UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2019
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission File Number 000-30739
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia54-1972729
(State or other jurisdiction of incorporation or organization)(I.R.S. employer identification no.)
10 Finderne Avenue, Building 10
Bridgewater, New Jersey08807
(Address of principal executive offices)(Zip Code)
(908) 977-9900
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section12(b) of the Act:
Title of each classTrading symbolsName of each exchange on which registered
Common stock, par value $0.01 per shareINSMNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

Emerging growth company o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Securities registered pursuant to Section12(b)As of October 28, 2019, there were 89,343,718 shares of the Act:
registrant’s common stock outstanding.



Table of Contents
INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
INDEX
TitleTrading symbolsName of each exchange on which registered
Common stock, par value $0.01 per shareINSMNasdaq Global Select Market
As of May 2, 2019, there were 77,666,309 shares of the registrant’s common stock outstanding.

INSMED INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 20193
INDEX
 
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.


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Table of Contents
PART I.  FINANCIAL INFORMATION
 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
INSMED INCORPORATED
Consolidated Balance Sheets
(in thousands, except par value and share data)
 
As of As ofAs ofAs of
March 31, 2019 December 31, 2018September 30, 2019December 31, 2018
(unaudited)   (unaudited) 
Assets 
  
Assets  
Current assets: 
  
Current assets:  
Cash and cash equivalents$420,231
 $495,072
Cash and cash equivalents$535,632  $495,072  
Accounts receivable9,347
 5,515
Accounts receivable15,346  5,515  
Inventory12,682
 7,032
Inventory23,313  7,032  
Prepaid expenses and other current assets12,372
 11,327
Prepaid expenses and other current assets21,313  11,327  
Total current assets454,632
 518,946
Total current assets595,604  518,946  
   
Intangibles, net57,427
 58,675
Intangibles, net54,930  58,675  
Fixed assets, net27,933
 22,636
Fixed assets, net52,991  22,636  
Right-of-use assets44,609
 
Operating lease right-of-use assetsOperating lease right-of-use assets39,949  —  
Other assets11,314
 4,299
Other assets19,643  4,299  
Total assets$595,915
 $604,556
Total assets$763,117  $604,556  
   
Liabilities and shareholders’ equity 
  
Liabilities and shareholders’ equity  
Current liabilities: 
  
Current liabilities:  
Accounts payable$30,223
 $17,741
Accounts payable$20,415  $17,741  
Accrued expenses38,317
 38,254
Accrued expenses38,908  38,254  
Accrued compensation16,271
 22,208
Accrued compensation13,954  22,208  
Lease liabilities9,359
 
Lease liabilities11,985  —  
Other current liabilities82
 1,529
Other current liabilities130  1,529  
Total current liabilities94,252
 79,732
Total current liabilities85,392  79,732  
   
Debt, long-term321,313
 316,558
Debt, long-term331,003  316,558  
Long-term lease liabilities35,709
 
Long-term lease liabilities31,417  —  
Other long-term liabilities504
 
Other long-term liabilities11,264  —  
Total liabilities451,778
 396,290
Total liabilities459,076  396,290  
   
Shareholders’ equity: 
  
Shareholders’ equity:  
Common stock, $0.01 par value; 500,000,000 authorized shares, 77,596,384 and 77,307,521 issued and outstanding shares at March 31, 2019 and December 31, 2018, respectively776
 773
Common stock, $0.01 par value; 500,000,000 authorized shares, 89,310,684 and 77,307,521 issued and outstanding shares at September 30, 2019 and December 31, 2018, respectivelyCommon stock, $0.01 par value; 500,000,000 authorized shares, 89,310,684 and 77,307,521 issued and outstanding shares at September 30, 2019 and December 31, 2018, respectively893  773  
Additional paid-in capital1,499,646
 1,489,664
Additional paid-in capital1,786,667  1,489,664  
Accumulated deficit(1,356,315) (1,282,162)Accumulated deficit(1,483,511) (1,282,162) 
Accumulated other comprehensive income (loss)30
 (9)
Accumulated other comprehensive lossAccumulated other comprehensive loss(8) (9) 
Total shareholders’ equity144,137
 208,266
Total shareholders’ equity304,041  208,266  
Total liabilities and shareholders’ equity$595,915
 $604,556
Total liabilities and shareholders’ equity$763,117  $604,556  
See accompanying notes to consolidated financial statements

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INSMED INCORPORATED
Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands, except per share data)
Three Months Ended March 31, Three Months Ended September 30,Nine Months Ended September 30,
2019 2018 2019201820192018
   
Revenues, net$21,902
 $
Revenues, net$38,885  $—  $90,759  $—  
   
Costs and expenses: 
  
Costs and expenses:    
Cost of product revenues (excluding amortization of intangible assets)4,150
 
Cost of product revenues (excluding amortization of intangible assets)6,437  —  15,506  —  
Research and development31,203
 30,098
Research and development34,340  39,538  99,081  105,358  
Selling, general and administrative54,810
 32,653
Selling, general and administrative53,347  44,445  160,590  114,258  
Amortization of intangible assets1,248
 
Amortization of intangible assets1,249  —  3,745  —  
Total costs and expenses91,411
 62,751
Total costs and expenses95,373  83,983  278,922  219,616  
   
Operating loss(69,509) (62,751)Operating loss(56,488) (83,983) (188,163) (219,616) 
   
Investment income2,416
 2,040
Investment income2,885  2,741  7,879  7,510  
Interest expense(6,726) (5,642)Interest expense(6,846) (6,675) (20,357) (18,805) 
Loss on extinguishment of debt
 (2,209)Loss on extinguishment of debt—  —  —  (2,209) 
Other (expense) income, net(119) 86
Other (expense) income, net(85) 220  (255) 550  
Loss before income taxes(73,938) (68,476)Loss before income taxes(60,534) (87,697) (200,896) (232,570) 
   
Provision for income taxes215
 48
Provision for income taxes148  46  453  134  
   
Net loss$(74,153) $(68,524)Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
   
Basic and diluted net loss per share$(0.96) $(0.89)Basic and diluted net loss per share$(0.68) $(1.14) $(2.43) $(3.03) 
   
Weighted average basic and diluted common shares outstanding77,541
 76,619
Weighted average basic and diluted common shares outstanding89,245  77,066  82,907  76,819  
   
Net loss$(74,153) $(68,524)Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
Other comprehensive income: 
  
Other comprehensive income:    
Foreign currency translation gains39
 42
Foreign currency translation (losses) gainsForeign currency translation (losses) gains(1)   23  
Total comprehensive loss$(74,114) $(68,482)Total comprehensive loss$(60,683) $(87,741) $(201,348) $(232,681) 
 
See accompanying notes to consolidated financial statements


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

 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at July 1, 201877,039  $770  $1,472,699  $(1,102,846) $18  $370,641  
Comprehensive loss:      
Net loss(87,743) (87,743) 
Other comprehensive income  
Exercise of stock options47   603  604  
Issuance of common stock for vesting of RSUs—  
Stock compensation expense7,903  7,903  
Balance at September 30, 201877,086  $771  $1,481,205  $(1,190,589) $20  $291,407  
Balance at July 1, 201989,207  $892  $1,778,517  $(1,422,829) $(7) $356,573  
Comprehensive loss:      
Net loss(60,682) (60,682) 
Other comprehensive income(1) (1) 
Exercise of stock options and ESPP shares103   1,460  1,461  
Net proceeds from issuance of common stock(104) (104) 
Issuance of common stock for vesting of RSUs —  —  
Stock compensation expense6,794  6,794  
Balance at September 30, 201989,311  $893  $1,786,667  $(1,483,511) $(8) $304,041  
 Common Stock 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 Total
Shares Amount 
Balance at January 1, 201876,611
 $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 options12
 

 142
     142
Equity component of convertible debt issuance    136,463
     136,463
Stock compensation expense    5,674
     5,674
Balance at March 31, 201876,623
 $766
 $1,460,460
 $(1,026,409) $39
 $434,856
            
Balance at January 1, 201977,308
 $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 shares253
 3
 3,046
     3,049
Issuance of common stock for vesting of RSUs35
         
Stock compensation expense    6,936
     6,936
Balance at March 31, 201977,596
 $776
 $1,499,646
 $(1,356,315) $30
 $144,137



See accompanying notes to consolidated financial statements



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


 Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
SharesAmount
Balance at January 1, 201876,611  $766  $1,318,181  $(957,885) $(3) $361,059  
Comprehensive loss:      
Net loss(232,704) (232,704) 
Other comprehensive income23  23  
Exercise of stock options428   6,385  6,389  
Equity component of convertible debt issuance136,434  136,434  
Issuance of common stock for vesting of RSUs47    
Stock compensation expense20,205  20,205  
Balance at September 30, 201877,086  $771  $1,481,205  $(1,190,589) $20  $291,407  
Balance at January 1, 201977,308  $773  $1,489,664  $(1,282,162) $(9) $208,266  
Comprehensive loss:      
Net loss(201,349) (201,349) 
Other comprehensive income  
Exercise of stock options and ESPP shares1,266  12  14,953  14,965  
Net proceeds from issuance of common stock10,658  107  260,967  261,074  
Issuance of common stock for vesting of RSUs79    
Stock compensation expense21,083  21,083  
Balance at September 30, 201989,311  $893  $1,786,667  $(1,483,511) $(8) $304,041  

See accompanying notes to consolidated financial statements
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INSMED INCORPORATED
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months Ended September 30,
 20192018
Operating activities  
Net loss$(201,349) $(232,704) 
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation3,249  2,652  
Amortization of intangible assets3,745  —  
Stock-based compensation expense21,083  20,205  
Loss on extinguishment of debt—  2,209  
Amortization of debt issuance costs1,047  1,000  
Accretion of debt discount and back-end fee13,398  11,591  
Changes in operating assets and liabilities:  
Accounts receivable(9,831) —  
Inventory(16,281) —  
Prepaid expenses and other current assets(10,156) (4,315) 
Other assets(15,305) —  
Accounts payable1,410  2,536  
Accrued expenses and other10,999  9,823  
Accrued compensation(8,254) (810) 
Net cash used in operating activities(206,245) (187,813) 
Investing activities  
Purchase of fixed assets(29,230) (10,063) 
Net cash used in investing activities(29,230) (10,063) 
Financing activities  
Proceeds from exercise of stock options, ESPP, and RSU vesting14,966  6,390  
Proceeds from issuance of common stock, net261,074  —  
Payment on extinguishment of debt—  (2,835) 
Payment of debt—  (55,000) 
Proceeds from issuance of 1.75% convertible senior notes due 2025—  450,000  
Payment of debt issuance costs—  (14,235) 
Net cash provided by financing activities276,040  384,320  
Effect of exchange rates on cash and cash equivalents(5) (35) 
Net increase in cash and cash equivalents40,560  186,409  
Cash and cash equivalents at beginning of period495,072  381,165  
Cash and cash equivalents at end of period$535,632  $567,574  
Supplemental disclosures of cash flow information:  
Cash paid for interest$7,880  $4,975  
Cash paid for income taxes$320  $127  
 Three Months Ended March 31,
 2019 2018
Operating activities 
  
Net loss$(74,153) $(68,524)
Adjustments to reconcile net loss to net cash used in operating activities: 
  
Depreciation1,069
 769
Amortization of intangible assets1,248
 
Stock-based compensation expense6,936
 5,674
Loss on extinguishment of debt
 2,209
Amortization of debt issuance costs349
 299
Accretion of debt discount4,406
 3,021
Accretion of back-end fee on debt
 50
Changes in operating assets and liabilities: 
  
Accounts receivable(3,832) 
Inventory(5,650) 
Prepaid expenses and other current assets(1,061) (2,217)
Other assets(7,044) 
Accounts payable9,499
 (828)
Accrued expenses and other323
 (165)
Accrued compensation(5,937) (7,701)
Net cash used in operating activities(73,847) (67,413)
Investing activities 
  
Purchase of fixed assets(4,028) (5,365)
Net cash used in investing activities(4,028) (5,365)
Financing activities 
  
Proceeds from exercise of stock options and ESPP3,049
 142
Payment on extinguishment of debt
 (2,835)
Payment of debt
 (55,000)
Proceeds from issuance of 1.75% convertible senior notes due 2025
 450,000
Payment of debt issuance costs
 (14,141)
Net cash provided by financing activities3,049
 378,166
Effect of exchange rates on cash and cash equivalents(15) 28
Net increase in cash and cash equivalents(74,841) 305,416
Cash and cash equivalents at beginning of period495,072
 381,165
Cash and cash equivalents at end of period$420,231
 $686,581
    
Supplemental disclosures of cash flow information: 
  
Cash paid for interest$3,939
 $1,275
Cash paid for income taxes$178
 $54
See accompanying notes to consolidated financial statements


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

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

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are in Bridgewater, New Jersey. The Company has legal entities in the US, France, Germany, Ireland, Germany, France,Italy, the Netherlands, the United Kingdom (UK), the Netherlands, BermudaSwitzerland, Japan and Japan.Bermuda.
 
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the US for complete consolidated financial statements are not included herein. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The unaudited interim consolidated financial information presented herein reflects all normal adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated in consolidation and certain prior year amounts have been reclassified to conform to the current year presentation.
 
The Company had $420.2$535.6 million in cash and cash equivalents as of March 31,September 30, 2019 and reported a net loss of $74.2$201.3 million for the threenine months ended March 31,September 30, 2019. Historically, the Company has funded its operations through public offerings of equity securities and debt financings. The Company commenced commercial shipments of ARIKAYCE in October 2018. The Company expects to continue to incur operating losses both in ourat its US and certain international entities while funding research and development (R&D) activities for ARIKAYCE and ourits other pipeline programs, continuing commercial launch activities for ARIKAYCE in the US, continuing to invest in pre-commercial and regulatory activities for ARIKAYCE in Europe and Japan, and funding other general and administrative activities.

The Company expects its future cash requirements to be substantial, and the Company may need to raise additional capital to fund operations, including the commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE, to develop INS1007 and INS1009 and to develop, acquire, in-license or co-promote other products or product candidates, including those that address orphan or rare diseases.

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

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

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

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

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

As of September 30, 2019
Fair Value
Carrying ValueLevel 1Level 2Level 3
Cash and cash equivalents$535.6  $535.6  $—  $—  

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no0 transfers in or out of Level 1, Level 2 or Level 3 during the threenine months ended March 31,September 30, 2019 and 2018, respectively.

As of March 31,September 30, 2019 and December 31, 2018, the Company held no0 securities that were in an unrealized gain or loss position.

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

The estimated fair value of the liability component of the Company's 1.75% convertible senior notes due 2025 (the Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of March 31,September 30, 2019 was $438$375.3 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$331.0 million carrying value of the Convertibles Notes as of March 31,September 30, 2019 excludes the $120.6$111.6 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 nine months ended March 31,September 30, 2019 and 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 share77,541
 76,619
Net loss per share: 
  
Basic and diluted$(0.96) $(0.89)
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 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
 (in thousands, except per share amounts)
Numerator:    
Net loss$(60,682) $(87,743) $(201,349) $(232,704) 
Denominator:    
Weighted average common shares used in calculation of basic net loss per share:89,245  77,066  82,907  76,819  
Effect of dilutive securities:    
Common stock options—  —  —  —  
RSUs—  —  —  —  
Convertible debt securities—  —  —  —  
Weighted average common shares outstanding used in calculation of diluted net loss per share89,245  77,066  82,907  76,819  
Net loss per share:    
Basic and diluted$(0.68) $(1.14) $(2.43) $(3.03) 
 
The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of March 31,September 30, 2019 and 2018 as their effect would have been anti-dilutive (in thousands):
 
 As of March 31,
 2019 2018
Stock options to purchase common stock11,903
 9,866
Unvested RSUs170
 234
Convertible debt securities11,492
 11,492

As of September 30,
 20192018
Stock options to purchase common stock10,773  9,608  
Unvested RSUs460  245  
Convertible debt securities11,492  11,492  
 
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high credit-quality financial institutions and may invest its short-term investments in US treasury securities, mutual funds and government agency bonds. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.
The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. The following table presents the percentage of gross product revenue represented by the Company's three largest customers as of the quarternine months ended March 31,September 30, 2019.
Percentage of Total Gross Product Revenue
Customer A33%
Customer BA31%
Customer B28% 
Customer C16%21% 

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)
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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 varyvaries from the estimates above, the Company may need to adjust prior period accruals, affecting revenue in the period of adjustment.
The Company has initiated early access programs (EAPs) in Europe and other countries, some of which may be fully reimbursed. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.
Cost of product revenues (excluding amortization of intangible assets) - Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, in addition to royalty expenses and milestone payments. Prior to FDA approval of ARIKAYCE, the Company expensed all inventory related costs in the period incurred. Inventory used for clinical development purposes is expensed to research and development (R&D) expense when consumed.

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous generally accepted accounting principles. ASU 2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02

A lease is a contract, or part of a contract, that conveys the right to control the use of explicitly or implicitly identified property, plant or equipment in exchange for consideration. Control of an asset is conveyed to the Company if the Company obtains the right to obtain substantially all of the economic benefits of the asset or the right to direct the use of the asset. The
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Company recognizes ROU assets and lease liabilities at the lease commencement date based on the present value of future, fixed lease payments over the term of the arrangement. ROU assets are amortized on a straight-line basis over the term of the lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Variable lease payments are recognized at the time when the event giving rise to the payment occurs and are recognized in the statement of comprehensive income in the same line item as expenses arising from fixed lease payments.

In accordance with Topic 842, leases are measured at present value using the rate implicit in the lease or, if the implicit rate is not determinable, the lessee's implicit borrowing rate. As the implicit rate is not typically available, the Company uses its implicit borrowing rate based on the information available at the lease commencement date to determine the present value of future lease payments. The implicit borrowing rate approximates the rate the Company would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.

Financial information presented prior to January 1, 2019 has not been adjusted and is presented in accordance with ASC 840. Refer to the Recently Adopted Accounting Pronouncements section within this note below and Note 7 - Leases for details about the Company's lease portfolio, including Topic 842 required disclosures.

Recently Adopted Accounting Pronouncements - Topic 842was effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods)years) and early adoption was permitted. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provided a transition option in which an entity would initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company used the new transition option and the package of practical expedients that allowed it to not reassess: (1) whether any expired or existing contracts are or contain leases; (2) lease classification for any expired or existing leases; and (3) initial direct costs for any expired or existing leases. The Company also used the practical expedient that allows it to treat the lease and non-lease components of its leases as a single component. The Company adopted ASU 2016-02 effective January 1, 2019. The impact of the adoption of ASU 2016-02 on the consolidated balance sheet was $47.4 million. Refer to Note 6 - Leases for additional details about the Company's lease portfolio, including Topic 842 required disclosures.
 
New Accounting Pronouncements (Not Yet Adopted)—In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which requires financial assets measured at an amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.2019 and the Company will adopt the standard effective January 1, 2020. Different aspects of the guidance require modified retrospective or prospective adoption. The Company is currently evaluating thehas performed a preliminary assessment and anticipates adoption will not have a material impact of adoption on its consolidated financial statements.
 
3.        Inventory

As of March 31,September 30, 2019 and December 31, 2018, the Company's inventory balance consists of the following (in thousands):
September 30, 2019December 31, 2018
Raw materials$10,556  $2,145  
Work-in-process6,199  4,567  
Finished goods6,558  320  
$23,313  $7,032  
 March 31, 2019 December 31, 2018
Raw materials$4,454
 $2,145
Work-in-process7,059
 4,567
Finished goods1,169
 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 onin 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 fees11,380
 13,398
Accrued technical operation expenses9,536
 9,371
Accrued royalty payable1,000
 409
Accrued interest payable1,663
 3,631
Accrued sales allowances and related costs2,642
 818
Accrued construction costs2,475
 2,946
Other accrued expenses1,989
 1,046
 $38,317
 $38,254

5.Intangible,Intangibles, net
 
As of March 31,September 30, 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
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a result of the FDA approval of ARIKAYCE onin September 28, 2018. Total intangible assets, net was $57.4$54.9 million as of March 31,September 30, 2019 and $58.7 million as of December 31, 2018.

Intangible assets are measured at their respective fair values on the date they were recorded and, with respect to the acquired ARIKAYCE milestone, at the date of subsequent adjustments of fair value. The Company began amortizing its intangible assets in October 1, 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. A rollforward of the Company's intangible assets for the threenine months ended March 31,September 30, 2019 follows (in thousands):
2019
Intangible AssetJanuary 1,AdditionsAmortizationSeptember 30,
Acquired ARIKAYCE R&D$56,988  $—  $(3,637) $53,351  
PARI milestone upon FDA approval1,687  —  (108) 1,579  
     Intangible assets$58,675  $—  $(3,745) $54,930  
 2019
Intangible AssetJanuary 1, Additions Amortization March 31,
Acquired ARIKAYCE R&D$56,988
 $
 $(1,212) $55,776
PARI milestone upon FDA approval1,687
 
 (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 annualreviews the recoverability of these finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. During the quarter ended September 30, 2019, no indicators of impairment testwere identified.
5. Fixed Assets, net

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

Asset DescriptionEstimated
Useful Life (years)
As of September 30, 2019As of December 31, 2018
Lab equipment7$8,646  $7,935  
Furniture and fixtures72,559  2,320  
Computer hardware and software3-54,839  3,796  
Office equipment765  65  
Manufacturing equipment71,535  1,166  
Leasehold improvementslease term8,861  7,202  
Construction in Progress (CIP)—  44,003  14,325  
70,508  36,809  
Less: accumulated depreciation(17,517) (14,173) 
Fixed assets, net$52,991  $22,636  

Fixed assets, net of depreciation increased to $53.0 million as of October 1.September 30, 2019 from $22.6 million as of December 31, 2018. The increase was primarily due to $29.7 million in CIP for the manufacturing equipment related to the long-term capacity build-out at the Patheon UK Limited (Patheon) facility and the Company's new corporate headquarters.


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6.                                     Accrued Expenses
As of September 30, 2019 and December 31, 2018, the Company's accrued expenses balance consists of the following (in thousands): 
September 30, 2019December 31, 2018
Accrued clinical trial expenses$4,988  $6,635  
Accrued professional fees9,421  13,398  
Accrued technical operation expenses10,176  9,371  
Accrued royalty payable1,830  409  
Accrued interest payable1,663  3,631  
Accrued sales allowances and related costs4,640  818  
Accrued construction costs4,693  2,946  
Other accrued expenses1,497  1,046  
 $38,908  $38,254  
7.     ��                             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 itsthe Company's lease agreements that have commenced range from less than one year to seven years. In its assessment of the term of each such lease, the Company has not included any options to extend or terminate the lease due to the absence of economic incentives in its lease agreements. As permitted by the practical expedient in ASU 2016-02, leases that qualify for treatment as a short-term lease are expensed as incurred. These short-term leases are not material to the Company's financial position. Furthermore, the Company has elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets. The Company's leases do not contain residual value guarantees and it does not sublease any of its leased assets.

The Company outsources its manufacturing operations to CMOs. Upon review of the agreements with its CMOs, the Company determined that these contracts contain embedded leases for dedicated manufacturing facilities. The Company obtains substantially all of the economic benefits from the use of the manufacturing facilities, has the right to direct how and for what purpose the facility is used throughout the period of use, and the supplier does not have the right to change the operating instructions of the facility. The operating lease right-of-use assetassets and corresponding lease liabilityliabilities 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 leases7.3%
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Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
Lease cost
 Operating lease cost$3,072  $9,225  
Total lease cost$3,072  $9,225  
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
  Operating cash flows for operating leases$3,140  $9,415  
Right-of-use assets obtained in exchange for new operating lease liabilities$—  $47,389  
Weighted average remaining lease term - operating leases (years)5.2 years5.2 years
Weighted average discount rate - operating leases7.4 %7.4 %


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
202011,000
202110,287
20226,000
20236,000
Thereafter12,000
Total$54,631
Less: present value discount9,563
Present value of lease liabilities$45,068


Year ending December 31,
2019 (remaining)$6,435  
202010,984  
202110,287  
20226,000  
20236,000  
Thereafter12,000  
Total51,706  
Less: present value discount8,304  
Present value of lease liabilities$43,402  
Balance sheet classification at September 30, 2019:
  Current lease liabilities$11,985  
  Long-term lease liabilities31,417  
Total lease liabilities$43,402  



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 halffourth quarter of 2019, the lease will be accounted for as a finance lease.lease and the Company estimates the impact on its consolidated balance sheet will be approximately $20 million to $25 million.

Additionally, in October 2017, the Company entered into certain agreements with Patheon UK Limited (Patheon) related to increasing its long-term production capacity for ARIKAYCE commercial inventory. Similar to the CMO arrangements previously described, the Company has determined that this agreement with Patheon contains an embedded lease for the manufacturing facility and the specialized equipment contained therein. CostsCertain costs incurred by the Company related tounder the agreement of $7.1$15.5 million, subsequent to the adoption of ASU 2016-02, have been classified within other assets in the Company's consolidated balance sheet. Upon the commencement date, the lease will be accounted for as an operating lease and prepaid costs and minimum guarantees specified in the agreement will be combined to establish aan operating lease right-of-use asset and related lease liability.


7.
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8.                                   Debt
 
In January 2018, the Company completed an underwritten public offering of the Convertible Notes, in which the Company sold $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriters' option to purchase additional Convertible Notes of $50.0 million. The Company's net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million, were approximately $435.8 million. The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased.

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

Holders may convert their Convertible Notes prior to October 15, 2024, only under the following circumstances, subject to the conditions set forth in an indenture, dated as of January 26, 2018, between the Company and Wells Fargo Bank, National Association (Wells Fargo), as trustee, as supplemented by the first supplemental indenture, dated January 26, 2018, between the Company and Wells Fargo (as supplemented, the Indenture): (i) during the five5 business day period immediately after any five5 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 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
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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 $140.9was$140.9 million. The discount is being amortized to interest expense over the term of the Convertible Notes and has a remaining period of approximately 5.795.3 years. The following table presents the carrying value of the Company’s debt balance (in thousands):
 
 March 31, 2019 December 31, 2018
 1.75% convertible senior notes due 2025$450,000
 $450,000
 Debt issuance costs, unamortized(8,091) (8,440)
 Discount on debt(120,596) (125,002)
Long-term debt, net$321,313
 $316,558

September 30, 2019December 31, 2018
 1.75% convertible senior notes due 2025$450,000  $450,000  
 Debt issuance costs, unamortized(7,392) (8,440) 
 Discount on debt(111,605) (125,002) 
Long-term debt, net$331,003  $316,558  
 
As of March 31,September 30, 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 thereafter450,000
 $450,000

Year Ending December 31:
2019$— 
2020— 
2021— 
2022— 
2023— 
2024 and thereafter450,000 
$450,000 
 
In February 2018, the Company used part of the net proceeds from the issuance of the Convertible Notes to pay off its outstanding debt to Hercules Capital (Hercules). The payments to Hercules consisted of $55.0 million for the principal amount and an additional $3.2 million in back-end fees, outstanding interest, and prepayment penalty fees, which resulted in a $2.2 million loss on extinguishment of debt in the quarter ended March 31, 2018. 

Interest Expense

For the three months ended March 31, 2019 and March 31, 2018, interestInterest expense related to the Convertible Notes was $6.7 millionfor the three and $5.6 million, respectively,nine months ended September 30, 2019 and September 30, 2018, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, and accretion of debt discount is as described in the table belowfollows (in thousands):

Three Months Ended
September 30,
Nine Months Ended
September 30,
2019201820192018
Contractual interest expense$1,971  $1,971  $5,912  $6,214  
Amortization of debt issuance costs349  415  1,047  1,000  
Accretion of back-end fee on debt—  —  —  50  
Accretion of debt discount4,526  4,289  13,398  11,541  
     Total interest expense$6,846  $6,675  $20,357  $18,805  
 Three Months Ended March 31,
 2019 2018
Contractual interest expense$1,971
 $2,272
Amortization of debt issuance costs349
 299
Accretion of back-end fee on debt
 50
Accretion of debt discount4,406
 3,021
     Total interest expense$6,726
 $5,642


8.9.                                     Shareholders’ Equity
 
Common Stock — As of March 31,September 30, 2019, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 per share and 77,596,38489,310,684 shares of common stock issued and outstanding. In addition, as of March 31,September 30, 2019, the Company had reserved 11,892,80010,773,384 shares of common stock for issuance upon the exercise of outstanding stock options and 169,343459,747 shares of common stock for issuance upon the vesting of RSUs. The Company has also reserved
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11,492,280 shares of common stock for issuance upon conversion of the Convertible Notes, subject to adjustment in accordance with the Indenture.

In the second quarter of 2019, the Company completed an underwritten public offering of 10,657,692 shares of the Company's common stock, which included the underwriters' exercise in full of their over-allotment option of 1,042,307 shares from the Company at a price to the public of $26.00, less underwriting discounts and commissions. The Company's net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of $16.0 million, were $261.1 million. The offering also included the sale of 400,000 shares from the Company's Chairman and Chief Executive Officer, from which the Company received no proceeds.

In January 2018, the Company completed an underwritten public offering of $450.0 million aggregate principal amount of Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. The fair value of the liability component of the Convertible Notes on the date of issuance was estimated at $309.1 million, and accordingly, the equity component (included in additional paid-in capital) on the date of issuance was calculated as $140.9 million using the residual method, as further described in Note 78 Debt.

Preferred Stock — As of March 31,September 30, 2019, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01 per share and no0 shares of preferred stock were issued and outstanding.


9.10.                                     Stock-Based Compensation
 
The Company’s current equity compensation plan, the 20172019 Incentive Plan, was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 18, 2017.16, 2019. The 2019 Incentive Plan is administered by the Compensation Committee of the Board of Directors of the Company. Under the terms of the 2019 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), RSUs, performance options/shares and other stock awards to eligible employees and non-employee directors. On May 16, 2019, upon the approval of the 2019 Incentive Plan by shareholders, 3,500,000 shares were authorized for issuance thereunder, plus any shares subject to then-outstanding awards under the 2017 Incentive Plan, 2015 Incentive Plan and the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. As of March 31,September 30, 2019, 909,3034,032,845 shares remained for future issuance under the 20172019 Incentive Plan. The 20172019 Incentive Plan will terminate on April 3, 2027May 16, 2029 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 threenine months ended March 31,September 30, 2019, the Company granted inducement stock options covering 51,870198,530 shares of the Company's common stock to new employees.
 
On May 15, 2018, the 2018 Employee Stock Purchase Plan (2018 ESPP) was approved by shareholders at the Company’s Annual Meeting of Shareholders. The Company has reserved the following for issuance under the 2018 ESPP: (i) 1,000,000 shares of common stock, plus (ii) commencing on January 1, 2019 and ending on December 31, 2023, an additional number of shares to be added on the first day of each calendar year equal to the lesser of (A) 1,200,000 shares of common stock, (B) 2% of the number of outstanding shares of common stock on such date and (C) an amount determined by the administrator.

Stock Options - As of March 31,September 30, 2019, there was $43.0$34.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 3.02.7 years. During the quarter ended September 30, 2018, performance-condition options totaling $1.1 million, or 133,334 shares, met their recognition criteria as a result of the FDA approval of ARIKAYCE and vested in full. As of March 31,September 30, 2019, there were no0 performance-condition options outstanding.
  
Restricted Stock Units — As of March 31,September 30, 2019, there was $2.8$8.6 million of unrecognized compensation expense related to unvested RSU awards, which is expected to be recognized over a weighted average period of 2.13.0 years.

 
The following table summarizes the aggregate stock-based compensation expense recorded in the consolidated statements of comprehensive loss related to stock options and RSUs during the three and nine months ended March 31,September 30, 2019 and 2018, respectively (in millions): 
 Three Months Ended March 31,
 2019 2018
Research and development expenses$2.2
 $1.9
Selling, general and administrative expenses4.7
 3.8
Total$6.9
 $5.7
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 Three Months Ended September 30,Nine Months Ended September 30,
 2019201820192018
Research and development$2.2  $2.8  $6.6  $7.4  
Selling, general and administrative4.6  5.1  14.5  12.8  
Total$6.8  $7.9  $21.1  $20.2  
 
10.11.                                     Income Taxes
 
The Company’s provision for income taxes was $0.2$0.1 million and $0.0 million for the three months ended March 31,September 30, 2019 and March 31,September 30, 2018, respectively and $0.5 million and $0.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. The provision for income taxes in both periods was a result of certain of the Company’s international subsidiaries, which had taxable income during the three and nine months ended March 31,September 30, 2019 and 2018. In jurisdictions where the Company has net losses, there was a full valuation allowance recorded against the Company’s deferred tax assets and therefore no0 tax benefit was recorded.

The Company is subject to US federal and state income taxes and the statute of limitations for tax audit is open for the Company's federal tax returns for the years ended 2014 and later, and is generally open for certain states for the years 2013 and later. The Company has incurred net operating losses since inception, except for the year ended December 31, 2009. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin. As of March 31,September 30, 2019 and December 31, 2018, the Company had recorded reserves for unrecognized income tax benefits against certain deferred tax assets in the United States. However, given the Company’s valuation allowance position these reserves do not have an impact on the balance sheet as of March 31,September 30, 2019 and December 31, 2018 or the income statement for the three and nine months ended March 31,September 30, 2019 and March 31,September 30, 2018. Due to the noncash impact of the reserve for unrecognized income tax benefits theThe Company has not recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next 12 months.
 
11.12.                                     Commitments and Contingencies
 
Rent expense charged to operations was $0.8$0.4 million and $0.4 million for the three months ended March 31,September 30, 2019 and 2018, respectively, and was $2.0 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.
 
Legal Proceedings
 
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Note Regarding Forward LookingForward-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:

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

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

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

Principal Product/Product CandidateStatusNext Expected Milestones
ARIKAYCE for MAC lung disease
• We continue to focus on havingthe execution of 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
US. The product was granted accelerated approval of ARIKAYCEby the FDA for the treatment of refractory MAC lung disease as part of a combination antibacterial drug regimen for adult patients who have limited or no alternative treatment options. We began commercial shipments of ARIKAYCE in October 2018.

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

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


WeIn addition to our MAA, we intend to submit regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020. If approved by the relevant regulatory authorities, we expect ARIKAYCE would be the first inhaled therapy specifically indicated for the treatment of MAC lung disease in Europe and Japan.


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

• We intendcontinue to collaborate with the FDA on and invest in, the post-approval confirmatory clinical trial required byfor full approval. We have initiated efforts to evaluate an appropriate patient reported outcome (PRO) tool that will enable the FDAassessment of therapies for the treatment of NTM lung disease. If a PRO tool is verified through a short-term study, we plan to support full approval andbegin the confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease. In addition, we intend to complete the design and protocol of the confirmatoryconduct a separate study during the first half of 2019. We also intend to collaboratein patients with the FDA on lifecycle management programs.

NTM lung disease caused by M. abscessus.
INS1007 (oral reversible inhibitor of DPP1) for non-CF bronchiectasis and other rare diseases

We are enrollingIn May 2019, we completed enrollment of patients in the WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel-group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis.
• We expect to complete enrollment intop-line data from the WILLOW clinical study of INS1007 in mid-2019.
the first quarter of 2020.

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

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

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

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


Our Strategy

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

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

Accelerated Approval

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

As a condition of accelerated approval, we must conduct a post-approval confirmatory clinical trial. The required confirmatory trial, which is currently under discussion with the FDA, is proposed towill be a randomized, double-blind, placebo-controlled clinical trialdesigned to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. The trial will evaluate the effect of ARIKAYCE on a clinically meaningful endpoint, as compared to an appropriate control, in the intended patient population of patients with MAC lung disease. PursuantWe have initiated efforts to evaluate an appropriate PRO tool that will enable the timetable agreed uponassessment of therapies for the treatment of NTM lung disease. If the PRO is verified through a short-term study, we plan to begin a confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease. In addition, we intend to conduct a separate study in patients with NTM lung disease caused by M. abscessus. We continue to collaborate with the FDA on the study protocol is expected to be finalized duringtimetable as well as the first halfdesign and validation of 2019, with trial results to be reported by 2024. Continuedthe PRO and the post-approval confirmatory clinical trial. The full approval of ARIKAYCE will be contingent upon verification and description of clinical benefit in this study.

Regulatory Pathway Outside of the US

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

Clinical Trials

Accelerated approval of ARIKAYCE was supported by preliminary data from ourthe CONVERT study, a global Phase 3 study evaluating the safety and efficacy of ARIKAYCE in adult patients with refractory MAC lung disease, using achievement of sputum culture conversion (defined as three consecutive negative monthly sputum cultures) by Month 6 as the primary endpoint. Patients who achieved sputum culture conversion by Month 6 continued in the CONVERT study for an additional 12 months of treatment following the first monthly negative sputum culture in order to assess the durability of culture conversion, as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three months. We previously reported interim durability data asIn May 2019, we presented at the American Thoracic Society meeting that 41/65 (63.1%) of December 2017, in which 60.9% of patients (28/46) who had achieved the primary endpoint at Month 6 on ARIKAYCE plus guidelines-based therapy (GBT) remainedGBT had maintained durable culture negativeconversion for three months off all therapy compared to 0.0% of patients (0/7) who had achieved the primary endpoint at Month 60/10 (0%) on GBT only. Final durability data for patients three months off all therapy were consistent with these interim data, and safetyonly (p<0.0002). Safety data for these patients were consistent with safety data previously reported for patients by Month 6 of the CONVERT study. The CONVERT study is ongoing.
Patients who did not culture convert by Month 6 may have been eligible to enroll in ourthe 312 study, an open-label extension study for these non-converting patients who completed six months of treatment in the CONVERT study. The primary objective of the 312 study was to evaluate the long-term safety and tolerability of ARIKAYCE in combination with a standard multi-drug regimen. The secondary objectives of the 312 study included evaluating the proportion of subjects achieving culture conversion (defined in the same way as the CONVERT study) by Month 6 and the proportion of subjects achieving culture conversion by Month 12, which was the end of treatment. We previously reported interim data as of December 2017 for patients in the 312 study, with 28.4% of patients who received GBT only in the CONVERT study (19/67) and 12.3% of patients who had received ARIKAYCE plus GBT in the CONVERT study (7/57) achieving culture conversion by Month 6 of the 312
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study. The 312 study has concluded. Final efficacy data regarding culture conversion were consistent with these interim data. We are continuing to analyzehave analyzed the safety and efficacy data from the 312 study, butand we have not identifiedobserved any new safety signals. The 312 study has concluded.

Further Research and Lifecycle Management
 
We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE in the US beyond treatment of refractory MAC lung 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 maintenance to prevent recurrence (defined as true relapse or reinfection) of MAC lung disease. As noted above, if a PRO tool is verified through a short-term study, we plan to conduct our required confirmatory trial to assess and describe the clinical benefit of ARIKAYCE in patients with MAC lung disease. We intend to submit regulatory filings for ARIKAYCE in Europe in mid-2019 and Japan in the first half of 2020.

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

INS1007
 
INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October 2016. DPP1 is an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the neutrophil serine proteases (including neutrophil elastase, proteinase 3, and cathepsin G) that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases. Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis. We are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions, including treating granulomatosis with polyangiitis.
 
The WILLOW Study
 
The WILLOW study is a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. We commencedcompleted enrollment in the WILLOW study in December 2017, whichMay 2019 and top-line data are expected in the first quarter of 2020. We enrolled 256 patients who had at least two documented pulmonary exacerbations in the twelve months prior to screening. Patients were randomized to receive INS1007 10mg once-daily, INS1007 25mg once-daily, or placebo for a period of 24 weeks. The primary endpoint for the study is time to first pulmonary exacerbation, with secondary endpoints covering a range of pulmonary measures including frequency of pulmonary exacerbations.
Further Research

In August 2019, we expectreceived notice from the FDA that we were awarded a development grant of $1.8 million for specific work to completebe performed on a PRO tool over the next two years. The grant funding is for the development of a novel PRO tool for use in mid-2019. In addition, we are exploring the potential of INS1007clinical trials to measure symptoms in various neutrophil-driven inflammatory conditions.patients with non-CF bronchiectasis with and without NTM lung infection.

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

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

Cost of Product Revenues (excluding amortization of intangible assets)
Cost of product revenues (excluding amortization of intangible assets) consist primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and allocation of overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI.and milestone payments. We began capitalizing inventory upon FDA approval of ARIKAYCE. All costs related to inventory for ARIKAYCE prior to FDA approval were expensed as incurred and therefore not included in cost of product revenues.
Research and Development (R&D) Expenses

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

Amortization of Intangible Assets

Upon commercialization of ARIKAYCE, our intangible assets began to be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on estimates and assumptions we believe are reasonable based on available facts and circumstances. Unanticipated events or circumstances may occur that require us to review the assets for impairment.
Investment Income and Interest Expense
Investment income consists of interest and dividend income earned on our cash and cash equivalents. Interest expense consists primarily of the accretion of debt discount, contractual interest costs and the amortization of debt issuance costs related to our accretion of debt. Debt discount is accreted, and debt issuance costs are amortized, to interest expense using the effective interest rate method over the term of the debt. Our balance sheet reflects debt, net of the debt discount, debt issuance costs paid to the lender, and other third-party costs. Unamortized debt issuance costs associated with extinguished debt are expensed in the period of the extinguishment.
 
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RESULTS OF OPERATIONS
 
Comparison of the Three Months Ended March 31,September 30, 2019 and 2018
 
Overview - Operating Results
Our operating results for the quarter ended March 31,September 30, 2019, included the following:
Total revenues from sales of ARIKAYCE of $21.9$38.9 million during the quarter ended March 31,September 30, 2019;
Cost of product revenues (excluding amortization of intangibles) of $4.2$6.4 million during the quarter ended March 31,September 30, 2019 related to sales of ARIKAYCE;
IncreasedDecreased R&D expenses of $1.1$5.2 million as compared to the same period in the prior year primarily resulting from an increaseconstruction costs relating to the build-out of the Patheon production facility being included in compensationother assets in 2019 and relatedexternal manufacturing expenses due to an increasefor ARIKAYCE being included as a component of inventory in headcount;2019;
Increased SG&A expenses of $22.2$8.9 million as compared to the same period in the prior year resulting from higher compensationmilestone payments and relatedother external expenses due to an increase in headcount, and an increase in commercial activities related to ARIKAYCE;
Amortization of intangible assets of $1.2 million during the quarter ended March 31,September 30, 2019; and

Increased interest expense of $1.1$0.2 million as compared to the same period in the prior year related to interestaccretion of the debt discount on the $450.0 million aggregate principal amount of 1.75% convertible senior notes due 2025 (the Convertible Notes).
Revenues, net
Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA onin September 28, 2018 and launched in the US in October 2018. The following table summarizes the sources of revenue for the three months ended March 31,September 30, 2019 (in thousands):
For the Three Months Ended September 30, 2019
Net product revenues, US$37,804 
Net product revenues, EAPs1,081 
    Total revenues, net$38,885 
 For the Three Months Ended March 31, 2019
Net product revenues, US$20,983
Net product revenues, EAPs919
    Total revenues$21,902

Cost of Product Revenues (excluding amortization of intangibles)
Cost of product revenues (excluding amortization of intangible assets) consistconsists primarily of direct and indirect costs related to the manufacturing of ARIKAYCE sold, including third-party manufacturing costs, packaging services, freight, and production-related overhead costs, and inventory adjustment charges, in addition to royalty expenses due to PARI.and milestone payments. We began capitalizing inventory upon FDA approval of ARIKAYCE. Cost of product revenues (excluding amortization of intangible assets) was $4.2$6.4 million during the quarter ended March 31,September 30, 2019.
All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. As mentioned above, our cost of product revenues includes certain expenses which are fixed, other expenses that were incurred after FDA approval and royalties based on net sales. We expect our cost of product revenues (excluding amortization of intangible assets) to continue to be positively impacted during 2019, as we sell through certain inventory that was expensed prior to FDA approval of ARIKAYCE in September 2018.

R&D Expenses
 
R&D expenses for the quarters ended March 31,September 30, 2019 and March 31,September 30, 2018 were comprised of the following (in thousands):
 
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Quarters Ended March 31, Increase (decrease) Quarters Ended September 30,Increase (decrease)
2019 2018 $ % 20192018$%
External Expenses 
  
  
  
External Expenses    
Clinical development & research$10,529
 $7,818
 $2,711
 34.7 %Clinical development & research$8,235  $8,047  $188  2.3 %
Manufacturing556
 7,934
 (7,378) (93.0)%Manufacturing3,006  13,130  (10,124) (77.1)%
Regulatory, quality assurance, and medical affairs1,792
 1,630
 162
 9.9 %Regulatory, quality assurance, and medical affairs4,778  2,969  1,809  60.9 %
Subtotal—external expenses$12,877
 $17,382
 $(4,505) (25.9)%Subtotal—external expenses$16,019  $24,146  $(8,127) (33.7)%
Internal Expenses 
  
  
  
Internal Expenses    
Compensation and benefit related expenses$12,757
 $7,953
 $4,804
 60.4 %Compensation and benefit related expenses$13,177  $10,064  $3,113  30.9 %
Stock-based compensation2,191
 1,930
 261
 13.5 %Stock-based compensation2,218  2,799  (581) (20.8)%
Other internal operating expenses3,378
 2,833
 545
 19.2 %Other internal operating expenses2,926  2,529  397  15.7 %
Subtotal—internal expenses$18,326
 $12,716
 $5,610
 44.1 %Subtotal—internal expenses$18,321  $15,392  $2,929  19.0 %
Total$31,203
 $30,098
 $1,105
 3.7 %Total$34,340  $39,538  $(5,198) (13.1)%
 
R&D expenses increaseddecreased to $31.2$34.3 million during the quarter ended March 31,September 30, 2019 from $30.1$39.5 million in the same period in 2018. The $1.1$5.2 million increasedecrease was primarily due to a $4.8$10.1 million decrease in external manufacturing expenses, as (i) construction costs relating to the build-out of the Patheon production facility during the quarter ended September 30, 2019 were recorded as other assets, and (ii) raw materials purchased and CMO costs during the quarter ended September 30, 2019 were classified as inventory. This decrease was partially offset by an increase of $3.1 million in compensation and related expenses due to an increase in headcount and an increase of $2.7$1.8 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 purchasedregulatory, quality assurance, and CMO costs during the quarter ended March 31, 2019 were recorded as inventory, and (ii)medical affairs expenses.

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

During the quarter ended March 31,September 30, 2019, external R&D expenses of $12.9$16.0 million consisted of $4.9$9.9 million related to ARIKAYCE, $5.9$5.0 million related to INS1007, and $2.1$1.1 million related to other research expenses. During the quarter ended March 31,September 30, 2018, external R&D expenses of $17.4$24.1 million consisted of $14.6$19.8 million related to ARIKAYCE, $2.3$3.3 million related to INS1007, and $0.5$1.0 million related to other research expenses.

  SG&A Expenses 

SG&A expenses for the quarters ended March 31,September 30, 2019 and March 31,September 30, 2018 were comprised of the following (in thousands):
 
 Quarters Ended September 30,Increase (decrease)
20192018$%
Compensation and benefit related expenses$14,836  $14,513  $323  2.2 %
Stock-based compensation4,575  5,103  (528) (10.3)%
Professional fees and other external expenses26,935  20,412  6,523  32.0 %
Facility related and other internal expenses7,001  4,417  2,584  58.5 %
Total SG&A expenses$53,347  $44,445  $8,902  20.0 %
  Quarters Ended March 31, Increase (decrease)
 2019 2018 $ %
Compensation and benefit related expenses $19,536
 $11,708
 $7,828
 66.9%
Stock-based compensation 4,745
 3,744
 1,001
 26.7%
Professional fees and other external expenses 21,591
 12,929
 8,662
 67.0%
Facility related and other internal expenses 8,938
 4,272
 4,666
 109.2%
Total SG&A expenses $54,810
 $32,653
 $22,157
 67.9%

SG&A expenses increased to $54.8$53.3 million during the quarter ended March 31,September 30, 2019 from $32.7$44.4 million in the same period in 2018. The $22.2$8.9 million increase was primarily due to $7.8a $6.5 million in higher compensation and related expenses due to an increase in headcount, including the hiring of our field force,professional fees and $8.7 million in commercialother external expenses, primarily for milestone payments related to ARIKAYCE, including disease awareness, patient support activities, field operationsand $2.6 million in facility related and other professional fees.internal expenses.
Amortization of Intangible Assets
Amortization of intangible assets for the quarter ended March 31,September 30, 2019 was $1.2 million and is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestone paid to PARI for the FDA approval of ARIKAYCE. 
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Interest Expense
 
Interest expense was $6.7$6.8 million for the quarter ended March 31,September 30, 2019 as compared to $5.6$6.7 million in the same period in 2018. The $1.1$0.2 million increase in interest expense in the quarter ended March 31,September 30, 2019 as compared to the prior year period relates to accretion of the debt discount on the Convertible Notes.

Comparison of the Nine Months Ended September 30, 2019 and 2018
Overview - Operating Results
Our operating results for the nine months ended September 30, 2019, included the following:
Total revenues from sales of ARIKAYCE of $90.8 million during the nine months ended September 30, 2019;
Cost of product revenues (excluding amortization of intangibles) of $15.5 million during the nine months ended September 30, 2019 related to sales of ARIKAYCE;
Decreased R&D expenses of $6.3 million as compared to the same period in the prior year primarily resulting from construction costs relating to the build-out of the Patheon production facility being included in other assets in 2019 and external manufacturing expenses for ARIKAYCE being included as a component of inventory in 2019;
Increased SG&A expenses of $46.3 million as compared to the same period in the prior year resulting from an increase in professional fees and other external expenses related to ARIKAYCE and higher compensation and related expenses due to an increase in headcount;
Amortization of intangible assets of $3.7 million during the nine months ended September 30, 2019; and
Increased interest expense of $1.6 million as compared to the same period in the prior year related to interest on the Convertible Notes and accretion of the debt discount.
Revenues, net
Total revenue consists of net sales of ARIKAYCE, which was approved by the FDA in September 2018 and launched in the US in October 2018. The following table summarizes the sources of revenue for the nine months ended September 30, 2019 (in thousands):
For the Nine Months Ended September 30, 2019
Net product revenues, US$87,751 
Net product revenues, EAPs3,008 
    Total revenues, net$90,759 

Cost of Product Revenues (excluding amortization of intangibles)
Cost of product revenues (excluding amortization of intangible assets) was $15.5 million during the nine months ended September 30, 2019. All product costs incurred prior to FDA approval of ARIKAYCE in September 2018 were expensed as R&D expenses. We expect our cost of product revenues (excluding amortization of intangible assets) to continue to be positively impacted during 2019, as we sell through certain inventory that was expensed prior to FDA approval of ARIKAYCE in September 2018.

R&D Expenses
R&D expenses for the nine months ended September 30, 2019 and September 30, 2018 were comprised of the following (in thousands):
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 Nine Months Ended 
September 30,
Increase (decrease)
 20192018$%
External Expenses    
Clinical development & research$26,301  $22,785  $3,516  15.4 %
Manufacturing7,500  32,010  (24,510) (76.6)%
Regulatory, quality assurance, and medical affairs10,033  8,128  1,905  23.4 %
Subtotal—external expenses$43,834  $62,923  $(19,089) (30.3)%
Internal Expenses    
Compensation and benefit related expenses$38,909  $26,985  $11,924  44.2 %
Stock-based compensation6,580  7,354  (774) (10.5)%
Other internal operating expenses9,758  8,096  1,662  20.5 %
Subtotal—internal expenses$55,247  $42,435  $12,812  30.2 %
Total$99,081  $105,358  $(6,277) (6.0)%
R&D expenses decreased to $99.1 million during the nine months ended September 30, 2019 from $105.4 million in the same period in 2018. The $6.3 million decrease was primarily due to a $24.5 million decrease in external manufacturing expenses, as (i) construction costs relating to the build-out of the Patheon production facility during the quarter ended September 30, 2019 were recorded as other assets, and (ii) raw materials purchased and CMO costs during the quarter ended September 30, 2019 were classified as inventory. Partially offsetting the decrease was an $11.9 million increase in compensation and related expenses due to an increase in headcount and an increase of $3.5 million in clinical trial expenses, primarily related to the phase 2 WILLOW trial for INS1007.

During the nine months ended September 30, 2019, external R&D expenses of $43.8 million consisted of $22.9 million related to ARIKAYCE, $16.6 million related to INS1007, and $4.3 million related to other research expenses. During the nine months ended September 30, 2018, external R&D expenses of $62.9 million consisted of $52.4 million related to ARIKAYCE, $8.4 million related to INS1007, and $2.1 million related to other research expenses.

 SG&A Expenses

SG&A expenses for the nine months ended September 30, 2019 and September 30, 2018 were comprised of the following (in thousands):
 Nine Months Ended September 30,Increase (decrease)
20192018$%
Compensation and benefit related expenses$50,573  $40,286  $10,287  25.5 %
Stock-based compensation14,503  12,851  1,652  12.9 %
Professional fees and other external expenses74,566  47,947  26,619  55.5 %
Facility related and other internal expenses20,948  13,174  7,774  59.0 %
Total SG&A expenses$160,590  $114,258  $46,332  40.6 %

SG&A expenses increased to $160.6 million during the nine months ended September 30, 2019 from $114.3 million in the same period in 2018. The $46.3 million increase was primarily due to a $26.6 million increase in professional fees and other external expenses related to ARIKAYCE, including disease awareness, patient support activities, field operations, other professional fees, and milestone payments related to ARIKAYCE. In addition, SG&A increased $10.3 million due to higher compensation and related expenses from an increase in headcount.
Amortization of Intangible Assets
Amortization of intangible assets for the nine months ended September 30, 2019 was $3.7 million and is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestone paid to PARI for the FDA approval of ARIKAYCE. 
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Interest Expense
Interest expense was $20.4 million for the nine months ended September 30, 2019 as compared to $18.8 million in the same period in 2018. The $1.6 million increase in interest expense in the nine months ended September 30, 2019 as compared to the prior year period relates to interest on the $450.0 million aggregate principal amount of the Convertible Notes issued in late January 2018.2018 and accretion of the debt discount. The interest expense on the Convertible Notes is based on an effective interest rate of 7.6%.

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

In the second quarter of 2019, we completed an underwritten public offering of 10,657,692 shares of common stock, which included the underwriters' exercise in full of its over-allotment option of 1,042,307 shares from the Company at a price to the public of $26.00, less underwriting discounts and commissions. Our net proceeds from the sale of the shares, after deducting the underwriting discounts and commissions and offering expenses of $16.0 million, were $261.1 million. The offering also included the sale of 400,000 shares from our Chairman and Chief Executive Officer, from which we received no proceeds.

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

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

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

Cash Flows
 
As of March 31,September 30, 2019, we had cash and cash equivalents of $420.2$535.6 million, as compared with $495.1 million as of December 31, 2018. The $74.8$40.6 million decreaseincrease was due to cash provided by financing activities related to cash proceeds received from our underwritten public offering offset, in large part, by cash used in operating activities and, to a lesser extent, cash used in investing activities. Our working capital was $360.4$510.2 million as of March 31,September 30, 2019 as compared with $439.2 million as of December 31, 2018.
 
Net cash used in operating activities was $73.8$206.2 million and $67.4$187.8 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively. The net cash used in operating activities during the threenine months ended March 31,September 30, 2019 and 2018 was primarily for the commercial (in 2019), pre-commercial (in 2018), clinical and manufacturing activities related to ARIKAYCE, as well as other SG&A expenses. In addition, net cash used in operating activities during both the threenine months ended March 31,September 30, 2019 and 2018 included clinical trial expenses related to INS1007. Beginning in 2019, certain payments related to the long-term production capacity build-out at Patheon that are currently classified as other assets will be reclassified to operating lease right-of-use assets on our balance sheet upon the lease inception date.
 
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Net cash used in investing activities was $4.0$29.2 million and $5.4$10.1 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively. The net cash used in investing activities during the threenine months ended March 31,September 30, 2019 and 2018 was primarily related to our new corporate headquarters and the purchase of fixed assets for our long-term production capacity build-out at Patheon. We expect our cash used in investing activities to increase for the year ended December 31, 2019 compared to the year ended December 31, 2018 due primarily to our investments in the build-out of our new corporate headquarters and our long-term production capacity build-out at Patheon.these two strategic investments.
 
Net cash provided by financing activities was $3.0$276.0 million and $378.2$384.3 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively. Net cash provided by financing activities for the threenine months ended March 31,September 30, 2019 was primarily due to cash proceeds from our underwritten public offering, as well as stock option exercises and participation in our employee stock purchase program.plan. Net cash provided by financing activities for the threenine months ended March 31,September 30, 2018 included net cash proceeds of $435.8 million from our issuance of Convertible Notes in January 2018, partially offset by the February 2018 pay-off of our outstanding debt to Hercules Capital in the amount of $55.0 million.

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

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

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


ITEM 3.                                               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As of March 31,September 30, 2019, our cash and cash equivalents were in cash accounts and money market funds. Our investments in money market funds are not insured by the federal government.
 
As of March 31,September 30, 2019, we had $450.0 million of Convertible Notes outstanding which bear interest at a coupon rate of 1.75%. If a 10% change in interest rates had occurred on March 31,September 30, 2019, it would not have had a material effect on the fair value of our debt as of that date, nor would it have had a material effect on our future earnings or cash flows.
 
The majority of our business is conducted in US dollars. However, we do conduct certain transactions in other currencies, including Euros, British Pounds, and Japanese Yen. Historically, fluctuations in foreign currency exchange rates have not materially affected our results of operations and during the threenine months ended March 31,September 30, 2019 and 2018, our results of operations were not materially affected by fluctuations in foreign currency exchange rates.
 
ITEM 4.                                               CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer and ChiefPrincipal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefPrincipal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation as of March 31,September 30, 2019, our
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Chief Executive Officer and ChiefPrincipal Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in Internal Control Over Financial Reporting
 
During the threenine months ended March 31,September 30, 2019, we implemented processes and internal controls related to the January 1, 2019 adoption of ASU 2016-02. The implementation of these processes resulted in material changes to our internal control over financial reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reporting for the fiscal year ended December 31, 2019.

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

ITEM 1A.                                      RISK FACTORS

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

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
There were no unregistered sales of the Company’s equity securities by the Company during the quarter ended March 31,September 30, 2019.
  

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ITEM 6. EXHIBITS
 
Exhibit Index
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).
Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Quarterly Report on Form 10-Q filed on August 6, 2015).
Form of Award Agreement for Restricted Stock Units issued to directors pursuant to the Insmed Incorporated 2017 Incentive Plan.
First Amendment to Lease, dated October 1, 2016, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
Second Amendment to Lease, dated October 17, 2018, between CIP II/AR Bridgewater Holdings LLC and Insmed Incorporated
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Certification of Paolo Tombesi,John Goll, Chief FinancialAccounting Officer (Principal Financial and Accounting Officer) of Insmed Incorporated, pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Certification of William H. Lewis, Chairman and Chief Executive Officer (Principal Executive Officer) of Insmed Incorporated, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Certification of Paolo Tombesi,John Goll, Chief FinancialAccounting 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.
101The following materials from Insmed Incorporated’s quarterly report on Form 10-Q for the quarter ended March 31,September 30, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31,September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Comprehensive Loss for the three and nine months ended March 31,September 30, 2019 and 2018, (iii) Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2019 and 2018, and (iv)(v) Notes to the Unaudited Consolidated Financial Statements.Statements, and (vi) Cover Page.
104 The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in iXBRL and contained in Exhibit 101.


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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
INSMED INCORPORATED
Date: May 7,October 30, 2019By/s/ Paolo TombesiJohn Goll
Paolo TombesiJohn Goll
Chief FinancialAccounting Officer
(Principal Financial and Accounting Officer)


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