SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-30739 -------------- INSMED INCORPORATED (Exact name of registrant as specified in its charter) Virginia 54-1972729 (State or other Jurisdiction of (I.R.S. employer Incorporation or Organization) identification no.) 800 East Leigh Street (804) 828-6893 Richmond, Virginia 23219 (Registrant's telephone number (Address of principal executive offices) including area code) Indicate by check X 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 --- --- As of April 30, 2001, the latest practicable date, there were 32,843,665 shares of Insmed Incorporated common stock outstanding. -1-
INSMED INCORPORATED INDEX REPORT: FORM 10-Q PART I. FINANCIAL INFORMATION ITEM 1 Financial Statements ...............................................3 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ..............................................7 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk .........9 PART II. OTHER INFORMATION ITEM 1 Legal Proceedings ..................................................9 ITEM 2 Changes in Securities and Use of Proceeds ..........................9 ITEM 3 Defaults Upon Senior Securities ....................................9 ITEM 4 Submission of Matters to a Vote of Security Holders ................9 ITEM 5 Other Information ..................................................9 ITEM 6 Exhibits and Reports on Form 8-K ...................................9 SIGNATURE ..................................................................10 -2-
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INSMED INCORPORATED Condensed Consolidated Balance Sheets (in thousands) <TABLE> <CAPTION> March 31, December 31, 2001 2000 --------- ------------ (Unaudited) <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 72,121 $ 71,628 Marketable securities 300 11,455 Due from Taisho Pharmaceutical Co., Ltd. 2,760 1,228 Other current assets 284 309 --------- --------- Total current assets 75,465 84,620 Property and equipment, net 1,513 1,628 Goodwill, net 16,011 16,220 Other assets 250 250 --------- --------- Total assets $ 93,239 $ 102,718 ========= ========= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 4,262 $ 3,391 Payroll liabilities 522 604 Deferred revenue - current portion 143 143 --------- --------- Total current liabilities 4,927 4,138 Deferred revenue 1,762 1,798 Stockholders' equity: Common stock 328 328 Additional capital 198,954 198,930 Accumulated deficit (112,735) (102,642) Accumulated other comprehensive income 3 166 --------- --------- Net stockholders' equity 86,550 96,782 --------- --------- Total liabilities and stockholders' equity $ 93,239 $ 102,718 ========= ========= </TABLE> See accompanying note. -3-
INSMED INCORPORATED Condensed Consolidated Statements of Operations (in thousands, except per share data - unaudited) <TABLE> <CAPTION> Three Months Ended March 31, --------------------------- 2001 2000 ------------- ------------ <S> <C> <C> Revenues $ 100 $ - Operating expenses: Research and development 10,359 2,351 General and administrative 1,086 680 Non-cash stock compensation - 8,389 -------- -------- Total operating expenses 11,445 11,420 -------- -------- Operating loss (11,345) (11,420) Interest income 1,252 119 -------- -------- Net loss $(10,093) $(11,301) ======== ======== Basic and diluted net loss per share $ (0.31) $ (3.26) ======== ======== Shares used in computing basic and diluted net loss per share 32,820 3,469 ======== ======== </TABLE> See accompanying note. -4-
INSMED INCORPORATED Consolidated Statements of Cash Flows (in thousands - unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 ------------ ------------- <S> <C> <C> Operating activities Net loss $(10,093) $(11,301) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 147 22 Amortization of goodwill 209 - Gain on sale of marketable securities (208) 5 Issuance of stock for services - 427 Non-cash stock compensation - 8,389 Changes in operating assets and liabilities: Due from Taisho Pharmaceutical Co., Ltd. (1,532) - Other assets 25 (393) Accounts payable 871 278 Other liabilities (118) 90 -------- -------- Net cash used in operating activities (10,699) (2,483) -------- -------- Investing activities Purchases of marketable securities - (199) Proceeds from marketable securities matured and sold 11,200 1,699 Purchases of property and equipment (32) (41) -------- -------- Net cash provided by investing activities 11,168 1,459 -------- -------- Financing activities Proceeds from issuance of common stock 24 3,318 Repayment of notes receivable from stock sales - 4 -------- -------- Net cash provided by financing activities 24 3,322 -------- -------- Increase in cash and cash equivalents 493 2,298 Cash and cash equivalents at beginning of period 71,628 317 -------- -------- Cash and cash equivalents at end of period $ 72,121 $ 2,615 ======== ======== </TABLE> See accompanying note. -5-
Insmed Incorporated Note to Condensed Consolidated Financial Statements (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and applicable Securities and Exchange Commission regulations for interim financial information. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is presumed that users of this interim financial information have read or have access to the audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the March 31, 2001 presentation. Recent Accounting Pronouncements In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133, which is effective for fiscal years beginning after June 15, 2000. The Company anticipates that the adoption of SFAS No. 133, as amended, will not have a significant effect on its consolidated financial statements. -6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and note thereto included in Part I - Item 1 of this Quarterly Report and the financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Overview We discover and develop pharmaceutical products for the treatment of metabolic diseases and endocrine disorders associated with insulin resistance. Insmed has two lead drug candidates -- INS-1 and SomatoKine. We are actively developing these drugs to treat diabetes and polycystic ovary syndrome (commonly known as PCOS). We have not been profitable and have accumulated a deficit of approximately $112.7 million through March 31, 2001. We expect to incur significant additional losses for at least the next several years and until such time as we generate sufficient revenue to offset expenses. Research and development costs relating to product candidates will continue to increase. Manufacturing, sales and marketing costs will increase as we prepare for the commercialization of our products. Results of Operations For the three months ended March 31, 2001, we recorded a net loss of $10.1 million compared to a net loss of $11.3 million for the three months ended March 31, 2000. Research and development expenses increased $8.0 million from $2.4 million for the three months ended March 31, 2000, as a result of increased development programs in progress for INS-1 and SomatoKine. During the three months ended March 31, 2001, we expended an aggregate of $7.1 million for external, clinical trial and manufacturing costs related to INS-1, and $2.5 million for SomatoKine. General and administrative expenses increased to $1.1 million from $0.7 million for the three months ended March 31, 2000. We became a public company on June 1, 2000. Substantially all of the increase in general and administrative expenses is due to higher investor relations, legal and insurance costs associated with being a public company. In the first quarter of 2000, we recognized an $8.4 million non-cash charge for stock compensation. Approximately $4.8 million of this charge was reversed in the second quarter of 2000. The major component of this non-cash charge relates to stock options exercised with a non-recourse note. Generally accepted accounting principles require that compensation be recognized in the financial statements based on the difference between the current market price of the underlying stock and the market price utilized in the previous reporting period. The non-recourse note to which the majority of the charge relates was repaid on June 30, 2000. -7-
At March 31, 2001, cash, cash equivalents and marketable securities were $10.7 million less than at December 31, 2000, as funds were expended for operations. We have an agreement with Taisho Pharmaceutical Co., Ltd. for the development and commercialization of INS-1 in Japan and other Asian countries. Under the terms of the agreement, Taisho will fund 20% of INS-1 development costs in North America and Europe. Amounts due from Taisho increased $1.5 million between December 31, 2000, and March 31, 2001, because Taisho's share of INS-1 development costs increased. Liquidity and Capital Resources At March 31, 2001, our cash, cash equivalents and marketable securities were approximately $72.4 million and were invested in money market instruments and investment grade corporate debt. Our business strategy contemplates selling additional equity and entering into agreements with corporate partners to fund research and development, and provide milestone payments, license fees and equity investments to fund operations. We will need to raise substantial additional funds to continue development and commercialization of our products. There can be no assurance that adequate funds will be available when we need them, or on favorable terms. If at any time we are unable to obtain sufficient additional funds, we will be required to delay, restrict or eliminate some or all of our research or development programs, dispose of assets or technology or cease operations. Forward Looking Statements Statements included within this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical in nature, may constitute forward-looking statements for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements regarding expected financial position, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing or proposed products or services, plans and objectives of management, demand for new pharmaceutical products, market trends in the pharmaceutical business, inflation and various economic and business trends. Such forward-looking statements are subject to numerous risks and uncertainties, including risks that product candidates may fail in the clinic or may not be successfully marketed, the Company may lack financial resources to complete development of product candidates, competing products may be more successful, demand for new pharmaceutical products may decrease, the biopharmaceutical industry may experience negative market trends and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. As a result of these and other risks and uncertainties, actual results may differ materially from those described in the discussion above. -8-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest excess cash in investment grade, interest-bearing securities and, at March 31, 2001, had $72.4 million invested in money market instruments and investment grade corporate debt. Such investments are subject to interest rate and credit risk. Our policy of investing in highly rated securities whose maturities at March 31, 2001, are all less than one year minimizes such risks. In addition, while a hypothetical decrease in market interest rates of 10% from March 31, 2001 levels would reduce interest income, it would not result in a loss of the principal and the decline in interest income would not be material. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.15 Sublease, dated March 30, 2001, between Rhodia Inc. and Insmed Incorporated. 10.16 Consent to Sublease, dated as of April 12, 2001, among A & W Virginia Corporation, as Landlord, Rhodia Inc., as Tenant, and Insmed Incorporated, as Subtenant. -9-
(b) Reports on Form 8-K A report on Form 8-K, dated March 27, 2001, was filed to furnish copies of slides presented by our Chairman of the Board, President and Chief Executive Officer at the Banc of America Healthcare 2001 Conference. A report on Form 8-K, dated March 20, 2001, was filed to furnish a copy of a press release announcing the results of a Phase II trial of SomatoKine in patients with Type 2 diabetes. A report on Form 8-K, dated February 27, 2001, was filed to furnish a copy of a press release announcing the results of Phase II clinical trials of INS-1 in obese women with polycystic ovarian syndrome and in dyslipidemia in non-diabetic subjects, and to announce that we would host a conference call on February 28, 2001 to discuss these results. A report on Form 8-K, dated January 4, 2001, was filed to furnish a copy of a press release announcing the results of a Phase II clinical trial of Type 2 diabetes patients treated with INS-1 in combination with sulfonylureas, and to announce that we would host a conference call on January 5, 2001 to discuss these results. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSMED INCORPORATED (Registrant) Date: May 3, 2001 By: /s/ Michael D. Baer ----------------------------------------- Michael D. Baer Chief Financial Officer (Principal Accounting and Financial Officer and Duly Authorized Officer) -10-
EXHIBIT INDEX Exhibit No. 10.15 Sublease, dated March 30, 2001, between Rhodia Inc. and Insmed Incorporated. 10.16 Consent to Sublease, dated as of April 12, 2001, among A & W Virginia Corporation, as Landlord, Rhodia Inc., as Tenant, and Insmed Incorporated, as Subtenant. -11-