insm-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

☐ 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)


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

700 US Highway 202/206,
Bridgewater, New Jersey						08807
(Address of principal executive offices)						(Zip Code)

(908) 977-9900

(Registrant’s telephone number including area code)

Not Applicable

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

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


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

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 ☐

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 ☐

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 ☐
Emerging growth company ☐

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. ☐

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

As of October 25, 2021, there were 118,372,133 shares of the registrant’s common stock outstanding.

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INSMED INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

INDEX


PART I. FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements

	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	3

	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2021 and 2020	4

	Consolidated Statements of Shareholders' Equity (unaudited) for the three and nine months ended September 30, 2021 and 2020	5

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and 2020	7

	Notes to Consolidated Financial Statements (unaudited)	8

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	41
ITEM 4	Controls and Procedures	42

PART II. OTHER INFORMATION

ITEM 1	Legal Proceedings	42
ITEM 1A	Risk Factors	42
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 5	Other Information	43
ITEM 6	Exhibits	44

SIGNATURE		45

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, PULMOVANCE, ARIKARES and ARIKAYCE 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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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

INSMED INCORPORATED

Consolidated Balance Sheets

(in thousands, except par value and share data)


	As of		As of
	September 30, 2021		December 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	846,556	$	532,756
Accounts receivable	19,317		16,562
Inventory	67,453		49,592
Prepaid expenses and other current assets	25,655		23,982
Total current assets	958,981		622,892

Fixed assets, net	53,199		53,953
Finance lease right-of-use assets	9,525		10,334
Operating lease right-of-use assets	31,283		32,946
Intangibles, net	75,071		49,261
Goodwill	136,110		—
Other assets	47,602		26,769
Total assets	$	1,311,771	$	796,155

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	23,531	$	42,853
Accrued liabilities	62,266		37,807
Accrued compensation	19,554		25,591
Finance lease liabilities	1,198		1,081
Operating lease liabilities	5,952		11,475

Total current liabilities	112,501		118,807

Debt, long-term	557,604		356,318
Contingent consideration	76,490		—
Finance lease liabilities, long-term	13,805		14,713
Operating lease liabilities, long-term	22,647		21,255
Other long-term liabilities	23,882		9,178
Total liabilities	806,929		520,271

Shareholders’ equity:
Common stock, $0.01 par value; 500,000,000 authorized shares, 118,355,458 and 102,763,060 issued and outstanding shares at September 30, 2021 and December 31, 2020, respectively	1,184		1,028
Additional paid-in capital	2,655,823		2,105,252
Accumulated deficit	(2,152,265)		(1,830,589)
Accumulated other comprehensive income	100		193
Total shareholders’ equity	504,842		275,884
Total liabilities and shareholders’ equity	$	1,311,771	$	796,155

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Product revenues, net	$	46,757	$	43,643	$	132,337	$	122,998

Operating expenses:
Cost of product revenues (excluding amortization of intangible assets)	10,183		10,622		30,864		29,010
Research and development	70,347		41,411		196,392		113,343
Selling, general and administrative	60,280		46,585		169,007		147,594
Amortization of intangible assets	1,264		1,248		3,790		3,745
Change in fair value of deferred and contingent consideration liabilities	8,300		—		8,300		—
Total operating expenses	150,374		99,866		408,353		293,692

Operating loss	(103,617)		(56,223)		(276,016)		(170,694)

Investment income	46		70		113		1,677
Interest expense	(11,245)		(7,185)		(29,123)		(22,065)
Loss on extinguishment of debt	—		—		(17,689)		—
Other expense, net	(476)		(4)		(678)		(14)
Loss before income taxes	(115,292)		(63,342)		(323,393)		(191,096)

(Benefit) provision for income taxes	(2,578)		317		(1,717)		781

Net loss	$	(112,714)	$	(63,659)	$	(321,676)	$	(191,877)

Basic and diluted net loss per share	$	(0.96)	$	(0.63)	$	(2.93)	$	(2.00)

Weighted average basic and diluted common shares outstanding	117,092		101,615		109,955		96,029

Net loss	$	(112,714)	$	(63,659)	$	(321,676)	$	(191,877)
Other comprehensive income (loss):
Foreign currency translation (loss) income	(324)		212		(93)		124
Total comprehensive loss	$	(113,038)	$	(63,447)	$	(321,769)	$	(191,753)

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statements of Shareholders' Equity (unaudited)

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount
Balance at June 30, 2020	101,434	$	1,014	$	2,069,119	$	(1,664,717)	$	(98)	$	405,318
Comprehensive loss:
Net loss						(63,659)				(63,659)
Other comprehensive income (loss)								212		212
Exercise of stock options and ESPP shares issuance	369	4		6,324						6,328
Net proceeds from issuance of common stock				(47)						(47)
Issuance of common stock for vesting of RSUs	1	—								—
Stock-based compensation expense				8,909						8,909
Balance at September 30, 2020	101,804	$	1,018	$	2,084,305	$	(1,728,376)	$	114	$	357,061

Balance at June 30, 2021	115,239	$	1,152	$	2,569,028	$	(2,039,551)	$	424	$	531,053
Comprehensive loss:
Net loss						(112,714)				(112,714)
Other comprehensive income (loss)								(324)		(324)
Exercise of stock options and ESPP shares issuance	226	3		2,491						2,494

Equity component of convertible debt issuance				311						311

Issuance of common stock for vesting of RSUs	1	—								—
Issuance of common stock for business acquisition	2,889	29		71,762						71,791
Stock-based compensation expense				12,231						12,231
Balance at September 30, 2021	118,355	$	1,184	$	2,655,823	$	(2,152,265)	$	100	$	504,842

See accompanying notes to consolidated financial statements

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INSMED INCORPORATED

Consolidated Statements of Shareholders' Equity (unaudited)

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount
Balance at December 31, 2019	89,682	$	897	$	1,797,286	$	(1,536,499)	$	(10)	$	261,674
Comprehensive loss:
Net loss						(191,877)				(191,877)
Other comprehensive income (loss)								124		124
Exercise of stock options and ESPP shares issuance	841	9		13,886						13,895
Net proceeds from issuance of common stock	11,155	111		245,754						245,865
Issuance of common stock for vesting of RSUs	126	1								1
Stock-based compensation expense				27,379						27,379
Balance at September 30, 2020	101,804	$	1,018	$	2,084,305	$	(1,728,376)	$	114	$	357,061

Balance at December 31, 2020	102,763	$	1,028	$	2,105,252	$	(1,830,589)	$	193	$	275,884
Comprehensive loss:
Net loss						(321,676)				(321,676)
Other comprehensive income (loss)								(93)		(93)
Exercise of stock options and ESPP shares issuance	986	10		16,009						16,019
Net proceeds from issuance of common stock	11,500	115		269,771						269,886
Equity component of convertible debt issuance				196,374						196,374
Equity component of convertible debt redemption				(37,846)						(37,846)
Issuance of common stock for vesting of RSUs	217	2								2
Issuance of common stock for business acquisition	2,889	29		71,762						71,791
Stock-based compensation expense				34,501						34,501
Balance at September 30, 2021	118,355	$	1,184	$	2,655,823	$	(2,152,265)	$	100	$	504,842

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,
	2021		2020
Operating activities
Net loss	$	(321,676)	$	(191,877)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	7,011		6,829
Amortization of intangible assets	3,790		3,745
Stock-based compensation expense	34,501		27,379
Loss on extinguishment of debt	17,689		—
Amortization of debt issuance costs	1,348		1,048
Accretion of debt discount	20,707		14,139
Finance lease amortization expense	809		809
Change in fair value of deferred and contingent consideration liabilities	8,300		—
Noncash operating lease expense	11,218		5,168
Changes in operating assets and liabilities:
Accounts receivable	(2,875)		4,036
Inventory	(18,588)		(15,116)
Prepaid expenses and other current assets	(2,097)		631
Other assets	(20,994)		(4,786)
Accounts payable	(18,854)		9,120
Accrued liabilities and other	6,108		(10,613)
Accrued compensation	(5,567)		(3,068)
Net cash used in operating activities	(279,170)		(152,556)
Investing activities
Purchase of fixed assets	(6,147)		(5,307)

Cash paid for Business Acquisition, net	(6,920)		—
Net cash used in investing activities	(13,067)		(5,307)
Financing activities
Proceeds from exercise of stock options, ESPP, and RSU vestings	16,021		13,896
Proceeds from issuance of common stock, net	269,886		245,865
Payment on extinguishment of 1.75% convertible senior notes due 2025	(12,578)		—
Payment of principal on 1.75% convertible senior notes due 2025	(225,000)		—
Proceeds from issuance of 0.75% convertible senior notes due 2028	575,000		—
Payment of debt issuance costs	(15,702)		—
Payments of finance lease principal	(791)		(769)

Net cash provided by financing activities	606,836		258,992
Effect of exchange rates on cash and cash equivalents	(799)		195
Net increase in cash and cash equivalents	313,800		101,324
Cash and cash equivalents at beginning of period	532,756		487,429
Cash and cash equivalents at end of period	$	846,556	$	588,753
Supplemental disclosures of cash flow information:
Cash paid for interest	$	8,202	$	8,847
Cash paid for income taxes	$	1,451	$	780

See accompanying notes to consolidated financial statements

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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, is approved in the United States (US) as ARIKAYCE® (amikacin liposome inhalation suspension), in Europe as ARIKAYCE Liposomal 590 mg Nebuliser Dispersion and in Japan as ARIKAYCE inhalation 590mg (amikacin sulfate inhalation drug product). ARIKAYCE received accelerated approval in the US in September 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. In October 2020, the European Commission (EC) approved ARIKAYCE for the treatment of nontuberculous mycobacterial (NTM) lung infections caused by MAC in adults with limited treatment options who do not have cystic fibrosis (CF). In March 2021, Japan's Ministry of Health, Labour and Welfare (MHLW) approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. NTM lung disease caused by MAC (which the Company refers to as 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 brensocatib and treprostinil palmitil inhalation powder (TPIP). Brensocatib is a small molecule, oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1), which the Company is developing for the treatment of patients with bronchiectasis and other neutrophil-mediated diseases. TPIP is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for pulmonary arterial hypertension (PAH) and other rare pulmonary disorders.

The Company was incorporated in the Commonwealth of Virginia on November 29, 1999 and its principal executive offices are located in Bridgewater, New Jersey. The Company has legal entities in the US, France, Germany, Ireland, Italy, the Netherlands, Switzerland, the United Kingdom (UK), and Japan.

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, 2020.

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.

The Company had $846.6 million in cash and cash equivalents as of September 30, 2021 and reported a net loss of $321.7 million for the nine months ended September 30, 2021. 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 consolidated operating losses, including losses in its US and certain international entities, while funding research and development (R&D) activities for ARIKAYCE, brensocatib, TPIP and its other pipeline programs, and continuing and commencing pre-commercial, commercialization and regulatory activities for ARIKAYCE, 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 continued commercialization of ARIKAYCE and additional clinical trials related to ARIKAYCE, to develop brensocatib and TPIP and to develop, acquire, in-license or co-promote other products or product candidates, including those that address a broad range of 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 or commercialization efforts. The Company believes it currently has sufficient funds to meet its financial needs for at least the next 12 months.

Risks and Uncertainties - There are many uncertainties regarding the novel coronavirus (COVID-19) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect the Company's financial results and business operations for the nine months ended September 30, 2021, the

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Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

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, 2020:

Fair Value Measurements - The Company categorizes its financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities, are as follows:

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

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

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

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


	September 30, 2021
			Fair Value
	Carrying Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	846.6	$	846.6	$	—	$	—
Deferred consideration	$	15.2	$	—	$	15.2	$	—
Contingent consideration liabilities	$	76.5	$	—	$	—	$	76.5


	December 31, 2020
			Fair Value
	Carrying Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	532.8	$	532.8	$	—	$	—

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. During the three months ended September 30, 2021, new Level 2 and Level 3 liabilities were added in connection with the Company's acquisitions of Motus Biosciences, Inc. (Motus) and AlgaeneX, Inc. (AlgaeneX) in August 2021 (the Business Acquisition). There were no other transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021 and December 31, 2020, the Company held no securities that were in an unrealized gain or loss position.

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The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. The Company has determined that there were no other-than-temporary impairments during the quarter ended September 30, 2021. 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.

Deferred Consideration

The deferred consideration arose from the Business Acquisition in August 2021 (see Note 13). The Company is obligated to issue to Motus equityholders an aggregate of 184,433 shares of the Company’s common stock on each of the first, second and third anniversaries of the closing date. A valuation of the deferred consideration is performed quarterly with gains and losses included within change in fair value of deferred and contingent consideration liabilities in the consolidated statements of comprehensive loss.

The deferred consideration has been classified as a Level 2 recurring liability as its valuation utilizes an input, the Insmed share price on the valuation date, which is a directly observable input at the measurement date and for the duration of the liabilities' anticipated lives. Deferred consideration expected to be settled within twelve months or less is classified as a current liability and are included in accrued liabilities. As of September 30, 2021, the fair value of deferred consideration included in accrued liabilities was $5.1 million. Deferred consideration expected to be settled in more than twelve months are classified as a non-current liability and are included in other long-term liabilities. As of September 30, 2021, the fair value of deferred consideration included in other long-term liabilities was $10.1 million.

The following observable input was used in the valuation of the deferred consideration as of September 30, 2021:


	Fair Value as of September 30, 2021 (in millions)	Observable Input	Input Value
Deferred consideration	$15.2	Insmed share price on the valuation date	$27.54

Contingent Consideration

The contingent consideration liabilities arose from the Business Acquisition in August 2021 (see Note 13). The contingent consideration liabilities consist of developmental and regulatory milestones, a pediatric voucher milestone and net sales milestones. Upon the achievement of certain development and regulatory milestone events, the Company is obligated to issue to Motus equityholders up to 5,348,572 shares in the aggregate. The fair value of the development and regulatory milestones are estimated utilizing a probability-adjusted approach. At September 30, 2021, the weighted average probability of success was 42%. The development and regulatory milestones will be settled in shares of the Company's common stock.

If the Company were to receive a priority review voucher, the Company is obligated to pay to the Motus equityholders a portion of the value of the priority review voucher, subject to certain reductions. The potential payout will be either 50% of the proceeds received by the Company from a sale of the priority review voucher or 50% of the average of the sales prices for the last three publicly disclosed priority review voucher sales, less certain adjustments. The fair value of the priority review voucher milestone is estimated utilizing a probability-adjusted discounted cash flow approach. This milestone will be settled in cash.

The contingent consideration liabilities for net sales milestones were valued using an option pricing model with Monte Carlo simulation. As of September 30, 2021, the fair value of these net sales milestones were deemed immaterial to the overall fair value of the contingent consideration.

The contingent consideration liabilities have been classified as a Level 3 recurring liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. If different assumptions were used for the inputs to the valuation approach, the estimated fair value could be significantly different than the fair value the Company determined. Contingent consideration liabilities expected to be settled in more than twelve months are classified as a non-current liability. A valuation of the contingent consideration liabilities is performed quarterly with gains and losses included within change in fair value of contingent consideration liabilities in the consolidated statements of comprehensive loss.

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The following significant unobservable inputs were used in the valuation of the contingent consideration liabilities as of September 30, 2021 (in millions):

Contingent Consideration Liabilities

Fair Value as of September 30, 2021

Valuation Technique

Unobservable Inputs

Values

Development and regulatory milestones

$66.2

Probability-adjusted

Probabilities of success

14% - 95%

Priority review voucher milestone

$5.3

Probability-adjusted discounted cash flow

Probability of success

13.5%

Discount rate

6.3%

Convertible Notes

The estimated fair value of the liability component of the Company's 0.75% convertible senior notes due 2028 (the 2028 Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of September 30, 2021 was $636.2 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the 2028 Convertible Notes. The $371.5 million carrying value of the 2028 Convertible Notes as of September 30, 2021 excludes the $193.7 million and $9.8 million of the unamortized portion of the debt discount and issuance costs, respectively.

The estimated fair value of the liability component of the Company's 1.75% convertible senior notes due 2025 (the 2025 Convertible Notes) (categorized as a Level 2 liability for fair value measurement purposes) as of September 30, 2021 was $218.1 million, determined using current market factors and the ability of the Company to obtain debt on comparable terms to the 2025 Convertible Notes. The $186.1 million carrying value of the 2025 Convertible Notes as of September 30, 2021 excludes the $36.6 million and $2.3 million of the unamortized portion of the debt discount and issuance costs, respectively.

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, 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 September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands, except per share amounts)
Numerator:
Net loss	$	(112,714)	$	(63,659)	$	(321,676)	$	(191,877)
Denominator:
Weighted average common shares used in calculation of basic net loss per share:	117,092		101,615		109,955		96,029
Effect of dilutive securities:
Common stock options	—		—		—		—
Restricted stock and RSUs	—		—		—		—
Convertible debt securities	—		—		—		—
Weighted average common shares outstanding used in calculation of diluted net loss per share	117,092		101,615		109,955		96,029
Net loss per share:
Basic and diluted	$	(0.96)	$	(0.63)	$	(2.93)	$	(2.00)

The following potentially dilutive securities have been excluded from the computations of diluted weighted average common shares outstanding as of September 30, 2021 and 2020 as their effect would have been anti-dilutive (in thousands):

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	September 30,
	2021	2020
Common stock options	14,518	13,047
Unvested restricted stock and RSUs	1,069	853
Convertible debt securities	23,438	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 Company uses an expected loss methodology to calculate allowances for trade receivables. The Company's 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. The Company does not currently have a material allowance for collectible trade receivables. The following table presents the percentage of total gross product revenue represented by the Company's three largest customers for the nine months ended September 30, 2021 and 2020.


	September 30,
	2021	2020
Customer A	28%	26%
Customer B	25%	28%
Customer C	24%	23%

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 manufacturers, or an adverse change in their business, could materially impact future operating results.

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

Product revenues, net consist primarily of net sales of ARIKAYCE in the US. The Company's customers in the US include specialty pharmacies and specialty distributors. In December 2020, the Company began recognizing product revenue from commercial sales of ARIKAYCE in Europe. In July 2021, the Company began recognizing product revenue from commercial sales of ARIKAYCE in Japan. Globally, product revenues are recognized once the Company performs and satisfies all five steps mentioned above.

Revenue is recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for (a) customer credits, such as invoice discounts for prompt pay, (b) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates, (c) estimated chargebacks, and (d) estimated costs of co-payment assistance. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (prompt pay discounts and chargebacks), prepaid expenses (co-payment assistance), or as a current liability (rebates). Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company's historical experience,

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current contractual and statutory requirements, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Customer credits: The Company's customers are offered various forms of consideration, including prompt payment discounts. The payment terms for sales to specialty pharmacies for prompt payment discounts are based on contractual rates agreed with the respective specialty pharmacies. The Company anticipates that its customers will earn these discounts and, therefore, deducts the full amount of these discounts from total gross product revenues at the time such revenues are recognized.

Rebates: The Company contracts with government agencies and managed care 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. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The current liability is included in accrued liabilities on the consolidated balance sheets. The Company estimates the rebates that it will provide to third-party payors based upon (i) the Company's contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) information obtained from the Company's specialty pharmacies.

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 the specialty distributor initially paid and the discounted price paid by the contracted customers. The Company estimates chargebacks provided to the specialty distributor and deducts these estimated amounts from gross product revenues, and from accounts receivable, at the time revenues are recognized.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Based upon the terms of the program and information regarding programs provided for similar specialty pharmaceutical products, the Company estimates the average co-pay mitigation amounts and the percentage of patients that it expects to participate in the program in order to establish accruals for co-payment assistance. These reserves are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue. The Company adjusts its accruals for co-pay assistance based on actual redemption activity and estimates of future redemptions related to sales in the current period.

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

The Company also recognizes revenue related to various early access programs (EAPs) in Europe, including France. EAPs are intended to make products available on a named patient basis before they are commercially available in accordance with local regulations.

Inventory and Cost of Product Revenues (excluding amortization of intangible assets) - Inventory is stated at the lower of cost and net realizable value. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE in September 2018. Inventory is sold on a first-in, first-out (FIFO) basis. The Company periodically reviews inventory for expiry and obsolescence and, if necessary, writes down accordingly. If quality specifications are not met during the manufacturing process, such inventory is written off to cost of product revenues (excluding amortization of intangible assets) in the period identified.

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 revenue-based milestone payments. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods.

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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 R&D expense when consumed.

Business combinations and asset acquisitions - The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in ASU 2017-01, “Business Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, and non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

The consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events. The obligations for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, are recognized as a gain or loss and recorded within change in the fair value of deferred and contingent consideration liabilities in the consolidated statements of comprehensive loss.

If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s books. Consideration transferred that is non-cash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets acquired and liabilities assumed, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values.

Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets.

Indefinite-lived intangible assets - Indefinite-lived intangible assets consist of In Process Research & Development (IPR&D). IPR&D acquired directly in a transaction other than a business combination is capitalized if the projects will be further developed or have an alternative future use; otherwise they are expensed. The fair values of IPR&D project assets acquired in business combinations are capitalized. The Company generally utilizes the Multi-Period Excess Earning Method to determine the estimated fair value of the IPR&D assets acquired in a business combination. The projections used in this valuation approach are based on many factors, such as relevant market size, patent protection, and expected pricing and industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company considers many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to, expected growth rates, the cost of equity and debt capital, general economic conditions, the Company’s outlook and market performance of the Company’s industry and recent and forecasted financial performance.

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Goodwill - Goodwill represents the amount of consideration paid in excess of the fair value of net assets acquired as a result of the Company’s business acquisitions accounted for using the acquisition method of accounting. Goodwill is not amortized and is subject to impairment testing at a reporting unit level on an annual basis or when a triggering event occurs that may indicate the carrying value of the goodwill is impaired. The Company reassesses its reporting units as part of its annual segment review. As of September 30, 2021, the Company concluded that it continues to operate as one reporting unit. An entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company will perform its annual test for goodwill as of October 1, 2021.

Leases - In February 2016, the Financial Accounting Standards Board (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.

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 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 or are amortized based on consumption, if this approach is more representative of the pattern in which benefit is expected to be derived from the underlying asset. 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 consolidated statements of comprehensive loss 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.

Refer to Note 7 - Leases for details about the Company's lease portfolio, including Topic 842 required disclosures.

Recently Adopted Accounting Pronouncements - 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. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables. The Company's 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. The Company adopted ASU 2016-13 effective January 1, 2020. Different aspects of the guidance required modified retrospective or prospective adoption. Adoption of the standard did not have a material impact on the Company's consolidated financial statements.

New Accounting Pronouncements (Not Yet Adopted) - In August 2020, the FASB issued ASU 2020-06, Debt — Accounting for Convertible Instruments, to reduce the complexity associated with applying US generally accepted accounting principles (GAAP) to certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the number of accounting models for convertible debt instruments is reduced, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Only convertible instruments that meet the definition of a derivative or are issued with substantial premiums will continue to be subject to the separation models. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021. A modified retrospective and a fully retrospective transition method are both permitted. The Company anticipates transitioning using the modified retrospective method and anticipates the impact of adopting ASU 2020-06 to result in a January 1, 2022 opening balance sheet adjustment decreasing retained earnings by approximately $4 million, increasing issuance costs classified to debt by approximately $6 million, and an offsetting adjustment of $10 million to additional paid-in capital. Effective January 1, 2022, the Company expects convertible debt interest expense will be comprised of contractual interest expense calculated from the face value of the convertible notes and annual amortization of debt issuance costs of approximately $3.3 million.

3. Inventory

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As of September 30, 2021 and December 31, 2020, the Company's inventory balance consists of the following (in thousands):


	September 30, 2021		December 31, 2020

Raw materials	$	27,386	$	21,601
Work-in-process	20,509		18,754
Finished goods	19,558		9,237
	$	67,453	$	49,592

Inventory is stated at the lower of cost and net realizable value and consists of raw materials, work-in-process and finished goods. The Company began capitalizing inventory costs following FDA approval of ARIKAYCE in September 2018 and has not recorded any significant 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. Intangibles, Net

As of September 30, 2021, the Company's identifiable intangible assets consisted of acquired ARIKAYCE R&D, acquired in-process research and development (IPR&D) from the Business Acquisition (see Note 13), and milestones paid to PARI for the license to use PARI's Lamira® Nebulizer System for the delivery of ARIKAYCE to patients as a result of the FDA and EC approvals of ARIKAYCE in September 2018 and October 2020, respectively. Intangibles, net was $75.1 million and $49.3 million as of September 30, 2021 and December 31, 2020, respectively.

The Company began amortizing its acquired ARIKAYCE R&D and PARI milestones intangible assets in October 2018, over ARIKAYCE's initial regulatory exclusivity period of 12 years. Amortization of intangible assets during each of the next five years is estimated to be approximately $5.1 million per year. A rollforward of the Company's intangible assets for the nine months ended September 30, 2021 is as follows (in thousands):



Intangible Asset	December 31, 2020		Additions		Amortization		September 30, 2021

Acquired ARIKAYCE R&D	$	47,289	$	—	$	(3,638)	$	43,651
Acquired IPR&D	—		29,600		—		29,600
PARI milestones	1,972		—		(152)		1,820
	$	49,261	$	29,600	$	(3,790)	$	75,071

The Company reviews the recoverability of these finite-lived and indefinite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company determined that no indicators of impairment of finite-lived or indefinite-lived intangible assets existed at September 30, 2021.

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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 Description	Estimated Useful Life (years)	September 30, 2021		December 31, 2020

Lab equipment	7	$	11,068	$	10,352
Furniture and fixtures	7	5,917		5,917
Computer hardware and software	3-5	7,366		7,267
Office equipment	7	89		88
Manufacturing equipment	7	1,567		1,567
Leasehold improvements	lease term	35,965		35,289
Construction in progress (CIP)	—	26,588		21,823
		88,560		82,303
Less: accumulated depreciation		(35,361)		(28,350)
		$	53,199	$	53,953

6. Accrued Liabilities

As of September 30, 2021 and December 31, 2020, the Company's accrued liabilities balance consists of the following (in thousands):


	September 30, 2021		December 31, 2020
Accrued clinical trial expenses	$	22,277	$	6,733
Accrued professional fees	14,238		8,594
Accrued technical operation expenses	7,419		9,164
Accrued royalty payable	2,223		3,423
Accrued interest payable	2,496		3,631
Accrued sales allowances and related costs	6,989		5,051
Deferred consideration	5,079		—
Accrued construction costs	19		364
Other accrued liabilities	1,526		847
	$	62,266	$	37,807

7. Leases

The Company's lease portfolio consists primarily of office space, manufacturing facilities, research equipment and fleet vehicles. All of the Company's leases are classified as operating leases, except for the Company's corporate headquarters lease, which is classified as a finance lease. The terms of the Company's lease agreements that have commenced range from less than one year to ten years, ten months. 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. 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 does 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 assets and corresponding lease liabilities associated with the manufacturing facilities is the sum of the minimum guarantees over the life of the production contracts.

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The Company also records variable consideration for variable lease payments in excess of fixed fees or minimum guarantees. Variable consideration related to the Company's leasing arrangements was $4.2 million and $6.0 million for the three months ended September 30, 2021 and 2020, respectively, and $4.6 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively. Variable costs related to CMO manufacturing agreements are direct costs related to the manufacturing of ARIKAYCE and are capitalized within inventory in the Company's consolidated balance sheet, while the variable costs related to other leasing arrangements, not related to the manufacturing of ARIKAYCE, have been classified within operating expenses in the Company's consolidated statements of comprehensive loss.

The table below summarizes the supplemental noncash disclosures of the Company's leases included in its consolidated financial statements (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Finance right-of-use assets obtained in exchange for lease obligations	$	—	$	—	$	—	$	—
Operating right-of-use assets obtained in exchange for lease obligations	$	914	$	513	$	9,555	$	718

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. The Company entered into certain agreements with Patheon related to increasing its long-term production capacity for ARIKAYCE commercial inventory. The Company has determined that these agreements with Patheon contain an embedded lease for the manufacturing facility and the specialized equipment contained therein. Costs of $29.8 million incurred by the Company under these additional agreements have been classified within other assets in the Company's consolidated balance sheet. Upon the commencement date, prepaid costs and minimum guarantees specified in the agreement will be combined to establish an operating lease ROU asset and operating lease liability.

8. Debt

In May 2021, the Company completed an underwritten public offering of the 2028 Convertible Notes, in which the Company sold $575.0 million aggregate principal amount of the 2028 Convertible Notes, including the exercise in full of the underwriters' option to purchase an additional $75.0 million in aggregate principal amount of 2028 Convertible Notes. The Company's net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $15.7 million, were approximately $559.3 million. The 2028 Convertible Notes bear interest payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2021. The 2028 Convertible Notes mature on June 1, 2028, unless earlier converted, redeemed, or repurchased.

In January 2018, the Company completed an underwritten public offering of the 2025 Convertible Notes, in which the Company sold $450.0 million aggregate principal amount of the 2025 Convertible Notes, including the exercise in full of the underwriters' option to purchase an additional $50.0 million in aggregate principal amount of 2025 Convertible Notes. 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 2025 Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The 2025 Convertible Notes mature on January 15, 2025, unless earlier converted, redeemed, or repurchased.

A portion of the net proceeds from the 2028 Convertible Notes was used to repurchase $225.0 million of the Company's outstanding 2025 Convertible Notes. The Company recorded a loss on early extinguishment of debt of $17.7 million, primarily related to the premium paid on extinguishment of a portion the 2025 Convertible Notes.

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 2025 Convertible Notes at any time. The initial conversion rate for the 2025 Convertible Notes is 25.5384 shares of common stock per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $39.16 per share of common stock). On or after March 1, 2028, until the close of business on the second scheduled trading day immediately preceding June 1, 2028, holders may convert their 2028 Convertible Notes at any time. The initial conversion rate for the 2028 Convertible Notes is 30.7692 shares of common stock per $1,000 principal amount of 2028 Convertible Notes (equivalent to an initial conversion price of approximately $32.50 per share of common stock). Upon conversion of either the 2025 Convertible Notes or the 2028 Convertible Notes, 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

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Company's option. The conversion rates will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

Holders may convert their 2025 Convertible Notes prior to October 15, 2024 or their 2028 Convertible Notes prior to March 1, 2028, only under the following circumstances, subject to the conditions set forth in the applicable indenture: (i) during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of the applicable series of convertible notes, as determined following a request by a holder of such 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 applicable series of 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 or June 30, 2021 for the 2025 Convertible Notes and 2028 Convertible Notes, respectively, (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. To date, there have not been any holder initiated redemption requests of either series of convertible notes.

Each series of 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 both series of 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 each series of convertible notes into liability and equity components. The carrying amount of the liability component of each series of convertible notes 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 for each series of convertible notes was determined by deducting the fair value of the liability component from the gross proceeds of the applicable convertible notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity. The fair value of the liability component of the 2025 Convertible Notes on the date of issuance was estimated at $309.1 million using an effective interest rate of 7.6% and, accordingly, the residual equity component on the date of issuance was $140.9 million. The fair value of the liability component of the 2028 Convertible Notes on the date of issuance was estimated at $371.6 million using an effective interest rate of 7.1% and, accordingly, the residual equity component on the date of issuance was $203.4 million. The respective discounts are being amortized to interest expense over the term of the applicable series of convertible notes and have remaining periods of approximately 3.29 years, with respect to the 2025 Convertible Notes, and 6.67 years, with respect to the 2028 Convertible Notes. The following table presents the carrying value of the Company's debt balance (in thousands):


	September 30, 2021		December 31, 2020
Face value of outstanding convertible notes	$	800,000	$	450,000
Debt issuance costs, unamortized	(12,080)		(5,646)
Discount on debt	(230,316)		(88,036)
Debt, long-term	$	557,604	$	356,318

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As of September 30, 2021, future principal repayments of the notes for each of the years through maturity were as follows (in thousands):


Year Ending December 31:
2021	$	—
2022	—
2023	—
2024	—
2025	225,000
2026 and thereafter	575,000
	$	800,000

Interest Expense

Interest expense related to the 2025 Convertible Notes and 2028 Convertible Notes for the three and nine months ended September 30, 2021 and 2020, which includes the contractual interest coupon payable semi-annually in cash, the amortization of the issuance costs, accretion of debt discount and finance lease interest expense is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Contractual interest expense	$	2,063	$	1,968	$	6,084	$	5,916
Amortization of debt issuance costs	541		350		1,348		1,048

Accretion of debt discount	8,318		4,776		20,707		14,139
Total convertible debt interest expense	10,922		7,094		28,139		21,103
Finance lease interest expense	323		91		984		962
Interest expense	$	11,245	$	7,185	$	29,123	$	22,065

9. Shareholders’ Equity

Common Stock — As of September 30, 2021, the Company had 500,000,000 shares of common stock authorized with a par value of $0.01 per share and 118,355,458 shares of common stock issued and outstanding. In addition, as of September 30, 2021, the Company had reserved 14,517,626 shares of common stock for issuance upon the exercise of outstanding stock options and 1,069,120 shares of common stock for issuance upon the vesting of RSUs. The Company has also reserved 23,438,430 shares of common stock for issuance upon conversion of the 2025 Convertible Notes and 2028 Convertible Notes, in the aggregate, subject to adjustment in accordance with the applicable indentures. In connection with the Company’s Business Acquisition, the Company reserved 9,406,112 shares of the Company’s common stock, subject to certain closing-related reductions. The shares of the Company’s common stock reserved in connection with the Motus acquisition were partly issued as acquisition consideration at closing, and will also be issued upon the first, second and third anniversaries of the acquisition’s closing date and upon the achievement of certain development and regulatory milestone events, subject to certain reductions. The shares of the Company’s common stock reserved in connection with the AlgaeneX acquisition will be issued upon the achievement of a development milestone event, subject to certain reductions.

Of the 9,406,112 shares reserved, subject to certain closing-related reductions, the Company issued 2,889,367 shares of the Company's common stock in connection with its Business Acquisition in the third quarter of 2021, following certain closing-related deductions. See Note 13 for additional information related to the Business Acquisition.

In the second quarter of 2021, the Company completed an underwritten public offering of 11,500,000 shares of the Company's common stock, including 1,500,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares from the Company, at a public offering price of $25.00 per share. The Company's net proceeds from the sale of the shares, after deducting the underwriting discounts and offering expenses of $17.5 million, were $270.1 million.

In the first quarter of 2021, the Company entered into a sales agreement with SVB Leerink LLC (SVB Leerink), to sell shares of the Company's common stock, with aggregate gross sales proceeds of up to $250.0 million, from time to time, through an “at the market” equity offering program (the ATM program), under which SVB Leerink acts as sales agent. As of September 30, 2021, the Company had not sold or issued any shares under the ATM program.

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In the second quarter of 2020, the Company completed an underwritten public offering of 11,155,000 shares of the Company's common stock, including 1,455,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares from the Company, at a public offering price of $23.25 per share. The Company's net proceeds from the sale of the shares, after deducting the underwriting discounts and offering expenses of $13.5 million, were $245.9 million.

Preferred Stock — As of September 30, 2021, the Company had 200,000,000 shares of preferred stock authorized with a par value of $0.01 per share and no shares of preferred stock were issued and outstanding.

10. Stock-Based Compensation

The Company's current equity compensation plan, the Insmed Incorporated 2019 Incentive Plan (as amended, the 2019 Incentive Plan), was approved by shareholders at the Company's Annual Meeting of Shareholders on May 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, the 2015 Incentive Plan and the 2013 Incentive Plan that subsequently were canceled, terminated unearned, expired, were forfeited, lapsed for any reason or were settled in cash without the delivery of shares. On May 12, 2020, at the Company's 2020 Annual Meeting of Shareholders, the Company's shareholders approved an amendment of the 2019 Incentive Plan providing for the issuance of an additional 4,500,000 shares under the plan. On May 12, 2021, at the Company's 2021 Annual Meeting of Shareholders, the Company's shareholders approved the second amendment to the 2019 Incentive Plan providing for the issuance of an additional 2,750,000 shares under the plan. As of September 30, 2021, 4,930,719 shares remained for future issuance under the 2019 Incentive Plan. The 2019 Incentive Plan will terminate on May 16, 2029 unless it is extended or terminated earlier pursuant to its terms. 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's inducement grant exception to the shareholder approval requirement for grants of equity compensation. During the nine months ended September 30, 2021, the Company granted inducement stock options covering 953,470 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 2018 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 September 30, 2021, there was $93.3 million of unrecognized compensation expense related to unvested stock options.

From time to time, the Company has granted performance-conditioned options to certain of its employees. Vesting of these options is subject to the Company achieving certain performance criteria established at the date of grant and the grantees fulfilling a service condition (continued employment). As of September 30, 2021, the Company had performance-conditioned options totaling 114,780 shares outstanding which had not yet met the recognition criteria.

Restricted Stock Units — As of September 30, 2021, there was $22.7 million of unrecognized compensation expense related to unvested RSU awards.

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 September 30, 2021 and 2020, respectively (in millions):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Research and development	$	4.8	$	3.0	$	12.9	$	8.8
Selling, general and administrative	7.4		5.9		21.6		18.6
Total	$	12.2	$	8.9	$	34.5	$	27.4

11. Income Taxes

The Company recorded a (benefit) provision for income taxes of $(2.6) million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $(1.7) million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively. The benefit for the three and nine months ended September 30, 2021 is primarily due to the partial reversal of a valuation allowance as a result of the Company's recent Business Acquisition (see note 13). The Company recorded a provision for income taxes for the three and nine months ended September 30, 2020 primarily as a result of certain of the Company's international subsidiaries, which had taxable income during the period. Additionally, the Company is impacted by certain state taxes which effectively impose income tax on modified gross revenues. In jurisdictions where the Company has net losses, there was a full valuation allowance recorded against the Company's deferred tax assets and therefore no tax benefit was recorded.

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 2017 and later, and is generally open for certain states for the years 2016 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 September 30, 2021 and December 31, 2020, the Company had recorded reserves for unrecognized income tax benefits against certain deferred tax assets in the US. However, given the Company’s valuation allowance position, these reserves do not have an impact on the balance sheet as of September 30, 2021 and December 31, 2020 or the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020. The Company has not recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next 12 months.

On March 27, 2020, the US government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which includes numerous modifications to income tax provisions, including a limitation on business interest expense and net operating loss provisions and the acceleration of alternative minimum tax credits. Given the Company's history of losses, the CARES Act did not impact its income tax positions.

12. Commitments and Contingencies

Rent expense charged to operations was $1.2 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively, and $3.5 million and $2.6 million for the nine months ended September 30, 2021 and 2020, 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.

13. Business Acquisition

On August 4, 2021, the Company acquired all of the equity interests of Motus and AlgaeneX, each a privately held, preclinical stage company. In connection with the closing of the Company’s acquisition of Motus, the Company issued an aggregate of 2,889,367 shares of the Company’s common stock, following certain closing-related reductions, to Motus’s former stockholders and option holders and certain individuals who are entitled to receive a portion of the acquisition consideration (collectively, Motus equityholders), subject to certain adjustments. The Company is obligated to issue to Motus equityholders an aggregate of 184,433 shares of the Company’s common stock on each of the first, second and third anniversaries of the closing date and up to 5,348,572 shares in the aggregate upon the achievement of certain development and regulatory milestone events, and to pay to the Motus equityholders an aggregate of $35 million upon the achievement of certain net sales-based

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milestones and a portion of the value of a priority review voucher (to the extent issued to the Company), in each case, subject to certain reductions.

At the closing of the Company’s acquisition of AlgaeneX, the Company paid $1.5 million in cash to AlgaeneX’s former stockholders and certain individuals who are entitled to receive a portion of the acquisition consideration (collectively, the AlgaeneX equityholders). The Company is obligated to issue to AlgaeneX’s equityholders an aggregate of 368,867 shares of the Company’s common stock upon the achievement of a development milestone event and pay to AlgaeneX equityholders a mid-single digits licensing fee on certain future payments received by the Company in licensing transactions for AlgaeneX’s manufacturing technology, in each case, subject to certain reductions.

The shares of the Company’s common stock issued to the Motus equityholders and the AlgaeneX equityholders were issued, and the shares issuable in the future will be issued, pursuant to Section 4(a)(2) of the Securities Act of 1933, and the numbers of such issued and issuable shares was calculated based on a per share value of $27.11, which is the weighted average price per share of the Company's common stock preceding the closing of the Business Acquisition for the 45 consecutive trading day period beginning on May 24, 2021. The Company will not receive any proceeds from the issuance of common stock to the Motus equityholders or the AlgaeneX equityholders.

The Company evaluated the Business Acquisition under ASC 805, Business Combinations and ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The Company concluded that substantially all of the fair value of the gross assets acquired is not concentrated in a single identifiable asset or a group of similar identifiable assets. The transaction does not pass the screen test and thus management performed a full assessment to determine if the acquired entities met the definition of a business. For the full assessment, management considered whether it has acquired (a) inputs, (b) substantive processes, and (c) outputs. Under ASC 805, to be considered a business, a set of activities and assets is required to have only the first two of the three elements, which together are or will be used in the future to create outputs. Management determined that the acquired entities met the definition of a business since the Company acquired inputs and substantive processes capable of producing outputs.

Therefore, the transaction has been accounted for under the acquisition method of accounting. Under the acquisition method, the total purchase price of the acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on the fair values as of the date of the acquisition.

The fair value of the consideration totaled approximately $165.5 million, summarized as follows (in thousands):


	Fair Value of Consideration
Cash consideration	$	10,500
Fair value of Insmed common stock issued	71,570
Estimated fair value of contingent consideration liabilities	69,706
Estimated fair value of deferred consideration	13,700
	$	165,476

The Company recorded the assets acquired and liabilities assumed as of the date of the acquisition based on the information available at that date. As the Company finalizes the fair values of the assets acquired and liabilities assumed, purchase price adjustments may be recorded during the measurement period and such adjustments could be material. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized. No adjustments have been made as of the acquisition date through the period ended September 30, 2021. The following table presents the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands).

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	Preliminary Purchase Price Allocation
Cash and cash equivalents	$	3,580
Intangible assets - IPR&D	29,600
Fixed assets	228
Other assets	17
Liabilities assumed	(558)
Deferred tax liability	(3,501)
Fair value of net assets acquired	29,366
Goodwill	136,110
	$	165,476

The Company incurred approximately $0.6 million in acquisition-related expenses, which were included in selling, general and administrative expenses in the consolidated statements of comprehensive loss for the periods ended September 30, 2021. The results of Motus's and AlgaeneX's operations have been included in the consolidated statements of comprehensive loss beginning on the acquisition date.

The fair value of IPR&D was capitalized as of the acquisition date and accounted for as indefinite-lived intangible assets until completion or disposition of the assets or abandonment of the associated research and development efforts. Upon successful completion of the development efforts, the useful lives of the IPR&D assets will be determined based on the anticipated period of regulatory exclusivity and will be amortized within operating expenses. Until that time, the IPR&D assets will be subject to impairment testing and will not be amortized. The goodwill recorded related to the acquisition is the excess of the fair value of the consideration transferred by the acquirer over the fair value of the net identifiable assets acquired and liabilities assumed at the date of acquisition. The goodwill recorded is not deductible for tax purposes.

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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:

•failure to successfully commercialize ARIKAYCE, our only approved product, in the US, Europe or Japan (amikacin liposome inhalation suspension, Liposomal 590 mg Nebuliser Dispersion, and amikacin sulfate inhalation drug product, respectively), or to maintain US, European or Japanese approval for ARIKAYCE;

•uncertainties in the degree of market acceptance of ARIKAYCE by physicians, patients, third-party payors and others in the healthcare community;

•our inability to obtain full approval of ARIKAYCE from the US Food and Drug Administration (FDA), including the risk that we will not successfully or in a timely manner complete the study to validate a patient reported outcome (PRO) tool and the confirmatory post-marketing clinical trial required for full approval of ARIKAYCE;

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•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 payors for ARIKAYCE or acceptable prices for ARIKAYCE;

•development of unexpected safety or efficacy concerns related to ARIKAYCE or our product candidates;

•inaccuracies in our estimates of the size of the potential markets for ARIKAYCE or our product candidates 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 or any of our product candidates that are approved in the future;

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

•risk that brensocatib does not prove to be effective or safe for patients in ongoing and future clinical studies, including the ASPEN study;

•risk that TPIP does not prove to be effective or safe for patients in ongoing and future clinical studies;

•failure to successfully conduct future clinical trials for ARIKAYCE, brensocatib, TPIP and our other product candidates due to our limited experience in conducting preclinical development activities and clinical trials necessary for regulatory approval and our potential inability to enroll or retain sufficient patients to conduct and complete the trials or generate data necessary for regulatory approval, among other things;

•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, Europe or Japan, or for our product candidates in the US, Europe, Japan or other markets;

•failure of third parties on which we are dependent to manufacture sufficient quantities of ARIKAYCE or our product candidates for commercial or clinical needs, to conduct our clinical trials, or to comply with our agreements or 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 successfully integrate our recent acquisitions and appropriately manage the amount of management’s time and attention devoted to integration activities;

•risks that our acquired technologies, products and product candidates are not commercially successful;

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

•business or economic disruptions due to catastrophes or other events, including natural disasters or public health crises;

•impact of the COVID-19 pandemic and efforts to reduce its spread on our business, employees, including key personnel, patients, partners and suppliers;

•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 product 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;

•our limited experience operating internationally;

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•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 an additional third-party manufacturing facility approved by the appropriate regulatory authorities 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” in this Quarterly Report on Form 10-Q and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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, 2020.

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, is approved in the US as ARIKAYCE® (amikacin liposome inhalation suspension), in Europe as ARIKAYCE Liposomal 590 mg Nebuliser Dispersion and in Japan as ARIKAYCE inhalation 590mg (amikacin sulfate inhalation drug product). ARIKAYCE received accelerated approval in the US in September 2018 for the treatment of 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. In October 2020, the EC approved ARIKAYCE for the treatment of NTM lung infections caused by MAC in adults with limited treatment options who do not have CF. In March 2021, Japan's MHLW approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. NTM lung disease caused by MAC (which we refer to as 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 brensocatib and TPIP. Brensocatib is a small molecule, oral, reversible inhibitor of DPP1, which we are developing for the treatment of patients with bronchiectasis and other neutrophil-mediated diseases. TPIP is an inhaled formulation of the treprostinil prodrug treprostinil palmitil which may offer a differentiated product profile for PAH and other rare pulmonary disorders.

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The table below summarizes the current status and anticipated milestones for ARIKAYCE and our product candidates brensocatib and TPIP.

Principal Product/Product Candidate

Status

Next Expected Milestones

ARIKAYCE for MAC lung disease

• We continue to focus on the commercialization of ARIKAYCE in the US. The product was granted accelerated approval by 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 October 2020, the FDA approved a supplemental new drug application (sNDA) for ARIKAYCE, adding important efficacy data regarding the durability and sustainability of culture conversion to the ARIKAYCE label.

• In October 2020, the EC approved ARIKAYCE for the treatment of NTM lung infections caused by MAC in adults with limited treatment options who do not have CF. In the fourth quarter of 2020, we launched ARIKAYCE in Germany. In February 2021, we launched ARIKAYCE in the Netherlands. In September 2021, we launched ARIKAYCE in Wales.

• In December 2020, we commenced the post-approval confirmatory frontline clinical trial program for ARIKAYCE in patients with MAC lung disease. The frontline clinical trial program consists of the ARISE trial and the ENCORE trial. We are currently enrolling patients for these trials, and are running these global studies in parallel.

• In March 2021, Japan's MHLW approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. In July 2021, we launched ARIKAYCE in Japan.

• In addition to our launches in Germany, the Netherlands and Wales, we plan to launch in other European countries, subject to local reimbursement processes.

• We will continue to advance the post-approval confirmatory, frontline clinical trial program for ARIKAYCE, through the ARISE trial and the ENCORE trial, which are intended to fulfill the FDA's post-marketing requirement to allow for the full approval of ARIKAYCE in the US, as well as to support the use of ARIKAYCE as a frontline treatment for patients with MAC lung disease in the US, Europe and Japan.

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Principal Product/Product Candidate

Status

Next Expected Milestones

Brensocatib (oral reversible inhibitor of DPP1) for non-cystic fibrosis bronchiectasis (NCFBE) and other inflammatory diseases

• In June 2020, we announced full results from our global, randomized, double-blind placebo-controlled Phase 2 WILLOW study evaluating the efficacy, safety, and pharmacokinetics of brensocatib administered once daily in adults with NCFBE. Final results from the WILLOW study were published online in the New England Journal of Medicine in September 2020.

• Full results for the WILLOW study reflect that the study met its primary endpoint of time to first pulmonary exacerbation over the 24-week treatment period for both the 10 mg and 25 mg dosage groups of brensocatib compared to placebo (p=0.027, p=0.044, respectively). In addition, treatment with 10mg brensocatib resulted in a significant reduction in the rate of pulmonary exacerbations, a key secondary endpoint. Patients treated with brensocatib experienced a 36% reduction in the 10 mg arm (p=0.041) and a 25% reduction in the 25 mg arm (p=0.167) versus placebo.

• In June 2020, the FDA granted breakthrough therapy designation for brensocatib for the treatment of adult patients with NCFBE for reducing exacerbations.

• In November 2020, brensocatib was granted access to the Priority Medicines (PRIME) scheme from the European Medicines Agency (EMA) for patients with NCFBE.

• In December 2020, we commenced a Phase 3 trial (the ASPEN trial) through which we will seek to confirm the positive results seen in the WILLOW study. We are currently enrolling patients for this trial, which is designed to investigate brensocatib in patients with bronchiectasis. The primary endpoint is the rate of pulmonary exacerbations over a 52-week treatment period. Patients with bronchiectasis due to CF may not be enrolled in the trial.

• We will continue to advance the ASPEN trial, to seek to confirm the positive results seen in the WILLOW trial and to support a new drug application (NDA) for brensocatib for the treatment of adult patients with bronchiectasis.

• We are advancing a clinical development program for brensocatib in CF. The CF Therapeutics Development Network has endorsed our study protocol for brensocatib in CF. The process for initiating study sites for the Phase 2 pharmacokinetics/pharmacodynamics multiple-dose study is underway and we are on track to share results in 2022.

• We plan to explore the potential of brensocatib in additional neutrophil-mediated diseases.

TPIP (inhalation formulation of a treprostinil prodrug) for PAH and other rare pulmonary disorders

• In December 2020, we completed dosing of subjects in a Phase 1 healthy volunteer trial to assess the safety, tolerability and pharmacokinetics of TPIP.

• In February 2021, we announced topline results from the Phase 1 study of TPIP in healthy volunteers. Data from the study demonstrated that TPIP was generally well tolerated, with a pharmacokinetic profile that supports continued development with once-daily dosing.

• In August 2021, we presented data from the Phase 1 healthy volunteer trial of TPIP in an oral session at the European Society of Cardiology Congress.

• We are advancing the development of TPIP with two studies in patients with PAH. The first is an open-label, proof-of-mechanism study to understand the impact of TPIP on pulmonary vascular resistance (PVR) over a 24-hour period. We anticipate having preliminary data from a small number of patients in this study by the end of 2021. The second will evaluate the effect of TPIP on PVR and 6-minute walk distance over a 16-week treatment period using an up-titration, once-daily dosing schedule. We plan to initiate study sites by the end of 2021.

• Beyond PAH, we continue to explore potential development pathways for TPIP in patients with other rare pulmonary disorders, including pulmonary hypertension associated with interstitial lung disease (PH-ILD). We plan to initiate a Phase 2 study in patients with PH-ILD using an up-titration, once-daily dosing schedule in early 2022.

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Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases with unmet medical need. 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 accelerated approval for ARIKAYCE from the FDA for the treatment of refractory MAC lung disease in patients with limited or no alternative treatment options, and currently are primarily focused on the successful commercialization of ARIKAYCE. In Europe, we secured EC approval of ARIKAYCE for the treatment of NTM lung infections caused by MAC in adults with limited treatment options who do not have cystic fibrosis. We also recently secured Japan's MHLW approval of ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. 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. Our product candidates are brensocatib, our Phase 3 product candidate which we are developing for patients with bronchiectasis and potentially other neutrophil-mediated diseases, and TPIP, our product candidate that may offer a differentiated product profile for patients with PAH and other rare pulmonary disorders. We are also advancing earlier-stage programs in other rare disorders.

Our current priorities are as follows:

•Continue our efforts to ensure the successful commercialization of ARIKAYCE;

•Develop and validate a PRO tool for NTM lung disease to be used in, among other trials, the ENCORE trial required for the full US approval of ARIKAYCE by the FDA in patients with MAC lung disease;

•Continue our expansion efforts in Europe to support commercial activities for ARIKAYCE in the region;

•Continue our expansion efforts in Japan to support commercial launch activities in the country;

•Ensure our product supply chain will support the global commercialization and potential future lifecycle management programs of ARIKAYCE;

•Maintain or obtain determinations of coverage and reimbursement in the US, Europe and Japan for ARIKAYCE from governmental and other third-party payors;

•Support further research and lifecycle management strategies for ARIKAYCE, including the potential use of ARIKAYCE as part of a frontline, multi-drug regimen;

•Advance brensocatib, including in the Phase 3 ASPEN trial in patients with bronchiectasis;

•Advance the Phase 2 TPIP development program;

•Generate preclinical findings from our earlier-stage programs and advance translational medicine; and

•Expand our pipeline through corporate development.

ARIKAYCE for Patients with MAC Lung Disease

ARIKAYCE is our first approved product. ARIKAYCE received accelerated approval in the US in September 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. In October 2020, ARIKAYCE received approval in Europe for the treatment of NTM lung infections caused by MAC in adults with limited treatment options who do not have CF. In March 2021, ARIKAYCE received approval in Japan for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. 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. 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 provides an additional five years of exclusivity for the designated indication. The FDA granted a total of 12 years of exclusivity in the indication for which ARIKAYCE was approved.

ARIKAYCE also has been included in the international treatment guidelines for NTM lung disease. The evidence-based guidelines, issued by the American Thoracic Society (ATS), European Respiratory Society (ERS), European Society of Clinical Microbiology and Infectious Diseases (ESCMID), and Infectious Diseases Society of America (IDSA), now strongly recommend the use of ARIKAYCE for MAC lung disease as part of a combination antibacterial drug regimen for adult patients with limited or no alternative treatment options who have failed to convert to a negative sputum culture after at least six months of treatment.

In October 2020, the FDA approved an sNDA for ARIKAYCE, adding important efficacy data regarding the durability and sustainability of culture conversion to the ARIKAYCE label. The data, which are from the Phase 3 CONVERT study of ARIKAYCE, demonstrate that the addition of ARIKAYCE to GBT was associated with sustained culture conversion through the end of treatment as well as durable culture conversion three months post-treatment compared with GBT alone.

Accelerated Approval

In March 2018, we submitted an NDA for ARIKAYCE to the FDA to 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. In September 2018, the FDA granted accelerated 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. In December 2020, we commenced the post-approval confirmatory frontline clinical trial program for ARIKAYCE in patients with MAC lung disease. The frontline clinical trial program consists of the ARISE trial, an interventional study designed to validate cross-sectional and longitudinal characteristics of a PRO tool in MAC lung disease, and the ENCORE trial, designed to establish the clinical benefits and evaluate the safety of ARIKAYCE in patients with newly diagnosed MAC lung disease using the PRO tool validated in the ARISE trial. We are running these global studies in parallel and approximately 200 sites are expected to be initiated for these clinical trials. The frontline clinical program is intended to fulfill the FDA’s post-marketing requirement to allow for full approval of ARIKAYCE by the FDA, and verification and description of clinical benefit in the ENCORE trial will be necessary for full approval of ARIKAYCE.

Regulatory Pathway Outside of the US

In October 2020, the EC granted marketing authorization for ARIKAYCE for the treatment of NTM lung infections caused by MAC in adults with limited treatment options who do not have CF. We have launched ARIKAYCE in Germany, the Netherlands and Wales, and plan to launch in other European Union (EU) countries and the UK, subject to local reimbursement processes.

In March 2021, Japan's MHLW approved ARIKAYCE for the treatment of patients with NTM lung disease caused by MAC who did not sufficiently respond to prior treatment with a multidrug regimen. In July 2021, we launched ARIKAYCE in Japan.

Further Research and Lifecycle Management

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We are currently exploring and supporting research and lifecycle management programs for ARIKAYCE beyond treatment of refractory MAC lung disease as part of a combination antibacterial regimen for adult patients who have limited or no treatment options. As noted above, we will continue to advance the post-approval confirmatory, frontline clinical trial program for ARIKAYCE, through the ARISE trial and the ENCORE trial, which are intended to fulfill the FDA's post-marketing requirement to allow for the full approval of ARIKAYCE in the US, as well as to support the use of ARIKAYCE as a frontline treatment for patients with MAC lung disease in the US, Europe and Japan.

The ARISE trial is a randomized, double-blind, placebo-controlled Phase 3b study in adult patients with newly diagnosed MAC lung disease that aims to generate evidence demonstrating the domain specification, reliability, validity, and responsiveness of PRO-based scores, including a respiratory symptom score. Patients will be randomized 1:1 to receive ARIKAYCE plus background regimen or placebo plus background regimen once daily for six months. Patients will then discontinue all study treatments and remain in the trial for one month for the continued assessment of PRO endpoints. The study is currently enrolling patients, and is expected to enroll approximately 100 patients.

The ENCORE trial is a randomized, double-blind, placebo-controlled Phase 3b study to evaluate the efficacy and safety of an ARIKAYCE-based regimen in patients with newly diagnosed MAC lung disease. Patients will be randomized 1:1 to receive ARIKAYCE plus background regimen or placebo plus background regimen once daily for 12 months. Patients will then discontinue all study treatments and remain in the trial for three months for the assessment of durability of culture conversion. The primary endpoint is change from baseline to Month 13 in respiratory symptom score. The key secondary endpoint is the proportion of subjects achieving durable culture conversion at Month 15. The study is currently enrolling patients, and is expected to enroll approximately 250 patients.

We initiated the frontline clinical trial program of ARIKAYCE in December 2020 and are running the ARISE and ENCORE trials in parallel in approximately 200 sites.

Subsequent lifecycle management studies could also potentially enable us to reach more patients. These initiatives include investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding from us and may also include new clinical studies sponsored by us.

Product Pipeline

Brensocatib

Brensocatib 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 (NSPs) 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 NSPs (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 result in excessive active NSPs that cause lung destruction and inflammation. Brensocatib may decrease the damaging effects of inflammatory diseases such as bronchiectasis by inhibiting DPP1 and its activation of NSPs.

Bronchiectasis is a severe, chronic pulmonary disorder in which the bronchi become permanently dilated due to a cycle of infection, inflammation, and lung tissue damage. The condition is marked by frequent pulmonary exacerbations requiring antibiotic therapy and/or hospitalizations. Symptoms include chronic cough, excessive sputum production, shortness of breath, and repeated respiratory infections, which can worsen the underlying condition. Bronchiectasis affects approximately 340,000 to 520,000 patients in the US, and reports suggest that bronchiectasis may affect approximately 350,000 to 500,000 patients in the European 5 (comprised of France, Germany, Italy, Spain and the United Kingdom) and one million to five million patients in the Asia-Pacific region. Today, there are no approved therapies in the US, Europe, or Japan for the treatment of patients with bronchiectasis.

Based on the positive results of the WILLOW study discussed below, in December 2020 we commenced our Phase 3 trial, ASPEN, which will investigate brensocatib in bronchiectasis. ASPEN is a global, randomized, double-blind, placebo-controlled Phase 3 study to assess the efficacy, safety, and tolerability of brensocatib in patients with bronchiectasis. Patients with bronchiectasis due to CF may not be enrolled in the study. Patients will be randomized to receive brensocatib 10 mg, brensocatib 25 mg, or placebo once daily for 52 weeks. The primary endpoint is the rate of pulmonary exacerbations over the 52-week treatment period. Secondary endpoints include time to first pulmonary exacerbation, percentage of subjects who remain pulmonary exacerbation-free, change from baseline in post-bronchodilator FEV1, rate of severe pulmonary exacerbations, change from baseline in the Bronchiectasis (QOL-B) Respiratory Symptoms Domain Score, and incidence and

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severity of treatment-emergent adverse events (AEs). This study is currently enrolling patients, and is expected to enroll approximately 1,620 patients (540 in each arm) at approximately 480 sites in 40 countries.

In March 2020, AstraZeneca exercised its first option pursuant to our October 2016 license agreement under which AstraZeneca can advance clinical development of brensocatib in the indications of chronic obstructive pulmonary disease (COPD) or asthma. Under the terms of the agreement, upon exercise of this option, AstraZeneca is solely responsible for all aspects of the development of brensocatib up to and including Phase 2b clinical trials in COPD or asthma. The agreement also includes a second and final option which, if exercised, would permit AstraZeneca to further develop brensocatib beyond Phase 2b clinical trials upon reaching agreement on commercial terms satisfactory to each party for the further development and commercialization of brensocatib in COPD or asthma. We retain full development and commercialization rights for brensocatib in all other indications and geographies.

In June 2020, the FDA granted breakthrough therapy designation for brensocatib for the treatment of adult patients with NCFBE for reducing exacerbations. The FDA's breakthrough therapy designation is designed to expedite the development and review of therapies that are intended to treat serious or life-threatening diseases and for which preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy. The benefits of breakthrough therapy designation include more frequent communication and meetings with FDA, eligibility for rolling and priority review, intensive guidance on an efficient drug development program, and organizational commitment from the FDA involving senior managers. In November 2020, brensocatib was granted access to the PRIME scheme from the EMA for patients with NCFBE.

In October 2021, the European Medicines Agency’s Paediatric Committee approved the brensocatib Pediatric Investigational Plan for the treatment of patients with NCFBE. Subsequently, the ASPEN trial will now include 40 adolescent patients between ages 12 to 17, which will fulfill the pediatric study requirements to support marketing applications in this patient population in the US, Europe, and Japan.

The WILLOW Study

The WILLOW study was a randomized, double-blind, placebo-controlled, parallel-group, multi-center, multi-national, Phase 2 study to assess the efficacy, safety and tolerability, and pharmacokinetics of brensocatib administered once daily for 24 weeks in patients with NCFBE. The WILLOW study was conducted at 116 sites and enrolled 256 adult patients diagnosed with NCFBE who had at least two documented pulmonary exacerbations in the 12 months prior to screening. Patients were randomized 1:1:1 to receive either 10 mg or 25 mg of brensocatib or matching placebo. The primary efficacy endpoint was the time to first pulmonary exacerbation over the 24-week treatment period in the brensocatib arms compared to the placebo arm.

WILLOW Efficacy Data

We announced topline data for the WILLOW study in February 2020 and full data for the WILLOW study in June 2020. In September 2020, final results from the WILLOW study were published online in the New England Journal of Medicine. The data demonstrate that the WILLOW study met its primary endpoint of time to first pulmonary exacerbation over the 24-week treatment period for both the 10 mg and 25 mg dosage groups of brensocatib compared to placebo (p=0.027, p=0.044, respectively). The risk of exacerbation at any time during the trial was reduced by 42% for the 10 mg group versus placebo (HR 0.58, p=0.029) and by 38% for the 25 mg group versus placebo (HR 0.62, p=0.046). In addition, treatment with brensocatib 10 mg resulted in a significant reduction in the rate of pulmonary exacerbations, a key secondary endpoint, versus placebo. Specifically, patients treated with brensocatib experienced a 36% reduction in the 10 mg arm (p=0.041) and a 25% reduction in the 25 mg arm (p=0.167) versus placebo. Change in concentration of active NE in sputum versus placebo from baseline to the end of the treatment period was also statistically significant (p=0.034 for 10 mg, p=0.021 for 25 mg).

WILLOW Safety and Tolerability Data

Brensocatib was generally well-tolerated in the study. Rates of AEs leading to discontinuation in patients treated with placebo, brensocatib 10 mg, and brensocatib 25 mg were 10.6%, 7.4%, and 6.7%, respectively. The most common AEs in patients treated with brensocatib were cough, headache, sputum increase, dyspnea, fatigue, and upper respiratory tract infection. Rates of adverse events of special interest (AESIs) in patients treated with placebo, brensocatib 10 mg, and brensocatib 25 mg, respectively, were as follows: rates of skin events (including hyperkeratosis) were 11.8%, 14.8%, and 23.6%; rates of dental events were 3.5%, 16.0%, and 10.1%; and rates of infections that were considered AESIs were 17.6%, 13.6%, and 16.9%.

Further Research and Development

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In August 2019, we received notice from the FDA that we were awarded a development grant of $1.8 million for specific work to be performed on a PRO tool. The grant funding is for the development of a novel PRO tool for use in clinical trials to measure symptoms in patients with NCFBE with and without NTM lung infection.

We are advancing a clinical development program for brensocatib in CF. The CF Therapeutics Development Network has endorsed our study protocol for brensocatib in CF. The process for initiating study sites for the Phase 2 pharmacokinetics/pharmacodynamics multiple-dose study is underway and we are on track to share results in 2022.

Treprostinil Palmitil Inhalation Powder

TPIP is an investigational inhaled formulation of treprostinil prodrug that has the potential to address certain of the current limitations of existing prostanoid therapies. We believe that TPIP 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 TPIP may be associated with fewer side effects, including severity and/or frequency of cough, headache, throat irritation, nausea, flushing and dizziness that are associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe TPIP may offer a differentiated product profile for PAH and other rare pulmonary disorders.

In February 2021, we announced topline results from the Phase 1 study of TPIP in healthy volunteers. The objective of this first-in-human single ascending dose and multiple ascending dose study was to assess the pharmacokinetics and tolerability profile of TPIP. Data from the study demonstrated that TPIP was generally well tolerated, with a pharmacokinetic profile that supports continued development with once-daily dosing. The most common AEs across all cohorts in the study were cough, dizziness, headache, and nausea. Most AEs were mild in severity and consistent in nature with those typically seen with other inhaled prostanoid therapies. There were few moderate AEs and no severe or serious AEs. Subjects in the multiple dose panel that incorporated an up-titration approach beginning at 112.5 µg once-daily and progressing to 225 µg once-daily reported fewer AEs compared to the panel dosed with 225 µg once-daily from the first dose.

Overall pharmacokinetic results demonstrated that treprostinil exposure (AUC and Cmax) was dose-proportional, with low to moderate inter-subject variability. Treprostinil was detected in the plasma at 24 hours at all doses and throughout the 48-hour sampling period for the two highest doses. Compared with currently available inhaled treprostinil therapy, TPIP showed substantially lower Cmax and longer half-life. Data from this study were presented in an oral session at the European Society of Cardiology Congress in August 2021.

We are advancing the development of TPIP with two studies in patients with PAH. The first is an open-label, proof-of-mechanism study to understand the impact of TPIP on PVR over a 24-hour period. We anticipate having preliminary data from a small number of patients in this study by the end of 2021. The second will aim to investigate the effect of TPIP on PVR and 6-minute walk distance over a 16-week treatment period using an up-titration, once-daily dosing schedule. We plan to initiate study sites by the end of 2021. Beyond PAH, we continue to explore potential development pathways for TPIP in patients with other rare pulmonary disorders, including PH-ILD. We plan to initiate a Phase 2 study in patients with PH-ILD using an up-titration, once-daily dosing schedule in early 2022.

Corporate Development

We plan to continue to develop, acquire, in license or co-promote other products, product candidates and technologies, including those that address rare diseases. We are focused broadly on rare disease therapeutics and prioritizing those areas that best align with our core competencies.

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

Product Revenues, Net

Product revenues, net, 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. In December 2020 and February 2021, we began commercial sales of ARIKAYCE in Germany and the Netherlands, respectively. In July 2021, the Company began recognizing product revenue from commercial sales of ARIKAYCE in Japan. In September 2021, the Company began commercial sales of ARIKAYCE in Wales. 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.

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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 revenue-based milestones. 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 primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs and program management. R&D expenses also includes other internal operating expenses, the cost of manufacturing product candidates, including the medical devices for drug delivery, for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as brensocatib. Our R&D expenses related to manufacturing our product candidates and medical devices for clinical study are primarily related to activities at contract manufacturing organizations (CMOs) that manufacture brensocatib and TPIP. Our R&D expenses related to clinical trials are primarily related to activities at contract research organizations (CROs) that conduct and manage clinical trials on our behalf. These contracts with CROs set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts with CROs primarily depend on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol. Deposits for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed.

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 and human resource functions. SG&A expenses also include professional fees for legal services, consulting services, including commercial activities, insurance, board of director fees, tax and accounting services and certain milestones 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.

Change in Fair Value of Deferred and Contingent Consideration Liabilities

In connection with our Business Acquisition in the third quarter of 2021, we recorded deferred and contingent consideration liabilities related to potential future milestone payments. Adjustments to the fair value are due to changes in: the probability of achieving milestones; our stock price; or certain other estimated assumptions. The change in fair value of deferred and contingent consideration liabilities is calculated quarterly with gains and losses recorded in the consolidated statements of comprehensive loss.

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 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

COVID-19 Update

We are committed to the safety and well-being of our workforce and have taken the following protective measures:

•In March 2020, we implemented a number of corporate initiatives in response to the novel coronavirus global pandemic which manifests as COVID-19. These initiatives included a remote working policy for all employees in order to aid the global containment effort and allow infectious disease specialists and pulmonologists to focus exclusively on treating patients and containing the virus. The policy included all of the field-based therapeutic specialists and employees who support ARIKAYCE prescribers.

•Since June 2020, certain of our field-based employees who support ARIKAYCE prescribers were permitted to return to the field on a voluntary basis. To date, access to prescribers has been limited with significant regional variability. Our Arikares® trainers are continuing to offer remote training for patients who initiate treatment with ARIKAYCE. As COVID-19 infections in the US subsided and vaccination rates increased, we observed a resumption of activities, including field-based employees returning to the field, reopening of physician offices and patients returning to in-office visits. However, as new variants of COVID-19 emerge, some of these activities have recently been paused in certain regions.

•Since reopening our physical offices in the third quarter of 2020, we have put in place protocols in each location in adherence to local and state laws and with the health and safety of our employees in mind. As of October 2021, we required all employees and visitors entering our corporate headquarters to be fully vaccinated.

•Effective mid-December 2021, with the health and safety of our employees and ARIKAYCE physicians, caregivers, and patients in mind, we are requiring that all U.S. employees be fully vaccinated against COVID-19.

Though we continue to see use of ARIKAYCE, including new patient adds and continued prescription renewals, there remains a general uncertainty regarding the impact of COVID-19 on all aspects of our business, including how it will impact our patients, physicians, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect our financial results and business operations through the quarter ended September 30, 2021, we are unable to predict the impact that COVID-19 will have on our financial position and operating results in future periods due to these and other numerous uncertainties. We will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to our operations as necessary.

Comparison of the Three Months Ended September 30, 2021 and 2020

Overview - Operating Results

Our operating results for the three months ended September 30, 2021, included the following:

•Product revenues, net, increased $3.1 million as compared to the same period in the prior year as a result of the increase in ARIKAYCE sales;

•Cost of product revenues (excluding amortization of intangible assets) of $10.2 million decreased slightly as compared to the same period in the prior year;

•Increased R&D expenses of $28.9 million as compared to the same period in the prior year primarily resulting from increases in clinical development and research costs for our ongoing clinical trials;

•Increased SG&A expenses of $13.7 million as compared to the same period in the prior year resulting from increases related to our global commercial activities;

•Amortization of intangible assets of $1.3 million was consistent with the same period in the prior year;

•Change in fair value of deferred and contingent consideration liabilities was $8.3 million as a result of our Business Acquisition in the third quarter of 2021; and

•Increased interest expense of $4.1 million as compared to the same period in the prior year related to the accretion of debt discount for our debt.

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Product Revenues, Net

Product revenues, net, consists of net sales of ARIKAYCE. The following table summarizes the sources of revenue for the three months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
Product revenues, net	$	46,757	$	43,643	$	3,114	7.1	%

Product revenues, net, increased to $46.8 million, an increase of 7.1%, from $43.6 million in the same period in 2020 as a result of the increase in ARIKAYCE sales.

Cost of Product Revenues (excluding amortization of intangible assets)

Cost of product revenues (excluding amortization of intangible assets) for the three months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Three Months Ended September 30,						Increase (decrease)
	2021			2020			$		%
Cost of product revenues (excluding amortization of intangible assets)	$	10,183		$	10,622		$	(439)	(4.1)	%
Cost of product revenues, as % of revenues	21.8		%	24.3		%

Cost of product revenues (excluding amortization of intangible assets) decreased slightly to $10.2 million for the three months ended September 30, 2021 as compared to $10.6 million in the same period in 2020.

R&D Expenses

R&D expenses for the three months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Three Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
External Expenses
Clinical development and research	$	28,807	$	13,613	$	15,194	111.6	%
Manufacturing	5,713		1,829		3,884		212.4	%
Regulatory, quality assurance, and medical affairs	5,484		4,079		1,405		34.4	%
Subtotal—external expenses	$	40,004	$	19,521	$	20,483	104.9	%
Internal Expenses
Compensation and benefit related expenses	$	21,102	$	15,769	$	5,333	33.8	%
Stock-based compensation	4,766		2,958		1,808		61.1	%
Other internal operating expenses	4,475		3,163		1,312		41.5	%
Subtotal—internal expenses	$	30,343	$	21,890	$	8,453	38.6	%
Total	$	70,347	$	41,411	$	28,936	69.9	%

R&D expenses increased to $70.3 million during the three months ended September 30, 2021 from $41.4 million in the same period in 2020. The $28.9 million increase was primarily due to a $15.2 million increase in clinical development and research costs related to the ongoing ARIKAYCE frontline clinical trial program and the Phase 3 ASPEN trial of brensocatib. The increase was also due to a $7.1 million increase in compensation and benefit related expenses and stock-based compensation due to an increase in headcount, as well as a $3.9 million increase in manufacturing expenses to support ongoing clinical trials.

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External R&D expenses by product for the three months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Three Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
ARIKAYCE external R&D expenses	$	16,477	$	12,375	$	4,102	33.1	%
Brensocatib external R&D expenses	17,178		6,230		10,948		175.7	%
Other external R&D expenses	6,349		916		5,433		593.1	%
Total	$	40,004	$	19,521	$	20,483	104.9	%

We expect R&D expenses to continue to increase in 2021 relative to 2020 primarily due to our clinical trial activities and related spend including our Phase 3 ASPEN trial of brensocatib, our confirmatory clinical trial of ARIKAYCE in a front-line treatment setting for patients with MAC lung disease, and our TPIP clinical trials.

SG&A Expenses

SG&A expenses for the three months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Three Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
Compensation and benefit related expenses	$	19,827	$	15,980	$	3,847	24.1	%
Stock-based compensation	7,467		5,950		1,517		25.5	%
Professional fees and other external expenses	29,061		18,920		10,141		53.6	%
Facility related and other internal expenses	3,925		5,735		(1,810)		(31.6)	%
Total SG&A expenses	$	60,280	$	46,585	$	13,695	29.4	%

SG&A expenses increased to $60.3 million during the three months ended September 30, 2021 from $46.6 million in the same period in 2020. The $13.7 million increase was primarily due to a $10.1 million increase in professional fees and other external expenses primarily resulting from our commercial launch efforts in Europe and Japan and from resuming certain commercial activities in the US, as well as a $5.4 million increase in compensation and benefit related expenses and stock-based compensation due to an increase in global headcount.

Amortization of Intangible Assets

Amortization of intangible assets for the three months ended September 30, 2021 and 2020 was $1.3 million and $1.2 million, respectively. Amortization of intangible assets is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestones paid to PARI for the FDA and EC approvals of ARIKAYCE.

Change in Fair Value of Deferred and Contingent Consideration Liabilities

The change in fair value of deferred and contingent consideration liabilities for the three months ended September 30, 2021 was $8.3 million. The change is related to the fair value of the potential future consideration to be paid to former equityholders of the acquired businesses. Adjustments to the fair value are due to changes in: the probability of achieving milestones; our stock price; or certain other estimated assumptions.

Interest Expense

Interest expense increased to $11.2 million for the three months ended September 30, 2021 as compared to $7.2 million in the same period in 2020 due to the accretion of debt discount for our debt.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Overview - Operating Results

Our operating results for the nine months ended September 30, 2021, included the following:

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•Product revenues, net, increased $9.3 million as compared to the same period in the prior year as a result of the increase in ARIKAYCE sales;

•Cost of product revenues (excluding amortization of intangible assets) increased $1.9 million as compared to the same period in the prior year as a result of the increase in sales of ARIKAYCE;

•Increased R&D expenses of $83.0 million as compared to the same period in the prior year primarily resulting from increases in clinical development and research costs for our ongoing clinical trials;

•Increased SG&A expenses of $21.4 million as compared to the same period in the prior year resulting from increases in compensation and benefit related expenses, as well as increases related to our commercial launch efforts in Europe and Japan;

•Amortization of intangible assets of $3.8 million was consistent with the same period in the prior year;

•Change in fair value of contingent consideration liabilities was $8.3 million as a result of our Business Acquisition in the third quarter of 2021; and

•Increased interest expense of $7.1 million as compared to the same period in the prior year related to the accretion of debt discount for our debt.

Product Revenues, Net

Product revenues, net, consists of net sales of ARIKAYCE. The following table summarizes the sources of revenue for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
Product revenues, net	$	132,337	$	122,998	$	9,339	7.6	%

Product revenues, net, increased to $132.3 million, an increase of 7.6%, from $123.0 million in the same period in 2020 as a result of the increase in ARIKAYCE sales.

Cost of Product Revenues (excluding amortization of intangible assets)

Cost of product revenues (excluding amortization of intangible assets) for the nine months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Nine Months Ended September 30,						Increase (decrease)
	2021			2020			$		%
Cost of product revenues (excluding amortization of intangible assets)	$	30,864		$	29,010		$	1,854	6.4	%
Cost of product revenues, as % of revenues	23.3		%	23.6		%

Cost of product revenues (excluding amortization of intangible assets) increased to $30.9 million for the nine months ended September 30, 2021 as compared to $29.0 million in the same period in 2020. The increase in cost of product revenues (excluding amortization of intangible assets) in the nine months ended September 30, 2021 was directly attributable to the increase in total revenues discussed above.

R&D Expenses

R&D expenses for the nine months ended September 30, 2021 and 2020 were comprised of the following (in thousands):

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	Nine Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
External Expenses
Clinical development and research	$	75,736	$	27,190	$	48,546	178.5	%
Manufacturing	22,524		9,468		13,056		137.9	%
Regulatory, quality assurance, and medical affairs	12,689		11,526		1,163		10.1	%
Subtotal—external expenses	$	110,949	$	48,184	$	62,765	130.3	%
Internal Expenses
Compensation and benefit related expenses	$	59,513	$	45,412	$	14,101	31.1	%
Stock-based compensation	12,884		8,779		4,105		46.8	%
Other internal operating expenses	13,046		10,968		2,078		18.9	%
Subtotal—internal expenses	$	85,443	$	65,159	$	20,284	31.1	%
Total	$	196,392	$	113,343	$	83,049	73.3	%

R&D expenses increased to $196.4 million during the nine months ended September 30, 2021 from $113.3 million in the same period in 2020. The $83.0 million increase was primarily due to a $48.5 million increase in clinical development and research costs related to the initiation of the ARIKAYCE frontline clinical trial program and the Phase 3 ASPEN trial of brensocatib. The increase was also due to a $18.2 million increase in compensation and benefit related expenses and stock-based compensation due to an increase in headcount, as well as a $13.1 million increase in manufacturing expenses to support ongoing clinical trials.

External R&D expenses by product for the nine months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Nine Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
ARIKAYCE external R&D expenses	$	44,627	$	29,732	$	14,895	50.1	%
Brensocatib external R&D expenses	42,978		14,643		28,335		193.5	%
Other external R&D expenses	23,344		3,809		19,535		512.9	%
Total	$	110,949	$	48,184	$	62,765	130.3	%

SG&A Expenses

SG&A expenses for the nine months ended September 30, 2021 and 2020 were comprised of the following (in thousands):


	Nine Months Ended September 30,				Increase (decrease)
	2021		2020		$		%
Compensation and benefit related expenses	$	62,919	$	51,278	$	11,641	22.7	%
Stock-based compensation	21,619		18,599		3,020		16.2	%
Professional fees and other external expenses	68,259		60,331		7,928		13.1	%
Facility related and other internal expenses	16,210		17,386		(1,176)		(6.8)	%
Total SG&A expenses	$	169,007	$	147,594	$	21,413	14.5	%

SG&A expenses increased to $169.0 million during the nine months ended September 30, 2021 from $147.6 million in the same period in 2020. The $21.4 million increase was primarily due to a $14.7 million increase in compensation and benefit related expenses and stock-based compensation due to an increase in global headcount, as well as an increase of $7.9 million in

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professional fees and other external expenses primarily resulting from our commercial launch efforts in Europe and Japan and from resuming certain commercial activities in the US.

Amortization of Intangible Assets

Amortization of intangible assets for the nine months ended September 30, 2021 and 2020 was $3.8 million and $3.7 million, respectively. Amortization of intangible assets is comprised of amortization of acquired ARIKAYCE R&D and amortization of the milestones paid to PARI for the FDA and EC approvals of ARIKAYCE.

Change in Fair Value of Deferred and Contingent Consideration Liabilities

The change in fair value of deferred and contingent consideration liabilities for the nine months ended September 30, 2021 was $8.3 million. Adjustments to the fair value are due to changes in: the probability of achieving milestones; our stock price; or certain other estimated assumptions.

Interest Expense

Interest expense was $29.1 million for the nine months ended September 30, 2021 as compared to $22.1 million in the same period in 2020 due to the accretion of debt discount for our debt.

LIQUIDITY AND CAPITAL RESOURCES

Overview

There is considerable time and cost associated with developing potential pharmaceutical products to the point of regulatory approval and commercialization. We commenced commercial shipments of ARIKAYCE in October 2018. We expect to continue to incur consolidated operating losses, including losses at our US and certain international entities, as we plan to fund R&D for ARIKAYCE, brensocatib, TPIP and our other pipeline programs, continue pre-commercial, commercialization and regulatory activities for ARIKAYCE, and other general and administrative activities.

In May 2021, we completed an underwritten public offering of $575.0 million aggregate principal amount of the 2028 Convertible Notes, including the exercise in full of the underwriters' option to purchase additional 2028 Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and offering expenses of $15.7 million, were $559.3 million. A portion of the net proceeds from the 2028 Convertible Notes was used to repurchase $225.0 million of the Company's outstanding 2025 Convertible Notes. The Company recorded a loss on early extinguishment of debt of $17.7 million, primarily related to the premium paid on extinguishment of a portion of the 2025 Convertible Notes.

In May 2021, we also completed an underwritten public offering of 11,500,000 shares of the Company's common stock, including 1,500,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares from the Company, at a public offering price of $25.00 per share. Our net proceeds from the sale of the shares, after deducting the underwriting discounts and offering expenses of $17.5 million, were $270.1 million.

In the first quarter of 2021, we entered into a sales agreement with SVB Leerink to sell shares of our common stock, with aggregate gross sales proceeds of up to $250.0 million, from time to time, through an ATM program, under which SVB Leerink acts as sales agent. As of September 30, 2021, we had not sold or issued any shares under the ATM program.

In the second quarter of 2020, we completed an underwritten public offering of 11,155,000 shares of our common stock, including 1,455,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares, at a public offering price of $23.25 per share. Our net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses of $13.5 million, were $245.9 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 design and conduct ongoing and future clinical trials for brensocatib and TPIP, and to develop, acquire, in-license or co-promote other products or product candidates, 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 brensocatib, TPIP and our other product candidates, or to pursue the license or purchase of other technologies or products and product candidates. During 2021, we plan to continue to support the

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commercialization of ARIKAYCE in the US, Europe and Japan, to continue to fund further clinical development of ARIKAYCE, brensocatib and TPIP, and to fund our global expansion efforts. Our cash requirements for the next 12 months will be impacted by a number of factors, the most significant of which we expect to be expenses related to our commercialization efforts and our ARISE and ENCORE clinical trials for ARIKAYCE, expenses related to the ASPEN trial and other development activities for brensocatib, and to a lesser extent, expenses related to the clinical development of TPIP.

Cash Flows

As of September 30, 2021, we had cash and cash equivalents of $846.6 million, as compared with $532.8 million as of December 31, 2020. The $313.8 million increase was primarily due to our May 2021 underwritten public offerings of debt and equity, partially offset by the repurchase of a portion of our 2025 Convertible Notes and cash used in operating activities. Our working capital was $846.5 million as of September 30, 2021 as compared with $504.1 million as of December 31, 2020.

Net cash used in operating activities was $279.2 million and $152.6 million for the nine months ended September 30, 2021 and 2020, respectively. The net cash used in operating activities during the nine months ended September 30, 2021 and 2020 was primarily for the commercial, clinical and manufacturing activities related to ARIKAYCE, as well as other SG&A expenses and clinical trial expenses related to brensocatib and TPIP. The increase in cash used in operating activities for the nine months ended September 30, 2021 compared to the corresponding period in 2020 was primarily due to the increase in R&D expenses to support our ongoing clinical trials. The increase was also due to the net change in working capital, driven primarily by increases in other assets from deposits to our CRO for our recently initiated clinical trials and the $12.5 million milestone payment to AstraZeneca related to the first dosing in our Phase 3 ASPEN trial.

Net cash used in investing activities was $13.1 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively, for purchases of fixed assets and in 2021, the Business Acquisition.

Net cash provided by financing activities was $606.8 million and $259.0 million for the nine months ended September 30, 2021 and 2020, respectively. Net cash provided by financing activities for the nine months ended September 30, 2021 and 2020 was primarily due to net cash proceeds from the issuance and extinguishment of debt during the nine months ended September 30, 2021 and the net proceeds from the issuance of common stock during the nine months ended September 30, 2021 and 2020.

Contractual Obligations

There were no material changes outside of the ordinary course of business in our contractual obligations during the nine months ended September 30, 2021 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, 2020.

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, 2020. 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 September 30, 2021, 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 September 30, 2021, we had $800.0 million of convertible notes outstanding. Our 2025 Convertible Notes and our 2028 Convertible Notes bear interest at a coupon rate of 1.75% and 0.75%, respectively. If a 10% change in interest rates

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had occurred on September 30, 2021, 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 nine months ended September 30, 2021 and 2020, 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 Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. 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 ensure 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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation as of September 30, 2021, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

Our business is subject to substantial risks and uncertainties. You should carefully consider the risk factors set forth below as well as the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business, including our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 25, 2021. Any of the risks and uncertainties described below and in our other filings with the SEC, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, prospects for growth, and the value of an investment in our common stock. In addition, these risks and uncertainties could cause actual results to differ materially from those expressed or implied by forward-looking statements contained in this Form 10-Q (please read the Cautionary Note Regarding Forward-Looking Statements in this Form 10-Q).

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

In connection with the August 4, 2021 closing of the Company’s acquisition of Motus, following certain closing-related reductions, the Company issued an aggregate of 2,889,367 shares of the Company’s common stock to Motus’s former stockholders and option holders and certain individuals who are entitled to receive a portion of the acquisition consideration (collectively, Motus equityholders). The shares of the Company’s common stock issued to the Motus equityholders were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, and the number of such issuable shares was calculated based on a per share value of $27.11. The Company did not receive any proceeds from the issuance of common stock to the Motus equityholders.

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ITEM 5. OTHER INFORMATION

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements

On October 24, 2021, John Soriano notified the Company of his resignation from his position as the Company’s Chief Compliance Officer, effective October 28, 2021. Mr. Soriano’s resignation is at his initiative and relates to his disagreement with the Company’s decision to implement a COVID-19 vaccine requirement for its US employees. There is no other disagreement related to compliance, quality or otherwise between Mr. Soriano and the Company or its board of directors.

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ITEM 6. EXHIBITS

Exhibit Index


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

3.2						Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated’s Current Report on Form 8-K filed on March 30, 2020).

4.1						Second Supplemental Indenture, dated as of May 13, 2021, by and between the Company and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 4.2 to Insmed Incorporated’s Current Report on Form 8-K filed on May 13, 2021).

4.2						Form of 0.75% Convertible Senior Note due 2028 (included in Exhibit 4.1).

10.1						Form of Award Agreement for Non-Qualified Stock Options issued to non-US employees pursuant to the Insmed Incorporated 2019 Incentive Plan (filed herewith).

10.2						Form of Award Agreement for Restricted Stock Units pursuant to the Insmed Incorporated 2019 Incentive Plan (filed herewith).

10.3						Amendment to Form of Award Agreement for Restricted Stock Units pursuant to the Insmed Incorporated 2019 Incentive Plan (filed herewith).

10.4						Form of Award Agreement for Performance-Based Restricted Stock Units pursuant to the Insmed Incorporated 2019 Incentive Plan (filed herewith).

10.5						Form of Award Agreement for Performance-Based Restricted Stock Units to non-US employees pursuant to the Insmed Incorporated 2019 Incentive Plan (filed herewith).

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

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

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

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

101						The following materials from Insmed Incorporated’s quarterly report on Form 10-Q for the quarter ended September 30, 2021 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) Notes to the Unaudited Consolidated Financial Statements, and (vi) Cover Page.

104						The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL and contained in Exhibit 101.

* Certain portions of this exhibit have been redacted.
** Management contract or compensatory plan or arrangement.

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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: October 28, 2021	By	/s/ Sara Bonstein
		Sara Bonstein
		Chief Financial Officer
		(Principal Financial and Accounting Officer)