasonable specificity the events or actions that constitute Cause and providing the Executive with an opportunity to cure (if curable) within a reasonable period of time. Cause shall in no event be deemed to exist except upon a decision made by the Board, at a meeting, duly called and noticed, to which the Executive (and the Executive’s counsel) shall be invited upon proper notice and shall be permitted to present evidence. For purposes of this Section 6(b), any good faith determination by the Board of Cause shall be binding and conclusive on all interested parties. In the event that the Term of Employment is terminated by the Company for Cause, Executive shall be entitled only to the Accrued Obligations, payable as and when those amounts would have been payable had the Term of Employment not ended.

(c) Disability . The Company shall have the option, in accordance with applicable law, to terminate the Term of Employment upon written notice to the Executive, at any time during which the Executive is suffering from a Disability. In the event that the Term of Employment is terminated due to the Executive’s Disability, the Executive shall be entitled to (i) the Accrued Obligations, payable as and when those amounts would have been paid had the Term of Employment not ended, (ii) the Pro-Rata Bonus, payable within 2 ½ months following the end of the fiscal year in which the Termination Date occurs, and (iii) any insurance benefits to which he and his beneficiaries are entitled as a result of his Disability.

(d) Death . In the event that the Term of Employment is terminated due to the Executive’s death, the Executive’s estate shall be entitled to (i) the Accrued Obligations, payable as and when those amounts would have been paid had the Term of Employment not ended, (ii) the Pro-Rata Bonus, payable within 2 ½ months following the end of the fiscal year in which the Termination Date occurs, and (iii) any insurance benefits to which he and his beneficiaries are entitled as a result of his death.

(e) Termination Without Cause or Resignation With Good Reason . The Company may terminate the Term of Employment without Cause, and the Executive may terminate the Term of Employment for Good Reason, at any time upon written notice. If the Term of Employment is terminated by the Company without Cause (other than due to the Executive’s death or Disability) or by the Executive for Good Reason, in either case prior to the date of a Change in Control or more than one year after a Change in Control, the Executive shall be entitled to the following:

(i) The Accrued Obligations, payable as and when those amounts would have been paid had the Term of Employment not ended;

(ii) Any unpaid Bonus in respect to any completed fiscal year that has ended on or prior to the Termination Date, payable within 2 ½ months following the last day of the month in which the Termination Date occurs;

(iii) The Pro-Rata Bonus, payable within 2 ½ months following the end of the fiscal year in which the Termination Date occurs;

(iv) The Severance Amount, payable in equal installments consistent with the Company’s normal payroll schedule over the 6 month period beginning with the first regularly scheduled payroll date that occurs more than 30 days following the Termination Date;

(v) Provided that the Executive timely elects continued coverage under COBRA, the Company will reimburse the Executive for the monthly COBRA cost of continued health and dental coverage of the Executive and his qualified beneficiaries paid by the Executive under the health and dental plans of the Company, less the amount that the Executive would be required to contribute for health and dental coverage if the Executive were an active employee of the Company, for 6 months (or, if less, for the duration that such COBRA coverage is available to Executive); and

(vi) Accelerated vesting, as of the Termination Date, of any stock options that would have otherwise vested within six months following the Termination Date.

(f) Termination by Executive Without Good Reason . The Executive may terminate his employment without Good Reason by providing the Company 30 days’ written notice of such termination. In the event of a termination of employment by the Executive under this Section 6(f), the Executive shall be entitled only to the Accrued Obligations payable as and when those amounts would have been payable had the Term of Employment not ended. In the event of termination of the Executive’s employment under this Section 6(f), the Company may, in its sole and absolute discretion, by written notice, accelerate such date of termination and still have it treated as a termination without Good Reason.

(g) Change in Control of the Company . If the Executive’s employment is terminated by the Company (or any entity to which the obligations and benefits under this Agreement have been assigned, pursuant to Section 10) without Cause or by the Executive for Good Reason during the one year period immediately following the Change in Control, then the Executive shall be entitled to the same payments, rights and benefits described in Section 6(e), subject to the following enhancements:

(i) The Severance Amount will be doubled and will be paid in a lump-sum on the first regularly scheduled payroll date that occurs more than 30 days following the Termination Date (rather than in installments over 12 months);

(ii) Provided that the Executive timely elects continued coverage under COBRA, the Company will reimburse the Executive for the monthly COBRA cost of continued health and dental coverage of the Executive and his qualified beneficiaries paid by the Executive under the health and dental plans of the Company, less the amount that the Executive would be required to contribute for health and dental coverage if the Executive were an active employee of

the Company, for 12 months (or, if less, for the duration that such COBRA coverage is available to Executive); and

(iii) All time-vested Equity Awards will vest in full.

(h) Release . All rights, payments and benefits due to the Executive under this Article 6 (other than the Accrued Obligations) shall be conditioned on the Executive’s execution of a general release of claims against the Company and its affiliates substantially in the form attached hereto as Exhibit A (the “Release”) and on that Release becoming effective and irrevocable within 30 days following the Termination Date.

(i) Section 280G Certain Reductions of Payments by the Company .

(i) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a “Payment”), would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as “Agreement Payments”) shall be reduced to the Reduced Amount. The “Reduced Amount” shall be an amount expressed in present value that avoids any Payment being nondeductible by the Company because of Section 280G of the Code. To the extent necessary to avoid imposition of the Excise Tax, the amounts payable or benefits to be provided to the Executive shall be reduced such that the reduction of compensation to be provided to the Executive is minimized. In applying this principle, the reduction shall be made in a manner consistent with the requirements of Section 409A of the Code, and where two economically equivalent amounts are subject to reduction but payable at different times, such amounts shall be reduced on a pro rata basis (but not below zero). Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not an Agreement Payment would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not Agreement Payments shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. If a reduction of any Payment is required pursuant to this Section 6(i), such reduction shall occur to the amounts in the order that results in the greatest economic present value of all payments and benefits actually made or provided to the Executive. For purposes of this Section 6(i), present value shall be determined in accordance with Section 280G(d)(4) of the Code.

(ii) All determinations required to be made under this Section 6(i) shall be made by a tax or compensation consulting firm of national reputation selected by the Company (the “Consulting Firm”), which shall provide detailed supporting calculations both to the Company and the Executive within 20 business days of the date of termination or such earlier time as is requested by the Company and an opinion to the Executive that he has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Consulting Firm shall be binding upon the Company

and the Executive. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. All fees and expenses of the Consulting Firm incurred in connection with the determinations contemplated by this Section 6(i) shall be borne by the Company.

(iii) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Consulting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made (“Overpayment”) or that additional Payments which will not have been made by the Company could have been made (“Underpayment”), in each case, consistent with the calculations required to be made hereunder. In the event that the Consulting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against the Executive which the Consulting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Executive shall be promptly repaid to the Company by the Executive. In the event that the Consulting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.

(j) Cooperation . Following the Term of Employment, the Executive shall give his assistance and cooperation willingly, upon reasonable advance notice with due consideration for his other business or personal commitments, in any matter relating to his position with the Company, or his expertise or experience as the Company may reasonably request, including his attendance and truthful testimony where deemed appropriate by the Company, with respect to any investigation or the Company’s defense or prosecution of any existing or future claims or litigations or other proceedings relating to matters in which he was involved or potentially had knowledge by virtue of his employment with the Company. In no event shall his cooperation materially interfere with his services for a subsequent employer or other similar service recipient. To the extent permitted by law, the Company agrees that (i) it shall promptly reimburse the Executive for his reasonable and documented expenses in connection with his rendering assistance and/or cooperation under this Section 6(j) upon his presentation of documentation for such expenses and (ii) the Executive shall be reasonably compensated for any continued material services as required under this Section 6(j).

(k) Return of Company Property . Following the Termination Date, the Executive or his personal representative shall return all Company property in his possession, including but not limited to all computer equipment (hardware and software), telephones, facsimile machines, palm pilots and other communication devices, credit cards, office keys, security access cards, badges, identification cards and all copies (including drafts) of any documentation or information (however stored) relating to the business of the Company, its customers and clients or its prospective customers and clients (provided that the Executive may retain a copy the addresses contained in his rolodex, palm pilot, PDA or similar device).

(l) Compliance with Section 409A .

(i) General . It is the intention of both the Company and the Executive that the benefits and rights to which the Executive could be entitled pursuant to this Agreement comply with Section 409A of the Code and the Treasury Regulations and other guidance promulgated or issued thereunder (“Section 409A”), to the extent that the requirements of Section 409A are applicable thereto, and the provisions of this Agreement shall be construed in a manner consistent with that intention.

(ii) Distributions on Account of Separation from Service . If and to the extent required to comply with Section 409A, no payment or benefit required to be paid under this Agreement on account of termination of the Executive’s employment shall be made unless and until the Executive incurs a “separation from service” within the meaning of Section 409A.

(iii) Six Month Delay for Specified Employees . If the Executive is a “specified employee” (within the meaning of Section 409A(a)(2)(B)(i) of the Code), then no payment or benefit that is considered deferred compensation subject to Section 409A of the Code (and not exempt from Section 409A of the Code as a short term deferral or otherwise) that is payable on account of the Executive’s “separation from service”, as that term is defined for purposes of Section 409A, shall be made before the date that is six months after the Executive’s “separation from service” (or, if earlier, the date of the Executive’s death) if and to the extent that such payment or benefit constitutes deferred compensation (or may be nonqualified deferred compensation) under Section 409A and such deferral is required to comply with the requirements of Section 409A. Any payment or benefit delayed by reason of the prior sentence shall be paid out or provided in a single lump sum at the end of such required delay period in order to catch up to the original payment schedule.

(iv) Treatment of Each Installment as a Separate Payment . For purposes of applying the provisions of Section 409A to this Agreement, each separately identified amount to which the Executive is entitled under this Agreement shall be treated as a separate payment. In addition, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments.

(v) Taxable Reimbursements and In-Kind Benefits .

(A) Any reimbursements by the Company to the Executive of any eligible expenses under this Agreement that are not excludable from the Executive’s income for Federal income tax purposes (the “Taxable Reimbursements”) shall be made by no later than the last day of the taxable year of the Executive following the year in which the expense was incurred.

(B) The amount of any Taxable Reimbursements and the value of any in-kind benefits to be provided to the Executive, during any taxable year of the Executive shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of the Executive.

(C) The right to Taxable Reimbursement, or in-kind benefits, shall not be subject to liquidation or exchange for another benefit.

(vi) No Guaranty of 409A Compliance . Notwithstanding the foregoing, the Company does not make any representation to the Executive that the payments or benefits provided under this Agreement are exempt from, or satisfy, the requirements of Section 409A, and the Company shall have no liability or other obligation to indemnify or hold harmless the Executive or any beneficiary of the Executive for any tax, additional tax, interest or penalties that the Executive or any beneficiary of the Executive may incur in the event that any provision of this Agreement, or any amendment or modification thereof, or any other action taken with respect thereto, is deemed to violate any of the requirements of Section 409A.

7. Restrictive Covenants .

(a) Non-competition . At all times during the Restricted Period, the Executive shall not, directly or indirectly (whether as a principal, agent, partner, employee, officer, investor, owner, consultant, board member, security holder, creditor or otherwise), engage in any Competitive Activity, or have any direct or indirect interest in any sole proprietorship, corporation, company, partnership, association, venture or business or any other person or entity that directly or indirectly (whether as a principal, agent, partner, employee, officer, investor, owner, consultant, board member, security holder, creditor, or otherwise) engages in a Competitive Activity; provided that the foregoing shall not apply to the Executive’s ownership of securities of the Company or the acquisition by the Executive, solely as an investment, of securities of any issuer that is registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, and that are listed or admitted for trading on any United States national securities exchange or that are quoted on the Nasdaq Stock Market, or any similar system or automated dissemination of quotations of securities prices in common use, so long as the Executive does not control, acquire a controlling interest in or become a member of a group which exercises direct or indirect control of, more than five percent of any class of capital stock of such corporation.

(b) Nonsolicitation of Employees and Certain Other Third Parties . At all times during the Restricted Period, the Executive shall not, directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity (i) employ or attempt to employ or enter into any contractual arrangement with any employee, consultant or individual contractor performing services for the Company, or any Related Entity, unless such employee, consultant or independent contractor, has not been employed or engaged by the Company for a period in excess of six months, and/or (ii) call on, solicit, or engage in business with, any of the actual or targeted prospective customers or clients of the Company or any Related Entity on behalf of any person or entity in connection with any Competitive Activity, nor shall the Executive make known the names and addresses of such actual or targeted prospective customers or clients, or any information relating in any manner to the trade or business relationships of the Company or any Related Entities with such customers or clients, other than in connection with the performance of the Executive’s duties under this Agreement, and/or (iii) persuade or encourage or attempt to persuade or encourage any persons or entities with whom the Company or any Related Entity does business or has some business relationship to cease doing business or to terminate its business relationship with the Company or any Related Entity or to engage in any Competitive Activity on its own or with any competitor of the Company or any Related Entity.

(c) Confidential Information. The Executive shall not at any time divulge, communicate, use to the detriment of the Company or any Related Entity or for the benefit of any other person or persons, or misuse in any way, any Confidential Information pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company or any Related Entity (which shall include, but not be limited to, information concerning the Company’s or any Related Entity’s financial condition, prospects, technology, customers, suppliers, sources of leads and methods of doing business) shall be deemed a valuable, special and unique asset of the Company and its Related Entities that is received by the Executive in confidence and as a fiduciary, and the Executive shall remain a fiduciary to the Company and its Related Entities with respect to all of such information. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information as required to perform his duties under this Agreement or to the extent required by law. If any person or authority makes a demand on the Executive purporting to legally compel him to divulge any Confidential Information, the Executive immediately shall give notice of the demand to the Company so that the Company may first assess whether to challenge the demand prior to the Executive’s divulging of such Confidential Information. The Executive shall not divulge such Confidential Information until the Company either has concluded not to challenge the demand, or has exhausted its challenge, including appeals, if any. Upon request by the Company, the Executive shall deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all memoranda, notes, records, reports, manuals, drawings, designs, computer files in any media and other documents (and all copies thereof) containing such Confidential Information.

(d) Ownership of Developments . All processes, concepts, techniques, inventions and works of authorship, including new contributions, improvements, formats, packages, programs, systems, machines, compositions of matter manufactured, developments, applications and discoveries, and all copyrights, patents, trade secrets, or other intellectual prope1ty rights associated therewith conceived, invented, made, developed or created by the Executive during the Term of Employment either during the course of performing work for the Company or its Related Entities, or their clients, or which are related in any manner to the business (commercial or experimental) of the Company or its Related Entities or their clients (collectively, the “Work Product”) shall belong exclusively to the Company and its Related Entities and shall, to the extent possible, be considered a work made by the Executive for hire for the Company and its Related Entities within the meaning of Title 17 of the United States Code. To the extent the Work Product may not be considered work made by the Executive for hire for the Company and its Related Entities, the Executive agrees to assign, and automatically assign at the time of creation of the Work Product, without any requirement of further consideration, any right, title, or interest the Executive may have in such Work Product. Upon the request of the Company, the Executive shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. The Executive shall further: (i) promptly disclose the Work Product to the Company; (ii) assign to the Company or its assignee, without additional compensation, all patent or other rights to such Work Product for the United States and foreign countries; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventions, all at the sole cost and expense of the Company.

(e) Books and Records . All books, records, and accounts relating in any manner to the customers or clients of the Company or its Related Entities, whether prepared by the Executive or otherwise coming into the Executive’s possession, shall be the exclusive property of the Company and its Related Entities and shall be returned immediately to the Company on termination of the Executive’s employment hereunder or on the Company’s request at any time.

(f) Acknowledgment by Executive . The Executive acknowledges and confirms that the restrictive covenants contained in this Section 7 (including without limitation the length of the term of the provisions of this Section 7) are reasonably necessary to protect the legitimate business interests of the Company and its Related Entities, and are not overbroad, overlong, or unfair and are not the result of overreaching, duress or coercion of any kind. The Executive further acknowledges and confirms that the compensation payable to the Executive under this Agreement is in consideration for the duties and obligations of the Executive hereunder, including the restrictive covenants contained in this Section 7, and that such compensation is sufficient, fair and reasonable. The Executive further acknowledges and confirms that his full, uninhibited and faithful observance of each of the covenants contained in this Section 7 will not cause him any undue hardship, financial or otherwise, and that enforcement of each of the covenants contained herein will not impair his ability to obtain employment commensurate with his abilities and on terms fully acceptable to him or otherwise to obtain income required for the comfortable support of him and his family and the satisfaction of the needs of his creditors. The Executive acknowledges and confirms that his special knowledge of the business of the Company and its Related Entities is such as would cause the Company and its Related Entities serious injury or loss if he were to use such ability and knowledge to the benefit of a competitor or were to compete with the Company or its Related Entities in violation of the terms of this Section 7. The Executive further acknowledges that the restrictions contained in this Section 7 are intended to be, and shall be, for the benefit of and shall be enforceable by, the Company’s successors and assigns. The Executive expressly agrees that upon any breach or violation of the provisions of this Section 7, the Company shall be entitled to seek in addition to any other rights or remedies it may have, to (i) temporary and/or permanent injunctive relief in any court of competent jurisdiction as described in Section 7(i) hereof, and (ii) such damages as are provided at law or in equity. The existence of any claim or cause of action against the Company or its Related Entities, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement of the restrictions contained in this Section 7.

(g) Reformation by Court . In the event that a court of competent jurisdiction shall determine that any provision of this Article 7 is invalid or more restrictive than permitted under the governing law of such jurisdiction, then only as to enforcement of this Article 7 within the jurisdiction of such court, such provision shall be interpreted or reformed and enforced as if it provided for the maximum restriction permitted under such governing law.

(h) Extension of Time . If the Executive shall be in violation of any provision of this Section 7, then each time limitation set forth in this Section 7 shall be extended for a period of time equal to the period of time during which such violation or violations occur. If the Company or any Related Entity seeks injunctive relief from such violation in any court, then the

covenants set forth in this Section 7 shall be extended for a period of time equal to the pendency of such proceeding including all appeals by the Executive.

(i) Injunction . It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Section 7 of this Agreement may cause irreparable harm and damage to the Company, and its Related Entities, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company and its Related Entities shall be entitled to seek an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Section 7 of this Agreement by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

8. Representations and Warranties of Executive . The Executive represents and warrants to the Company that:

(a) The Executive’s employment will not conflict with or result in his breach of any agreement to which he is a party or otherwise may be bound;

(b) The Executive has not violated, and in connection with his employment with the Company will not violate, any non-solicitation, non-competition or other similar covenant or agreement of a prior employer by which he is or may be bound; and

(c) In connection with Executive’s employment with the Company, he will not use any confidential or proprietary information that he may have obtained in connection with employment with any prior employer; and

(d) The Executive has not (i) been convicted of any felony; or (ii) committed any criminal act with respect to Executive’s current or any prior employment; and

(e) The Executive is not dependent on alcohol or the illegal use of drugs. The Executive recognizes that Company shall have the right to conduct random drug testing of its employees and that Executive may be called upon in such a manner.

9. Taxes . All payments or transfers of property made by the Company to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation.

10. Assignment . The Company shall have the right to assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation or other entity with or into which the Company may hereafter merge or consolidate or to which the Company may transfer all or substantially all of its assets, if in any such case said corporation or other entity shall by operation of law or expressly in writing assume all obligations of the Company hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder.

11. Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New Jersey, without regard to principles of conflict of laws.

12. Jurisdiction and Venue . The patties acknowledge that a substantial portion of the negotiations, anticipated performance and execution of this Agreement occurred or shall occur in Monmouth, New Jersey, and that, therefore, without limiting the jurisdiction or venue of any other federal or state courts, each of the parties irrevocably and unconditionally (i) agrees that any suit, action or legal proceeding arising out of or relating to this Agreement which is expressly permitted by the terms of this Agreement to be brought in a court of law, may be brought in the courts of record of the State of New Jersey in Monmouth County or the court of the United States, District of New Jersey; (ii) consents to the jurisdiction of each such court in any such suit, action or proceeding; (iii) waives any objection which it or he may have to the laying of venue of any such suit, action or proceeding in any of such courts; and (iv) agrees that service of any court papers may be effected on such party by mail, as provided in this Agreement, or in such other manner as may be provided under applicable laws or court rules in such courts.

13. Entire Agreement . This Agreement, together with the exhibit attached hereto, constitutes the entire agreement between the patties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company (or any of its Related Entities) with respect to such subject matter. This Agreement may not be modified in any way unless by a written instrument signed by both the Company and the Executive.

14. Notices . All notices required or permitted to be given hereunder shall be in writing and shall be personally delivered by courier, sent by registered or certified mail, return receipt requested or sent by confirmed facsimile transmission addressed as set forth herein. Notices personally delivered, sent by facsimile or sent by overnight courier shall be deemed given on the date of delivery and notices mailed in accordance with the foregoing shall be deemed given upon receipt by the addressee, as evidenced by the return receipt thereof. Notice shall be sent (i) if to the Company, addressed to 9 Deer Park Drive, Suite C, Monmouth Junction, NJ 08852-1919, Attention: General Counsel, and (ii) if to the Executive, to his address as reflected on the payroll records of the Company, or to such other address as either party shall request by notice to the other in accordance with this provision.

15. Benefits; Binding Effect. This Agreement shall be for the benefit of and binding upon the parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where permitted and applicable, assigns, including, without limitation, any successor to the Company, whether by merger, consolidation, sale of stock, sale of assets or otherwise.

16. Right to Consult with Counsel; No Drafting Party . The Executive acknowledges having read and considered all of the provisions of this Agreement carefully, and having had the opportunity to consult with counsel of his own choosing, and, given this, the Executive agrees that the obligations created hereby are not unreasonable. The Executive acknowledges that he has had an opportunity to negotiate any and all of these provisions and no rule of construction

shall be used that would interpret any provision in favor of or against a patty on the basis of who drafted the Agreement.

17. Severability . The invalidity of any one or more of the words, phrases, sentences, clauses, provisions, sections or articles contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses, provisions, sections or articles contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, provisions or provisions, section or sections or article or articles had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.

18. Waivers . The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.

19. Damages; Attorneys’ Fees . Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement. Each party shall bear its own costs and attorneys’ fees.

20. Waiver of Jury Trial . The Executive hereby knowingly, voluntarily and intentionally waives any right that the Executive may have to a trial by jury in respect of any litigation based hereon, or arising out of, under or in connection with this Agreement and any agreement, document or instrument contemplated to be executed in connection herewith, or any course of conduct, course of dealing statements (whether verbal or written) or actions of any party hereto.

21. No Set-off or Mitigation . The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In the event of any termination of the Executive’s employment under this Agreement, he shall be under no obligation to seek other employment or otherwise in any way to mitigate the amount of any payment provided for hereunder.

22. Section Headings . The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

23. No Third Party Beneficiary . The Related Entities are intended third party beneficiaries of this Agreement. Otherwise, nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person other than the Company, the parties hereto and their respective heirs, personal representatives, legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement.

24. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument and agreement.

25. Indemnification .

(a) Subject to limitations imposed by law, the Company shall indemnify and hold harmless the Executive to the fullest extent permitted by law from and against any and all claims, damages, expenses (including attorneys’ fees), judgments, penalties, fines, settlements, and all other liabilities incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and to which the Executive was or is a party or is threatened to be made a party by reason of the fact that the Executive is or was an officer, employee or agent of the Company, or by reason of anything done or not done by the Executive in any such capacity or capacities, provided that the Executive acted in good faith, in a manner that was not grossly negligent or constituted willful misconduct and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The Company also shall pay any and all expenses (including attorney’s fees) incurred by the Executive as a result of the Executive being called as a witness in his capacity as a current or former officer or director of the Company.

(b) The Company shall pay any expenses (including attorneys’ fees), judgments, penalties, fines, settlements, and other liabilities incurred by the Executive in investigating, defending, settling or appealing any action, suit or proceeding described in this Section 25 in advance of the final disposition of such action, suit or proceeding. The Company shall promptly pay the amount of such expenses to the Executive, but in no event later than ten days following the Executive’s delivery to the Company of a written request for an advance pursuant to this Section 25, together with a reasonable accounting of such expenses.

(c) The Executive hereby undertakes and agrees to repay to the Company any advances made pursuant to this Section 25 if and to the extent that it shall ultimately be found that the Executive is not entitled to be indemnified by the Company for such amounts.

(d) The Company shall make the advances contemplated by this Section 25 regardless of the Executive’s financial ability to make repayment, and regardless whether indemnification of the Executive by the Company will ultimately be required. Any advances and undertakings to repay pursuant to this Section 25 shall be unsecured and interest-free.

(e) The provisions of this Section 25 shall survive the Term of Employment.

[Signatures on Following Page]

IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first above written.

	COMPANY:


	Insmed Incorporated, a Virginia corporation
	By:
	Name:	William H. Lewis
	Title:	President and CEO


	EXECUTIVE:


	Christine A. Pellizzari

Exhibit A

General Release of Claims

1. Christine A. Pellizzari (“Executive”), for himself and his family, heirs, executors, administrators, legal representatives and their respective successors and assigns, in exchange for the consideration received pursuant to Sections 6(e) [and 6(g)] of the Employment Agreement (the “Severance Benefits”) to which this release is attached as Exhibit A (the “Employment Agreement”), does hereby release and forever discharge Insmed Incorporated (the “Company”), its subsidiaries, affiliated companies, successors and assigns, and its current or former directors, officers, employees, shareholders or agents in such capacities (collectively with the Company, the “Released Parties”) from any and all actions, causes of action, suits, controversies, claims and demands whatsoever, for or by reason of any matter, cause or thing whatsoever, whether known or unknown including, but not limited to, all claims under any applicable laws arising under or in connection with Executive’s employment or termination thereof, whether for tort, breach of express or implied employment contract, wrongful discharge, intentional infliction of emotional distress, or defamation or injuries incurred on the job or incurred as a result of loss of employment. Without limiting the generality of the release provided above, Executive expressly waives any and all claims under Age Discrimination in Employment Act (“ ADEA’ ’) that he may have as of the date hereof. Executive further understands that, by signing this General Release of Claims, he is in fact waiving, releasing and forever giving up any claim under the ADEA as well as all other laws within the scope of this paragraph 1 that may have existed on or prior to the date hereof. Notwithstanding anything in this paragraph 1 to the contrary, this General Release of Claims shall not apply to (i) any rights to receive any payments or benefits to which the Executive is entitled under COBRA, (ii) any rights or claims that may arise as a result of events occurring after the date this General Release of Claims is executed, (iii) any indemnification and advancement rights Executive may have as a former employee, officer or director of the Company or its subsidiaries or affiliated companies (including any rights under Section 25 of the Employment Agreement or under the Company’s charter or bylaws), (iv) any claims for benefits under any directors’ and officers’ liability policy maintained by the Company or its subsidiaries or affiliated companies in accordance with the terms of such policy, (v) rights to vested benefits under the Company’s 401(k) plan, and (vi) any rights as a holder of equity securities or debt securities/notes of the Company.

2. Executive represents that he has not filed against the Released Parties any complaints, charges, or lawsuits arising out of his employment, or any other matter arising on or prior to the date of this General Release of Claims, and covenants and agrees that he will never individually or with any person file, or commence the filing of any lawsuits, complaints or proceedings with any governmental agency, or against the Released Parties with respect to any of the matters released by Executive pursuant to paragraph 1 hereof; provided, that nothing herein shall prevent you from filing a charge or complaint with the Equal Employment Opportunity Commission (“EEOC”) or similar federal or state agency or your ability to participate in any investigation or proceeding conducted by such agency. Executive does agree, however, that he is waiving his right to recover any money in connection with such an

investigation or charge filed by him or by any other individual, or a charge filed by the Equal Employment Opportunity Commission or any other federal, state or local agency.

3. Executive acknowledges that, in the absence of his execution of this General Release of Claims, the Severance Benefits would not otherwise be due to him.

4. Executive acknowledges and agrees that he received adequate consideration in exchange for agreeing to the covenants contained in Section 7 of the Employment Agreement, that such covenants remain reasonable and necessary to protect the legitimate business interests of the Company and its affiliates and that he will continue to comply with those covenants.

5. Executive hereby acknowledges that the Company has informed him that he has up to 21 days to sign this General Release of Claims and he may knowingly and voluntarily waive that 21 day period by signing this General Release of Claims earlier. Executive also understands that he shall have seven days following the date on which he signs this General Release of Claims within which to revoke it by providing a written notice of his revocation to the Company in the manner described in Section 14 of the Employment Agreement.

6. Executive acknowledges and agrees that this General Release of Claims will be governed by and construed and enforced in accordance with the internal laws of the State of New Jersey applicable to contracts made and to be performed entirely within such State.

7. Executive acknowledges that he has read this General Release of Claims, that he has been advised that he should consult with an attorney before he executes this general release of claims, and that he understands all of its terms and executes it voluntarily and with full knowledge of its significance and the consequences thereof.

8. This General Release of Claims shall become irrevocable on the eighth day following Executive’s execution of this General Release of Claims, unless previously revoked in accordance with paragraph 5, above.

Intending to be legally bound hereby, Executive has executed this General Release of Claims on , 20 .

Exhibit 10.2

INSMED INCORPORATED

SENIOR EXECUTIVE BONUS PLAN

(adopted by the Board of Directors on October 31, 2013)

1. Purpose.

The purpose of the Senior Executive Bonus Plan (“Plan”) is to motivate and reward those individuals who are members of the senior executive management team of Insmed Incorporated (collectively, the “Executives”) in order to improve the performance and enterprise value of Insmed Incorporated (the “Company”) and achieve the established corporate goals of the Company. The term “Executives” shall mean those senior executives of the Company who are “officers” within the meaning of Rule 16a-1(f) promulgated under Section 16 of the Securities Exchange Act of 1934, as amended. Under the Plan, an Executive may be awarded the opportunity to receive a performance bonus for a given fiscal year of the Company, as described in further detail in Section 3.

2. The Committee.

The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”). The Compensation Committee shall have the sole discretion and authority to administer and interpret the Plan as appropriate and the decisions of the Compensation Committee shall in every case be final and binding on all persons having an interest in the Plan. As part of that authority, the Compensation Committee shall designate those members of the senior executive management team who are classified as “Executives” and therefore who are eligible to participate in the Plan, which designation may be changed from time to time. Notwithstanding the foregoing, the Board of Directors of the Company (the “Board”) shall have the final authority to determine the terms under which the Company’s Chief Executive Officer shall participate in the Plan and references to the “Compensation Committee” shall mean the Board to the extent that the Board exercises this authority.

3. Performance Bonus Amounts.

For each fiscal year, the performance bonus amount payable to each Executive under this Section 3 shall be expressed in terms of a target bonus, which shall be based on target goals for one or more of the performance criteria listed below and the extent to which such target goals are achieved. The Compensation Committee shall, for each fiscal year, select the target bonus amount for each Executive (expressed as a percentage of base salary), the performance criteria, the respective target goals for the selected performance criteria, and the bonus amounts payable depending upon if and the extent to which such targets are achieved, in accordance with the following terms:

(i) The relevant performance criteria may be selected from one or more of the following: (a) stock price appreciation, (b) gross or net sales or revenue, (c) operating profit, (d) gross, operating or net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation and (D) amortization); (e) costs, (f) return on equity, (g) return on assets, (h) earnings per share, (i) total earnings, (j) earnings growth, (k) return on capital, (l) return on assets, (m) return on sales, (n) cash flow

(including, but not limited to, operating cash flow and free cash flow), (o) book value per share, (p) market share, (q) economic value added, (r) market value added, (s) productivity, (t) level of expenses, (u) new product development, (v) regulatory body filings and/or approvals regarding commercialization of a product, (w) implementation or completion of critical projects, (x) achievement of developmental milestones, or (y) peer group comparisons of any of the foregoing, any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices. The Compensation Committee shall also have the authority to establish one or more performance criteria that are not listed above.

(ii) As determined by the Compensation Committee, any given performance criterion may be measured over all or part of the fiscal year. If for a fiscal year the Compensation Committee determines to use only performance criteria measurable over the entire fiscal year, then it must identify in writing within ninety (90) days after the beginning of the fiscal year the target bonus, the selected performance criteria and the target goals. If for any fiscal year the Compensation Committee determines to use at least one performance criterion to be measured over less than the entire fiscal year, then the performance bonus for the fiscal year shall be the bonus calculated for such short performance period or, if more than one performance period per fiscal year is involved, then the sum of the bonuses calculated separately for each short performance period ending with or within the fiscal year. In that case, on or before the date which represents 25 percent of the total number of days in such short performance period, the Compensation Committee shall identify in writing the target bonus, the selected performance criteria and the target goals applicable to such period.

(iii) The Compensation Committee may, in its sole discretion, provide that that any evaluation of performance under a performance criterion shall include or exclude any or all of the following events that may occur during the performance period: (a) the effects of charges for restructurings, discontinued operations, and/or extraordinary items, (b) items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the disposal of a segment of a business or related to a change in accounting principle, (c) the cumulative effect of accounting changes, (d) asset write-downs, (e) litigation, claims, judgments, settlements or loss contingencies, (f) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (g) accruals for reorganization and restructuring programs, (h) accruals of any amounts for payment under this Plan or any other compensation arrangement maintained by the Company, (i) items relating to financing activities, (j) items related to acquisitions, (k) items attributable to the business operations of any entity acquired by the Company during the performance period, (l) items related to amortization of acquired intangible assets, (m) items that are outside the scope of the Company’s core, on-going business activities, or (n) any other items of significant income or expense which are determined to be appropriate adjustments.

(iv) The Compensation Committee may in its discretion direct that a performance bonus otherwise payable to any Executive be increased or reduced above or below the

amount as calculated in accordance with the preceding terms, based on individual performance or such other factors as it deems appropriate.

4. Payment of Bonuses.

The bonus or bonuses for a fiscal year (including all short performance periods ending with or within such year) shall be paid as soon as practicable following the determination of such bonuses following the end of such year or short performance period, as the case may be. No performance bonus under Section 3 hereof shall be paid until the Compensation Committee determines the extent to which the performance criteria and target goals have been satisfied and any further adjustments to one or more performance bonuses that the Compensation Committee may wish to make. Further, unless otherwise provided in a written agreement with an Executive or otherwise determined by the Compensation Committee in its sole discretion, an Executive must be employed by the Company on the date that bonus payments are made for a fiscal year or short performance period, as the case may be. If an Executive would otherwise be entitled to payment of a performance bonus under Section 3 hereof, but was not employed by the Company for the entire fiscal year or short performance period, as the case may be, he or she may, in the sole discretion of the Compensation Committee, receive a prorated portion of the bonus amount payable as though he or she were employed for the entire year determined as follows: (i) if the performance period for such bonus is the entire fiscal year, the full year bonus amount shall be multiplied by a fraction, the numerator of which is the number of days the Executive was employed by the Company during the fiscal year and the denominator of which is the number of days in the entire fiscal year; or (ii) if the bonus for the fiscal year represents the bonus or sum of bonuses computed separately for each short period within the fiscal year, then the bonus otherwise payable for each short period shall be multiplied by a fraction, the numerator of which is the number of days the Executive was employed by the Company during such short period and the denominator of which is the total number of days in such short period. The Company shall withhold all applicable federal, state, local and foreign taxes required by law to be paid or withheld relating to the receipt or payment of any performance bonus.

5. Amendment and Termination.

The Board or the Compensation Committee may terminate the Plan at any time, for any and no reason. The Board or the Compensation Committee may also amend the Plan in any manner and at any time, for any or no reason, including an amendment that has or may have the result of reducing the amount of the performance bonus for one or more Executives.

6. Recoupment Policy.

Subject to the terms and conditions of the Plan, the Compensation Committee may provide that any Executive and/or any bonus awarded under the Plan, is subject to any recovery, recoupment, clawback and/or other forfeiture policy maintained by the Company from time to time.

7. General.

(i) The Plan is adopted by the Board effective as of October 31, 2013.

(ii) Any rights of an Executive under the Plan shall not be assignable by such Executive, by operation of law or otherwise, except by will or the laws of descent and distribution. No Executive may create a lien on any funds or rights to which he or she may have an interest under the Plan, or which is held by the Company for the benefit of the Executive under the Plan.

(iii) Participation in the Plan shall not give any Executive any right to remain in the Company’s employ. Further, the adoption of the Plan shall not be deemed to give any Executive or other individual the right to be selected to participate in the Plan in the future or limit the right of the Compensation Committee to decide, in its sole discretion, to cause an Executive’s participation in the Plan to cease at any time.

(iv) To the extent any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the rights of an unsecured creditor of the Company.

(v) The Plan shall be governed by and construed in accordance with the laws of the State of New Jersey, without regard to its provisions regarding conflicts of laws.

(vi) If any one or more of the provisions contained in the Plan, or any application thereof, shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications thereof shall not in any way be affected or impaired thereby. The Plan shall be construed and enforced as if such invalid, illegal or unenforceable provision has never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the invalid, illegal or unenforceable provision or by its severance herefrom. In lieu of such invalid, illegal or unenforceable provisions there shall be added automatically as a part hereof a provision as similar in terms and economic effect to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable.

(vii) The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board or the Compensation Committee to adopt such other incentive arrangements as it may deem desirable.

(viii) The Plan as designed is not intended to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), but nothing in the Plan shall limit the authority of the Compensation Committee to take such actions as it may determine to take in order to permit performance bonuses under the Plan to satisfy all of the requirements applicable to “performance-based compensation” under Section 162(m) of the Code.

(viii) To the extent applicable, it is intended that the Plan and performance bonuses paid hereunder comply with the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service (“Section 409A”). Any provision that would cause the Plan or any right granted hereunder to fail to satisfy Section 409A shall have no force or effect until amended to comply with Section 409A, which amendment may be retroactive to the extent permitted by Section 409A.

END OF PLAN DOCUMENT

EXHIBIT 31.1

Section 302 Certification

I, William H. Lewis, Chief Executive Officer of Insmed Incorporated, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of Insmed Incorporated;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2013
	/s/ William H. Lewis
	William H. Lewis
	Chief Executive Officer
	(Principal Executive Officer)

EXHIBIT 31.2

Section 302 Certification

I, Andrew T. Drechsler, Chief Financial Officer of Insmed Incorporated, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of Insmed Incorporated;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2013
	/s/ Andrew T. Drechsler
	Andrew T. Drechsler
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003

Solely for the purposes of complying with 18 U.S.C. § 1350, I, William Lewis, Chief Executive Officer of Insmed Incorporated (the “Company”), hereby certify, based on my knowledge, that:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William H. Lewis
William H. Lewis
Chief Executive Officer
(Principal Executive Officer)

November 5, 2013

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

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003

Solely for the purposes of complying with 18 U.S.C. § 1350, I, Andrew T. Drechsler, Chief Financial Officer of Insmed Incorporated (the “Company”), hereby certify, based on my knowledge, that:

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Andrew T. Drechsler
Andrew T. Drechsler
Chief Financial Officer
(Principal Financial and Accounting Officer)

November 5, 2013