Why did Insmed's auditors raise substantial doubt about its ability to continue as a going concern?

The filing states that Ernst & Young's report identifies recurring operating losses and a net capital deficiency, and that the company's net loss position, failure to attain profitable operations and dependence on obtaining adequate financing raise substantial doubt. Management states that existing cash reserves, including amounts raised in the March 15, 2005 financing, will not sufficiently fund activities through the next twelve months without additional funding.

What is IPLEX and what indication was it approved for?

IPLEX (mecasermin rinfabate) is a proprietary complex of recombinant IGF-1 and its binding protein rhIGFBP-3, administered as a once-daily subcutaneous injection. The FDA approved it on December 12, 2005 for the treatment of growth failure in children with Severe Primary IGFD or with growth hormone gene deletion who have developed neutralizing antibodies to growth hormone.

How much has Insmed spent on research and development, and how is that expected to change?

Research and development expenses were $23.3 million in 2004 and $21.8 million in 2005. The company states that the amount spent on research and development relative to its overall budget is expected to decrease as it devotes more resources to commercializing IPLEX.

What litigation does Insmed face, and what is the potential impact?

Tercica and Genentech have sued Insmed for patent infringement in the UK and U.S. courts, and Tercica has filed a complaint alleging deceptive promotional statements and unfair business practices related to its product Increlex. The company states that an adverse ruling could have a material adverse effect on its business, financial condition and results of operations, and that the outcome cannot be predicted with certainty.

What are the key terms of the convertible notes issued in March 2005?

Insmed issued approximately $35 million of 5.5% Senior Convertible Notes at a conversion price of $1.295 per share, along with warrants to purchase 14,864,865 shares at $1.36 per share. The notes mature in nine quarterly installments from March 1, 2008 to March 1, 2010, and the company may redeem 50% or more of the notes at par on one occasion if specified stock price conditions are met.

INSM 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 6, 2006. Cited figures are marked; the original filing is the authoritative source.

Insmed Incorporated, a Virginia biopharmaceutical company, reports in its annual report for 2005 that it received FDA approval on December 12, 2005 for IPLEX (mecasermin rinfabate), its once-daily IGF-1 replacement therapy, for growth failure in children with Severe Primary IGFD.

The company plans to launch IPLEX commercially in the United States in the second quarter of 2006 with its own specialty sales force targeting about 400 pediatric endocrinologists, and it estimates the full cost of bringing IPLEX to market at $270 million^a. IPLEX carries seven years of U.S. Orphan Drug exclusivity for Severe Primary IGFD. Its oncology candidates INSM-18 and rhIGFBP-3 remain in Phase I/II and Phase I clinical development.

The company reported a 2005 net loss of $40.9 million^b on revenues of $131 thousand, with an accumulated deficit of $254.7 million at December 31, 2005. Ernst & Young's audit report includes a going concern explanatory paragraph, and management states that existing cash reserves will not sufficiently fund activities through the next twelve months without additional financing. Cash and cash equivalents were $18.8 million at year-end, and the company had $35 million of 5.5% Senior Convertible Notes issued in March 2005.

The filing also highlights significant risk. Tercica and Genentech have sued Insmed for patent infringement in the United Kingdom and the United States, and Tercica's competing product Increlex was approved by the FDA in August 2005 for a substantially similar indication. Investors should weigh the commercial launch opportunity against the going concern doubt, the need for substantial additional capital, and the ongoing litigation.

02—Key points

Key Highlights

FDA approved IPLEX on December 12, 2005 for growth failure in children with Severe Primary IGFD; it is described as the only once-daily IGF-1 replacement therapy and carries seven years of Orphan Drug exclusivity for that indication in the U.S.
Commercial launch planned for the second quarter of 2006 with an initial sales force of 25 to 30 representatives, targeting about 400 U.S. pediatric endocrinologists.
2005 net loss of $40.9 million on revenues of $131 thousand; accumulated deficit of $254.7 million at December 31, 2005.
Independent auditor Ernst & Young includes a going concern explanatory paragraph; cash and cash equivalents were $18.8 million at year-end 2005.
Company estimates the full cost of bringing IPLEX to market at $270 million.
Competitor Tercica received FDA approval in August 2005 for Increlex, a rhIGF-1 product for a substantially similar indication, and Tercica and Genentech have filed patent infringement suits against Insmed.
Convertible notes issued March 15, 2005 totaled approximately $35 million at 5.5%, with warrants for 14,864,865 shares at $1.36 per share.

03—Questions

Frequently Asked Questions

Why did Insmed's auditors raise substantial doubt about its ability to continue as a going concern?
The filing states that Ernst & Young's report identifies recurring operating losses and a net capital deficiency, and that the company's net loss position, failure to attain profitable operations and dependence on obtaining adequate financing raise substantial doubt. Management states that existing cash reserves, including amounts raised in the March 15, 2005 financing, will not sufficiently fund activities through the next twelve months without additional funding.
What is IPLEX and what indication was it approved for?
IPLEX (mecasermin rinfabate) is a proprietary complex of recombinant IGF-1 and its binding protein rhIGFBP-3, administered as a once-daily subcutaneous injection. The FDA approved it on December 12, 2005 for the treatment of growth failure in children with Severe Primary IGFD or with growth hormone gene deletion who have developed neutralizing antibodies to growth hormone.
How much has Insmed spent on research and development, and how is that expected to change?
Research and development expenses were $23.3 million in 2004 and $21.8 million in 2005. The company states that the amount spent on research and development relative to its overall budget is expected to decrease as it devotes more resources to commercializing IPLEX.
What litigation does Insmed face, and what is the potential impact?
Tercica and Genentech have sued Insmed for patent infringement in the UK and U.S. courts, and Tercica has filed a complaint alleging deceptive promotional statements and unfair business practices related to its product Increlex. The company states that an adverse ruling could have a material adverse effect on its business, financial condition and results of operations, and that the outcome cannot be predicted with certainty.
What are the key terms of the convertible notes issued in March 2005?
Insmed issued approximately $35 million of 5.5% Senior Convertible Notes at a conversion price of $1.295 per share, along with warrants to purchase 14,864,865 shares at $1.36 per share. The notes mature in nine quarterly installments from March 1, 2008 to March 1, 2010, and the company may redeem 50% or more of the notes at par on one occasion if specified stock price conditions are met.

04—Continue

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