SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 2000
-----------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-30739
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INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-1972729
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
800 East Leigh Street (804) 828-6893
Richmond, Virginia 23219 (Registrant's telephone number
(Address of principal executive offices) including area code)
(zip code)
N/A
(former name)
Indicate by check [x] whether the Registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days:
Yes: No X
----- -------
As of June 26, 2000, the latest practicable date, there were 108,127,568
shares of Insmed Incorporated's common stock outstanding.
INSMED INCORPORATED
INDEX
REPORT: FORM 10-Q Page
----
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements and Notes......................................................... 2
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 6
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk............................. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 20
Item 2. Changes in Securities and Use of Proceeds.............................................. 20
Item 3. Defaults Upon Senior Securities........................................................ 20
Item 4. Submission of Matters to Vote of Security Holders...................................... 20
Item 5. Other Information...................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
SIGNATURES
PART I-FINANCIAL INFORMATION
On November 30, 1999, Insmed Incorporated (the "Registrant" or "Insmed
Incorporated"), Insmed Pharmaceuticals, Inc. (the "Company" or "Insmed
Pharmaceuticals") and Celtrix Pharmaceuticals, Inc. ("Celtrix") entered into a
reorganization agreement pursuant to which the Company would acquire Celtrix and
both the Company and Celtrix would become wholly-owned subsidiaries of the
Registrant (the "Reorganizations"). The transaction closed on May 31, 2000. This
Form 10-Q includes the Unaudited Condensed Consolidated Financial Statements of
Insmed Pharmaceuticals as of and for the quarter ended March 31, 2000, and the
Unaudited Pro Forma Condensed Consolidated Financial Statements of Insmed
Incorporated as of and for the quarter ended March 31, 2000.
ITEM 1-FINANCIAL STATEMENTS AND NOTES
INSMED PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2000 1999
------------ -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,615 $ 317
Marketable securities 2,812 4,318
Prepaids and other current assets 43 43
--------- ---------
Total current assets 5,470 4,678
Property and equipment:
Research and development equipment 355 336
Furniture and equipment 189 168
--------- ---------
544 504
Accumulated depreciation (283) (262)
--------- ---------
261 242
Other assets 912 376
--------- ---------
Total assets $ 6,643 $ 5,296
========= =========
Liabilities & stockholders' equity
Current liabilities:
Accounts payable $ 1,144 $ 723
Payroll liabilities 202 111
--------- ---------
Total current liabilities 1,346 834
Stockholder's equity:
Series A Convertible Participating Preferred Stock 61 61
Series B Convertible Preferred Stock 36 36
Common Stock 44 39
Additional capital 39,310 27,181
Notes receivable from stock sales (61) (64)
Accumulated deficit (34,081) (22,780)
Accumulated other comprehensive loss (12) (11)
--------- ---------
Total stockholders' equity 5,297 4,462
--------- ---------
Total liabilities & stockholder's equity $ 6,643 $ 5,296
========= =========
2
See accompanying notes.
INSMED PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data - unaudited)
Three Months Ended
March 31,
-----------------------
2000 1999
----------- ----------
Revenues $ 90 $ 168
Operating expenses
Research and development 2,441 1,309
General and administrative 680 439
Non-cash stock compensation 8,389 -
--------- --------
Total operating expenses 11,510 1,748
--------- --------
Operating loss (11,420) (1,580)
Interest income 119 90
--------- --------
Net loss $ (11,301) $ (1,490)
========= ========
Basic and diluted net loss per share $ (2.85) $ (0.42)
========= ========
Shares used in computing basic
and diluted net loss per share 3,966 3,588
========= ========
See accompanying notes.
3
INSMED PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
Operating activities
Net loss $(11,301) $ (1,490)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 22 19
Loss on sale of marketable securities 5 -
Loss on sale of property and equipment - 1
Issuance of stock for services 427 -
Interest accrued on note receivable from stock sales (1) (1)
Non-cash stock compensation 8,389 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets - 6
Other assets (393) -
Accounts payable 278 30
Payroll liabilities 91 (18)
-------- --------
Cash used in operating activities (2,483) (1,453)
-------- --------
Investing activities
Purchases of marketable securities (199) -
Proceeds from marketable securities matured and sold 1,699 -
Purchases of property & equipment (41) (6)
-------- --------
Cash provided by (used) in investing activities 1,459 (6)
-------- --------
Financing activities
Proceeds from issuance of common stock 3,318 -
Receipt of principal on note receivable from stock sale 4 -
-------- --------
Cash provided by financing activities 3,322 -
-------- --------
Increase (decrease) in cash and cash equivalents 2,298 (1,459)
Cash and cash equivalents at beginning of period 317 11,677
-------- --------
Cash and cash equivalents at end of period $ 2,615 $ 10,218
======== ========
See accompanying notes.
4
Insmed Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Interim Financial Statements
The condensed consolidated balance sheet as of March 31, 2000 and the
condensed consolidated statements of operations and cash flows for the three
month period ended March 31, 2000, have been prepared by the company, without
audit. In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements include all adjustments, which include
normal recurring adjustments, necessary to present fairly the company's
financial position and the results of its operations and its cash flows. Interim
results are not necessarily indicative of results to be expected for a full
fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the fiscal year ended December 31, 1999 included in the
joint proxy statement/prospectus of Insmed Pharmaceuticals Inc. and Celtrix
Pharmaceuticals, Inc. dated May 4, 2000.
2. Pending Acquisition of Celtrix
On November 30, 1999, the Registrant and the Company entered into an
agreement to acquire Celtrix Pharmaceuticals, Inc. The transaction closed on May
31, 2000. At closing each common share of Celtrix was exchanged for one share of
common stock in a newly formed holding company, Insmed Incorporated. The
aggregate liquidation preference and related dividends of Celtrix Series A
Preferred Stock were convertible into Celtrix common stock at a price per share
of $2.006. The holders of Celtrix Series A Preferred Stock received one share of
common stock of the Registrant on an as converted basis. Each preferred and
common share of the Company was exchanged for three and one-half shares of
common stock of the Registrant. All options and warrants outstanding at the time
of the transaction converted into options and warrants of the Registrant. As
part of the transaction the Company's management and board of directors became
the management and board of directors of the Registrant.
Pro forma condensed consolidated financial information on page 9 has been
included in this filing to relect the accounting for the acquisition of Celtrix
by the Company as a purchase in accordance with generally accepted accounting
principles.
3. Commitment to Issue Equity
The Company entered into an agreement to sell 5,632,678 shares of its
common stock and warrants to purchase 6,901,344 shares of common stock of Insmed
Incorporated for $34.5 million. The warrants are exercisable for five years at a
price of $2.25. The financing closed on May 31, 2000.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the financial statements and notes thereto in the
joint proxy statement/ prospectus dated May 4, 2000.
Overview
Insmed Pharmaceuticals develops drugs to treat metabolic and endocrine diseases.
Its current programs address treatments for type 2 diabetes and polycystic ovary
syndrome (PCOS). The Company was incorporated in Virginia in September 1988.
The Company's lead product is INS-1, a naturally occurring insulin sensitizer.
Unlike insulin, INS-1 achieves significant concentrations in the bloodstream
following oral administration. The Company has conducted more than twenty pre-
clinical studies of INS-1 and, as of March 31, 2000, has completed seven
clinical trials with five additional clinical trials in progress. In Phase II
clinical trials, INS-1 has demonstrated efficacy both in patients with type 2
diabetes and in women suffering from PCOS. In both pre-clinical and clinical
studies, it has been tolerated well and shown no evidence of organ toxicity.
Seven new trials are expected to begin in 2000.
Results of Operations
For the three months ended March 31, 2000, our net loss increased to $11.3
million from $1.5 million for the three months ended March 31, 1999. The
increase in the net loss primarily relates to a non-cash charge of $8.4 million
for stock compensation. The major component of the $8.4 million non-cash charge
relates to stock options exercised with a non-recourse note. Generally accepted
accounting principles require that compensation based on the difference between
the current market price of the underlying stock and the market price utilized
in the previous reporting period be recognized in the financial statements. We
used the sale of stock to Taisho Pharmaceutical Co., Ltd. ("Taisho") on March
28, 2000 (discussed below), to determine the amount of the charge in the second
quarter.
Revenues for the current and prior period relate to grants under the Small
Business Innovation Research Program (SBIR).
Research and development expenses increased 86% to $2.4 million in the first
quarter of 2000 from 1.3 million in the first quarter of the prior year. This
increase was caused primarily by salaries paid to people we hired to accommodate
our growth, and by increases in contract manufacturing costs we incurred to
produce INS-1 for clinical studies.
General and administrative expenses increased 55% from $439,000 in the first
quarter of 1999, to $680,000 in the first quarter of this year. Salaries and
benefits account for the majority of the increase. Subsequent to March 31, 1999,
we have added a chief financial officer, controller and intellectual property
associate to our general and administrative staff and, in the first quarter of
2000, we paid bonuses of $160,000 to general and administrative personnel.
6
As of March 31, 2000, current assets increased $792,000 compared to December 31,
1999, and stockholders' equity increased $835,000 primarily as a result of the
sale of 106,758 shares of common stock to Taisho for $28.10 per share, and the
exercise of stock options during the first quarter. Other assets, which consist
of legal, accounting and printing costs related to our merger with Celtrix,
increased $536,000. In the quarter ended June 30, 2000, these costs will be
included in the Celtrix purchase price allocation. Current liabilities increased
61% to $1.3 million as a result of professional fees related to the merger and
manufacturing costs for clinical trial material.
Liquidity and Capital Resources
Since the Company's inception in 1988, we have financed our operations
primarily through private placement of preferred and common stock aggregating
approximately $26.2 million through March 31, 2000. Our last private placement
of stock occurred in June 1998 and generated net proceeds of $14 million. In
addition, on March 28, 2000, we sold 106,758 shares of common stock to Taisho.
This equity investment was made in conjunction with the signing of a letter of
intent with Taisho regarding the development and commercialization rights for
Insmed's lead compound, INS-1, for the treatment of Polycystic Ovary Syndrome
(PCOS) and Type 2 diabetes in Japan and other Asian countries. In May 2000, we
sold 5,632,678 shares of Company common stock and warrants to purchase 6,901,344
shares of common stock of the Registrant for an aggregate consideration of $34.5
million. The warrants are exercisable for five years at a price of $2.25.
As a result of the May 2000 financing, we believe that we have adequate cash to
meet our needs until mid 2001. Our business strategy contemplates selling
additional equity and entering into agreements with corporate partners to fund
research and development, and provide milestone payments, license fees and
equity investments to fund operations. We will need to raise substantial
additional funds to continue development and commercialization of our products.
There can be no assurance that adequate funds will be available when we need
them, or on favorable terms. If at any time we are unable to obtain sufficient
additional funds, we will be required to delay, restrict or eliminate some or
all of our research or development programs, dispose of assets or technology, or
cease operations.
Forward Looking Statements
Statements included within this Management's Discussion and Analysis of
Financial Condition and Results of Operations, which are not historical in
nature, may constitute forward-looking statements for purposes of the safe
harbor provided by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include all statements regarding expected
financial position, results of operations, cash flows, dividends, financing
plans, business strategies, operating efficiencies or synergies, budgets,
capital and other expenditures, competitive positions, growth opportunities for
existing or proposed products or services, plans and objectives of management,
demand for new pharmaceutical products, market trends in the pharmaceutical
business, inflation and various economic and business trends. Such forward-
looking statements are subject to numerous risks and uncertainties, including
risks that product candidates may fail in the clinic or may not be successfully
marketed, the company may lack financial resources to complete development of
product candidates, competing products may be more successful, demand for new
pharmaceutical products may decrease, the biopharmaceutical industry may
experience negative market trends and other risks detailed from time to time in
the Registrant's filings with the Securities and Exchange Commission. As a
result of these and other risks and uncertainties, actual results may differ
materially from those described in the above discussion.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Insmed Pharmaceuticals invests its excess cash in investment grade,
interest-bearing securities. At March 31, 2000, Insmed Pharmaceuticals had $5.4
million invested in fixed rate securities. Insmed Pharmaceuticals' investments
in fixed rate securities are subject to interest rate and credit risk. Based on
Insmed Pharmaceuticals' policy of investing in highly rated securities whose
maturities at March 31, 2000 are all less than one year minimizes the risk
associated with its investment in fixed rate securities. While a hypothetical
decrease in market
7
interest rates by 10 percent from the March 31, 2000 levels would cause a
decrease in interest income, it would not result in a loss of the principal.
Additionally, the decrease in interest income would not be material.
8
Insmed Incorporated
PRO FORMA CONDENSED CONSOLIDATED FINANICAL STATEMENTS
The following Pro Forma Condensed Consolidated Financial Statements reflect
the accounting for the acquisition of Celtrix by Insmed Pharmaceuticals in
accordance with generally accepted accounting principles. Insmed Incorporated is
a holding company formed by Insmed Pharmaceuticals in order to facilitate the
Reorganizations in accordance with the reorganization agreement. The
reorganization agreement provides that:
. each share of issued and outstanding common and preferred stock of
Insmed Pharmaceuticals will be exchanged for 3.5 shares of Insmed
Incorporated common stock;
. each outstanding share of common stock of Celtrix will be exchanged
for one share of Insmed Incorporated common stock; and
. each share of Celtrix Series A Preferred Stock will be exchanged on
an as converted basis, by applying the liquidation preference of
$1,000 per share, plus accrued but unpaid dividends through the
closing date, to the conversion ratio of $2.006 specified in the
Celtrix Certificate of Incorporation, into one share of Insmed
Incorporated common stock.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
based upon and should be read in conjunction with the historical consolidated
financial statements of Insmed Pharmaceuticals and Celtrix, including the notes
thereto, which are incorporated herein by reference.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1999 gives effect to the acquisition of Celtrix by
Insmed Pharmaceuticals and related transactions as if such transactions had
occurred on January 1, 1999. Celtrix's fiscal year end is March 31, 1999.
Therefore, for the purpose of the historical data included in the Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the Year Ended December
31, 1999, the unaudited financial data from the nine months ended December 31,
1999, was combined with the unaudited financial data for the three months ended
March 31, 1999.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Three Months Ended March, 31, 2000 gives effect to the acquisition of
Celtrix by Insmed Pharmaceuticals and related transactions as if such
transactions had occurred on January 1, 2000.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 2000, gives effect to the acquisition of Celtrix by Insmed Pharmaceuticals
and related transactions as if they occurred on March 31, 2000. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet gives effect to the exchange of
shares described above and in note 1, reflects the expected allocation of the
purchase price described in note 2, the formation of Insmed Incorporated and the
$34.5 million equity financing.
For accounting purposes, the historical basis of Insmed Pharmaceuticals
assets and liabilities will carry over to Insmed Incorporated. The acquisition
of Celtrix will be accounted for using the purchase method of accounting, so the
total purchase costs of the acquisition will be allocated to the tangible and
intangible assets and liabilities acquired based upon their estimated fair
values.
9
The preliminary purchase price allocation is based on an independent third-party
valuation. This valuation has not yet been finalized. Accordingly the
preliminary purchase price allocation is subject to change. Upon completion of
the Reorganizations the amount of purchase price allocated to tangible assets
acquired, in process research and development and liabilities assumed, could
differ from the amounts and allocation discussed in Note 2. The Registrant is
not aware of any significant unrecorded obligations or contingencies, and do not
believe that the final purchase price allocation will differ materially from
that included in the pro forma financial information contained herein. The final
allocation of the purchase price will be made based upon valuations and other
studies that have not been completed.
In addition, Insmed Pharmaceuticals and Celtrix expect to incur costs
directly attributable to the Reorganizations of approximately $2.0 million and
$1.5 million, respectively. The $2.0 million of transaction costs Insmed
Pharmaceuticals expects to incur have been included in the determination of the
preliminary purchase price. The $1.5 million Celtrix expects to incur will be
expensed as incurred and have not been reflected in the Unaudited Pro Forma
Condensed Statement of Operations, as they are nonrecurring charges.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do not:
(a) purport to represent what the results of operations or financial
condition actually would have been if the acquisition of Celtrix by
Insmed Pharmaceuticals and the other transactions described below had
occurred as of the dates indicated or what such results will be for
any future periods,
(b) give effect to certain nonrecurring charges expected to result from
the transaction, or
(c) reflect any anticipated expenses that we expect that Insmed
Incorporated will incur as a result of combining the companies.
10
INSMED INCORPORATED
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999
(in thousands, except per share data)
Financing Pro
Historical Pro Forma Insmed as Historical Reorganization References Forma
Insmed Adjustments Adjusted Celtrix Adjustments (Note 2) Combined
---------- ----------- --------- ---------- -------------- ---------- --------
Statement of Operations Data:
Total revenues $ 663 $ - $ 663 $ 763 $ - $ 1,426
Costs and expenses:
Research and development 6,320 6,320 1,027 7,347
General and administrative 2,189 2,189 1,953 4,142
Stock compensation 285 285 - 285
-------- --------- --------- -------- ------- ---------
8,794 - 8,794 2,980 - 11,774
-------- --------- --------- -------- ------- ---------
Operating loss (8,131) - (8,131) (2,217) - (10,348)
Equity in loss from joint venture - - (8,973) (8,973)
Amortization of goodwill - - - (537) (J) (537)
Interest Income 338 338 85 423
Proceeds from settlement agreement - - 600 600
-------- --------- --------- -------- ------- ---------
Net loss $ (7,793) $ - $ (7,793) $(10,505) $ (537) $ (18,835)
======== ========= ========= ======== ======= =========
Net loss per share - basic and diluted $ (2.16) $ (0.40) $ (0.19)
======== ======== =========
Shares used in computing basic
and diluted net loss per share 3,606 26,176 99,306
======== ======== =========
11
Insmed Incorporated
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2000
(in thousands, except per share data)
Financing Pro
Historical Pro Forma Insmed as Historical Reorganization References Forma
Insmed Adjustments Adjusted Celtrix Adjustments (Note 2) Combined
---------- ----------- --------- ---------- -------------- ---------- --------
Total revenues $ 90 $ - $ 90 $ 90 $ - $ 180
Cost and expenses:
Research and development 2,441 2,441 227 2,668
General and administrative 680 680 746 1,426
Non cash stock compensation 8,389 8,389 - 8,389
---------- ----------- --------- ---------- -------------- --------
11,510 - $ 11,510 973 - 12,483
---------- ----------- --------- ---------- -------------- --------
Operating loss (11,420) - (11,420) (883) - (12,303)
Equity in loss from joint venture - - (165) (165)
Amortization of goodwill - - - (134) (J) (134)
Interest income, net 119 119 33 152
---------- ----------- --------- ---------- -------------- --------
Net loss $ (11,301) $ - $ (11,301) $ (1,015) $ (134) $(12,450)
========== =========== ========= ========== ============== ========
Net loss per share - basic and diluted $ (2.85) $ (0.03) $ (0.11)
========== ========== ========
Shares used in computing basic
and diluted net loss per share 3,966 31,863 107,042
========== ========== ========
12
Insmed Incorporated
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 2000
(in thousands)
Financing Insmed Pro
Historical Pro Forma References as Historical Forma References Pro
Insmed Adjustments (Note 2) Adjusted Celtrix Adjustments (Note 2) Forma
---------- ----------- --------- -------- ---------- ----------- ---------- -----
Assets
Current assets:
Cash and cash equivalents $ 2,615 $ 32,600 (A) $ 35,215 $ 6,700 $ - $ 41,915
Marketable securities 2,812 2,812 - 2,812
Prepaids and other current
assets 43 43 115 158
------- --------- --------- -------- --------- ---------
Total current assets 5,470 32,600 38,070 6,815 - 44,885
Property and equipment, net 261 261 68 329
Assets held for sale - - 346 (346) (C) -
Goodwill - - - 10,735 (J) 10,735
Other assets 912 912 2,582 1,088 (B)
(2,582) (C)
(2,000) (D) -
------- --------- --------- -------- --------- ---------
Total assets $ 6,643 $ 32,600 $ 39,243 $ 9,811 $ 6,895 $ 55,949
======= ========= ========= ======== ========= =========
Liabilities and stockholders'
equity
Current liabilities:
Accounts payable $ 1,144 $ - $ 1,144 $ - $ 1,088 (B) $ 2,232
Other current liabilities 202 202 531 - 733
------- --------- --------- -------- --------- ---------
Total current liabilities 1,346 - 1,346 531 1,088 2,965
Exchangeable preferred stock - - 7,948 (7,948) (E) -
Stockholders' equity:
Preferred Stocks 97 97 - (97) (F) -
Common Stocks 44 56 (A) 100 338 42 (E)
(107,041,998 pro forma shares 340 (F)
outstanding) 250 (G) 1,070
Additional capital 39,310 32,544 (A) 71,854 142,656 8,288 (E)
(243) (F)
(250) (G)
(142,044) (H)
54,433 (I)
(2,928) (C)
(2,000) (D)
10,735 (J) 140,231
Cumulative preferred stock
dividend - - 382 (382) (E) -
Notes receivable from stock
sale (61) (61) - - (61)
Accumulated deficit (34,081) (34,081) (142,044) 142,044 (H)
(54,433) (I) (88,514)
Accumulated other
comprehensive loss (12) (12) - - (12)
------- --------- --------- -------- --------- ---------
Total stockholders' equity 5,297 32,600 37,897 1,332 13,755 52,984
------- --------- --------- -------- --------- ---------
Total liabilities and
stockholders' equity $ 6,643 $ 32,600 $ 39,243 $ 9,811 $ 6,895 $ 55,949
======= ========= ========= ======== ========= =========
13
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
Note 1
The unaudited pro forma condensed consolidated financial statements reflect
the conversion of all of the outstanding shares of Celtrix and Insmed
Pharmaceuticals common and preferred stock into Insmed Incorporated. The table
below is based on the respective companies' capitalization at March 31, 2000,
using the conversion ratio of one (1) share of Insmed Incorporated common stock
for each share of Celtrix common stock and 3.5 shares of Insmed Incorporated
common stock for each share of Insmed Pharmaceuticals stock. No exercise of
options or warrants outstanding at March 31, 2000 was assumed.
Shares of
Insmed
Number of Conversion Incorporated
Company Stock Shares Ratio to be Issued
- --------------- ------------- --------- ----------- --------------
Insmed Pharmaceuticals, Inc. Series A Preferred 6,144,599 3.5 21,506,097
Insmed Pharmaceuticals, Inc. Series B Preferred 3,581,761 3.5 12,536,164
Insmed Pharmaceuticals, Inc. Common 4,359,477 3.5 15,258,170
Celtrix Pharmaceuticals, Inc. Series A Preferred 8,010 1.0 (1) 4,183,426
Celtrix Pharmaceuticals, Inc. Common 33,843,770 1.0 33,843,770
Insmed Pharmaceuticals, Inc. Common 5,632,678 (2) 3.5 19,714,373
--------------
Number of Pro Forma Outstanding Shares at March 31, 2000 107,042,000
==============
(1) As of March 31, 2000, there are 8,010 shares of Series A Preferred Stock
outstanding. These shares have a liquidation preference of $1,000 per
share. Dividends accreted and unpaid related to this stock are $381,952 at
March 31, 2000. The aggregate liquidation preference and dividends are
convertible into Celtrix common stock at a price of $2.006 per share, which
would provide for the issuance of 4,183,426 shares of Insmed Incorporated
common stock if the transaction occurred on March 31, 2000.
(2) These shares represent common stock of Insmed Pharmaceuticals issuable upon
closing the $34.5 million equity financing.
In connection with the purchase of Celtrix, Insmed Incorporated expects
approximately $54.4 million of the purchase price to be allocated to in-process
research and development. Insmed Pharmaceuticals management has engaged an
independent third-party appraisal company to perform a valuation of the
intangible assets acquired. It is expected that Insmed Incorporated will enter
into various corporate collaborations and agreements to manufacture, market,
distribute, and develop the in-process research and development acquired in the
purchase of Celtrix. The terms and conditions of these agreements could differ
substantially from the assumptions made by management. It is also likely that
the terms and conditions of existing corporate collaboration agreements could be
amended or terminated, which could also significantly affect the assumptions
associated with the in-process projects.
The value assigned to purchased in-process research and development was
determined by
14
estimating the costs to develop the purchased in-process research and
development into commercially viable products; estimating the resulting net cash
flows from such projects; and discounting the net cash flows back to their
present value.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion and/or acceleration of existing development programs, including the
mandatory completion of several phases of clinical trials and the general and
administrative costs necessary to manage the projects and trials. Assuming the
approval of the drug by the FDA, costs related to the wide scale manufacturing,
distribution, and marketing of the drugs are included in the projection. The
resulting net cash flows from such projects are based on Insmed Incorporated
management's estimates of revenues, cost of sales and research and development,
sales and marketing and, general and administrative costs, and the anticipated
income tax effect.
The discounting of net cash flows back to their present value is based on
the weighted average cost of capital ("WACC"). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
that enterprise. The discount rates utilized in discounting the net cash flows
from purchased in-process research and development range from 33% to 45%. These
discount rates may be higher than the WACC due to the inherent uncertainties
surrounding the successful development of the purchased in-process research and
development.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Celtrix management in the ordinary
course of managing its business. Insmed Incorporated management has reviewed and
challenged the forecast data and related assumptions and utilized the
information in analyzing in-process research and development. The forecast data
and assumptions are inherently uncertain and unpredictable. However, based upon
the information available at this time Insmed Incorporated management believes
the forecast data and assumptions to be reasonable. These assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the forecasted results. Any such variance may result in a material adverse
effect on Insmed Incorporated's financial condition and results of operations.
In the allocation of purchase price to the IPR&D, the concept of
alternative future use was specifically considered for each of the programs
under development. The acquired IPR&D consists of Celtrix's work to complete
each of the identified programs. The programs are very specific to the disease
and market for which they are intended. There are no alternative uses for the
in-process programs in the event that the programs fail in clinical trials or
are otherwise not feasible. The development effort for the acquired IPR&D does
not possess an alternative future use for Insmed Incorporated as defined by
generally accepted accounting principles.
Below is a brief description of in-process research and development
projects including an estimation of when management believes Insmed Incorporated
may realize revenues from the sale of these products in the respective
application.
15
SomatoKine: Diabetes
Diabetes is typically characterized by the inadequate production or
utilization of insulin. Insulin is a vital hormone needed by the body for normal
control of blood glucose levels. The findings from a Phase II study in 12
patients to treat patients with type 1 diabetes suggests that SomatoKine is a
potential therapeutic for improving insulin sensitivity in both type 1 and type
2 diabetes and helping patients to manage their disease, thus avoiding the
complications which ultimately accompany the disease. Several additional studies
will be required to develop the product for this indication. We expect to resume
Phase II trials immediately.
The valuation of this program assumes that Phase II studies will continue
until 2003, that Phase III studies will be completed by 2005, and that the
product will launch in 2006. We estimate future costs for this program will be
about $3 million a year through 2005. A discount rate of 35% was utilized in
discounting these estimated cash flows.
SomatoKine: Severe Osteoporosis
Osteoporosis is a chronic, debilitating disorder in which the bones become
increasingly porous, brittle and subject to fracture. We believe the
findings from a Phase II feasibility study in hip fracture patients present an
argument for further development of SomatoKine for the treatment of severe
osteoporosis. The Phase II study suggests that a relatively short period of
treatment with SomatoKine offers the potential to restore the patient's bone
mineral density and improve supportive muscle strength as opposed to current
treatments which are used primarily to prevent further bone loss. We expect to
begin a second Phase II study later this year.
The valuation of this program assumes that Phase II studies will continue
until 2003, that Phase III studies will be completed by 2006, and that sales
will be made in 2007. The future costs of this program are estimated to be about
$4 million a year through 2006. A discount rate of 34% was utilized in
discounting these estimated cash flows.
SomatoKine: Protein Wasting and Severe Burns
Many critically ill patients suffer from serious protein wasting
conditions, which contribute to physical weakness and increase their risk of
morbidity and mortality. The results for the Phase II study conducted in burn
patients demonstrates potential efficacy for SomatoKine to treat serious medical
conditions associated with muscle and weight loss, and provides further evidence
supporting the use of SomatoKine to treat wasting diseases associated with
cancer cachexia, AIDS and advanced kidney failure. A discount rate of 45% was
utilized in discounting these estimated cash flows.
In persons suffering from traumatic burns over at least 20% of their body
surface, very low levels of IGF-I, along with major tissue damage are associated
with the disruption of biological processes that are essential for healing and
protections from burn complications. In a Phase II study conducted within this
population patients who received SomatoKine through two skin graft cycles
indicated substantial improvement in restoring the balance between protein
synthesis and degradation which is a prerequisite for accelerated wound healing
and reduced hospital stay. A discount rate of 33% was utilized in discounting
these estimated cash flows.
16
The valuation of these programs assumes that sales of SomatoKine could
begin in 2003 to treat severe burns and in 2006 to treat protein wasting. We
estimate the aggregate future costs to develop these indications will be $30
million. Because the value of protein wasting and severe burn indications is low
in relation to diabetes and severe osteoporosis, we will defer further trials in
these indications until we obtain additional data from the planned studies for
the more valuable indications.
TGF-beta-2: Dermal Ulcer
Celtrix entered into a product development, license and marketing agreement
with Genzyme Corporation ("Genzyme") in June 1994 for TGF-beta-2. The objective
is to commercialize this product for tissue repair and treatment of systemic
applications. Under the terms of the agreements, Genzyme assumed responsibility
for all costs related to developing TGF-beta-2 for these indications. Celtrix is
entitled to receive milestone payments and royalties if such development is
successful. The valuation of this program is based on receipt of milestone
payments of $2.5 million between 2001 and 2004, and royalties beginning in 2005.
A discount rate of 34% was utilized in discounting these estimated cash flows.
We have budgeted approximately $5.0 million in 2000 to continue the
development and clinical trial studies of SomatoKine for its applications in
diabetes and severe osteoporosis. The results of these trials will dictate the
amount of future funds and company resources that may be ultimately dedicated to
these projects. These results may lead management to conclude to continue
development, revise or postpone development plans, or possibly terminate the
pursuit of SomatoKine commercialization for one or both of these applications.
The total acquisition cost is estimated to be approximately $71.5 million,
determined as follows (in thousands):
Fair value of Insmed Incorporated shares(1)............................................ $59,823
Fair value of Insmed Incorporated stock options(2)..................................... 9,697
Insmed Pharmaceuticals transaction costs, consisting primarily of financial advisory,
legal and accounting fees(3)........................................................... 2,000
-------
$71,520
=======
(1) The fair value per share was calculated by averaging the Celtrix closing
price for the five days prior to and subsequent to the signing of the
definitive reorganization agreement on November 30, 1999. The result of
this calculation is $1.94886 which was multiplied by the shares outstanding
on an as converted basis as of November 30, 1999 of 30,646,461.
(2) Options and warrants outstanding at November 30, 1999 of 10,244,113 were
multiplied by the fair value of each grant. The fair value of these options
and warrants were estimated as of November 30, 1999 using the Black-Scholes
pricing method assuming a risk free interest rate of 6.0%, no dividends, a
volatility factor of .801, and a weighted average exercise price of .33 to
.50 years. The application of this method resulted in a fair value per
option and warrant between $0.01 and $1.41.
(3) Under purchase accounting the $2.0 million in transaction costs Insmed
Pharmaceuticals expects to incur are included in the determination of the
purchase price. The $1.5 million in transaction costs Celtrix expects to
incur will be expensed as incurred.
Based upon preliminary estimate of the valuation of tangible and intangible
assets acquired and liabilities assumed, Insmed Pharmaceuticals has allocated
the total cost of the purchase to the
17
net assets of Celtrix, as follows (in thousands):
March 31,
2000
Tangible assets acquired: ---------
Cash $ 6,700
Receivables and other current assets 115
Property and Equipment 68
In-Process research and development 54,433
Goodwill 10,735
Liabilities assumed (531)
--------
$ 71,520
========
The Celtrix research and development programs in process were valued as follows:
SomatoKine: Diabetes $ 36,122
SomatoKine: Osteoporosis 12,650
SomatoKine: Severe Burns 1,224
SomatoKine: Protein Wasting 3,169
TGF-beta-2: Dermal Ulcer 1,268
--------
$ 54,433
========
The in-process research and development has been written off against the
consolidated accumulated deficit. Because the charge is nonrecurring, it has not
been reflected in the pro forma condensed consolidated statement of operations.
Note 2
The pro forma condensed consolidated balance sheet includes the adjustments
necessary to give effect to the reorganization as if it occurred on March 31,
2000. The balance sheet also reflects the allocation of the preliminary purchase
price to the estimated fair value of tangible and intangible assets acquired and
liabilities assumed, a charge to the accumulated deficit for acquired in-process
research and development and the elimination of Celtrix and Insmed
Pharmaceuticals' equity accounts. Adjustments included in the pro forma
condensed consolidated balance sheet are summarized as follows (in thousands
except share and per share amounts):
(A) Sale of 5,632,678 shares of Insmed Pharmaceuticals common stock,
immediately prior to the merger close, and sale of warrants to
purchase 6,901,344 shares of common stock of Insmed Incorporated.
Proceeds, net of estimated transaction costs of $1.9 million, are
expected to approximate $32.6 million.
(B) Increase the accrual for Insmed Pharmaceuticals' estimated
transaction-related costs to $2,000 principally for investment
banking, legal and accounting services. Approximately $912 has been
incurred through March 31, 2000.
(C) Adjustment of net assets based upon purchase price allocation.
(D) Reclassification of the estimated transaction costs incurred by Insmed
Pharmaceuticals to reflect their inclusion in the determination of the
preliminary purchase price.
(E) The exchange of Celtrix preferred stock and cumulative dividends on an
as converted
18
basis into 4,183,426 shares of Insmed Incorporated common stock at the
exchange ratio prescribed in the Celtrix Certificate of Incorporation.
(F) Conversion of Insmed Pharmaceuticals Convertible Participating
Preferred Stock, Series A and Convertible Preferred Stock, Series B
into 34,042,261 shares of Insmed Incorporated common stock.
(G) Conversion of Insmed Pharmaceuticals and Celtrix common stock into
68,816,313 shares of Insmed Incorporated common stock.
(H) Elimination of Celtrix accumulated deficit.
(I) Charge to operations for in-process research and development of
$54,433.
(J) Record amount allocated to goodwill of $10,465 in the Unaudited
Proforma Condensed Consolidated Balance Sheet and amortization expense
of $537 and $134 in the Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the year ended December 31, 1999 and the
three months ended March 31, 2000, respectively. An amortization
period of twenty years was used.
Note 3
Pro forma basic and diluted net loss per share amounts for the year ended
December 31, 1999 and the three months ended March 31, 2000, are based upon the
estimated weighted-average number of shares expected to be outstanding
subsequent to the reorganizations. The determination of the pro-forma weighted-
average shares outstanding used in the calculation of pro forma basic and
diluted net loss per share for the three months ended March 31, 2000 is included
in the table in Note 1 on page 14. The impact of outstanding options and
warrants, including Insmed Pharmaceuticals and Celtrix options converted, is not
included in the calculation of basic and diluted net loss per share as the
effect would be antidilutive.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and Exchange
Act of 1934 on June 1, 2000. The common stock is listed on The Nasdaq SmallCap
Market and its symbol is "INSM."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
20
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
(Registrant)
Date: July 17, 2000
------ ---
By: /s/ Michael D. Baer
------------------------------------
Michael D. Baer
Chief Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
21