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 ~~June 30, 2018~~March 31, 2019


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~~000-30739

INSMED INCORPORATED

(Exact name of registrant as specified in its charter)



Virginia		54-1972729
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

10 Finderne Avenue, Building 10
Bridgewater, New Jersey		08807
(Address of principal executive offices)		(Zip Code)

(908) 977-9900

(Registrant’s telephone number including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically ~~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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
Emerging growth company o
~~Non-accelerated filer~~ o ~~(Do not check if a smaller reporting company)~~		~~Smaller reporting company~~ o
		~~Emerging growth company~~ o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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



Title of each class	Trading symbols	Name of each exchange on which registered
Common stock, par value $0.01 per share	INSM	Nasdaq Global Select Market

As of ~~July 31, 2018,~~May 2, 2019, there were ~~77,040,858~~77,666,309 shares of the registrant’s common stock ~~$0.01 par value,~~ outstanding.

INSMED INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE 30, 2018~~MARCH 31, 2019

INDEX



PART I. FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements

	Consolidated Balance Sheets as of ~~June 30, 2018~~March 31, 2019 (unaudited) and December 31, ~~2017~~2018	3

	Consolidated Statements of Comprehensive Loss (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4

	Consolidated Statements of ~~Cash Flows~~Shareholders' Equity (unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5

	~~Notes to~~ Consolidated ~~Financial~~ Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018	6

	~~ITEM 2~~Notes to Consolidated Financial Statements (unaudited)	7

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1517
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	2927
ITEM 4	Controls and Procedures	2927

PART II. OTHER INFORMATION

ITEM 1	Legal Proceedings	2927
ITEM 1A	Risk Factors	2927
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	2927
ITEM 6	Exhibits	3028

SIGNATURE		3129

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

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

INSMED INCORPORATED

Consolidated Balance Sheets

(in thousands, except par value and share data)


	As of			As of			As of			As of
	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	634,329		$	381,165		$	420,231		$	495,072
Accounts receivable							9,347			5,515
Inventory							12,682			7,032
Prepaid expenses and other current assets	10,929			8,279			12,372			11,327
Total current assets	645,258			389,444			454,632			518,946

In-process research and development	58,200			58,200
Intangibles, net							57,427			58,675
Fixed assets, net	17,881			12,432			27,933			22,636
Right-of-use assets							44,609			—
Other assets	2,905			1,971			11,314			4,299
Total assets	$	724,244		$	462,047		$	595,915		$	604,556

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	15,966		$	14,671		$	30,223		$	17,741
Accrued expenses	29,046			29,339			38,317			38,254
Accrued compensation							16,271			22,208
Lease liabilities							9,359			—
Other current liabilities	630			646			82			1,529
Total current liabilities	45,642			44,656			94,252			79,732

Long-term debt, net	307,156			55,567
Debt, long-term							321,313			316,558
Long-term lease liabilities							35,709			—
Other long-term liabilities	805			765			504			—
Total liabilities	353,603			100,988			451,778			396,290

Shareholders’ equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 77,038,788 and 76,610,508 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively	770			766
Common stock, $0.01 par value; 500,000,000 authorized shares, 77,596,384 and 77,307,521 issued and outstanding shares at March 31, 2019 and December 31, 2018, respectively							776			773
Additional paid-in capital	1,472,699			1,318,181			1,499,646			1,489,664
Accumulated deficit	(1,102,846		)	(957,885		)	(1,356,315		)	(1,282,162		)
Accumulated other comprehensive income (loss)	18			(3		)	30			(9		)
Total shareholders’ equity	370,641			361,059			144,137			208,266
Total liabilities and shareholders’ equity	$	724,244		$	462,047		$	595,915		$	604,556

See accompanying notes to consolidated financial statements

INSMED INCORPORATED

Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Revenues	$	—		$	—		$	—		$	—
Revenues, net													$	21,902		$	—

Operating expenses:
Costs and expenses:
Cost of product revenues (excluding amortization of intangible assets)													4,150			—
Research and development	35,722			26,871			65,820			49,125			31,203			30,098
General and administrative	37,160			16,644			69,813			30,359
Total operating expenses	72,882			43,515			135,633			79,484
Selling, general and administrative													54,810			32,653
Amortization of intangible assets													1,248			—
Total costs and expenses													91,411			62,751

Operating loss	(72,882		)	(43,515		)	(135,633		)	(79,484		)	(69,509		)	(62,751		)

Investment income	2,729			169			4,769			323			2,416			2,040
Interest expense	(6,488		)	(1,489		)	(12,130		)	(2,963		)	(6,726		)	(5,642		)
Loss on extinguishment of debt	—			—			(2,209		)	—			—			(2,209		)
Other income, net	244			200			330			105
Other (expense) income, net													(119		)	86
Loss before income taxes	(76,397		)	(44,635		)	(144,873		)	(82,019		)	(73,938		)	(68,476		)

Provision for income taxes	40			37			88			67			215			48

Net loss	$	(76,437	)	$	(44,672	)	$	(144,961	)	$	(82,086	)	$	(74,153	)	$	(68,524	)

Basic and diluted net loss per share	$	(1.00	)	$	(0.72	)	$	(1.89	)	$	(1.32	)	$	(0.96	)	$	(0.89	)

Weighted average basic and diluted common shares outstanding	76,767			62,209			76,693			62,126			77,541			76,619

Net loss	$	(76,437	)	$	(44,672	)	$	(144,961	)	$	(82,086	)	$	(74,153	)	$	(68,524	)
Other comprehensive (loss) income:
Foreign currency translation (losses) gains	(21		)	5			21			23
Other comprehensive income:
Foreign currency translation gains													39			42
Total comprehensive loss	$	(76,458	)	$	(44,667	)	$	(144,940	)	$	(82,063	)	$	(74,114	)	$	(68,482	)

See accompanying notes to consolidated financial statements

INSMED INCORPORATED

Consolidated Statements of Shareholders' Equity (unaudited)

(in thousands)



	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2018	76,611	$	766	$	1,318,181	$	(957,885	)	$	(3	)	$	361,059
Comprehensive loss:
Net loss						(68,524		)				(68,524		)
Other comprehensive income									42			42
Exercise of stock options	12			142								142
Equity component of convertible debt issuance				136,463								136,463
Stock compensation expense				5,674								5,674
Balance at March 31, 2018	76,623	$	766	$	1,460,460	$	(1,026,409	)	$	39		$	434,856

Balance at January 1, 2019	77,308	$	773	$	1,489,664	$	(1,282,162	)	$	(9	)	$	208,266
Comprehensive loss:
Net loss						(74,153		)				(74,153		)
Other comprehensive income									39			39
Exercise of stock options and ESPP shares	253	3		3,046								3,049
Issuance of common stock for vesting of RSUs	35											—
Stock compensation expense				6,936								6,936
Balance at March 31, 2019	77,596	$	776	$	1,499,646	$	(1,356,315	)	$	30		$	144,137

See accompanying notes to consolidated financial statements

INSMED INCORPORATED

Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Operating activities
Net loss	$	(144,961	)	$	(82,086	)	$	(74,153	)	$	(68,524	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	1,698			1,454			1,069			769
Amortization of intangible assets							1,248			—
Stock-based compensation expense	12,303			8,591			6,936			5,674
Loss on extinguishment of debt							—			2,209
Amortization of debt issuance costs	585			61			349			299
Accretion of debt discount	7,252			—			4,406			3,021
Accretion of back-end fee on debt	50			342			—			50
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(3,653		)	128
Accounts receivable							(3,832		)	—
Inventory							(5,650		)	—
Prepaid expenses and other current assets							(1,061		)	(2,217		)
Other assets							(7,044		)	—
Accounts payable	1,981			767			9,499			(828		)
Accrued expenses and other	1,794			(2,415		)	323			(165		)
Accrued compensation							(5,937		)	(7,701		)
Net cash used in operating activities	(122,951		)	(73,158		)	(73,847		)	(67,413		)
Investing activities
Purchase of fixed assets	(8,212		)	(854		)	(4,028		)	(5,365		)
Net cash used in investing activities	(8,212		)	(854		)	(4,028		)	(5,365		)
Financing activities
Proceeds from exercise of stock options	5,785			2,434
Loss on extinguishment of debt	(2,209		)	—
Proceeds from exercise of stock options and ESPP							3,049			142
Payment on extinguishment of debt							—			(2,835		)
Payment of debt	(55,000		)	—			—			(55,000		)
Proceeds from issuance of 1.75% convertible senior notes due 2025	450,000			—			—			450,000
Payment of debt issuance costs	(14,235		)	—			—			(14,141		)
Net cash provided by financing activities	384,341			2,434			3,049			378,166
Effect of exchange rates on cash and cash equivalents	(14		)	51			(15		)	28
Net increase (decrease) in cash and cash equivalents	253,164			(71,527		)
Net increase in cash and cash equivalents							(74,841		)	305,416
Cash and cash equivalents at beginning of period	381,165			162,591			495,072			381,165
Cash and cash equivalents at end of period	$	634,329		$	91,064		$	420,231		$	686,581

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,276		$	2,574		$	3,939		$	1,275
Cash paid for income taxes	$	93		$	41		$	178		$	54

See accompanying notes to consolidated financial statements

INSMED INCORPORATED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.The Company and Basis of Presentation

Insmed is a global biopharmaceutical company ~~focused~~ on a mission to transform the ~~unmet needs~~lives of patients with serious and rare diseases. The Company's ~~lead~~first commercial product, ~~candidate is amikacin~~ARIKAYCE (amikacin liposome inhalation ~~suspension (ALIS)~~suspension), ~~which is~~received accelerated approval in ~~late-stage development~~the United States (US) on September 28, 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment ~~refractory nontuberculous mycobacteria (NTM)~~options. MAC lung disease ~~caused by Mycobacterium avium complex (MAC),~~is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. ~~Our earlier~~The Company's clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1)~~, an enzyme responsible for activating neutrophil serine proteases, which are implicated~~ with therapeutic potential in ~~the pathology of chronic inflammatory lung diseases, such as~~ non-cystic fibrosis (non-CF) ~~bronchiectasis.~~bronchiectasis and other inflammatory diseases. INS1009 is an inhaled ~~nanoparticle~~ formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are in Bridgewater, New Jersey. The Company has legal entities in the ~~United States (US),~~US, Ireland, Germany, France, the United Kingdom (UK), the Netherlands, Bermuda and Japan. ~~All intercompany transactions and balances have been eliminated in consolidation.~~

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

The Company had ~~$634.3~~$420.2 million in cash and cash equivalents as of ~~June 30, 2018~~March 31, 2019 and reported a net loss of ~~$145.0~~$74.2 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. Historically, the Company has funded its operations through public offerings of equity securities and debt financings. ~~To date, the Company has not generated material revenue from ALIS.~~ The Company ~~does not expect to generate material revenue unless or until marketing approval is received for ALIS. Accordingly, the~~commenced commercial shipments of ARIKAYCE in October 2018. The Company expects to continue to incur operating losses both in our US and certain international entities while funding research and development (R&D) activities ~~regulatory submissions, potential~~for ARIKAYCE and our other pipeline programs, continuing commercial launch activities for ARIKAYCE in the US, continuing to invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and funding other general and administrative ~~expenses.~~activities. The Company expects its future cash requirements to be substantial, and the Company may need to raise additional capital to fund operations, including the commercialization of ARIKAYCE and additional clinical trials related to ~~develop and commercialize ALIS,~~ARIKAYCE, to develop INS1007 and INS1009 and to develop, acquire, in-license or co-promote other products or product candidates that address orphan or rare diseases.

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

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

2.Summary of Significant Accounting Policies

The following are the required interim disclosure updates to the Company's significant accounting policies described in Note 2 of the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017:~~2018:

Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to

measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:

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

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

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

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

The Company’s only financial assets and liabilities which were measured at fair value as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were Level 1 assets comprised of cash and cash ~~equivalents of $634.3 million and $381.2 million, respectively.~~equivalents. The estimated fair value of the liability component of the 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) was determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are currently in place. The following table shows certain assets and liabilities and their carrying values and fair values:

As of June 30, 2018
Carrying Value Fair Value
(in millions)
Level 1
Cash and cash equivalents $ 634.3
$ 634.3
Level 2
Convertible Notes ($450.0 face value) $ 307.2
* $ 411.1

* The carrying value of the Convertible Notes excludes $133.6 million of the unamortized portion of the debt discount.

~~The Company’s~~Company's cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. ~~Cash equivalents consist of liquid investments with an original maturity of three months or less from the date of purchase. As of June 30, 2018, the Company's cash~~The following table shows assets and ~~cash equivalents balance included US treasury bills of $399.9 million.~~liabilities that are measured at fair value on a recurring basis and their carrying value (in millions):



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

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers in or out of Level 1, Level 2 or Level 3 during the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company held no securities that were in an unrealized gain or loss position.

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

The estimated fair value of the liability component of the 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of March 31, 2019 was $438 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the Convertible Notes. The $321.3 million carrying value of the Convertibles Notes as of March 31, 2019 excludes the $120.6 million of the unamortized portion of the debt discount.

Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and other dilutive securities outstanding during the period. Potentially dilutive securities from stock options, restricted stock units (RSUs) and convertible debt securities would be anti-dilutive as the Company incurred a net loss. Potentially dilutive common shares resulting from the assumed exercise of outstanding stock options and from the assumed conversion of the Convertible Notes are determined based on the treasury stock method.

The following table sets forth the reconciliation of the weighted average number of common shares used to compute basic and diluted net loss per share for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:



	Three Months Ended March 31,
	2019			2018
	(in thousands, except per share amounts)
Numerator:
Net loss	$	(74,153	)	$	(68,524	)
Denominator:
Weighted average common shares used in calculation of basic net loss per share:	77,541			76,619
Effect of dilutive securities:
Common stock options	—			—
RSUs	—			—
Convertible debt securities	—			—
Weighted average common shares outstanding used in calculation of diluted net loss per share	77,541			76,619
Net loss per share:
Basic and diluted	$	(0.96	)	$	(0.89	)

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in thousands, except per share amounts)
Numerator:

Net loss $ (76,437 ) $ (44,672 ) $ (144,961 ) $ (82,086 )
Denominator:

Weighted average common shares used in calculation of basic net loss per share: 76,767
62,209
76,693
62,126
Effect of dilutive securities:

Common stock options —
—
—
—
RSUs —
—
—
—
Convertible debt securities —
—
—
—
Weighted average common shares outstanding used in calculation of diluted net loss per share 76,767
62,209
76,693
62,126
Net loss per share:

Basic and Diluted $ (1.00 ) $ (0.72 ) $ (1.89 ) $ (1.32 )

The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ as their effect would have been anti-dilutive (in thousands):



	As of March 31,
	2019	2018
Stock options to purchase common stock	11,903	9,866
Unvested RSUs	170	234
Convertible debt securities	11,492	11,492

As of June 30,
2018 2017
Stock options to purchase common stock 9,578
8,621
Unvested RSUs 236
47
Convertible debt securities 11,492
—

Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high credit-quality financial institutions and may invest its short-term investments in US treasury securities, mutual funds and government agency bonds. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.

The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The following table presents the percentage of gross product revenue represented by the Company's three largest customers as of the quarter ended March 31, 2019.



	Percentage of Total Gross Product Revenue
Customer A	33%
Customer B	31%
Customer C	16%

The Company did not have product revenue prior to US FDA approval of ARIKAYCE in September 2018. The Company relies on third-party manufacturers and suppliers for manufacturing and supply of its products. The inability of the suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future operating results. A change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially impact future operating results.

Revenue Recognition—In accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, the Company recognizes revenue when a customer obtains control of promised goods or services, in an

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

Product revenues consist primarily of sales of ARIKAYCE in the US. Product revenues are recognized once the Company performs and satisfies all five steps mentioned above. In October 2018, the Company began shipping ARIKAYCE to its customers in the US, which include specialty pharmacies and specialty distributors. The Company recognizes revenues for product received by its customers, net of allowances for customer credits, including prompt pay discounts, service fees, estimated rebates, including government rebates such as Medicaid rebates and Medicare Part D coverage gap reimbursements in the US, chargebacks and returns.

Customer credits: The Company’s customers are offered various forms of consideration, including service fees and prompt payment discounts. The Company anticipates that its customers will earn prompt payment discounts and, therefore, deducts the full amount of these discounts from total gross product revenues when revenues are recognized. Service fees are also deducted from total gross product revenues as they are earned.

Rebates: The Company contracts with Medicaid, other government agencies and various private organizations, or collectively, third-party payors, so that ARIKAYCE will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized.

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

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by a third-party administrator.

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

The Company has initiated early access programs (EAPs) in Europe and other countries, some of which may be fully reimbursed. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.

Cost of product revenues (excluding amortization of intangible assets) - Prior to FDA approval of ARIKAYCE, the Company expensed all inventory related costs in the period incurred. Inventory used for clinical development purposes is expensed to research and development (R&D) expense when consumed.

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

financing activities. This standard update isbecame effective as of the first quarter of 2018. As a result of the adoption of the standard, in the first quarter of 2018, the Company reported a $2.2 million loss on extinguishment of debt in the ~~financing~~operating activities section of its consolidated statement of cash flows. The Company had no material debt extinguishment costs prior to the first quarter of 2018. ~~There were no other significant impacts as a result~~The impact of adopting this ~~standard.~~

~~In May 2014, the FASB issued ASU 2014-9,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ which amended the existing accounting standards for revenue recognition. ASU 2014-9 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2014-9 in the first quarter of 2018 and the impact of adoption isstandard was not material to ~~its consolidated financial statements.~~the Company.

~~New Accounting Pronouncements (Not Yet Adopted)~~—In February 2016, the FASB issued ASU ~~2016-2,~~ 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles. ASU ~~2016-2~~2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU ~~2016-2~~2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) and early adoption iswas permitted. ~~The standard requires~~In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provided a ~~modified retroactive approach, but use~~transition option in which an entity would initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of ~~certain practical expedients is permitted.~~retained earnings in the period of adoption. The Company ~~expects to use~~used the new transition option and the package of practical expedients that ~~allows~~allowed it to not reassess: (1) whether any expired or existing contracts are or

contain ~~leases,~~leases; (2) lease classification for any expired or existing ~~leases,~~leases; and (3) initial direct costs for any expired or existing leases. The Company ~~additionally expects to use~~also used the practical expedient that allows it to treat the lease and non-lease components of its leases as a single component. The Company ~~expects~~adopted ASU 2016-02 effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the consolidated balance sheet was $47.4 million. Refer to ~~adopt~~Note 6 - Leases for additional details about the Company's lease portfolio, including Topic 842 required disclosures.

New Accounting Pronouncements (Not Yet Adopted)—In June 2016, the FASB issued ASU ~~2016-2 in~~2016-13, Financial Instruments - Credit Losses which requires financial assets measured at an amortized cost basis to be presented at the ~~first quarter~~net amount expected to be collected. The measurement of ~~2019~~expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is ineffective for fiscal years beginning after December 15, 2019. Different aspects of the ~~process of~~guidance require modified retrospective or prospective adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

3.~~Identifiable Intangible Asset~~ Inventory

As of March 31, 2019 and December 31, 2018, the Company's inventory balance consists of the following (in thousands):



	March 31, 2019		December 31, 2018
Raw materials	$	4,454	$	2,145
Work-in-process	7,059		4,567
Finished goods	1,169		320
	$	12,682	$	7,032

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

4.Accrued Expenses

As of March 31, 2019 and December 31, 2018, the Company's accrued expenses balance consist of the following (in thousands):



	March 31, 2019		December 31, 2018
Accrued clinical trial expenses	$	7,632	$	6,635
Accrued professional fees	11,380		13,398
Accrued technical operation expenses	9,536		9,371
Accrued royalty payable	1,000		409
Accrued interest payable	1,663		3,631
Accrued sales allowances and related costs	2,642		818
Accrued construction costs	2,475		2,946
Other accrued expenses	1,989		1,046
	$	38,317	$	38,254

5.Intangible, net

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

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



	2019
Intangible Asset	January 1,		Additions		Amortization			March 31,
Acquired ARIKAYCE R&D	$	56,988	$	—	$	(1,212	)	$	55,776
PARI milestone upon FDA approval	1,687		—		(36		)	1,651
Intangible assets	$	58,675	$	—	$	(1,248	)	$	57,427

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

6.Leases

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

The Company ~~believes there are no indicators~~outsources its manufacturing operations to CMOs. Upon review of ~~impairment relating to~~the agreements with its ~~in-process research and development intangible asset as of June 30, 2018.~~CMOs, the Company determined that these contracts contain embedded leases for dedicated manufacturing facilities. The Company obtains substantially all of the economic benefits from the use of the manufacturing facilities, has the right to direct how and for what purpose the facility is used throughout the period of use, and the supplier does not have the right to change the operating instructions of the facility. The right-of-use asset and corresponding lease liability associated with the manufacturing facilities is the sum of the minimum guarantees over the life of the production contracts.

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

The table below summarizes the Company's total lease costs included in its consolidated financial statements, as well as other required quantitative disclosures (in thousands).



	Three Months Ended
	March 31, 2019
Lease cost
Operating lease cost	$	3,078
Total lease cost	$	3,078

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	3,134
Right-of-use assets obtained in exchange for new operating lease liabilities	$	47,396
Weighted average remaining lease term - operating leases (years)	5.5
Weighted average discount rate - operating leases	7.3		%

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



Year ending December 31,
2019 (remaining)	$	9,344
2020	11,000
2021	10,287
2022	6,000
2023	6,000
Thereafter	12,000
Total	$	54,631
Less: present value discount	9,563
Present value of lease liabilities	$	45,068

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

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

4.~~Accrued Expenses~~

~~Accrued expenses consist of the following:~~

As of June 30,
2018 As of December 31,
2017
(in thousands)
Accrued clinical trial expenses $ 5,772
$ 7,837
Accrued compensation 7,371
12,197
Accrued professional fees 6,743
4,500
Accrued technical operation expenses 3,324
2,182
Accrued interest payable 3,391
423
Accrued construction costs 1,336
1,719
Other accrued expenses 1,109
481
$ 29,046
$ 29,339

5.7.Debt

In January 2018, the Company completed an underwritten public offering of the Convertible Notes, in which the Company sold $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriters' option to purchase additional Convertible Notes of $50.0 million. The Company's net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased.

On or after October 15, 2024, until the close of business on the second scheduled trading day immediately preceding January 15, 2025, holders may convert their Convertible Notes at any time. Upon conversion, holders may receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's option. The initial conversion rate is 25.5384 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $39.16 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Holders may convert their Convertible Notes prior to October 15, 2024, only under the following circumstances, subject to the conditions set forth in an indenture, dated as of January 26, 2018, between the Company and Wells Fargo Bank, National Association (Wells Fargo), as trustee, as supplemented by the first supplemental indenture, dated January 26, 2018, between the Company and Wells Fargo (as supplemented, the Indenture): (i) during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of convertible notes, as determined following a request by a holder of the convertible notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on such trading day, (ii) the Company elects to distribute to all or substantially all holders of the common stock (a) any rights, options or warrants (other than in connection with a stockholder rights plan for so long as the rights issued under such plan have not detached from the associated shares of common stock) entitling them, for a period of not more than 45 days from

the declaration date for such distribution, to subscribe for or purchase shares of common stock at a price per share that is less than the average of the last reported sale prices of the common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the declaration date for such distribution, or (b) the Company’s assets, debt securities or rights to purchase securities of the Company, which distribution has a per share value, as reasonably determined by the board of directors, exceeding 10% of the last reported sale price of the common stock on the trading day immediately preceding the declaration date for such distribution, (iii) if a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs, or if the Company is a party to (a) a consolidation, merger, combination, statutory or binding share exchange or similar transaction, pursuant to which the common stock would be converted into, or exchanged for, cash, securities or other property or assets, or (b) any sale, conveyance, lease or other transfer or similar transaction in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole, all or any portion of the Convertible Notes may be surrendered by a holder for conversion at any time from or after the date that is 30 scheduled trading days prior to the anticipated effective date of the transaction, (iv) if during any calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar quarter), the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, or, (v) if the Company sends a notice of redemption, a holder may surrender all or any portion of its Convertible Notes, to which the notice of redemption relates, for conversion at any time on or

after the date the applicable notice of redemption was sent until the close of business on (a) the second business day immediately preceding the related redemption date or (b) if the Company fails to pay the redemption price on the redemption date as specified in such notice of redemption, such later date on which the redemption price is paid.

The Convertible Notes can be settled in cash, common stock, or a combination of cash and common stock at the Company's option, and thus, the Company determined the embedded conversion options in the convertible notes are not required to be separately accounted for as a derivative. However, since the Convertible Notes are within the scope of the accounting guidance for cash convertible instruments, the Company is required to separate the Convertible Notes into liability and equity components. The carrying amount of the liability component as of the date of issuance was calculated by measuring the fair value of a similar liability that ~~does~~did not have an associated equity component. The fair value was based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the gross proceeds of the Convertible Notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity. The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million using an effective interest rate of 7.6%, and accordingly, the residual equity component on the date of issuance was $140.9 million. The discount is being amortized to interest expense over the term of the Convertible Notes and has a remaining period of approximately ~~6.5~~5.79 years.

For the three and six months ended June 30, 2018, total interest expense related to the Convertible Notes was $6.5 million and $11.2 million, respectively, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, and accretion of debt discount, as described in the table below. The following table presents the ~~components~~carrying value of the Company’s debt balance ~~as of June 30, 2018~~ (in thousands):



	March 31, 2019			December 31, 2018
1.75% convertible senior notes due 2025	$	450,000		$	450,000
Debt issuance costs, unamortized	(8,091		)	(8,440		)
Discount on debt	(120,596		)	(125,002		)
Long-term debt, net	$	321,313		$	316,558

1.75% convertible senior notes due 2025 $ 450,000
Debt issuance costs, unamortized (9,206 )
Discount on debt (133,638 )
Long-term debt, net $ 307,156

As of ~~June 30, 2018,~~March 31, 2019, future principal repayments of the debt for each of the fiscal years through maturity were as follows (in thousands):



Year Ending December 31:
2019	$	—
2020	—
2021	—
2022	—
2023	—
2024 and thereafter	450,000
	$	450,000

Year Ending December 31:
2018 $ —
2019 —
2020 —
2021 —
2022 —
2023 and thereafter 450,000
$ 450,000

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

Interest Expense

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Contractual interest expense	$	1,971	$	1,288	$	4,243	$	2,560	$	1,971	$	2,272
Amortization of debt issuance costs	286		30		585		61		349		299
Accretion of back-end fee on debt	—		171		50		342		—		50
Accretion of debt discount	4,231		—		7,252		—		4,406		3,021
Total interest expense	$	6,488	$	1,489	$	12,130	$	2,963	$	6,726	$	5,642

6.8.Shareholders’ Equity

Common Stock — As of ~~June 30, 2018,~~March 31, 2019, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 per share and ~~77,038,788~~77,596,384 shares of common stock issued and outstanding. In addition, as of ~~June 30, 2018,~~March 31, 2019, the Company had reserved ~~9,577,825~~11,892,800 shares of common stock for issuance upon the exercise of outstanding stock options and ~~235,815~~169,343 shares of common stock for issuance upon the vesting of RSUs. The Company has also reserved 11,492,280 shares of common stock for issuance upon conversion of the Convertible Notes, subject to adjustment in accordance with the Indenture.

In January 2018, the Company completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million, and accordingly, the equity component (included in additional paid-in capital) on the date of issuance was calculated as $140.9 million using the residual method, as further described in Note 57 Debt.

In September 2017, the Company completed an underwritten public offering of 14,123,150 shares of the Company’s common stock, which included the underwriter’s exercise in full of its over-allotment option of 1,842,150 shares, at a price to the public of $28.50 per share. The Company’s net proceeds from the sale of the shares, after deducting the underwriter’s discount and offering expenses of $24.8 million, were $377.7 million.

Preferred Stock — As of ~~June 30, 2018,~~March 31, 2019, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01 per share and no shares of preferred stock were issued and outstanding.

~~The following table summarizes the changes in total shareholders' equity for the six months ended June 30, 2018 (in thousands):~~

Balance at December 31, 2017 $ 361,059
Net loss for the period (144,961 )
Proceeds from exercise of stock options 5,785
Equity component of Convertible Notes 136,434
Stock-based compensation expense 12,303
Change in cumulative translation adjustment 21
Balance at June 30, 2018 $ 370,641

9.Stock-Based Compensation

The Company’s current equity compensation plan, the 2017 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 18, 2017. The 2017 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Under the terms of the 2017 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), RSUs, performance options/shares and other stock awards, as well as pay incentive bonuses to eligible employees and non-employee directors. On May 18, 2017, upon the approval of the 2017 Incentive Plan by shareholders, 5,000,000 shares were authorized for issuance thereunder, plus any shares subject to then-outstanding awards under the 2015 Incentive Plan and the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. As of ~~June 30, 2018, 3,501,366~~March 31, 2019, 909,303 shares remained for future issuance under the 2017 Incentive Plan. The 2017 Incentive Plan will terminate on April 3, 2027 unless it is extended or terminated earlier pursuant to its terms. The Company has submitted a proposal to its shareholders to approve a new equity compensation plan, the 2019 Incentive Plan, at the 2019 Annual Meeting of Shareholders. The 2019 Incentive Plan, if approved, will provide for the issuance of 3,500,000 shares, plus any shares that were subject to outstanding awards under the 2017 Incentive Plan, the 2015 Incentive Plan and the 2013 Incentive Plan, as of the effective date of the 2019 Incentive Plan, that are canceled, terminate unearned, expire, are forfeited, lapse for any reason or are settled in cash without the delivery of shares. If the 2019 Incentive Plan is approved, no additional awards will be granted under the 2017 Incentive Plan. In addition, from time to time, the Company makes inducement grants of stock options to new hires, which awards are made pursuant to the NASDAQ inducement grant exception. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company granted inducement stock options covering ~~236,730~~51,870 shares of the Company's common stock to new employees.

On May 15, 2018, the 2018 Employee Stock ~~Options~~ -Purchase Plan (2018 ESPP) was approved by shareholders at the Company’s Annual Meeting of Shareholders. The Company ~~calculates~~has reserved the ~~fair value~~following for issuance under the 2018 ESPP: (i) 1,000,000 shares of common stock, ~~options granted using the Black-Scholes valuation model. The following table summarizes the Company’s grant date fair value~~plus (ii) commencing on January 1, 2019 and ~~assumptions used in determining the fair value~~ending on December 31, 2023, an additional number of ~~all stock options granted during the periods presented:~~

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Volatility 67%-68% 73% 67%-68% 73%-74%
Risk-free interest rate 2.55%-2.82% 1.74%-1.88% 2.25%-2.82% 1.74%-1.99%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected option term (in years) 5.19 6.25 5.08 6.25
Weighted average fair value of stock options granted $15.18 $11.02 $16.93 $10.20

~~For each period presented, the volatility factor was based~~shares to be added on the ~~Company’s historical volatility during~~first day of each calendar year equal to the ~~expected option term. Estimated forfeitures are based on the actual percentage~~lesser of ~~option forfeitures since the closing~~(A) 1,200,000 shares of common stock, (B) 2% of the ~~Company’s merger with Transave, Inc. in December 2010. The expected option term for these grants was~~number of outstanding shares of common stock on such date and (C) an amount determined ~~using~~by the ~~Company’s historical exercise behavior.~~administrator.

From time to time, the Company grants performance-condition options to certain of its employees. Vesting of these options is subject to the Company achieving certain performance criteria established at the date of grant and the grantees fulfilling a service condition (continued employment).Stock Options - As of ~~June 30, 2018, the Company had performance-condition options totaling 133,334 shares outstanding which had not yet met the recognition criteria.~~

~~The following table summarizes the Company’s aggregate stock option activity for the six months ended June 30, 2018:~~

Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life in Years

Aggregate
Intrinsic
Value (in
thousands)
Options outstanding at December 31, 2017 8,608,921
$ 14.08

Granted 1,430,200
$ 29.22

Exercised (381,366 ) $ 15.17

Forfeited or expired (79,930 ) $ 17.30

Options outstanding at June 30, 2018 9,577,825
$ 16.27
7.27 $ 79,204
Vested and expected to vest at June 30, 2018 8,598,142
$ 15.75
7.10 $ 74,151
Exercisable at June 30, 2018 4,905,928
$ 13.16
6.15 $ 51,474

The total intrinsic value of stock options exercised during the three months ended June 30, 2018 and 2017 was $4.7 million and $1.6 million, respectively, and during the six months ended June 30, 2018 and 2017 was $4.9 million and $2.1 million, respectively.

~~As of June 30, 2018,~~March 31, 2019, there was ~~$38.1~~$43.0 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of ~~2.6~~3.0 years. ~~Included in unrecognized compensation expense was~~During the quarter ended September 30, 2018, performance-condition options totaling $1.1 million, ~~related to outstanding performance-condition options. These performance-condition options will vest, and compensation expense will be recognized, in~~or 133,334 shares, met their recognition criteria as a result of the ~~period in which~~ FDA approval of ~~ALIS is received~~ARIKAYCE and vested in ~~the US. The following table summarizes the range~~full. As of ~~exercise prices and the number of stock~~March 31, 2019, there were no performance-condition options ~~outstanding and exercisable as of June 30, 2018:~~outstanding.

Outstanding as of June 30, 2018 Exercisable as of June 30, 2018
Range of Exercise Prices ($) Number of Options Weighted Average Remaining Contractual Term (in years) Weighted Average Exercise Price ($) Number of Options Weighted Average Exercise Price ($)
$ 3.03
$ 4.55
960,038
4.13 $ 3.60
960,038
$ 3.60
$ 6.90
$ 6.90
127,903
4.64 $ 6.90
90,403
$ 6.90
$ 6.96
$ 10.85
998,827
7.81 $ 10.77
481,411
$ 10.68
$ 11.14
$ 12.58
1,035,336
5.59 $ 12.16
795,493
$ 12.17
$ 12.66
$ 13.67
1,007,519
8.14 $ 13.60
317,446
$ 13.53
$ 13.94
$ 16.07
1,139,846
7.07 $ 15.26
711,531
$ 15.11
$ 16.09
$ 17.16
1,458,791
8.17 $ 16.70
523,127
$ 16.53
$ 17.24
$ 22.76
1,318,770
6.72 $ 21.23
992,480
$ 21.32
$ 22.84
$ 28.51
381,245
9.31 $ 25.00
33,999
$ 23.72
$ 30.46
$ 32.46
1,149,550
9.42 $ 30.58
—
$ —

~~Restricted Stock and~~ Restricted Stock Units— The Company may grant restricted stock (RS) and RSUs to eligible employees, including its executives, and non-employee directors. Each share of RS vests, and 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. RS and RSU awards are valued at the market price of the Company’s common stock on the date of grant. The Company recognizes noncash compensation expense for the fair values of these RS and RSU awards on a straight-line basis over the requisite service period of these awards. As of ~~June 30, 2018,~~March 31, 2019, there was ~~$4.6~~$2.8 million of unrecognized compensation expense related to unvested RSU awards which is expected to be recognized over a weighted average period of ~~3.0~~2.1 years. ~~The following table summarizes the Company’s RSU award activity during the six months ended June 30, 2018:~~

Number of
RSUs

Weighted
Average
Grant Price ($)
Outstanding at December 31, 2017 46,914
$ 17.16
Granted 236,077
29.79
Released (46,914 ) 17.16
Forfeited (262 ) 30.46
Outstanding at June 30, 2018 235,815
$ 29.79

The following table summarizes the aggregate stock-based compensation expense recorded in the consolidated statements of comprehensive loss related to stock options and RSUs during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively:~~

respectively (in millions):



	Three Months Ended March 31,
	2019		2018
Research and development expenses	$	2.2	$	1.9
Selling, general and administrative expenses	4.7		3.8
Total	$	6.9	$	5.7

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(in millions)
Research and development expenses $ 2.7
$ 1.5
$ 4.6
$ 3.0
General and administrative expenses 3.9
3.1
7.7
5.6
Total $ 6.6
$ 4.6
$ 12.3
$ 8.6

8.10.Income Taxes

The Company’s provision for income taxes was ~~$40,000~~$0.2 million and ~~$88,000~~$0.0 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018, ~~respectively, and $37,000 and $67,000 for the three and six months ended June 30, 2017,~~ respectively. The provision for income taxes in ~~all~~both periods was a result of certain of the Company’s international subsidiaries, ~~in Europe,~~ which had taxable income during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. In jurisdictions where the Company has net losses, there was a full valuation allowance recorded against the Company’s deferred tax assets and therefore no tax benefit was recorded.

Following adoption of the Tax Cuts and Jobs Act during the fourth quarter of 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company recorded a provisional amount of $94.0 million as of December 31, 2017 related to the re-measurement of certain deferred tax balances, which was completely offset by a full valuation allowance. Upon further analyses of certain aspects of the Tax Cuts and Jobs Act and refinement of the Company's calculations during the six months ended June 30, 2018, the Company determined that the provisional amount would not need to be adjusted.

In addition to local taxes in foreign jurisdictions, the Company is subject to US federal, US state, and US tax on foreign earnings. In regard to the US tax on foreign earnings, the Company was subject to a one-time transition tax based on its total earnings and profits, which were generally deferred from US income taxes under previous US law. Due to the aggregate loss position of the Company's foreign subsidiaries, the Company did not record any provisional amount for the one-time transition tax liability at December 31, 2017. Additionally, the global intangible low-taxed income tax and base erosion provisions in the Tax Cuts and Jobs Act are effective for taxable years beginning after December 31, 2017. The Company does not currently expect these provisions to have a material impact (i) due to the aggregate loss position of its foreign subsidiaries and (ii) because the Company currently expects to be below the gross receipts threshold for purposes of the base erosion provisions.

The Company is subject to US federal and state income taxes and the statute of limitations for tax audit is open for the Company's federal tax returns for the years ended 2014 and later, and is generally open for certain states for the years 2013 and later. The Company has incurred net operating losses since inception, except for the year ended December 31, 2009. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company had recorded no reserves for unrecognized income tax benefits ~~nor had it~~against certain deferred tax assets in the United States. However, given the Company’s valuation allowance position these reserves do not have an impact on the balance sheet as of March 31, 2019 and December 31, 2018 or the income statement for the three months ended March 31, 2019 and March 31, 2018. Due to the noncash impact of the reserve for unrecognized income tax benefits the Company has not recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next 12 months.

9.11.Commitments and Contingencies

The Company has an operating lease for office and laboratory space located in Bridgewater, NJ, its corporate headquarters, for which the initial lease term expires in November 2019. Future minimum rental payments under this lease are $1.5 million. In July 2016, the Company signed an operating lease for additional laboratory space located in Bridgewater, NJ for which the initial lease term expires in December 2021. Future minimum rental payments under this lease are $1.7 million.

Rent expense charged to operations was ~~$0.4~~$0.8 million and ~~$0.3~~$0.4 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively, and $0.8 million and $0.7 million for the six months ended June 30, 2018 and 2017,~~ respectively. Future minimum rental payments required under the Company’s operating leases for the period from July 1, 2018 to December 31, 2018 and for each of the five years thereafter are as follows (in thousands):

Year Ending December 31:
2018 (remaining) $ 768
2019 1,421
2020 477
2021 498
2022 —
2023 —
$ 3,164

Legal Proceedings

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are statements that are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," "continues," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements.

Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated in any forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:

~~risks that data from the remainder of the treatment and off-treatment phases of the CONVERT study (the CONVERT study~~failure to successfully commercialize or ~~the 212 study) will not be consistent with the six-month results of the study;~~

maintain United States (US) approval for ARIKAYCE® (amikacin liposome inhalation suspension), our only approved product;

uncertainties in the ~~research~~degree of market acceptance of ARIKAYCE by physicians, patients, third-party payers and development of our existing product candidates, including due to delays in data readouts, such as the full data from the CONVERT study, patient enrollment and retention or failure of our preclinical studies or clinical trials to satisfy pre-established endpoints, including secondary endpointsothers in the ~~CONVERT study and endpoints in the CONVERT extension study (the 312 study);~~health-care community;

~~risks that subsequent data from the 312 study will not be consistent with the interim results;~~

~~failure~~our inability to obtain ~~or delays in obtaining, regulatory~~full approval of ARIKAYCE from the US Food and Drug Administration (FDA), ~~Japan’s Ministry~~including the risk that we will not successfully complete the confirmatory post-marketing study required for full approval;

inability of ~~Health, Labour and Welfare (MHLW) and Pharmaceuticals and Medical Devices Agency (PMDA),~~

us, PARI Pharma GmbH (PARI) or our other third-party manufacturers to comply with regulatory requirements related to ARIKAYCE or the ~~European Medicines Agency (EMA), and other regulatory authorities for our product candidates or their delivery devices, such as the eFlow~~Lamira Nebulizer System ~~including due~~(Lamira);

our inability to ~~insufficient clinical data, selection~~obtain adequate reimbursement from government or third-party payers for ARIKAYCE or acceptable prices for ARIKAYCE;

development of ~~endpoints that are not satisfactory to regulators, the outcome of the upcoming advisory committee meeting, extensions of action dates under the Prescription Drug User Fee Act (PDUFA),~~unexpected safety or ~~complexity in the review process for combination products;~~

imposition of significant post-approval regulatory requirements on our product candidates or failure to maintain regulatory approval for our product candidates, if received, due to a failure to satisfy post-approval regulatory requirements, such as the submission of sufficient data from confirmatory clinical studies;

~~safety and~~ efficacy concerns related to ARIKAYCE;

inaccuracies in our ~~product candidates;~~estimates of the size of the potential markets for ARIKAYCE or in data we have used to identify physicians, expected rates of patient uptake, duration of expected treatment, or expected patient adherence or discontinuation rates;

~~lack of experience in conducting and managing preclinical development activities and clinical trials necessary for regulatory approval, including the regulatory filing and review process;~~

~~uncertainties in the rate and degree of market acceptance of product candidates, if approved;~~

our inability to create an effective direct sales and marketing infrastructure or to partner with third parties that offer such an infrastructure for distribution of ARIKAYCE;

failure to obtain regulatory approval to expand ARIKAYCE’s indication to a broader patient population;

failure to successfully conduct future clinical trials for ARIKAYCE and our product candidates, ~~if approved;~~including due to our limited experience in conducting preclinical development activities and clinical trials necessary for regulatory approval and our inability to enroll or retain sufficient patients to complete the trials or generate data necessary for regulatory approval;

~~inaccuracies in~~risks that our ~~estimates of~~clinical studies will be delayed or that serious side effects will be identified during drug development;

failure to obtain regulatory approvals for ARIKAYCE outside the ~~size of the potential markets~~US or for our product candidates in the US, Europe, Japan or ~~limitations by regulators on the proposed treatment population for our product candidates;~~other markets;

failure of third parties on which we are dependent to manufacture sufficient quantities of ARIKAYCE or our product candidates for commercial or clinical needs, to conduct our clinical trials, ~~to manufacture sufficient quantities of our product candidates for clinical or commercial needs, including our raw materials suppliers,~~ or to comply with ~~our agreements or~~ laws and regulations that impact our ~~business;~~business or agreements with us;

~~inaccurate estimates regarding~~ our ~~future capital requirements,~~inability to attract and retain key personnel or to effectively manage our growth;

our inability to adapt to our highly competitive and changing environment;

our inability to adequately protect our intellectual property rights or prevent disclosure of our trade secrets and other proprietary information and costs associated with litigation or other proceedings related to such matters;

restrictions or other obligations imposed on us by agreements related to ARIKAYCE or our drug candidates, including ~~those necessary to fund~~ our ~~ongoing clinical development, regulatory~~license agreements with PARI and ~~commercialization efforts as well as milestone payments or royalties owed to third parties;~~

AstraZeneca AB (AstraZeneca), and failure to ~~develop,~~comply with our obligations under such agreements;

the cost and potential reputational damage resulting from litigation to which we are or ~~to license for development, additional~~may become a party, including product ~~candidates, including a failure to attract experienced third-party collaborators;~~liability claims;

~~uncertainties in the timing, scope and rate of reimbursement for our product candidates;~~limited experience operating internationally;

changes in laws and regulations applicable to our business and failure to comply with such laws and regulations;

inability to repay our existing indebtedness orand uncertainties with respect to ~~obtain~~our ability to access future capital; and

delays in the execution of plans to build out and move into the leased space at our new headquarters and to build out an additional ~~capital when needed on desirable terms or at all;~~

~~failure to obtain, protect~~third-party manufacturing facility and ~~enforce our patents and other intellectual property and costs~~unexpected expenses associated with ~~litigation or other proceedings related to such matters;~~those plans.

restrictions imposed on us by license agreements that are critical for our product development, including our license agreements with PARI Pharma GmbH (PARI) and AstraZeneca AB (AstraZeneca), and failure to comply with our obligations under such agreements;

~~competitive developments affecting our product candidates and potential exclusivity related thereto;~~

~~the cost and potential reputational damage resulting from litigation to which we are or may be a party;~~

~~loss of key personnel; and~~

~~lack of experience operating internationally.~~

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Any forward-looking statement is based on information current as of the date of this Quarterly Report on Form 10-Q and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results, plans, intentions or expectations anticipated in these forward-looking statements as a result of a variety of factors, many of which are beyond our control. More information on factors that could cause actual results to differ materially from

those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (SEC), including, but not limited to, those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018. We disclaim any obligation, except as specifically required by law, and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events,

conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

OVERVIEW

We are a global biopharmaceutical company ~~focused~~ on a mission to transform the ~~unmet needs~~lives of patients with serious and rare diseases. Our ~~lead~~first commercial product, ~~candidate is amikacin~~ARIKAYCE (amikacin liposome inhalation ~~suspension (ALIS)~~suspension), ~~which is~~received accelerated approval in ~~late-stage development~~the US on September 28, 2018 for the treatment of Mycobacterium avium complex (MAC) lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options in a refractory ~~nontuberculous mycobacteria (NTM)~~setting, as defined by patients who do not achieve negative sputum cultures after a minimum of 6 consecutive months of a multidrug background regimen therapy. MAC lung disease ~~caused by Mycobacterium avium complex (MAC),~~is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Our ~~earlier~~ clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1)~~, an enzyme responsible for activating neutrophil serine proteases, which are implicated~~ with therapeutic potential in ~~the pathology of chronic inflammatory lung diseases, such as~~ non-cystic fibrosis (non-CF) ~~bronchiectasis.~~bronchiectasis and other inflammatory diseases. INS1009 is an inhaled ~~nanoparticle~~ formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).

The table below summarizes the current status and anticipated milestones for ARIKAYCE and our ~~principal~~ product ~~candidates: ALIS,~~candidates INS1007 and INS1009.



Principal Product/Product ~~Candidate/Target~~ ~~Indications~~ Candidate	Status	Next Expected Milestones
~~ALIS~~ARIKAYCE for ~~NTM~~MAC lung ~~infections~~disease	• We ~~announced top-line data~~continue to focus on having a successful commercial launch of ARIKAYCE in the US for appropriate patients. We began commercial shipments of ARIKAYCE in October 2018. • In September 2018, the FDA granted accelerated approval of ARIKAYCE for the ~~CONVERT study in September 2017. The CONVERT study met its primary endpoint~~treatment of ~~culture conversion, which we defined~~refractory MAC lung disease as ~~three consecutive negative monthly sputum cultures by month six with statistical and clinical significance, with 29%~~part of a combination antibacterial drug regimen for adult patients ~~in the ALIS plus current guideline-based therapy (GBT) arm achieving culture conversion, compared to 9% of patients in the GBT-only arm (p<0.0001).~~ • We announced interim data from the CONVERT study and the 312 extension study in January 2018, which we view as consistent with the six-month results of the CONVERT study. The data included interim long-term durability data for the CONVERT study and interim efficacy data for the 312 study. • We filed a new drug application (NDA) for approval of ALIS with the FDA at the end of March 2018, and the FDA accepted the filing for priority review, pursuant to Section 506(c) of the Federal Food Drug and Cosmetic Act and 21 C.F.R. Part 314 Subpart H (Accelerated Approval of New Drugs for Seriouswho have limited or ~~Life-Threatening Illnesses) (Subpart H) based on the six-month data from the CONVERT study.~~ no alternative treatment options. • The FDA has designated ~~ALIS~~ARIKAYCE as an orphan drug ~~a breakthrough therapy,~~ and a ~~qualified~~qualified infectious disease product (QIDP), for nontuberculous mycobacterial (NTM) lung disease, and the European Commission has granted an orphan designation for ~~ALIS~~ARIKAYCE for the treatment of NTM lung disease.	• We ~~are preparing for an FDA advisory committee meeting to review data supporting our NDA for ALIS. The advisory committee meeting is scheduled for August 7, 2018.~~ ~~• The FDA set a PDUFA action date of September 28, 2018 for our NDA for ALIS for adult patients with NTM lung disease caused by MAC.~~ ~~• We also~~ intend to ~~seek marketing approvals~~submit regulatory filings for ~~ALIS outside~~ARIKAYCE in Europe in mid-2019 and Japan in the ~~US, such as in Japan and Europe, when sufficient data are available.~~first half of 2020. If approved, we expect ~~ALIS~~ARIKAYCE would be the first inhaled therapy specifically indicated for the treatment of ~~NTM~~MAC lung disease ~~caused by MAC~~ in ~~North America, Japan~~Europe and ~~Europe.~~ Japan. • If approved, we plan to commercialize ~~ALIS~~ARIKAYCE in ~~the US, Japan,~~ certain countries in Europe, Japan and certain other countries. • We intend to collaborate with the FDA on, and invest in, the post-approval confirmatory clinical trial required by the FDA to support full approval and intend to complete the design and protocol of the confirmatory study during the first half of 2019. We also intend to collaborate with the FDA on lifecycle management programs.
INS1007 (oral reversible inhibitor of DPP1) for non-CF bronchiectasis and other rare diseases	• We are enrolling patients in the WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel-group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. ~~• We are currently assessing regulatory strategies which could expedite the development and regulatory reviews of INS1007 in the US and the EU.~~	• We expect to ~~continue to advance~~complete enrollment in the WILLOW clinical study of INS1007 ~~during 2018.~~in mid-2019. • We are exploring the potential of INS1007 in various neutrophil-driven inflammatory ~~conditions.~~conditions, including treating granulomatosis with polyangiitis.
INS1009 (inhaled ~~nanoparticle~~ formulation of a treprostinil prodrug) for rare pulmonary disorders	• The results of our phase 1 study of INS1009 were presented at the European Respiratory Society international congress in September 2016.	• We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development including exploring its use as an inhaled dry powder formulation.

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

Our Strategy

Our strategy focuses on the needs of patients with rare diseases. We secured US regulatory approval of ARIKAYCE for the treatment of refractory MAC lung disease in patients with limited or no alternative treatment options. We are currently primarily focused on the ~~development and commercialization~~US commercial launch of ~~ALIS.~~ARIKAYCE. We are not aware of any other approved inhaled therapies specifically indicated to treat ~~NTM~~MAC lung disease in North America, ~~Japan~~Europe or ~~Europe. While we~~Japan. We believe that ~~ALIS~~ARIKAYCE has the potential to ~~treat a number of different bacterial infections, we are prioritizing securing US regulatory approval of ALIS for adult~~prove beneficial in other patients with ~~treatment refractory NTM lung disease caused by MAC.~~MAC, as well as in other infections. We are also advancing earlier-stage programs in other rare pulmonary disorders.

Our current priorities are as follows:

~~Completing~~Continue our efforts to ensure a successful US launch of ARIKAYCE;

Complete the ~~CONVERT study~~design and protocol of the ~~312 study;~~

~~Securing approval~~confirmatory clinical trial required for the ~~ALIS NDA from~~full US approval of ARIKAYCE by the FDA ~~under Subpart H, based on~~in patients with MAC during the first half of 2019;

Accelerate our global expansion efforts to support potential regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020;

Advance our pipeline, which is intended to bring additional therapies to market for patients with serious and rare diseases, including completing enrollment in the WILLOW study, our six-month ~~data from the CONVERT study;~~Phase 2 trial of INS1007 in patients with non-cystic fibrosis bronchiectasis, in mid-2019;

~~Ensuring~~Ensure our product supply chain will support the global commercialization ~~if approved,~~ and potential future ~~life cycle~~lifecycle management programs of ~~ALIS;~~ARIKAYCE;

~~Preparing for potential commercialization of ALIS in the US, Japan, certain countries in Europe, and certain other countries;~~

~~Developing~~Develop the core value dossier to support the ~~global~~ reimbursement for ARIKAYCE in the US, Europe and Japan;

Obtain determinations of ~~ALIS;~~coverage and reimbursement in the US for ARIKAYCE from governmental and other third-party payors;

~~Supporting~~Support further research and lifecycle management strategies for ~~ALIS,~~ARIKAYCE in the US, including exploring the potential use of ~~ALIS~~ARIKAYCE as part of a front-line, multi-drug regimen and as a maintenance ~~monotherapy~~therapy to prevent recurrence (defined as true relapse or reinfection) of ~~NTM~~MAC lung disease;

~~Enrolling patients in the WILLOW phase 2 study of INS1007 in non-CF bronchiectasis;~~

~~Exploring~~Explore INS1009 for use as an inhaled dry powder formulation and ~~generating~~generate preclinical findings from our earlier-stage programs; and

~~Expanding~~Expand our rare disease pipeline through corporate development.

~~Product Pipeline~~

~~ALIS~~ARIKAYCE for Patients with ~~NTM~~MAC Lung Disease

~~Our lead product candidate~~ARIKAYCE is ~~ALIS,~~our first approved product. ARIKAYCE received accelerated approval in the US on September 28, 2018 for the treatment of refractory MAC lung disease as part of a ~~novel, once-daily liposomal formulation of amikacin that is in late-stage clinical development~~combination antibacterial drug regimen for adult patients with limited or no alternative treatment ~~refractory NTM~~options. MAC lung disease ~~caused by MAC,~~is a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenous administration, our ~~advanced liposome~~proprietary Pulmovance™ technology uses charge-neutral liposomes to deliver amikacin directly to the ~~lung~~lungs where itliposomal amikacin is taken up by the lung macrophages where the ~~NTM~~MAC infection resides. This technology also prolongs the release of amikacin in the lungs, while minimizing systemic exposure, thereby offering the potential for decreased systemic toxicities. ~~ALIS’s~~ARIKAYCE's ability to deliver high levels of amikacin directly to the lung and sites of MAC infection via the use of our Pulmovance technology, distinguishes it from intravenous amikacin. ~~ALIS~~ARIKAYCE is administered once-daily, using ~~a portable aerosol delivery system, via~~Lamira®, an ~~optimized, investigational eFlow® Nebulizer System~~inhalation device developed and manufactured by PARI. Lamira is a portable nebulizer that enables aerosolization of liquid medications via a vibrating, perforated membrane, and was designed specifically for ARIKAYCE delivery.

The FDA has designated ~~ALIS~~ARIKAYCE as an orphan drug ~~a breakthrough therapy,~~ and a QIDP for NTM lung disease. Orphan designated drugs are eligible for seven years of exclusivity for the orphan indication. QIDP designation features an additional five years of exclusivity for the designated indication. ~~As a result, if ALIS is approved in the US, we expect the~~The FDA ~~to grant~~granted a total of 12 years of exclusivity in the indication for which ~~ALIS is~~ARIKAYCE was approved. ~~A QIDP-designated product is eligible~~

Accelerated Approval

In March 2018, we submitted a new drug application (NDA) for ~~fast track status~~ARIKAYCE to the FDA pursuant to Section 506(c) of the Federal Food Drug and ~~is often granted priority review status. A priority review designation~~Cosmetic Act and 21 C.F.R. Part 314 Subpart H (Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses) (Subpart H). Accelerated approval allows drugs that (i) are being developed to treat a ~~drug~~serious or life-threatening disease or condition and (ii) provide a meaningful therapeutic benefit over existing treatments to be approved substantially based on an intermediate endpoint or a surrogate endpoint that is ~~not~~reasonably likely to predict clinical benefit, rather than a ~~new molecular entity means~~clinical endpoint such as survival or irreversible morbidity. On September 28, 2018, the ~~FDA’s goal is to take action on~~FDA granted approval for ARIKAYCE under the ~~NDA within six months following receipt~~Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD) for the treatment of ~~the NDA. The FDA has granted our request for priority review~~refractory MAC lung disease as part of ~~the NDA for ALIS~~a combination antibacterial drug regimen for adult patients with ~~NTM lung disease caused by MAC~~limited or no alternative treatment options via the accelerated approval pathway. LPAD, which was enacted as part of the 21st Century Cures Act, serves to advance the development of new antibacterial drugs to treat serious or life-threatening infections in limited populations of patients with unmet needs. As required for drugs approved under the LPAD pathway, labeling for ARIKAYCE includes certain statements to convey that the drug has been shown to be safe and ~~set~~effective only for use in a ~~PDUFA action date~~limited population.

As a condition of ~~September 28, 2018.~~

accelerated approval, we must conduct a post-approval confirmatory clinical trial. The ~~CONVERT Study and 312 Study~~

~~CONVERT Efficacy Data~~

~~The CONVERT study~~required confirmatory trial, which is currently under discussion with FDA, is proposed to be a randomized, ~~open-label global phase 3~~double-blind, placebo-controlled clinical study of ALIS in adult patients with treatment refractory NTM lung disease caused by MAC. We announced top-line data for the CONVERT study in September 2017, and the full six-month data were reported at the American Thoracic Society 2018 International Conference in May 2018. The CONVERT study enrolled 336 adult patients with NTM lung disease caused by MAC who were refractorytrial to at least six months' treatment with a multi-drug, guideline-based therapy (GBT). After a screening period of up to 10 weeks, eligible patients were randomized 2:1 to once-daily ALIS plus GBT or GBT only. The primary endpoint of the study was the proportion of patients achieving culture conversion, which we defined as three consecutive monthly negative sputum cultures, by month six. The CONVERT study met its primary endpoint, with 29% of patients in the ALIS plus GBT arm achieving culture conversion, compared to 9% of patients in the GBT-only arm (p<0.0001).

We have also reported data for certain secondary and exploratory endpoints for the first six months of the study. Data for the six-minute walk test indicated no statistically significant difference between patients in the two arms of the study. However, an analysis of these data (per a pre-specified exploratory endpoint) showed that patients who achieved culture conversion in either arm demonstrated an improvement in six-minute walk distance when compared to patients who did not culture convert (p=0.0108). The patients who achieved culture conversion in either arm had an average improvement in six-minute walk distance of 16.83 meters from baseline to six months, and non-converters had an average decrease in six-minute walk distance of 7.88 meters from baseline to six months. The secondary endpoint of time to culture conversion was analyzed using a Cox regression model to estimate the treatment effect (hazard ratio) and the results of this analysis demonstrated a hazard ratio of 3.9, suggesting that patients receiving ALIS plus GBT were 290% more likely to convert than patients receiving GBT only (p<0.0001). However, the time to culture conversion is not statistically significant given its position in the hierarchical testing. We are continuing our analysis of the impact of conversion on a variety of other clinical measures.

The protocol for the CONVERT study incorporates feedback from the FDA and the EMA via its scientific advice working party process, as well as local health authorities in other countries, including the PMDA. Because the CONVERT study met the primary endpoint of culture conversion at month six, we submitted an NDA for ALIS to the FDA at the end of March 2018 pursuant to Subpart H, which permits the FDA to approve a product candidate based on a surrogate or intermediate endpoint subject to the requirement that we conduct post-approval studies to verifyassess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. The trial will evaluate the ~~product. The FDA has completed~~effect of ARIKAYCE on a clinically meaningful endpoint, as compared to an appropriate control, in the ~~filing review and determined that~~intended patient population of patients with MAC lung disease. Pursuant to the application is sufficiently complete to permit a substantive review. The FDA granted our request for a priority review and set a PDUFA action date of September 28, 2018. In addition, the Division of Antimicrobial Products oftimetable agreed upon with the FDA, the study protocol is ~~scheduled~~expected to ~~host an advisory committee meeting on August 7, 2018~~be finalized during the first half of 2019, with trial results to ~~review data supporting our NDA for ALIS. We expect that full NDA~~be reported by 2024. Continued approval ~~would~~of ARIKAYCE will be contingent ~~on FDA review~~upon verification and description of ~~among other things,~~clinical benefit in this study.

Clinical Trials

Accelerated approval of ARIKAYCE was supported by preliminary data from our CONVERT study, a global Phase 3 study evaluating the ~~final analyses~~safety and efficacy of ~~durability~~ARIKAYCE in adult patients with refractory MAC lung disease, using achievement of sputum culture conversion ~~for converters.~~

~~CONVERT Safety and Tolerability Data~~

~~Approximately 98% of patients in~~(defined as three consecutive negative monthly sputum cultures) by Month 6 as the ALIS plus GBT arm of the CONVERT study experienced at least one treatment-emergent adverse event (TEAE), compared to 91% of patients in the GBT-only arm, with most events being mild or moderate in severity. A greater percentage of patients in the ALIS plus GBT arm than in the GBT-only arm experienced TEAEs involving dysphonia, cough, haemoptysis, dyspnoea, oropharyngeal pain, diarrhea, nausea, and fatigue. Based on our review of the study safety data, the incidence of dysphonia, cough and dyspnoea among patients in the ALIS plus GBT arm generally decreased after the second study month. Approximately 20% and 18% of patients in the ALIS plus GBT arm and GBT-only arm of the study, respectively, experienced at least one serious treatment emergent adverse event (STEAE). The table below provides additional information regarding certain STEAEs experiencedprimary endpoint. Patients who achieved sputum culture conversion by ~~patients in the CONVERT study.~~



		~~2:1 Randomization~~
~~Patients Reporting STEAEs >3% in Either Arm~~		~~ALIS + GBT (n=223)~~	~~GBT (n=112)~~
~~Patients Reporting At Least One STEAE~~		~~20.2% (45)~~	~~17.9% (20)~~
~~System Organ Class~~	~~Preferred Term~~
~~Respiratory, Thoracic, Mediastinal Disorders~~		~~11.7% (26)~~	~~9.8% (11)~~
	~~Hemoptysis~~	~~2.7% (6)~~	~~4.5% (5)~~
	~~COPD (exacerbation)~~	~~3.1% (7)~~	~~0.9% (1)~~
~~Infections and Infestations~~		~~9.0% (20)~~	~~5.4% (6)~~
	~~Pneumonia~~	~~3.6% (8)~~	~~1.8% (2)~~
~~Cardiac Disorders~~		~~0.4% (1)~~	~~4.5% (5)~~
~~Patient Deaths~~		~~2.7% (6)~~	~~4.5% (5)~~

There were no distinctions between treatment arms for adverse events of hearing loss or renal impairment, side effects commonly associated with the intravenous use of amikacin. As of September 2017, the overall dropout rateMonth 6 continued in the CONVERT study ~~was 16.1%, with~~for an ~~8.9% dropout rate~~additional 12 months of treatment following the first monthly negative sputum culture in ~~the GBT-only arm and a 19.6% dropout rate in the ALIS plus GBT arm. As of December 2017, the overall dropout rate in the CONVERT study was 18% (n=60/336).~~

~~CONVERT Long-Term Durability Data~~

~~In January 2018, we announced interim data on~~order to assess the durability of culture conversion, as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three ~~months, which we expect will be the endpoint necessary to support full regulatory approval in the US. The following~~months. We previously reported interim durability data are interim results observed through December 2017, and have not been further analyzed. As of December 2017, of the 75 patients achieving culture conversion in the CONVERT study, 53 of these patients were evaluable for durability of culture conversion three months after the completion of treatment. Interim data for durability of culture conversion as of December 2017, ~~on these 53 patients are detailed below:~~



	~~Evaluable Number of Patients~~ as of December 2017 (At Least Three Months Post Treatment)*	~~Percent with Durable Culture~~ ~~Conversion Three Months~~ ~~After Completion~~ ~~of All Treatment~~
~~Converters in the ALIS + GBT arm (n=65)~~	46	in which 60.9% ~~(28/46)~~
~~Converters in the GBT‑only arm (n=10)~~	7	~~0.0% (0/7)~~

* Evaluable number of patients ~~includes all patients~~(28/46) who ~~reached~~had achieved the primary endpoint at Month 6 on ARIKAYCE plus guidelines-based therapy (GBT) remained culture negative three months ~~post-treatment and~~off all therapy, compared to 0.0% of patients (0/7) who ~~discontinued prior to~~had achieved the primary endpoint at Month 6 on GBT only. Final durability data for patients three months ~~post-treatment.~~

~~312 Study~~off all therapy were consistent with these interim data, and safety data for these patients were consistent with safety data previously reported for patients by Month 6 of the CONVERT study. The CONVERT study is ongoing.

~~All non-converters in the CONVERT study, as determined at the month eight visit,~~Patients who did not culture convert by Month 6 may behave been eligible to ~~enter the~~enroll in our 312 study, ~~which is a separate 12-month, single-arm,~~an open-label ~~study. The purpose of the 312~~extension study ~~is to further evaluate the safety and tolerability of long-term treatment with ALIS added to GBT. The secondary endpoints of the 312 study include evaluating the proportion of~~for these non-converting patients ~~achieving culture conversion (three consecutive monthly negative sputum cultures) by month six and the proportion of patients achieving culture conversion by month 12 (end of treatment).~~

~~312 Study Interim Efficacy Data~~

~~In January 2018, we also announced interim data for the 312 study, which enrolled 163 adult patients with NTM lung disease caused by MAC~~ who completed six months of treatment in the CONVERT study. The primary objective of the 312 study ~~but did not demonstrate~~was to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard multi-drug regimen. The secondary objectives of the 312 study included evaluating the proportion of subjects achieving culture conversion (defined in the same way as the CONVERT study) by Month 6 and the proportion of subjects achieving culture conversion by Month ~~6. The following data are~~12, which was the end of treatment. We previously reported interim results observed through December 2017, and have not been further analyzed. Patients in the ALIS plus GBT arm of the CONVERT study and patients in the GBT-only arm of the CONVERT study who did not achieve culture conversion by Month 6 had the option to enroll in the 312 study at Month 8. Under the study protocol, non-converting patients from both arms of the CONVERT study will receive 12 months of ALIS plus GBT in the 312 study. We will also use the data from this trial to further assess the impact of the addition of ALIS to background GBT on sputum culture conversion, by Month 6.

~~As of December 2017, of the 163 patients enrolled in the 312 study, 124 patients were evaluable for culture conversion. Descriptive interim culture conversion~~ data as of December 2017 for ~~these 124~~ patients ~~are detailed below. The interim culture conversion data has not been statistically analyzed.~~



	Number of Patients Completing Six Months of Treatment in the 312 study as of December 2017 **	~~Percent Achieving Sputum~~ ~~Culture Conversion by~~ ~~Month 6 in the 312 study~~
~~Patients who received GBT only in the 212 study and crossed over to receive six months of treatment with ALIS + GBT (n=90)~~	67	~~28.4% (19/67)~~
~~Patients who received ALIS + GBT in the 212 study and crossed over to continue treatment in the 312 study, to receive a combined total of 14 months of ALIS + GBT treatment in both studies (n=73)~~	57	~~12.3% (7/57)~~

** Includes all patients completing six months of treatment, all patients who discontinued prior to six months and all ongoing patients prior to six months who completed two months of treatment.

~~312 Study Interim Safety and Tolerability Data~~

We have not yet performed a final analysis of any safety data for the 312 study. However, based on an interim review of the data above, we believe that STEAEs were similar to the STEAEs we reported as part of our full six-month data results for the 212 study. As of December 2017, the overall dropout rate in the 312 study, ~~was 24% (n=39/163).~~with 28.4% of patients who received GBT only in the CONVERT study (19/67) and 12.3% of patients who had received ARIKAYCE plus GBT in the CONVERT study (7/57) achieving culture conversion by Month 6 of the 312 study. The 312 study has concluded. Final efficacy data regarding culture conversion were consistent with these interim data. We are continuing to analyze the safety and efficacy data from the 312 study, but we have not identified any new safety signals.

Further Research and Lifecycle Management ~~for ALIS~~

We are currently exploring and supporting research and lifecycle management programs for ~~ALIS~~ARIKAYCE in the US beyond treatment of refractory ~~NTM~~MAC lung ~~infections caused by MAC.~~disease as part of a combination antibacterial regimen for adult patients who have

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

Subsequent lifecycle management studies could also potentially enable us to reach more patients. For instance, the use of ~~ALIS~~ARIKAYCE to treat infections caused by non-MAC NTM species, such as M. abscessus,. If the data from the CONVERT study are sufficient to support our marketing authorization applications (MAAs) and regulatory bodies approve ALIS, such lifecycle management studies could enable us to reach more potential patients. is being evaluated. These initiatives include investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding from us, and may also include new clinical studies sponsored by us.

~~Market Opportunity for ALIS in NTM Lung Disease in 2018~~Product Pipeline

NTM lung disease is associated with increased rates of morbidity and mortality, and MAC is the predominant pathogenic species in NTM lung disease in the US, Japan and Europe. The prevalence of NTM lung disease has increased over the past two decades, and we believe it is an emerging public health concern worldwide. Based on currently available information from external sources, including market research funded by us and third parties, and internal analyses and calculations, we estimate potential patient populations in the US, Japan and EU5 (comprised of France, Germany, Italy, Spain and the United Kingdom) for 2018 as follows:

Potential Market Estimated Number of Patients with Diagnosed NTM Lung Disease Estimated Number of Patients Treated for NTM Lung Disease Caused by MAC Estimated Number of Patients Refractory to Treatment
United States 75,000-105,000 40,000-50,000 10,000-15,000
Japan 125,000-145,000 60,000-70,000 15,000-18,000
EU5 14,000 4,400 1,400

We are not aware of any approved inhaled therapies specifically indicated for NTM lung disease in North America, Japan or Europe. Current guideline-based approaches for NTM lung disease, including those from the American Thoracic Society and Infectious Diseases Society of America, involve multi-drug regimens not approved for the treatment of NTM lung disease and treatment that could last two years or more. Based on a burden of illness study that we conducted in the US with a major medical benefits provider, we previously concluded that patients with NTM lung disease are costly to healthcare plans, while a recent claims-based study in the US has shown that patients with NTM lung disease have higher resource utilization and costs than their age and gender-matched controls. Accordingly, we believe that a significant market opportunity for ALIS in NTM lung disease exists in the US and internationally.

We are currently exploring the NTM market opportunity for ALIS in Japan. The CONVERT study included a comprehensive pharmacokinetic sub-study in Japanese subjects in lieu of a separate local pharmacokinetic study in Japan, as agreed with the PDMA. If the data from the CONVERT study are sufficient to support our MAAs, we expect to submit regulatory filings in Japan and Europe. We have established a Japanese subsidiary and began hiring local employees in 2018, including a general manager, to closely manage our regulatory and pre-commercial activities.

INS1007

INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October 2016. DPP1 is an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the neutrophil serine proteases (including neutrophil elastase, proteinase 3, and cathepsin G) that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases. Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis.We are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions, including treating granulomatosis with polyangiitis.

The WILLOW Study

The WILLOW study is a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. We commenced enrollment in the WILLOW study in December ~~2017.~~2017, which we expect to complete in mid-2019. In addition, we are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.

~~Phase 1 Study Results~~

In a phase 1 study of healthy volunteers conducted by AstraZeneca, INS1007 (previously AZD7986) was well tolerated and demonstrated inhibition of the activity of the neutrophil serine protease neutrophil elastase in a dose and concentration dependent manner. In preclinical studies, it was shown to reversibly inhibit DPP1 and the activation of neutrophil serine proteases within maturing neutrophils.

INS1009

INS1009 is an investigational ~~sustained-release~~ inhaled treprostinil prodrug ~~nanoparticle~~ formulation that has the potential to address certain of the current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaled dry powder formulation.

~~Phase 1 Study Results~~

In late 2014, we had a pre-IND meeting with the FDA for INS1009 and clarified that, subject to final review of the preclinical data, INS1009 could be eligible for an approval pathway under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (FDCA) (505(b)(2) approval). Like a traditional NDA that is submitted under Section 505(b)(1) of the FDCA, a

505(b)(2) NDA must establish that the drug is safe and effective, but unlike a traditional NDA, the applicant may rely at least in part on studies not conducted by or for the applicant and for which the applicant does not have a right of reference. The ability to rely on existing third-party data to support safety and/or effectiveness can reduce the time and cost associated with the NDA process.

We have completed a phase 1 study of INS1009. The phase 1 study was a randomized, double-blind, placebo-controlled single ascending dose study of INS1009 for inhalation to determine its safety, tolerability, and pharmacokinetics in healthy volunteers. Twenty-four (24) patients were enrolled and received INS1009 with cohorts of eight patients receiving doses of 85 micrograms (mcg), 170 mcg, 340 mcg or placebo. Participants in the first cohort (8 patients) received a single dose of open label treprostinil (Tyvaso®) at 54 mcg 24 hours prior to receiving INS1009 at 85 mcg. The 85 mcg dose of INS1009 provides an equivalent amount of treprostinil on a molar basis as the 54 mcg dose of Tyvaso. The peak treprostinil serum concentration was approximately 90% lower after INS1009 administration compared with Tyvaso, which could indicate a reduced future adverse event (AE) profile. The pharmacokinetic characteristics also supported once- or twice-daily dosing. The longer half-life of treprostinil for INS1009 was likely due to a sustained pulmonary release. The AE profile was consistent with other inhaled prostanoids. These data were presented at the European Respiratory Society international congress in September 2016.

KEY COMPONENTS OF OUR ~~STATEMENT~~RESULTS OF OPERATIONS

Revenues

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

Cost of Product Revenues (excluding amortization of intangible assets)

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

Research and Development (R&D) Expenses

R&D expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs. Expenses also include other internal operating expenses, the cost of manufacturing our drug candidate(s) for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, our R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as for ~~ALIS and~~ INS1007. Our expenses related to manufacturing our drug candidate(s) for clinical ~~studies and commercial inventory prior to regulatory approvals~~study are primarily related to activities at contract manufacturing organizations (CMOs) that manufacture our product candidates for our use, including purchases of active pharmaceutical ingredients. ~~R&D expenses also include spending to build-out the CMO facilities to prepare for our future global production requirements.~~ Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf.

Since 2011, we have focused our development activities principally on our proprietary, advanced liposomal technology designed specifically for inhaled therapies. Our development efforts since 2015 have principally related to the development of ALIS in the NTM lung disease indication described above.

Selling, General and Administrative (SG&A) Expenses

~~General and administrative~~SG&A expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our non-employee directors and personnel serving in our executive, finance and accounting, legal and compliance, commercial and pre-commercial, corporate development, field sales, information technology, program management and human resource functions. ~~General and administrative~~SG&A expenses also include professional fees for legal services, ~~and patent-related expenses,~~ consulting services, including ~~for~~ pre-commercial planning activities such as ~~non-branded~~ disease awareness, insurance, board of director fees, tax and accounting services.

Amortization of Intangible Assets

Upon commercialization of ARIKAYCE, our intangible assets began to be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on estimates and assumptions we believe are reasonable based on available facts and circumstances. Unanticipated events or circumstances may occur that require us to review the assets for impairment.

Investment Income and Interest Expense

Investment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense consists primarily of the accretion of debt discount, contractual interest ~~expense,~~costs and the amortization of debt issuance costs ~~and~~related to our accretion of debt. Debt discount is accreted, and debt ~~discount. Debt~~ issuance costs are amortized, ~~and the debt discount is accreted~~ to interest expense using the effective interest rate method over the term of the debt. Our balance sheet reflects debt, net of the debt discount, debt issuance costs paid to the lender, and other third-party costs. Unamortized debt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~

~~Net Loss~~Overview - Operating Results

~~Net loss~~Our operating results for the quarter ended ~~June 30, 2018 was $76.4~~March 31, 2019, included the following:

Total revenues from sales of ARIKAYCE of $21.9 million ~~or $1.00 per share—basic and diluted, compared with a net loss of $44.7 million, or $0.72 per share—basic and diluted, for~~during the quarter ended ~~June 30, 2017. The $31.8~~March 31, 2019;

Cost of product revenues (excluding amortization of intangibles) of $4.2 million ~~increase in our net loss for~~during the quarter ended ~~June 30, 2018~~March 31, 2019 related to sales of ARIKAYCE;

Increased R&D expenses of $1.1 million as compared to the same period in ~~2017 was primarily due to:~~

~~Increased R&D expenses of $8.9 million,~~the prior year primarily resulting from an increase in ~~external manufacturing expenses and higher~~ compensation and related expenses due to an increase in headcount; ~~and~~

Increased ~~general and administrative~~SG&A expenses of ~~$20.5~~$22.2 million as compared to the same period in the prior year resulting from higher compensation and related expenses due to an increase in headcount, and an increase in ~~consulting fees relating~~commercial activities related to ~~pre-commercial planning activities.~~ARIKAYCE;

Amortization of intangible assets of $1.2 million during the quarter ended March 31, 2019; and

~~In addition, there was a $5.0 million increase in~~

Increased interest expense ~~resulting from~~of $1.1 million as compared to the ~~issuance of~~same period in the prior year related to interest on the $450.0 million aggregate principal amount of 1.75% convertible senior notes due 2025 (the Convertible Notes).

Revenues

Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA on September 28, 2018 and launched in ~~connection with~~ the ~~public offering~~US in October 2018. The following table summarizes the sources of revenue for the three months ended March 31, 2019 (in thousands):



	For the Three Months Ended March 31, 2019
Net product revenues, US	$	20,983
Net product revenues, EAPs	919
Total revenues	$	21,902

Cost of Product Revenues (excluding amortization of intangibles)

Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, production-related overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI. We began capitalizing inventory upon FDA approval of ARIKAYCE. Cost of product revenues (excluding amortization of intangible assets) was $4.2 million during the quarter ended March 31, 2019.

All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. As mentioned above, our cost of product revenues includes certain expenses which are fixed, other expenses that ~~occurred~~were incurred after FDA approval and royalties based on net sales. We expect our cost of product revenues (excluding amortization of intangible assets) to continue to be positively impacted during 2019, as we sell through certain inventory that was expensed prior to FDA approval of ARIKAYCE in ~~January~~September 2018.

R&D Expenses

R&D expenses for the quarters ended ~~June 30,~~March 31, 2019 and March 31, 2018 ~~and 2017~~ were comprised of the following ~~components~~ (in thousands):


	Quarters Ended June 30,				Increase (decrease)					Quarters Ended March 31,				Increase (decrease)
	2018		2017		$			%		2019		2018		$			%
External Expenses
Clinical development & research	$	6,920	$	9,845	$	(2,925	)	(29.7	)%	$	10,529	$	7,818	$	2,711		34.7	%
Manufacturing	10,946		4,862		6,084			125.1	%	556		7,934		(7,378		)	(93.0	)%
Regulatory and quality assurance	3,529		2,525		1,004			39.8	%
Regulatory, quality assurance, and medical affairs										1,792		1,630		162			9.9	%
Subtotal—external expenses	$	21,395	$	17,232	$	4,163		24.2	%	$	12,877	$	17,382	$	(4,505	)	(25.9	)%
Internal Expenses
Compensation and related expenses	$	11,593	$	8,047	$	3,546		44.1	%
Compensation and benefit related expenses										$	12,757	$	7,953	$	4,804		60.4	%
Stock-based compensation										2,191		1,930		261			13.5	%
Other internal operating expenses	2,734		1,592		1,142			71.7	%	3,378		2,833		545			19.2	%
Subtotal—internal expenses	$	14,327	$	9,639	$	4,688		48.6	%	$	18,326	$	12,716	$	5,610		44.1	%
Total	$	35,722	$	26,871	$	8,851		32.9	%	$	31,203	$	30,098	$	1,105		3.7	%

R&D expenses increased to ~~$35.7~~$31.2 million during the quarter ended ~~June 30, 2018~~March 31, 2019 from ~~$26.9~~$30.1 million in the same period in ~~2017.~~2018. The ~~$8.9~~$1.1 million increase was primarily due to an increase of $6.1 million in external manufacturing expenses, specifically related to purchases of ALIS raw materials, CMO expenses related to ALIS commercial inventory production, and construction costs relating to the build-out of a ~~third party CMO production facility. In addition, there was a $3.5~~$4.8 million increase in compensation and related expenses due to an increase in headcount and an increase of $2.7 million primarily due to increases in expenses related to the phase 2 WILLOW trial for INS1007. These increases were offset by a decrease of $7.4 million in external manufacturing expenses, (i) as raw materials purchased and CMO costs during the quarter ended ~~June 30, 2018~~March 31, 2019 were recorded as ~~compared~~inventory, and (ii)

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

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

SG&A Expenses

~~General and administrative~~SG&A expenses for the ~~quarter~~quarters ended ~~June 30,~~March 31, 2019 and March 31, 2018 ~~and 2017~~ were comprised of the following (in thousands):

Quarters Ended June 30, Increase (decrease)
2018 2017 $ %
General & administrative $ 13,455
$ 9,355
$ 4,100
43.8 %
Pre-commercial expenses 23,705
7,289
16,416
225.2 %
Total general & administrative expenses $ 37,160
$ 16,644
$ 20,516
123.3 %



	Quarters Ended March 31,				Increase (decrease)
	2019		2018		$		%
Compensation and benefit related expenses	$	19,536	$	11,708	$	7,828	66.9	%
Stock-based compensation	4,745		3,744		1,001		26.7	%
Professional fees and other external expenses	21,591		12,929		8,662		67.0	%
Facility related and other internal expenses	8,938		4,272		4,666		109.2	%
Total SG&A expenses	$	54,810	$	32,653	$	22,157	67.9	%

~~General and administrative~~SG&A expenses increased to ~~$37.2~~$54.8 million during the quarter ended ~~June 30, 2018~~March 31, 2019 from ~~$16.6~~$32.7 million in the same period in ~~2017.~~2018. The ~~$20.5~~$22.2 million increase was primarily due to ~~$10.5~~$7.8 million in higher compensation and related expenses due to an increase in headcount, including the hiring of our field force, and ~~$7.5~~$8.7 million in ~~consulting fees~~

~~relating~~commercial expenses related to ~~pre-commercial planning activities in preparation for the post-approval launch of ALIS,~~ARIKAYCE, including ~~non-branded~~ disease awareness, patient support ~~planning,~~activities, field operations and other professional fees. ~~In addition, there~~

Amortization of Intangible Assets

Amortization of intangible assets for the quarter ended March 31, 2019 was ~~an increase of~~ $1.2 million ~~related~~and is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestone paid to ~~patient services software licenses and fees, and ongoing training costs~~PARI for the ~~field force hired during the first quarter~~FDA approval of ~~2018.~~

ARIKAYCE.

Interest Expense

Interest expense was ~~$6.5~~$6.7 million for the quarter ended ~~June 30, 2018~~March 31, 2019 as compared to ~~$1.5~~$5.6 million in the same period in ~~2017.~~2018. The ~~$5.0~~$1.1 million increase in interest expense in the quarter ended ~~June 30, 2018~~March 31, 2019 as compared to the prior year period relates to interest on the ~~issuance of~~ $450.0 million aggregate principal amount of the Convertible Notes issued in late January 2018. The interest expense on the Convertible Notes is based on an effective interest rate of 7.6%.

~~Comparison of the Six Months Ended June 30, 2018 and 2017~~

~~Net Loss~~

Net loss for the six months ended June 30, 2018 was $145.0 million, or $1.89 per share—basic and diluted, compared with a net loss of $82.1 million, or $1.32 per share—basic and diluted, for the six months ended June 30, 2017. The $62.9 million increase in our net loss for the quarter ended June 30, 2018 as compared to the same period in 2017 was primarily due to:

~~Increased R&D expenses of $16.7 million, primarily resulting from an increase in external manufacturing expenses and higher compensation and related expenses due to an increase in headcount; and~~

Increased general and administrative expenses of $39.5 million, resulting from higher compensation and related expenses due to an increase in headcount, and an increase in consulting fees relating to pre-commercial planning activities for ALIS.

In addition, there was a $9.2 million increase in interest expense resulting from the issuance of $450.0 million aggregate principal amount of the Convertible Notes in connection with the public offering in January 2018.

~~R&D Expenses~~

~~R&D expenses for the quarters ended June 30, 2018 and 2017 were comprised of the following components (in thousands):~~

Six Months Ended June 30, Increase (decrease)
2018 2017 $ %
External Expenses

Clinical development & research $ 14,738
$ 18,320
$ (3,582 ) (19.6 )%
Manufacturing 18,880
7,606
11,274
148.2 %
Regulatory and quality assurance 5,159
3,493
1,666
47.7 %
Subtotal—external expenses $ 38,777
$ 29,419
$ 9,358
31.8 %
Internal Expenses

Compensation and related expenses $ 21,476
$ 15,698
$ 5,778
36.8 %
Other internal operating expenses 5,567
4,008
1,559
38.9 %
Subtotal—internal expenses $ 27,043
$ 19,706
$ 7,337
37.2 %
Total $ 65,820
$ 49,125
$ 16,695
34.0 %

R&D expenses increased to $65.8 million during the six months ended June 30, 2018 from $49.1 million in the same period in 2017. The $16.7 million increase was primarily due to an increase of $11.3 million in external manufacturing expenses, specifically related to purchases of ALIS raw materials, CMO expenses related to ALIS commercial inventory production, and construction costs relating to the build-out of a third party CMO production facility. In addition, there was a $5.8 million increase in compensation and related expenses due to an increase in headcount in the six months ended June 30, 2018 as compared to the prior year period.

~~General and Administrative Expenses~~

~~General and administrative expenses for the six months ended June 30, 2018 and 2017 were comprised of the following (in thousands):~~

Six Months Ended June 30, Increase (decrease)
2018 2017 $ %
General & administrative $ 26,974
$ 18,009
$ 8,965
49.8 %
Pre-commercial expenses 42,839
12,350
30,489
246.9 %
Total general & administrative expenses $ 69,813
$ 30,359
$ 39,454
130.0 %

General and administrative expenses increased to $69.8 million during the six months ended June 30, 2018 from $30.4 million in the same period in 2017. The $39.5 million increase was primarily due to $19.4 million in higher compensation and related expenses due to an increase in headcount, including the hiring of our field force, and $15.1 million in consulting fees relating to pre-commercial planning activities in preparation for the post-approval launch of ALIS, including non-branded disease awareness, patient support planning, field operations and other professional fees. In addition, there was an increase of $2.7 million related to patient services software licenses and fees, and ongoing training costs for the field force hired in the first quarter of 2018.

~~Interest Expense~~

Interest expense was $12.1 million for the six months ended June 30, 2018 as compared to $3.0 million in the same period in 2017. The $9.2 million increase in interest expense in the six months ended June 30, 2018 as compared to the prior year period relates to the issuance of $450.0 million aggregate principal amount of Convertible Notes in January 2018. The interest expense on the Convertible Notes is based on an effective interest rate of 7.6%.

LIQUIDITY AND CAPITAL RESOURCES

Overview

There is considerable time and cost associated with developing a potential pharmaceutical product to the point of regulatory approval and commercialization. In recent years, we have funded our operations through public offerings of equity securities and debt financings. We commenced commercial shipments of ARIKAYCE beginning in October 2018. We expect to continue to incur operating losses both in our US and certain international entities, as we plan to fund ~~research~~R&D for ARIKAYCE and ~~development~~our other pipeline programs, continue commercial launch activities for ARIKAYCE in the US, continue to invest in pre-commercial and ~~commercial launch~~regulatory activities for ARIKAYCE in Europe and Japan, and other general and administrative activities.

In January 2018, we completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were $435.8 million.

In September 2017, we completed an underwritten public offering of 14,123,150 shares of our common stock, which included the underwriter’s exercise in full of its over-allotment option of 1,842,150 shares, at a price to the public of $28.50 per share. Our net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses of $24.8 million, were $377.7 million.

We may need to raise additional capital to fund our operations, including continued commercialization of ARIKAYCE and future clinical trials related to ~~develop and commercialize ALIS if approved,~~ARIKAYCE, to develop INS1007 and INS1009, and to develop, acquire, in-license or ~~co-promote~~co-

promote other products that address orphan or rare diseases. We believe we currently have sufficient funds to meet our financial needs for at least the next 12 months. We ~~may~~expect to opportunistically raise additional capital and may do so through equity or debt financing(s), strategic transactions or otherwise. We expect such additional funding, if any, would be used to continue to commercialize ARIKAYCE, to conduct further trials of ARIKAYCE, to develop our ~~potential~~ product candidates, or to pursue the license or purchase of other technologies ~~to commercialize our~~or products and product ~~candidates or to purchase other products.~~candidates. During ~~2018,~~2019, we plan to support the ongoing commercial launch of ARIKAYCE in the US, to continue to fund further clinical development of ~~ALIS~~ARIKAYCE and INS1007, and support efforts to obtain regulatory approvals ~~and prepare~~ for ~~commercialization of ALIS.~~ARIKAYCE outside the US. Our cash requirements ~~in 2018~~for 2019 will be impacted by a number of factors, the most significant of which are expenses related to the ~~CONVERT and 312 studies and pre-commercialization~~commercialization efforts for ~~ALIS,~~ARIKAYCE, expenses related to the WILLOW trial for INS1007, and to a lesser extent, ~~expenses related to INS1007 and~~ future ~~ALIS~~ARIKAYCE clinical trials. ~~We expect our operating expenses to continue to significantly increase in 2018 as compared to 2017.~~

Cash Flows

As of ~~June 30, 2018,~~March 31, 2019, we had cash and cash equivalents of ~~$634.3~~$420.2 million, as compared with ~~$381.2~~$495.1 million as of December 31, ~~2017.~~2018. The ~~$253.2~~$74.8 million ~~increase~~decrease was due ~~primarily~~ to ~~the net cash proceeds from our issuance of Convertible Notes in January 2018, partially offset by~~ cash used in operating activities and, to a lesser extent, cash used in investing activities. Our working capital was ~~$599.6~~$360.4 million as of ~~June 30, 2018~~March 31, 2019 as compared with ~~$344.8~~$439.2 million as of December 31, ~~2017.~~2018.

Net cash used in operating activities was ~~$123.0~~$73.8 million and ~~$73.2~~$67.4 million for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The net cash used in operating activities during the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ was primarily for the commercial, pre-commercial (in 2018), clinical and manufacturing activities related to ~~ALIS,~~ARIKAYCE, as well as ~~general and administrative~~SG&A expenses. In addition, net cash used in operating activities during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 included clinical trial expenses related to INS1007.

Net cash used in investing activities was ~~$8.2~~$4.0 million and ~~$0.9~~$5.4 million for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The net cash used in investing activities induring the three months ended March 31, 2019 and 2018 was primarily related to the purchase of fixed assets for our long-term production capacity build-out at ~~one of~~Patheon. We expect our ~~CMOs. The net~~ cash used in investing activities ~~in 2017 related~~ to ~~payments~~increase for the year ended December 31, 2019 due primarily to our investments in the build-out of our ~~lab facility in Bridgewater, New Jersey.~~new corporate headquarters and our long-term production capacity build-out at Patheon.

Net cash provided by financing activities was ~~$384.3~~$3.0 million and ~~$2.4~~$378.2 million for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. Net cash provided by financing activities for the ~~six~~three months ended ~~June 30,~~March 31, 2019 was primarily due to cash proceeds from stock option exercises and participation in our employee stock purchase program. Net cash provided by financing activities for the three months ended March 31, 2018 included net cash proceeds of $435.8 million from our issuance of Convertible Notes in January 2018, ~~and cash proceeds from stock option exercises,~~ partially offset by the February 2018 pay-off of our outstanding debt to Hercules Capital ~~(Hercules)~~ in the amount of $55.0 million. ~~Net cash provided by financing activities for the six months ended June 30, 2017 was cash proceeds from stock option exercises.~~

Contractual Obligations

There were no material changes outside of the ordinary course of business in our contractual obligations during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, ~~2017, except for the following:~~2018.

In January 2018, we completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes pursuant to an indenture between the Company and Wells Fargo Bank, National Association, as trustee. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased. The Convertible Notes are convertible into common stock of the Company under certain circumstances described in the indenture. See ~~Note 5 - Debt~~ ~~of our consolidated financial statements for more information.~~

In February 2018, we used part of the net proceeds from the issuance of the Convertible Notes to pay off the outstanding debt owed to Hercules. The payments consisted of $55.0 million for the principal amount and an additional $3.2 million in back-end fees, outstanding interest, and prepayment penalties. As a result, we incurred a $2.2 million loss on the extinguishment of debt in the quarter ended March 31, 2018.

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

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. For the required interim disclosure updates related to our accounting policies, see

Note 2 to our consolidated financial statements — Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~June 30, 2018,~~March 31, 2019, our cash and cash equivalents were in cash accounts ~~or were invested in US treasury bills~~ and money market funds. ~~Money~~Our investments in money market ~~accounts~~funds are not insured by the federal government.

As of ~~June 30, 2018,~~March 31, 2019, we had $450.0 million of Convertible Notes outstanding which bear interest at a coupon rate of 1.75%. If a 10% change in interest rates had occurred on ~~June 30, 2018,~~March 31, 2019, it would not have had a material effect on the fair value of our debt as of that date, nor would it have had a material effect on our future earnings or cash flows.

The majority of our business is conducted in US dollars. However, we do conduct certain transactions in other currencies, including Euros, British Pounds, and Japanese Yen. Historically, fluctuations in foreign currency exchange rates have not materially affected our results of operations and during the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ our results of operations were not materially affected by fluctuations in foreign currency exchange rates.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our ~~principal executive officer~~Chief Executive Officer and ~~principal financial officer,~~Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~June 30, 2018.~~March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the ~~periodic~~ reports that we file or submit with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation as of ~~June 30, 2018,~~March 31, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures ~~are~~were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

~~There were no~~During the three months ended March 31, 2019, we implemented processes and internal controls related to the January 1, 2019 adoption of ASU 2016-02. The implementation of these processes resulted in material changes into our internal control over financial ~~reporting (as defined in Rule 13a-15(f) and 15d-15(f) under~~reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the ~~Exchange Act) during the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our~~effectiveness of internal control over financial ~~reporting.~~reporting for the fiscal year ended December 31, 2019.

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 1A.RISK FACTORS

There have been no material changes during the quarter ended ~~June 30, 2018~~March 31, 2019 to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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

There were no unregistered sales of the Company’s equity securities by the Company during the quarter ended ~~June 30, 2018.~~March 31, 2019.

ITEM 6.EXHIBITS

Exhibit Index



3.1		Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012 (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Annual Report on Form 10-K filed on March 18, 2013).

3.2		Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Quarterly Report on Form 10-Q filed on August 6, 2015).

10.1		Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2017 Incentive Plan.

10.2		First Amendment to Lease, dated October 1, 2016, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated

10.3		Second Amendment to Lease, dated October 17, 2018, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated

31.1		Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2		Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1		Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2		Certification of Paolo Tombesi, Chief Financial Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

101		The following materials from Insmed Incorporated’s quarterly report on Form 10-Q for the quarter ended ~~June 30, 2018~~March 31, 2019 formatted in ~~XBRL (eXtensible~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, (ii) Consolidated Statements of Comprehensive Loss for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ (iii) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ and (iv) Notes to the Unaudited Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		INSMED INCORPORATED


Date: ~~August 2, 2018~~May 7, 2019	By	/s/ Paolo Tombesi
		Paolo Tombesi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

3129



	As of June 30, 2018
	Carrying Value			Fair Value
	(in millions)
Level 1
Cash and cash equivalents	$	634.3		$	634.3
Level 2
Convertible Notes ($450.0 face value)	$	307.2	*	$	411.1



	As of June 30,
	2018	2017
Stock options to purchase common stock	9,578	8,621
Unvested RSUs	236	47
Convertible debt securities	11,492	—



	As of June 30, 2018		As of December 31, 2017
	(in thousands)
Accrued clinical trial expenses	$	5,772	$	7,837
Accrued compensation	7,371		12,197
Accrued professional fees	6,743		4,500
Accrued technical operation expenses	3,324		2,182
Accrued interest payable	3,391		423
Accrued construction costs	1,336		1,719
Other accrued expenses	1,109		481
	$	29,046	$	29,339



Balance at December 31, 2017	$	361,059
Net loss for the period	(144,961		)
Proceeds from exercise of stock options	5,785
Equity component of Convertible Notes	136,434
Stock-based compensation expense	12,303
Change in cumulative translation adjustment	21
Balance at June 30, 2018	$	370,641



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2017	8,608,921		$	14.08
Granted	1,430,200		$	29.22
Exercised	(381,366	)	$	15.17
Forfeited or expired	(79,930	)	$	17.30
Options outstanding at June 30, 2018	9,577,825		$	16.27	7.27	$	79,204
Vested and expected to vest at June 30, 2018	8,598,142		$	15.75	7.10	$	74,151
Exercisable at June 30, 2018	4,905,928		$	13.16	6.15	$	51,474



Outstanding as of June 30, 2018								Exercisable as of June 30, 2018
Range of Exercise Prices ($)				Number of Options	Weighted Average Remaining Contractual Term (in years)	Weighted Average Exercise Price ($)		Number of Options	Weighted Average Exercise Price ($)
$	3.03	$	4.55	960,038	4.13	$	3.60	960,038	$	3.60
$	6.90	$	6.90	127,903	4.64	$	6.90	90,403	$	6.90
$	6.96	$	10.85	998,827	7.81	$	10.77	481,411	$	10.68
$	11.14	$	12.58	1,035,336	5.59	$	12.16	795,493	$	12.17
$	12.66	$	13.67	1,007,519	8.14	$	13.60	317,446	$	13.53
$	13.94	$	16.07	1,139,846	7.07	$	15.26	711,531	$	15.11
$	16.09	$	17.16	1,458,791	8.17	$	16.70	523,127	$	16.53
$	17.24	$	22.76	1,318,770	6.72	$	21.23	992,480	$	21.32
$	22.84	$	28.51	381,245	9.31	$	25.00	33,999	$	23.72
$	30.46	$	32.46	1,149,550	9.42	$	30.58	—	$	—



	Number of RSUs		Weighted Average Grant Price ($)
Outstanding at December 31, 2017	46,914		$	17.16
Granted	236,077		29.79
Released	(46,914	)	17.16
Forfeited	(262	)	30.46
Outstanding at June 30, 2018	235,815		$	29.79



Year Ending December 31:
2018 (remaining)	$	768
2019	1,421
2020	477
2021	498
2022	—
2023	—
	$	3,164



Potential Market	Estimated Number of Patients with Diagnosed NTM Lung Disease	Estimated Number of Patients Treated for NTM Lung Disease Caused by MAC	Estimated Number of Patients Refractory to Treatment
United States	75,000-105,000	40,000-50,000	10,000-15,000
Japan	125,000-145,000	60,000-70,000	15,000-18,000
EU5	14,000	4,400	1,400